Whereas, for example, if Manager A and Manager B both failed at the same time, and the investor held investments in the funds of both, then two £85,000 limits would be available to cover their respective investments.
When it comes to exchange traded funds, the same principle applies. However, a large proportion of ETFs are domiciled outside the UK, typically in the Republic of Ireland and Luxembourg. If the manager of an overseas-based ETF became insolvent, there may be a compensation scheme in that jurisdiction, but losses are unlikely to be covered by the FSCS.
If a fund simply fails to perform and ends up with liabilities greater than its assets, there is no formal recourse for compensation. This is investment risk, and it sits with the investor. The same applies for the failure of listed companies.
Insolvency of a wrapper provider
Many investment platforms hold different tax wrappers, principally Sipps and Isas. Given both of these products require FCA authorisation, this adds another slant to the protection situation.
In terms of preventative measures, assets in trust-based Sipps are held by the Sipp trustee, which is a non-trading company functioning as a bare trustee. This means that the Sipp cash and assets are held by a separate legal entity to the administrator.
There are also FCA capital adequacy requirements for pension providers. As with the capital adequacy rules for platform providers, these require administrators to hold capital in reserve that they could draw upon in the event of the company being wound down. Companies that permit more esoteric and unusual investments are required to hold larger amounts of capital.
If you are looking at a platform proposition where the Sipp administrator and the platform are part of the same overall business, the provider will be subject to both sets of capital adequacy rules.
In terms of compensation, pension providers and Isa managers are regulated by the FCA, so there ought to be cover of up to £85,000 through the FSCS.
What is unclear from the publicly available information, or from previous insolvency cases, is whether a platform client with a Sipp, Isa and dealing account would be eligible for three sets of £85,000. This is on the basis there could technically be three entities within the platform’s company structure, each separately regulated by the FSCS.
Admittedly we are looking at an extreme worst-case scenario here, so it is unlikely to be an issue. Remember as well that in previous situations the FSCS has tried to be flexible where possible.
Non-platform protections
Finally, it is also important to consider how the platform businesses themselves are performing.
Platforms that have a consistent track record of profitability or that are part of a larger group should be able to ride out any storms. Advisers might also look at things like permissible investments, regulatory capital and platform IT capability when assessing a provider’s robustness.
