Chelsea: Investor Protection
Some investors have asked us for guidance on what happens to their investments if Chelsea, Cofunds or product providers collapse. The following is our understanding of the situation, which we hope will be helpful.
The Financial Services Compensation Scheme (FSCS) pays out:
Bank deposits : up to £85,000
Investments : up to £50,000
If Chelsea collapses (very unlikely, as a broker Chelsea has no direct exposure to the market) the investor will not suffer, because investments are held with Cofunds or product providers, not with Chelsea.
If Cofunds collapses the investor is protected as to £170,000 for the Cash Reserve (Cofunds use 2 different banks) and £50,000 for investments, but again such a collapse is very unlikely since Cofunds is simply a vehicle for holding funds and it is the funds themselves (and their underlying shares) that are exposed. It is also very unlikely that the major product providers who own Cofunds would allow it to collapse.
If a product provider or one of its funds collapses the investor is protected up to £50,000 per product provider, whether held through Cofunds or not. Thus if an investor holds Jupiter and Fidelity (either directly or through Cofunds) and they both collapse, he can claim £50,000 in respect of each.
As a point of detail, if Jupiter collapses and an investor has some Jupiter holdings through Cofunds and some directly, he can only claim £50,000 for all his Jupiter holdings: he cannot claim £50,000 twice.
Having said which, the collapse of major product providers is very unlikely: they are all heavily capitalised so should weather any storm; and also by definition funds spread their risks across a number of different shares. Some of those shares in individual companies may become worthless and the whole sector may suffer, but this will most likely lead to a lowering of the fund's unit price, not its complete collapse.
One further point needs to made about the Cofunds Cash Reserve. The FSCS treats this as a deposit with Royal Bank of Scotland and Scottish Widows Bank, which are the banks that Cofunds uses for the Cash Reserve. The Cash Reserve is therefore protected up to £170,000, i.e. £85,000 for each bank. Please note that if either Cofunds or one of the banks collapses and there is a claim, the FSCS would take into account any other deposits also held by that investor with these banks.
Finally it must be emphasised that despite the traumas of recent years, not a single depositor has in fact lost a penny and it is thought highly unlikely that the Government would allow any depositor to lose money: they will allow shareholders in banks to suffer, but not depositors.
Please do not hesitate to contact us if you require any further information or explanation or visit the Financial Services Compensation Scheme website at www.fscs.org.uk/consumer
Chelsea Financial Services