Compensation scheme

A compensation scheme is a regulatory mechanism designed to protect clients' funds held with financial firms in the event of the firm's insolvency. These schemes are typically government-backed or industry-funded, providing a safety net for investors. When a regulated broker fails, the scheme steps in to compensate eligible clients up to a specified maximum amount, ensuring a degree of financial security.

For a retail trader, a compensation scheme reduces the risk of losing capital if their broker collapses. However, compensation limits vary by jurisdiction. For instance, in the UK, the Financial Services Compensation Scheme (FSCS) covers up to £85,000 per person per firm. Traders should always verify if their chosen broker is regulated and participates in a relevant compensation scheme to protect their deposits.