A compensation scheme pays out when a regulated firm fails and client money is missing — not when a trade goes badly. That distinction matters more than the headline number, because it's the one most people get wrong when they see "FSCS" or "ICF" mentioned on a broker's homepage and assume it covers trading losses too. It never does. This article sets out what these schemes actually cover, which regulators run one, and why the scheme that applies to you depends on the legal entity on your account, not the brand.
What a compensation scheme actually protects against
Two specific failure modes, and nothing else:
- The firm becomes insolvent and can't return client funds from its own operating capital.
- Client money segregation broke down — funds that should have been kept separate from the firm's own money went missing or were misused.
A compensation scheme does not reimburse you for a losing trade, a margin call, a bad fill, or a broker's poor customer service. Losing money by trading is the ordinary, expected outcome of using leveraged products — that's a market-risk question, covered in our guide to how leverage actually works. Compensation schemes exist for the separate, much rarer event of the firm itself collapsing with your money still inside it.
The schemes that actually exist
There's no single global compensation fund — each one is tied to a specific regulator and country, and it only covers the legal entity that regulator licenses.
FSCS (UK) — up to £85,000. The Financial Services Compensation Scheme covers eligible clients of FCA-authorised entities if the firm fails and client money can't be returned. It's one of the more robust schemes among the brokers in our comparison tables, and several firms hold FCA entities specifically to offer it to UK residents.
ICF (Cyprus/EU) — up to €20,000. The Investor Compensation Fund covers clients of CySEC-regulated entities on the same basis: firm failure, not trading losses. It's lower than the FSCS ceiling and applies only to the CySEC-licensed entity in a broker's group, not the group as a whole.
No scheme at all. Plenty of legitimate, licensed entities — particularly those registered with offshore regulators such as the FSA in Seychelles, the FSC in Mauritius or Belize, or the SCB in the Bahamas — carry no compensation fund behind them. Our tier-1 vs offshore regulation guide explains why these entities exist and what you gain and lose by trading through one.
One thing worth flagging directly: being regulated by a "tier-1" authority doesn't automatically mean a compensation scheme applies. Australia's ASIC is a strict, well-resourced regulator with no retail investor compensation fund attached to it at all — strong conduct rules, but no payout scheme if a firm fails.
Why the same broker can mean different cover for different clients
Most international brokers run several legal entities under one brand, and the compensation position depends entirely on which entity onboards you — usually decided by your country of residence, not by which regional website you happen to browse. A client onboarded under a broker's FCA entity has FSCS cover behind them. A client of the identical brand, platform and support team, onboarded under the same group's Seychelles or Bahamas entity, typically has none. Same logo, same login screen, completely different outcome if the firm fails. We cover this pattern in detail in the broker brand is not the company that holds your money.
This is also why "does [broker] have a compensation scheme" doesn't have one answer — it depends on the entity, and the entity depends on you.
A worked example
Say a UK resident and a client in a country served only by an offshore entity both open accounts with the same international broker. The UK resident's account agreement names an FCA-authorised entity; if that entity fails and client funds are missing, the FSCS can pay out up to £85,000. The second client's account agreement names a Seychelles or Mauritius entity with no compensation fund attached; if that entity fails, recovery depends entirely on the local liquidation process, with no statutory backstop. Both accounts could be running on the same platform with the same spreads. The compensation position was set the moment the client agreement named the entity — not by anything either trader did.
How to check your own cover
- Find the exact legal entity named in your client agreement — not the brand.
- Confirm which regulator authorises that entity, using our regulation guide or the entity decoder.
- Check whether that regulator runs a compensation scheme, and its cap — the FCA and CySEC both publish this clearly; many offshore regulators don't run one at all.
- Remember the cap applies per eligible claim under that scheme's own rules, and it never extends to trading losses.
For the mechanics of confirming a licence is genuine in the first place, see how to verify a broker's licence yourself.
Compensation schemes are a backstop for firm failure, not insurance against losing trades — this is educational content, not financial advice, so confirm your own entity's cover on the regulator's official page before you deposit.