Segregated Client Money: What It Protects and What It Does Not

[Fairman]

Segregated Client Money: What It Protects and What It Does Not

Regulated brokers must keep client money separate from their own funds. This segregation is among the most important protections, though its limits are often misunderstood.

In a segregated arrangement, client deposits sit in accounts at banks, held in trust or marked as client money, and cannot be used for the firm's operating expenses. If the broker becomes insolvent, those funds should be returned to clients, ahead of the firm's creditors, in principle.

Where does it fall short? Segregation protects against misuse by the broker, but not against all losses. If the bank holding the funds fails, clients may be exposed, depending on deposit protection. If the broker's records are flawed, recovery can take long. And client money rules do not cover the profit and loss on open positions in the same way, particularly when the broker is the counterparty.

Procedures matter too. The process of returning funds after insolvency can take months, and clients may receive less than a full amount if there is a shortfall.

Some jurisdictions add compensation schemes that pay out up to a defined limit. Check whether your account qualifies, since professional or offshore clients may not.

Offshore brokers may claim to segregate funds without regulatory enforcement, which makes the claim less meaningful.

Read the client agreement for statements about how funds are held, and with which banks.

Practical step: find the clause in your broker's terms about client money, and note the banks named.

[Fairman]

The offshore point is key. Anyone can write segregated funds on a website. What matters is whether a regulator checks it and what happens if they don't. With strong regulators, client money rules are audited and there are consequences for breaking them, and sometimes a compensation scheme on top. With weak offshore registration, there may be no audit and no realistic way to recover money if the firm disappears. Look up the licence number on the regulator's own website, not the link the broker provides, and check the entity name matches your account documents. It takes five minutes and tells you whether the protection is real or just a claim.

[Fairman]

Worth checking whether you'd be classed as retail or professional too. Some protections and compensation schemes only apply to retail clients. Brokers sometimes encourage people to opt up to professional status for higher leverage, and the form can look like a simple upgrade. In many places it means losing negative balance protection, leverage limits and access to the ombudsman, among other things. If you're a newer trader, staying classed as retail is usually the safer choice. Higher leverage mostly gives you more ways to lose money quickly, and the protections you give up matter most on exactly the days when things go wrong.