What happens to my money if my broker goes bust?

The question comes back with every high-profile failure on the market: "if my broker has gone bust, has my money gone with it?". The short answer, in most cases, is no — because a licensed broker is protected by two independent layers. The first keeps your capital outside the firm's own assets. The second, if something is lost anyway, returns the money up to a defined cap. The catch is that both layers have limits, and the size of the guarantee depends on the licence your account actually sits under. Below I explain how the mechanism really works and what it does not cover.

Why client money stays out of the bankruptcy estate

The foundation of the protection is the segregation of client funds. An investment firm licensed in the European Union is required to hold client money in accounts separated from its own assets — it may not mix your deposit with the company's working capital or use it to finance day-to-day operations. This is not the broker's goodwill but a supervisory requirement under MiFID II, the Directive 2014/65/EU that governs the market in financial instruments across the Union.

The practical consequence is decisive. When a broker declares insolvency, what enters the bankruptcy estate — the pool from which its creditors are paid — is the firm's own property, not the funds entrusted by clients. Your money is legally "someone else's" in the broker's hands, so the administrator must, as a rule, return it to its owners before dividing the rest among banks, suppliers and other creditors. That is why a well-supervised broker that loses liquidity does not automatically drag its clients down with it.

"An investment firm shall, when holding financial instruments belonging to clients, make adequate arrangements so as to safeguard the ownership rights of clients, especially in the event of the investment firm's insolvency." — Directive 2014/65/EU (MiFID II), Article 16, European Parliament and Council, 2014.

Segregation also works the other way, as a warning sign. If a broker pushes you to deposit into a "company technical account", into a representative's private account or in cryptocurrency outside any custodial structure, that is a signal the first layer simply does not exist. The way a firm treats your funds tells you more about it than any banner promising returns. I covered the mechanics of separating accounts in more depth in the regulations section on forexmechanics.com.

How a national compensation scheme works

Segregation protects against "ordinary" insolvency, but not against a situation where client money actually disappears from the pooled account — through misappropriation, say, or a serious bookkeeping error. For that case a second layer exists: the investor compensation scheme. In Poland it is run by the Central Securities Depository (KDPW), with its legal basis in the Act on Trading in Financial Instruments, which implements the EU directive on investor-compensation schemes.

The limits are tiered. Compensation covers one hundred per cent of funds up to the equivalent of 3,000 euro, plus ninety per cent of the surplus above that amount. The total value of assets covered by the scheme is capped at 22,000 euro, and the maximum compensation per investor is 20,100 euro. In practice this means a small account is recovered in full, while with larger capital part of the risk stays on your side regardless. That is deliberate — the guarantee is meant to protect the savings of an average retail client, not to be full insurance on any amount.

It is worth separating two ideas that are easy to confuse. The KDPW scheme applies to brokerage houses and to money entrusted under investment services. That is not the same as a bank deposit guarantee, which protects bank deposits up to 100,000 euro. If your broker is part of a bank, your money may fall under different schemes depending on which account it sits in and in what capacity it is recorded — and that, again, follows from the contract, not from guesswork.

Cyprus, the UK and the "foreign broker" trap

The most common mistake a retail client makes is assuming that because a broker operates in the Union, the protection is the same everywhere. It is not. The limit and the procedure depend on the jurisdiction of the licence you sign the contract under, and many global brands run accounts through companies in different countries. Three examples show the scale of the difference.

Cyprus matters here because many popular brokers serving clients across the EU operate under CySEC supervision, and the ICF fund guarantees noticeably less than the British FSCS. More caution still is needed with an entity outside the European Union. A "foreign CFD broker" is sometimes registered in a jurisdiction where no real compensation scheme applies and where enforcing a claim is, in practice, illusory. I discuss the differences in supervisory status itself in the article on the local versus foreign broker, and the broader client-protection framework in the piece on MiFID II regulation in forex.

What the protection does not cover — and what 2015 taught us

The single most important honest caveat is this: neither segregation nor the compensation scheme protects you against a market loss. If you lose capital on your own trades, no guarantee returns it — this is not insurance against bad decisions. The second point is time. Even a smoothly functioning compensation scheme does not pay out the next day; there can be a queue of creditors, a procedure and a delay measured in weeks or months.

You also have to understand the arithmetic of the limits. With a 22,000 euro cap on covered assets, a client who held the equivalent of 50,000 euro on the account would, in the event of misappropriation, recover the guaranteed portion and then have to fight for the rest as an ordinary creditor in the proceedings — with no certainty anything comes back. The limit is therefore not a promise to "return everything", only a ceiling. The larger the capital, the smaller the percentage the guarantee actually protects, and the more it matters to spread funds and to choose a soundly supervised entity.

The black Thursday of 15 January 2015 illustrates this well, when the Swiss National Bank scrapped the 1.20 floor on EUR/CHF and the franc strengthened by more than twenty per cent within minutes. Several brokers went insolvent because clients were left with balances below zero. In the UK, Alpari UK was wound up, and its retail clients recovered funds through the FSCS — the guarantee worked, but the payouts stretched out over time. That was a double lesson: the scheme works, yet it is not a cushion that removes the stress and the delay. Soon afterwards the Union introduced mandatory negative balance protection, so that a retail client would not leave an account owing a debt to the broker.

A third caveat concerns the credibility of the licence itself. Guarantees only mean something if the broker genuinely falls under the supervision it claims. The list of red flags — from the absence of a verifiable licence to pressure for a fast deposit — sits in the article on how to spot a scam broker. A separate trap that catches people who have already lost money is so-called fund recovery firms promising to retrieve money from a broker — these operate as a secondary scam and in practice never return any funds. This is not legal advice, and the specific thresholds and procedures change over time, so every figure in this article is worth confirming at the regulator's source.

What to do tomorrow

1. Find the company name and licence number in your account documents. Open the terms of business and the account registration confirmation and write down the exact name of the entity you have a contract with, together with the country of its licence. This five-minute task decides whether you are protected by a 22,000 euro cap, a 20,000 euro one, an 85,000 pound one, or effectively nothing.
2. Verify that entity in the relevant regulator's register. For a Polish brokerage house use the KNF entity search; for a foreign one, the register of the relevant commission. Check that the licence number from the contract matches the entry in the register, not merely the logo on the broker's marketing page.
3. Establish which compensation scheme you actually fall under. Match the jurisdiction of the licence to the right scheme — KDPW for Poland, the ICF for Cyprus, the FSCS for the United Kingdom — and note the applicable limit and whether one exists at all. If the entity sits outside the Union, treat the absence of a guarantee as a real risk, not a formality.
4. Size your balance against the guarantee limit. If you hold more on the account than the relevant jurisdiction's scheme covers, consider splitting capital across institutions or knowingly accepting the surplus as risk above the guarantee. Run this calculation once and return to it with every larger deposit.