Investor Compensation Scheme
Regulation & Safety
An investor compensation scheme reimburses eligible clients up to a set amount if a regulated broker fails and cannot return their funds.
What is an investor compensation scheme?
An investor compensation scheme is a fund, usually established or mandated by a financial regulator, that reimburses eligible retail clients up to a defined limit if a regulated firm fails and is unable to return client funds. Regulated brokers that hold client money are typically required to contribute to such a scheme as a condition of their license.
Examples include the UK’s Financial Services Compensation Scheme (associated with FCA-regulated firms) and Cyprus’s Investor Compensation Fund (associated with CySEC-regulated firms). Each scheme sets its own eligibility rules, coverage limits, and claims process, and these details can change over time — always check the current rules of the specific scheme relevant to your broker’s licensed entity rather than assuming a figure.
How it relates to segregated funds
An investor compensation scheme is designed as a second layer of protection, distinct from fund segregation. Segregation aims to ensure client money never mixes with the broker’s own funds in the first place, so it should, in principle, remain recoverable even in insolvency. A compensation scheme exists as a backstop for cases where, for whatever reason, segregation alone does not fully return client funds — for example, if there is a shortfall discovered during insolvency proceedings.
Why it matters for traders
Compensation schemes are only as good as the regulator and jurisdiction behind them — they typically apply only to specific regulated entities, not to a broker’s brand globally, and they usually cap the amount reimbursed per client. An offshore broker operating outside a scheme’s jurisdiction may offer no comparable protection at all. Before relying on “investor compensation” as a safety net, confirm which entity you’d actually be contracting with, whether it participates in a scheme, and what the current coverage limit and eligibility conditions are.
Quick recap
- An investor compensation scheme reimburses eligible clients, up to a cap, if a regulated broker fails.
- It works alongside, not instead of, client fund segregation.
- Coverage depends entirely on the specific regulated entity and jurisdiction — always verify directly rather than assuming.