Segregated funds protect you if the broker fails, not if your trades do
Segregation means the broker holds client money in accounts identified separately from its own money, so it cannot be used for the firm's expenses or debts. If the firm fails, that pool is meant to be returned to clients rather than shared among the firm's creditors.
It does not cover trading losses and it does not guarantee a full return. If the pool is short, the next layer is an investor compensation scheme, where one applies.
- What the rules requireFCA CASS 7.13 and ASIC RG 212
- What happens in a shortfallA worked example
- How to check yoursAgreement, payee, register
- What it does not coverFour gaps
1. What the rules require
United Kingdom: FCA CASS 7.13 rule text
- Segregation is described as "an important safeguard" for client money (7.13.1G).
- Client money must be promptly placed with a central bank, a qualifying credit institution, a third-country bank or a qualifying money market fund (7.13.3R), normally paid straight into a client bank account (7.13.6R).
- Client accounts must be identified separately from the firm's own money (7.13.12R), and the firm must be able to withdraw the money within one business day, subject to limited exceptions (7.13.13R).
- Banks are chosen and reviewed with due skill, care and diligence (7.13.8R); no more than 20% of client money may sit with group entities (7.13.20R).
- Money must be allocated to individual clients within ten business days (7.13.36R).
Australia: ASIC RG 212 guidance text
- Since 4 April 2018 a licensee cannot rely on a client's consent to use derivative retail client money to hedge the licensee's own risk, as its capital or working capital, or for its own obligations.
- Licensees must meet record-keeping, reconciliation and reporting requirements for that money.
2. When the pool is short hypothetical
Invented figures. A UK-authorised firm fails. Its records show £10 million owed to clients, but the segregated accounts hold £9 million. You were owed £50,000.
- Distribution from the pool.If the pool is shared pro rata, you receive 90% of £50,000, which is £45,000.
- Compensation for the gap.The remaining £5,000 may be claimed from FSCS if you are eligible, within its £85,000 per person, per firm limit for investment firms that failed after 1 April 2019.
- Beware "recovery" offers.The FCA warns that recovery scams target people who have lost money and charge upfront fees.
The actual distribution method is set by the insolvency process; the pro rata split is a simplification to show how the layers fit together.
3. How to check your own account
- Read the client money clause.Look for whether money is held as client money or on trust, the type of bank, and any carve-outs letting the firm use it.
- Check who you paid.The payee on your transfer should be the contracting entity or its client account. Payments to individuals or unrelated companies never entered a protected pool.
- Check the register.Confirm the contracting entity holds permission to hold client money. Compare entities with the licence check.
4. Four things segregation does not cover
- Trading losses, which are no longer your money once realised.
- A shortfall in the segregated pool itself.
- Group companies outside the UK or Australian rules.
- Money sent anywhere other than the firm's client account.
5. Frequently asked questions
"Held at a top-tier bank": is that enough?
The bank's name says where the money sits, not whether it is in a client account or who can move it. Read the agreement and the firm's obligations.
How does FXCN score this?
Verifiable segregation adds 30 points in FXCN's risk-and-compliance dimension, which starts at 50, caps at 100 and carries 20% of the total score. A bare claim without evidence does not count.
Is segregation the same as negative balance protection?
No. Negative balance protection limits what you owe after your own trades; segregation deals with the firm's failure.