Investor compensation scheme

An investor compensation scheme is a fund, usually set up by law and financed by levies on regulated firms, that pays out when an investment firm becomes insolvent and client assets turn out to be missing, for example through fraud, poor record-keeping or misuse of client money. In the European Union, each member state must operate one under an EU directive that sets a minimum level of cover; the UK has the FSCS and the US has SIPC. Compensation is capped at a limit set by law per person per firm, and each scheme has its own rules on who and what is eligible.

The key point is what these schemes do not cover: a fall in the market value of your investments, or losses from your own investment choices. If a failed firm has kept client assets properly segregated, those assets are normally returned and compensation is not needed; the scheme matters when there is a genuine shortfall. It is separate from deposit guarantee schemes, which protect bank deposits, and cash held at a broker may fall under either depending on where it is kept. Because limits apply per firm, some investors with large sums spread them across more than one provider.