Compensation schemes appear in broker comparisons as a checkbox, which obscures both what they do and how much they differ. They are insurance against one specific event — the failure of an authorised firm that cannot return what it owes clients — and they are irrelevant to every other risk in trading.
The essentials
- They cover firm failure, never trading losses.
- Limits differ by an order of magnitude between jurisdictions.
- They follow the legal entity holding your account, not the brand.
- Several major jurisdictions have no equivalent scheme at all.
What triggers a claim
A scheme pays when an authorised firm is unable to meet its obligations to clients — typically insolvency where segregated client money is short, whether through fraud, error or the failure of a bank holding it.
It does not pay because a position lost money, because a stop filled badly, because the broker's spreads were wide, or because a strategy failed. Those are commercial outcomes, and no scheme in any jurisdiction covers them. This distinction accounts for most of the disappointment schemes generate, because the checkbox in a comparison table implies a broader protection than exists.
The three schemes most relevant to retail traders
<strong>The Financial Services Compensation Scheme</strong> in the United Kingdom covers eligible claims up to £85,000 per person per firm. It is funded by an industry levy and pays without litigation. In practice it is the strongest of the three for a retail trader, both in limit and in the speed with which it has historically paid.
<strong>The Investor Compensation Fund</strong> in Cyprus covers eligible claims up to €20,000 per client. The limit is materially lower, and payouts have historically been slower. The fund exists and has paid, but a client holding a substantial balance at a Cypriot entity should size expectations to the limit rather than to the existence of the scheme.
<strong>SIPC</strong> in the United States covers securities accounts up to $500,000, including $250,000 for cash. It is important to note what it excludes: SIPC does not cover forex or commodity futures positions, so its relevance to a currency trader is limited to any securities held at the same firm.
Australia has no equivalent scheme
Client money at an Australian-licensed broker is protected by segregation rules and by supervision, not by a compensation fund. If such a firm fails, recovery follows insolvency law. This is a substantive difference from the UK and Cyprus that comparison tables rarely make explicit.
Per person, per firm — and what that means
Limits apply per eligible claimant per failed firm, not per account. Holding three accounts at one broker does not triple the protection; it divides one limit across three balances.
The practical consequence for anyone whose trading capital exceeds a scheme limit is to hold it at more than one firm. This is the same reasoning that governs bank deposit protection, and it is unfamiliar in trading only because most retail balances sit well below the limits.
Joint accounts are usually treated as two eligible claimants, doubling the effective limit. Corporate accounts may or may not be eligible depending on the entity's size, and the rules on that are specific enough to check rather than assume.
The entity question, again
Scheme membership belongs to the licensed entity, not to the brand. A broker group holding a UK licence, a Cypriot licence and an offshore registration provides three different levels of protection, and which one applies to you is determined by which entity holds your account.
Clients outside the licensed regions are routinely onboarded to the offshore entity, where no scheme exists. The website may prominently display the strongest licence in the group throughout. The client agreement names the actual entity, and it is the only document that answers the question.
Establishing your actual coverage
- Find the entity name and licence number on your client agreement.
- Look the number up on the regulator's own public register.
- Confirm the entity is a member of the relevant compensation scheme.
- Note the limit and check it against your intended balance.
- If the balance exceeds the limit, plan to hold the excess elsewhere.
- Recheck if the broker restructures or migrates your account to another entity.
What segregation does that a scheme does not
Client money segregation requires the firm to hold client funds separately from its own, so that in an insolvency they are not available to the firm's creditors. It is the first line of protection and it works in the ordinary case: a firm that fails with properly segregated funds intact returns them.
The compensation scheme covers the case where segregation failed — funds were not held properly, or a bank holding them failed. The two work together, and neither substitutes for the other. A jurisdiction with segregation rules but no scheme protects you against firm insolvency but not against firm misconduct.
How much weight to give it
For an account holding a few thousand units of currency, the scheme is a reassurance that will almost certainly never be used, and it should not outweigh cost or execution in choosing a broker. For an account holding a substantial fraction of someone's savings, it is one of the most consequential differences between two otherwise similar firms.
The general rule is to size exposure to a broker as if the scheme did not exist, and to treat it as the backstop it is rather than as a licence to concentrate funds.
Common questions
Does a compensation scheme cover my trading losses?
No. It covers the failure of an authorised firm that cannot return client money. Losses from trading are commercial outcomes and are not covered by any scheme.
If I have three accounts at one broker, is my protection tripled?
No. The limit applies per claimant per firm, so one limit is shared across all your accounts there. Holding balances at separate firms is what multiplies the protection.
Does SIPC protect my forex account?
No. SIPC covers securities accounts and explicitly excludes forex and commodity futures. Its relevance to a currency trader is limited to securities held at the same firm.
What if my account is with an offshore entity?
Then no scheme applies, and recovery in a failure depends on whatever assets exist and on insolvency proceedings in that jurisdiction. Size the balance accordingly.
