With the advised platform market now accounting for north of £600 billion, a lot of client wealth is currently held on investor platforms. And this will be in several different account types – pensions, ISAs and dealing accounts.
That’s a tremendous amount of money, yet few platform providers are household names in the same way as banks or insurance companies are.
Therefore, when recommending a platform to clients, you may encounter situations where they will want to ask questions about how secure their life savings will be.
While you’ll have conducted your own due diligence on the recommended platform itself, it’s worth being aware of the systemic controls and protections that are in place as well.
Financial Services Compensation Scheme (FSCS)
I’m hesitant to start with the FSCS because that’s putting the cart somewhat before the horse, but this is often the aspect that clients are most familiar with and will ask about first.
The FSCS is the government-backed lifeboat scheme that steps in to pay compensation when an authorised firm has failed and is unable to settle claims against it or is unable to return customer funds. Compensation is limited to £85,000 per person per failed firm.
This covers banks and building societies authorised by the Prudential Regulation Authority (PRA) and financial firms authorised by the Financial Conduct Authority (FCA).
In the context of investment platforms, there could be several authorised firms in the chain, and this is where it can become confusing.
Any cash held on the platform will be deposited with banks, and the FSCS ‘looks through’ the platform. Clients may therefore want to know which banks the platforms use as these amounts would be aggregated with the client’s own personal bank account.
If the platform were to become insolvent, there would be FSCS cover up to £85,000. Pension scheme administrators and ISA managers are individually authorised by the FCA. Therefore, there should in theory be £85,000 cover for each of those, even if they are subsidiary companies of the platform.
If we were to look at investments, fund managers are authorised by the FCA, so if a fund manager failed and funds couldn’t be returned there would be £85,000 cover. However, if an investment simply failed due to poor performance this would not be covered.
Checks and balances
Prevention, of course, is better than cure, and there is a raft of protection measures in place that are just as important as the FSCS, if not more so.
Under FCA CASS rules, client cash must be held in trust accounts with authorised UK banks. This keeps the cash entirely separate from the platform’s own cash. These accounts are then monitored and reconciled daily, meaning there is always an accurate record.
Similarly, investments must be held separately in the name of a nominee company or third-party custodian, which again creates a demarcation between the platform’s investments and investors’ investments.
The aim of these measures is so that investor funds are clearly identifiable should the platform fail.
Platforms are also subject to capital adequacy rules that require them to hold enough capital in reserve to cover an extreme but plausible winding down of the business.
Putting this into practice
It’s worth noting that there may be additional flexibility in terms of how compensation is provided.
In 2018, broker Beaufort Securities was placed into special administration by the FCA following an investigation by the FCA and the US Department of Justice.
The above-mentioned checks and balances were successful in that PwC, the administrators, were able to identify all the client cash and investments.
The challenge centred around PwC’s fees, which were initially forecasted at £100 million (later reduced to £55 million). These would have fallen on Beaufort’s customers to pay. However, PwC and the FSCS came to an agreement whereby the latter would step in to cover the fees, and a year later most of Beaufort’s retail customers had received all of their cash and investments.
