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Broker Safety: Regulation and Investor Protection
Key takeaways
- A regulated broker must segregate client assets from its own — that is the fundamental protection.
- In the EU, the MiFID II directive and a compensation system of up to EUR 20,000 apply.
- Regulators differ in supervisory strength — FCA and BaFin are stricter than some smaller EU regulators.
- When choosing a broker, always verify which regulator it operates under and in which country.
- Deposit protection covers securities, not cash — the latter is protected differently.
Broker safety rests on two pillars: regulation, which sets the rules of the game, and segregation of client assets, which protects your securities if the broker goes bankrupt.
What Regulation Is and Why It Matters
A broker operating in the EU must hold a licence from a local regulator and comply with the MiFID II directive. This requires it to maintain client accounts separately from its own assets — see the separate article on asset segregation. However, regulators differ in supervisory strength:
- FCA (UK) — outside the EU post-Brexit, but generally regarded as a strict regulator.
- BaFin (DE) and AFM (NL) — strong EU regulators with active oversight.
- CySEC (CY) — popular due to lower costs for brokers; historically less strict in oversight.
- CNB — oversight of brokers headquartered or with a branch in the Czech Republic.
Investor Compensation Systems
In the EU, the Investor Compensation Scheme (ICS) operates: if a broker goes bankrupt and client assets are unavailable or damaged (not in the case of a market decline!), the compensation fund pays out up to EUR 20,000 per client. This is insurance against insolvency, not protection against market risks.
How a Broker Applies Protection in Practice
Securities must be deposited with a custodian (securities administrator), who segregates them from the broker's assets. In the event of broker bankruptcy, your ETFs still exist at the depository account — they are not part of the bankruptcy estate. Cash in a trading account has weaker protection, so keep only as much as needed for planned purchases.
What to Focus On When Choosing
When choosing a broker, verify in the fee schedule or terms: which regulator the broker operates under, where the securities are held, and who the custodian is. More practical advice can be found in the article how to choose a broker for a Czech household.
FAQ
What happens to my ETFs if the broker goes bankrupt?
If the broker properly maintained segregated accounts, your securities remain at the custodian and belong to you — they are not part of the bankruptcy estate. It may take weeks before you can access them again, but you will not lose them.
What is ICS and how much does it cover?
The Investor Compensation Scheme is the EU system for compensation in the event of broker insolvency. It pays out up to EUR 20,000 per client. It does not cover market losses — only the situation where the broker misappropriated or lost client securities.
Is a CySEC broker dangerous?
Not automatically. CySEC is a legitimate EU regulator. Historically it was less strict than FCA or BaFin, but MiFID II obligations apply to all. The important thing is to verify that the broker actually complies with asset segregation rules.
How do I know the broker is properly holding my securities?
In the terms or statement, look for mention of a custodian and "segregated accounts." A regulated broker must provide this information. You can also verify registration directly on the regulator's website (CNB, FCA, CySEC).