'Are my ISA savings protected if my broker goes bust?' loveMONEY reader questions answered

A reader is worried about their ISA investments in the event that their broker goes bust. Sarah Coles from Hargreaves Lansdown explains what protections are in place.

Am I right in saying that shares held in an ISA are only protected up to £55,000? What happens when someone has a portfolio in excess of £100,000 if the stockbroker managing the ISA goes bust?

In a nominee account, you are simply part of a pool and that pool could have been corrupted by the manager(s).

So what do people do to protect themselves against fraud and other malpractices where they have portfolios in excess of £100,000?

Help from the loveMONEY Expert Panel

Sarah Coles (pictured), personal finance analyst at Hargreaves Lansdown and member of the loveMONEY Expert Panel, gives this investor some reassurance. 

The good news is that you have much greater protection than you think. Shares in a nominee service are held entirely separately from the broker, in a trust company. This separate company cannot run up liabilities of its own and won’t be affected in the unlikely event that the broker goes bust.

If you have sold all your shares and are holding cash in a nominee account at the point a broker goes bust, you are also protected. This is because the money is held on trust by third-party institutions (usually banks) and separated from the company’s own funds.

If one of those banks was to go bust, then the first £85,000 you have with that particular bank (including any money held in your own accounts) will be covered by the FSCS. However, cash held in your share dealing accounts may be spread across more than one institution. Hargreaves Lansdown, for example, spreads cash across five clearing banks.

If you hold a fund and the fund manager goes bust, then the underlying assets are protected. The stocks owned by that fund are held separately by a trustee or a depositary, so if the fund manager goes under, the investments in the fund remain.

You also asked what happens in the event of fraud or malpractice. If there was a problem with the separate company holding the shares in a nominee account, check if your broker would accept full responsibility for any default. This should be in their terms and conditions. If they don’t, you would need to rely on FSCS protection which covers the first £50,000 of your investments.

As for the broker themselves, the safety of your money in part depends whether the broker is regulated, and their adherence to the rules laid out by the FCA. There is much less protection with unregulated businesses and services.

With public companies, you can check the independently audited report and accounts to see how conservatively their company money is managed.

They will also make it clear the checks and balances they have in place to ensure procedures are followed correctly. If a broker ceases trading and cannot satisfy claims made against it, then investors are likely to be covered by the FSCS and can be awarded up to £50,000 in compensation each – but this should be a final safeguard for the worst case scenario rather than being considered your only protection.

Open a Stocks & Shares ISA for as little as £50 (capital at risk)

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This communication has been specifically designed and written for use by the media. This is not a communication for investors: it is not personal advice or a recommendation to either invest or to refrain from investing. The views expressed by the author do not necessarily reflect those of loveMONEY.