Segregated funds

When you deposit money with a regulated broker, the rules require it to keep that money apart from its own. Client funds sit in designated client bank accounts, usually at one or more credit institutions, and the firm cannot use them to pay its expenses, cover its own trading or settle debts with its creditors. EU firms follow MiFID II safeguarding rules, and the UK's FCA has its own client money rules (CASS).

Why it matters

If a broker becomes insolvent, segregated client money should be identifiable and returned to clients rather than added to the pot shared among the firm's creditors. Without segregation, clients could rank alongside every other creditor and recover only a fraction.

What it does not cover

• Trading losses. Segregation protects your balance from the firm's problems, not from your own trades.
• Shortfalls. If records are poor, the bank holding the money fails, or the firm has misused funds, there may be a gap. That is where an investor compensation scheme may help. In Cyprus, the Investor Compensation Fund covers eligible clients of CySEC-regulated investment firms up to 20,000 euros.
• Unregulated firms. An offshore or unlicensed broker can say it segregates funds with nobody checking.

Example

Illustrative figures: a broker holds 50 million euros of client money in segregated accounts and has 30 million euros of debts of its own when it fails. The client money is not available to the firm's creditors, so the 50 million euros should be distributed to clients according to their balances, after the administrator's process.

Practical note

Segregation is only as good as the regulator enforcing it. Check that the firm is genuinely licensed on the regulator's own register; our guide to checking a broker licence and the regulator registers page show how.