What Really Protects Your Money If Your Bank or Broker Fails?

Three safety nets that look alike — and aren't

Imagine you're settling into a chair with a cup of chai, and a friend asks: "If my bank collapses, do I get my money back?" It sounds like one simple question. It's actually three different questions wearing the same coat. Bank deposits, brokerage accounts and crypto holdings each sit under separate protection systems — if they're protected at all. Understanding which one you're relying on is one of the most useful pieces of financial literacy a retail client can have.

Let's start with the plainest definition. A compensation scheme is a backstop: it steps in with a limited payout when a regulated firm fails and can't return what it owes you. It protects you from the firm, never from the market. If your shares fall in value, no scheme writes you a cheque. As the European Commission's guidance on investor compensation puts it, the directive does not cover investment risk — a decline in the price of what you bought is yours to bear.

The bank deposit model: caps, per person

Bank deposit insurance is the most familiar version. In the United Kingdom, deposits with banks, building societies and credit unions authorised by the Prudential Regulation Authority are protected by the Financial Services Compensation Scheme (FSCS) up to £120,000 per person. That covers current accounts, savings accounts, cash ISAs and savings bonds. The limit is per person, so a joint account with two holders is protected up to £240,000.

Two details trip people up. First, the limit is per banking firm, not per brand — so if one firm operates under several names, your accounts across all those names still share a single £120,000 ceiling. Second, the £120,000 figure applies to firms that fail on or after 1 December 2025; earlier failures were assessed under the previous £85,000 limit. There's also temporary protection of up to six months above the cap for certain "temporary high balances," such as proceeds from selling a property, generally up to £1.4 million — and no limit for balances linked to personal injury or incapacity.

The investor model: a floor, not a uniform number

Now the brokerage side. Here the picture is deliberately looser, because different jurisdictions set their own levels. The European Union's 1997 Investor Compensation Schemes Directive requires every member state to run at least one scheme, with a minimum of €20,000 per investor. That's a floor, not a ceiling — countries may pay more. A 2010 proposal to raise it to €50,000 was not endorsed and was withdrawn in 2015, so the €20,000 minimum has been standing for a long while.

What a scheme actually covers matters as much as the number. Generally it responds when a regulated investment firm can't return cash or assets it held on your behalf because of its financial condition, or when a judicial authority has intervened. In the EU, the directive does not cover investment losses, though it may extend to losses from poor advice. In the UK, the FSCS has historically gone further than most in covering losses arising from bad investment advice — one reason the UK is often described as an outlier on that point.

Some schemes also apply a percentage rule. Cyprus's Investor Compensation Fund covers non-professional clients up to €20,000, but pays 90% of an eligible claim rather than the full amount. Work an example: if a Cyprus-authorised broker fails and an administrator recovers €18,000 of your €30,000 from segregated client accounts, your remaining verified claim is €12,000. The scheme pays the lower of 90% of that (€10,800) and €20,000 — so €10,800. Above roughly €22,222 in verified claims, the 90% rule means every extra euro falls outside the cap.

Italy's National Guarantee Fund similarly caps compensation at €20,000 per investor, with claims generally filed within 180 days of the liquidation notice in the official gazette and payment within 90 days of the filing deadline.

The American cousin: SIPA and SIPC

The United States uses a different structure. Under the Securities Investor Protection Act of 1970, the Securities Investor Protection Corporation (SIPC) — a nonprofit membership corporation most registered brokers and dealers must join — typically arranges the transfer of a failed brokerage's accounts to another firm. If that isn't possible, the firm is liquidated and the trustee must distribute securities to customers to the greatest extent practicable: returning customer-name securities, distributing customer property ratably, and using SIPC funds to cover remaining net equity claims, with advances capped at $500,000 per customer, of which no more than $250,000 may be for cash. Note the orientation: an ordinary bankruptcy trustee converts securities to cash, whereas an SIPC trustee tries to preserve your portfolio as it stood. It's a restoration service, not a market hedge.

What actually does the heavy lifting

Here's the part that rarely makes headlines. Compensation is the safety net, but segregation is the trapeze artist. When a firm fails, client money and assets that were correctly kept separate from the firm's own funds are returned first. A scheme steps in for the shortfall — when segregation failed, records were wrong, or money went missing. For most clients of a well-run firm, segregation does the real work.

This is why regulators care so much about how client assets are held. The International Organization of Securities Commissions (IOSCO), the global standard setter for securities regulation, issued recommendations on the protection of client assets and later reviewed how widely they'd been adopted. IOSCO's broader principles require market intermediaries to meet minimum entry standards, hold capital and liquidity commensurate with their risks, and have procedures to limit loss to investors and contain systemic risk in case of failure.

This matters because of a scenario that plays out quietly: many brands run a European entity and an offshore entity under the same logo. If your client agreement names the offshore company, the European scheme doesn't apply to you — whatever the website footer suggests. Before opening an account, find the legal entity in your agreement, look it up on the regulator's own register, and note which scheme it belongs to and on what terms. Twenty minutes of checking outlasts a lot of regret. Keep an eye too on your client classification: opting up to "professional" status can remove retail protections.

Crypto: the protection gap

Now the honest part. Deposit insurance and investor compensation schemes were built for banks and regulated investment firms. Cryptoasset holdings sit largely outside those structures, and where protections exist they are newer, narrower and vary sharply by jurisdiction. The UK's Financial Conduct Authority has been consulting on stablecoin issuance and cryptoasset custody — a sign that rules are being drafted, not that a familiar safety net is already in place. Treat any assumption that crypto holdings enjoy deposit-style insurance as unverified, and check the rules that apply where you actually live. The available source material does not establish specific crypto compensation limits, so be sceptical of anyone who quotes one confidently.

One broader trend is worth noting: IOSCO's investor protection work now includes digital engagement practices, finfluencers, copy trading, neo-brokers and online fraud, and it has launched a global portal — the International Securities & Commodities Alerts Network — for identifying firms flagged as unauthorised or potentially fraudulent. Checking a register is becoming a genuinely practical habit rather than a box-tick.

A short, sane checklist

Protection is not a badge a firm earns once and keeps forever; it's a set of rules that depend on where your money legally sits. So: know the legal entity, know the scheme, know the cap and any percentage rule, know your client classification, and know where your assets are held and whether they're segregated. And remember the limits are usually per person, per firm — spreading money across accounts at the same firm changes nothing.

None of this tells you whether a provider is any good at what it does. A licence speaks to conduct and safety, not skill. That distinction — safety net versus performance — is the one worth carrying away with your chai.