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Illegal broker schemes and the missing funds

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As stipulated under different regulatory regimes brokers are obliged to segregate all its retail clients’ funds from its own funds, i.e. it is required that a broker must hold client funds separately, in a separate (segregated) account.

The client money is protected as follows: 

  • Client money rules apply to all regulated firms
  • that receive money from a client, or hold money for a client;
  • in the course of carrying out MiFID business and/or designated investment business.

Client money has to be entirely segregated from brokers own money.

One purpose of CASS 5.5 is to ensure that, unless otherwise permitted, client money is kept separate from the firm’s own money. Segregation, in the event of a firm’s failure, is important for the effective operation of the trust that is created to protect client money. The aim is to clarify the difference between client money and general creditors’ entitlements in the event of the failure of the firm.

UK FCA, Client Assets Sourcebook (CASS Chapter 5.5.2)

According to the FCA, if a firm is liable to pay money to a client, it must as soon as possible, and no later than one business day after the money is due and payable.

As a matter of fact almost all unauthorized and hence illegal broker schemes do not hold client funds in segregated accounts. They use client funds to finance their business and (e.g. marketing to acquire more clients, salaries, offices) and their luxury lifestyle. That said, it should become evident that there is still not enough money left to pay back client money. Most if it is gone, most of it at least.

Typically, those illegal broker schemes have a monthly budget for withdrawal requests. Hence, the pay only back to those clients which are most likely to deposit more money in the future.

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