17 June 2024

Trade with confidence in times of uncertainty

Banking & Finance
| The European |

By trading with USG UK, investors can face volatile markets knowing that they are fully protected under the FCA umbrella 

All traders appreciate the relationship between risk and reward. Volatile markets provide both risk and potential reward in abundance. However, it is not the role of regulators to advise you on how to manage your potential market risk. Nevertheless, the regulators do require that authorised financial companies warn you of the potential risks and, in the case of CFD trading, to quantify the risk, as a percentage of customers who lose money on their platform. Therefore, a number of protections have been put in place by regulators to provide some peace of mind to investors, especially retail investors. The most important one is only available to retail investors and is known as negative balance protection.

Negative balance protection was brought in by the European Securities and Markets Authority (ESMA) in 2018 and was subsequently adopted by the Financial Conduct Authority (FCA). It obliges brokers to ensure that retail investors do not lose more money than they have invested. On the face of it, this sounds like a rather pointless regulation, because in normal markets a client’s position would be closed-out before their balance dropped below zero. Commentators were regularly heard saying that this regulation would only have effect if a “black swan” event occurred. A black swan event is defined by Investopedia as an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. 

Black swan events are characterised by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight. The reaction of financial markets to a crisis such as Covid-19 demonstrates a good number of the characteristics of a black swan event, so negative balance protection now becomes extremely relevant.

In exceptionally volatile markets there is a risk that a close-out order is not able to be enacted because there is basically no trade at that price. This is because the market can “gap”. This leaves you at risk when, despite the best efforts of you and your broker, your account goes into negative territory. What this protection does is ensure that the broker is held responsible for any negative balances and the retail clients will not be accountable for any losses below zero on your account. Given the hugely volatile markets that are almost undoubtedly going to be the norm for the foreseeable future, it is very important for retail investors to check that you are with a regulated broker and that you are covered by negative balance protection.

The two further protections are more aimed at the safety of the funds deposited with regulated financial companies. The first of these is the segregation of funds. The purpose of the segregation of client’s funds from those of the company is to protect the client. An FCA authorised firm is governed by the FCA’s rules, especially the “client money rules” for the way in which they hold and deal with a client’s money.

Peace of mind for investors 

These rules require that a client’s money is held in a separate bank account to that of the company’s money. The bank accounts that hold client funds are established with FCA prescribed acknowledgment letters in which the bank recognises that the funds are held in trust for the client and is separate from the company’s.

The final protection is the Financial Services Compensation Scheme (FSCS) which was set up in 2001 having been established under the Financial Services and Markets Act 2000 (FSMA). It is a non-profit-making independent body which is financed by levies on authorised financial services firms. The scheme’s rules are made by the FCA and are contained in their handbook.

The FSCS is the UK’s statutory deposit insurance and investors compensation scheme for customers of authorised financial services firms. In simple terms this means that the FSCS can pay compensation to the customers of a firm if it is unable, or unlikely to be able, to pay claims against them. The cover has been increased to £85,000. This is the maximum amount that can be compensated to each individual client of each financial services firm. Please note though that the cover is for each individual and not each account.

According to Simon Quirke CEO of leading broker USG UK: “Protections like these provided by USG UK give investors some peace of mind. Investors have enough to deal with in volatile markets without having to worry about their account or money being mismanaged. Investors can be assured that, by trading with USG UK, they have all the protections offered under the FCA umbrella by an FCA authorised and regulated firm.”

Indeed then, there are protections in volatile markets but these are only available to clients of firms regulated and authorised by the FCA, like USG UK.

Further information 


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