Investors Chronicle reader Dr Andrew Brewster has written in to ask about this. He says: "I feel I should explore the possibility that there might be self-select individual savings account (Isa) providers out there who offer a greater level of asset protection than my present provider. This is in the event that my Isa provider may go bust and I might then become a creditor in these circumstances with assets exceeding Financial Services Compensation Scheme compensation levels."
Let's examine those levels. The maximum amount covered by the Financial Services Compensation Scheme is £50,000 for investments and £85,000 for deposits (per person, per firm). The FSCS can pay only when an authorised firm is in default.
In the case of investment compensation, FSCS provides protection if an authorised investment firm is unable to pay claims against it. For example:
Investments covered include: stocks and shares; unit trusts; futures and options; personal pension plans and long-term investments such as mortgage endowments.
The inclusion of the phrase "poor investment management" does not mean that you would be able to claim if the fund manager picked stocks that went down in value.
So should it be necessary to split your holdings between stockbrokers if you hold more than £85,000? Probably not, with some caveats.
The vast majority of Isa providers/stockbrokers/platforms hold the assets of savers ring-fenced in a nominee account, which works a bit like a trust. The custodian of this account - a third party, separate to the provider - is the legal owner, but you are the beneficiary.
Your assets are held in the name of the nominee and do not appear on the provider's balance sheet. In the event of an insolvency, these assets would not be available to its creditors, nor to those of the nominee company if it were to fail, and that should ensure that you receive the full value of your investments.
In theory, all this means it should not be necessary to split your Isas between providers just to make sure your investments are covered. But it might still be a good idea to do so. For instance, it could take a long time to extract assets from a failed nominee company, during which time the value of those holdings could decline. Also, nominee accounts are pooled. If there is a shortfall, due to fraud or incompetence, you may not get all your assets back. This is what happened to clients of Pacific Continental, a stockbroker that failed in 2007.
And in the very unlikely event that the third party holding the nominee account became insolvent and was unable to return your assets, then the FSCS would cover up to £50,000 of investments and up to £85,000 of cash.
You need to check the small print provided with your Isa or stockbroking account to see what applies to you. If the literature is unclear, then contact your provider to establish the exact arrangements.
Alternatively, you could hold shares within a personal Crest account, where they'll be held in your name. But not many brokers offer this service, those that do will charge extra for it, and it doesn't apply to funds.
Note that you will be unable to hold any shares in an Isa via Crest. HMRC rules require shares within Isas to be held within a nominee account.
Our stockbroker research revealed 10 stockbroker accounts that offer Crest membership (see table below).
