The rise of online investment platforms has revolutionized the way people invest their money. With the click of a button, investors can now access a wide range of investment products, from stocks and bonds to cryptocurrencies and peer-to-peer lending. However, as with any investment, there is always a risk that the platform may go bust, leaving investors wondering what will happen to their money.
Understanding the Risks
Before we dive into what happens if an investment platform goes bust, it’s essential to understand the risks involved. Investment platforms are not banks, and they are not subject to the same regulatory requirements. While some platforms may offer protection for investors, such as the Financial Services Compensation Scheme (FSCS) in the UK, others may not.
Types of Investment Platforms
There are several types of investment platforms, each with its own set of risks. Some of the most common types of platforms include:
- Brokerage platforms: These platforms allow investors to buy and sell stocks, bonds, and other securities. Examples include Robinhood and eToro.
- Peer-to-peer lending platforms: These platforms allow investors to lend money to individuals or businesses, earning interest on their investment. Examples include Lending Club and Funding Circle.
- Cryptocurrency platforms: These platforms allow investors to buy, sell, and store cryptocurrencies such as Bitcoin and Ethereum. Examples include Coinbase and Binance.
What Happens if an Investment Platform Goes Bust?
If an investment platform goes bust, it can be a complex and confusing process for investors. Here are some possible scenarios:
Insolvency Proceedings
If an investment platform becomes insolvent, it may enter into insolvency proceedings. This can involve the appointment of an administrator or liquidator, who will take control of the platform’s assets and liabilities.
- Administrator: An administrator is appointed to try to rescue the platform or sell its assets to pay off creditors. If the administrator is successful, the platform may be able to continue operating, and investors may be able to recover some or all of their investment.
- Liquidator: A liquidator is appointed to wind up the platform’s affairs and distribute its assets to creditors. If the liquidator is appointed, it is likely that the platform will cease to operate, and investors may lose some or all of their investment.
Investor Protection
Depending on the type of investment platform and the jurisdiction in which it operates, investors may be protected by regulatory schemes or insurance policies. For example:
- FSCS: The FSCS is a UK-based scheme that provides protection for investors in the event of a platform’s insolvency. The scheme covers investments up to £85,000 per investor, per platform.
- SIPC: The SIPC is a US-based scheme that provides protection for investors in the event of a platform’s insolvency. The scheme covers investments up to $500,000 per investor, per platform.
Case Studies
There have been several high-profile cases of investment platforms going bust in recent years. Here are a few examples:
Beaufort Securities
In 2018, Beaufort Securities, a UK-based brokerage platform, went into insolvency proceedings. The platform’s assets were frozen, and investors were left wondering what would happen to their money. In the end, the FSCS paid out £40 million to affected investors.
QuadrigaCX
In 2019, QuadrigaCX, a Canadian cryptocurrency platform, went into insolvency proceedings. The platform’s founder, Gerald Cotten, died suddenly, taking the passwords to the platform’s cryptocurrency wallets with him. Investors were left with significant losses, and the platform’s assets were eventually sold off to pay off creditors.
Conclusion
While investment platforms can offer a convenient and accessible way to invest, they are not without risk. If a platform goes bust, investors may be left with significant losses. It’s essential to understand the risks involved and to take steps to protect yourself, such as:
- Diversifying your investments: Spread your investments across multiple platforms and asset classes to reduce your risk.
- Researching the platform: Before investing, research the platform’s reputation, regulatory status, and investor protection policies.
- Monitoring your investments: Keep a close eye on your investments and be prepared to take action if the platform’s financial situation changes.
By taking these steps, you can reduce your risk and protect your investments in the event of a platform’s insolvency.
What happens to my investments if an investment platform goes bust?
If an investment platform goes bust, the impact on your investments will depend on the type of investments you hold and the platform’s business model. In general, if you hold direct investments such as shares or bonds, these assets are typically held in your name and are not affected by the platform’s insolvency. However, if you hold investments through a nominee account, the situation may be more complex.
In a nominee account, the investments are held in the name of the platform or its nominee company, rather than in your name. This means that if the platform goes bust, there may be a risk that your investments could be treated as part of the platform’s assets, rather than being ring-fenced as your own. However, many investment platforms have measures in place to protect client assets, such as segregating client money and assets from the platform’s own assets.
How do I know if my investments are protected if an investment platform goes bust?
The level of protection for your investments will depend on the specific arrangements in place at the investment platform. In the UK, for example, investment platforms are required to segregate client money and assets from their own assets, which provides a level of protection in the event of insolvency. Additionally, many investment platforms are members of the Financial Services Compensation Scheme (FSCS), which provides compensation to eligible claimants in the event of a firm’s insolvency.
To check if your investments are protected, you should review the terms and conditions of your account and check the platform’s website for information on their client asset protection arrangements. You can also contact the platform directly to ask about their procedures for protecting client assets in the event of insolvency.
What is the Financial Services Compensation Scheme (FSCS) and how does it work?
The Financial Services Compensation Scheme (FSCS) is a UK-based compensation scheme that provides protection to eligible claimants in the event of a financial services firm’s insolvency. The FSCS is funded by levies on financial services firms and provides compensation to claimants who have lost money due to a firm’s insolvency.
The FSCS provides compensation for a range of financial products, including investments, pensions, and insurance policies. The level of compensation varies depending on the type of product and the circumstances of the claim. For example, the FSCS provides compensation of up to £85,000 for eligible investment claims. To make a claim, you will need to contact the FSCS directly and provide evidence of your loss.
Can I claim compensation from the FSCS if an investment platform goes bust?
You may be eligible to claim compensation from the FSCS if an investment platform goes bust and you have lost money as a result. To be eligible, you will need to meet certain criteria, such as being a private individual or a small business, and having invested in a product that is covered by the FSCS.
The FSCS will typically only provide compensation if the investment platform is authorized by the Financial Conduct Authority (FCA) and is a member of the FSCS. You can check if the platform is a member of the FSCS by visiting the FSCS website or contacting the platform directly. If you are eligible to claim, you will need to provide evidence of your loss and complete a claim form.
How long does it take to get compensation from the FSCS?
The length of time it takes to get compensation from the FSCS can vary depending on the complexity of the claim and the availability of information. In general, the FSCS aims to process claims within 6-12 months, although some claims may take longer.
Once you have submitted your claim, the FSCS will review your application and may request additional information or evidence to support your claim. If your claim is successful, the FSCS will provide compensation as soon as possible. You can track the progress of your claim by contacting the FSCS directly.
What should I do if I am concerned about the financial stability of an investment platform?
If you are concerned about the financial stability of an investment platform, there are several steps you can take. Firstly, you should review the platform’s website and terms and conditions to understand their business model and client asset protection arrangements.
You can also check the platform’s regulatory status by visiting the Financial Conduct Authority (FCA) website. The FCA regulates investment platforms in the UK and provides information on authorized firms. Additionally, you can contact the platform directly to ask about their financial stability and procedures for protecting client assets. If you are still concerned, you may want to consider transferring your investments to a different platform.