Improvements to investor protection

May 30, 2018 | Tony Byrne's View

The Financial Conduct Authority, the FCA, has recently completed a consultation on investor protection. It’s excellent news for investors.

The investor compensation limit is going to increase from £50,000 per fund manager group to £85,000 with effect from April 2019. Investor protection is managed by the Financial Services Compensation Scheme, FSCS, which will pay compensation to investors in failed investments. It works in much the same way as the Deposit Protection Scheme for Bank and Building Societies. In fact this latest increase in the limit brings protection for investments into line with banks and Building Societies.

The reality is that clients of Wealth And Tax Management already have excellent investor protection meaning that although the increase in the investor protection compensation limit is welcome it is unlikely to make a significant difference to individual clients of ours. Why is this?

Well it’s because the vast majority of our clients’ investments are invested on a Wrap platform into collective investment schemes such as OEICS and unit trusts. These investments are invested in the name of custodians, usually large banks, on behalf of investors. What this means in practice is that if a fund manager were to go bust the investment could not be touched by the fund manager as it is invested in the custodian’s name.

That’s why when Barings Bank famously when bust all those years ago the bank could not touch the funds managed by its company Barings Fund Managers. So the only people to lose money were the bank’s depositors not its investors!

So how does this all work in practice?

Well a typical client of ours is invested in 15 funds. Each fund management group currently has £50K investor compensation meaning that total investor compensation available is £750K (15 x £50K). From April 2019 when the limit increases to £85K a typical client will have £1.275M total investor compensation which represents an increase of 70%!

In practice the kind of investment companies that fail are not the larger well established ones in the mainstream investment sectors. They tend to be the smaller, more specialist companies investing in high risk areas.

Nonetheless the increase in investor compensation is a welcome change as all but the wealthiest investors will have effectively 100% investor protection as long as they diversify their investments sufficiently.

So if you would like advice on how to invest your money in a way that maximises your investor compensation and reduces your risk of losing money then why not contact us? You know it makes sense.

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