Forex Broker Compensation Schemes: FSCS & ICF Explained

A forex broker going bust leads to traders laser-focusing on the term “regulated”. Unfortunately, certain terms used interchangeably, like “regulated” and “compensated”, often trip traders up at the worst conceivable moment. 

The Financial Services Compensation Scheme (FSCS) in the UK and the Investor Compensation Fund (ICF) in Cyprus are two important compensation schemes available to eligible retail investment clients. Neither of these schemes operates like bank guarantees to insure your trading account, nor does a bank refund lost trades like a savings account. 

Don’t just focus on the headline figure. It’s far more important to understand the scheme’s specific terms and actual limits.

What the FSCS Covers

The FSCS is a statutory compensation scheme in the UK, and is funded by levies on FCA-authorized firms, rather than by the government. For deposit-taking firms, or banks, the FSCS provides protection to savings amounting to £85,000 per person per bank. That deposit protection applies to bank savings, not to money held with a forex or CFD broker. Those funds fall under a separate investment limb, covered next.

For eligible investment claims, the FSCS provides compensation of up to £85,000 per person, per firm. This applies only when an authorized firm fails and cannot meet a valid legal liability. This compensation is applicable only in the event that the firm closes (i.e. goes insolvent, ceases trading, etc.) or is otherwise unable to meet its obligations. 

Compensation also applies if the firm fails to return money or assets it was legally obligated to keep. Clients are similarly covered if they suffer losses due to unsuitable advice or account mismanagement. 

A client whose account value decreased due to market movement will not receive any compensation from the FSCS. The FSCS is intended for firm failure and for instances of conduct that is not in line with the expectations of responsible business behavior.

There is also an FSCS eligibility filter. Protection from the FSCS is afforded to retail clients. If a broker has classified an account as a professional or elective professional client, that account may be completely outside the protection of the FSCS. 

This happens with greater frequency than most people realize once trading volume or account size reaches certain levels. Traders who have been offered professional trading status and, with it, access to higher levels of leverage should verify what kind of protection (if any) they have forfeited.

What the ICF Covers, and Why the Number Is Smaller

The Investor Compensation Fund is the equivalent mechanism for Cyprus Investment Firms (CIFs) regulated by CySEC. It is the scheme traders encounter when they use a broker regulated out of Cyprus. This is a common configuration for firms that provide services to clients in the EU or other regions. The ICF pays clients if its members’ firms can’t pay due to insolvency.

The ICF pays clients €20,000 or 90% of the client’s loss, whichever is less. This compensation is much less than the FSCS, which pays up to £85,000. Most CySEC-regulated brokers have small compensation funds and service a large number of retail clients in many countries. 

The ICF operates similarly to the FSCS. It will not cover regular trading losses or compensate clients of unlicensed firms. This creates a significant risk for clients. Many unlicensed offshore firms operate under different rules while using deceptive, EU-sounding names.

It is also important to note that some CySEC licenses do not include automatic ICF membership. Some classes of investment firms are exempt. The ICF coverage also depends on CySEC’s membership. Brokers have had ICF membership withdrawn after losing their CIF license. This is especially important for traders because some firms have previously advertised this protection.

The Core Difference Traders Miss

FSCS vs ICF: which is better; this is the real comparison people want to make. However, there are more critical issues. Both compensation schemes cover the same restricted circumstances, just at different ‘limits’. Neither scheme provides an investment guarantee. 

Neither applies simply because a broker widened spreads, requoted a price, or froze withdrawals; the protection begins only once insolvency has been legally established. Both hinge upon the failure of the firm being the direct cause of the loss, and both involve a formal claims process that can take months.

For this reason, client fund segregation is more important than both client compensation schemes combined. A broker is required to hold client funds in a separate account from the broker’s operating account to prevent the client funds from being lost should the broker go out of business. Most of the time, the compensation scheme is the least of client considerations.

Checking What You’re Actually Covered For

To determine which scheme applies to a given situation, a trader has to look into three things.

• Which regulator licenses the specific legal entity that holds their account
• Whether the legal entity classifies the account as retail or professional
• What the current compensation limit is for that jurisdiction, as the figures are subject to change

Not all of this information is provided on a broker’s marketing page; in most cases you will have to review the regulator’s public register to confirm.

In the client agreement, client money management and compensation may not be the most exciting sections, but they contain the most important information. 

When you read Broker Agreements prior to placing orders, you will know what information to find in that agreement prior to the live operation of the account. Even though compensation limits are one aspect of a much broader regulatory framework, regulation affects the way orders are executed, how funds are managed, and how disputes are resolved, which is why this broader issue of oversight is vital.

Compensation schemes address a specific, fairly narrow failure mode – a broker is unable to return what it owes. They should be known, but they do not eliminate the need to select a broker that is well-capitalized, licensed, and in good standing, and to limit account size to an amount that stays within the compensation scheme’s coverage.