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Fund platform compensation levels?

Investment | Unit Trusts Helpful? 28

Asked by Mark1, submitted 06 February 2014.

Open Quote Given the current discussion about fund platform charges there will inevitably be a trend for investors to consolidate their holdings onto a single platform. The Financial Compensation scheme is limited to £50,000 should a platform go bust. Several platforms are foreign owned or based - e.g. much of FundsNetwork administration is done in India.

Is there any way investors with larger total sums can protect themselves, apart from spreading money between more than one platform? And what happens when several IFAs use the same platform - eg Interactive Investor and Clubfinance both use CoFunds. Would the compensation limit apply to an investor's holding with each IFA or only once?
End Quote

Answered by Justin on 08 February 2014

There are a few things to consider here. The most important is that platforms must ring fence your cash and investments from their own business, which is done via what's called a nominee company. The nominee company, which is usually owned by the platform, physically owns the investments with customers being what's called the beneficial owners.

If a platform goes bust then the nominee company would be unaffected. You might have to wait a while for your investments to be transferred into another platform, but you shouldn't lose any money as a result.

The one exception is if a platform has illegally taken money or investments from the nominee company and goes bust – hence is unable to make good the loss. This is where the FSCS would kick in, with up to £50,000 of compensation per person per platform.

If you use a platform via financial advisers or discount brokers then the FSCS limit applies at the platform level, not adviser/broker, so in your example it only applies once.

Could a platform suffer fraud within its nominee company? Yes, but its very unlikely given the various regulatory safeguards they should adhere to. We can never say never, but it's not something I personally lose sleep over.

Underlying investment funds operate along similar principals; investors money is held via a custodian whose job is to ring fence it from the fund management company. Regulated funds are covered up to £50,000 by the FSCS independently of the platform, but obviously only should losses occur at the fund, not platform, level..

You might find my article about nominee accounts helpful as well as a similar question to yours here.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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