If Your Investment Platform Fails
Most people who have thought about this at all assume there is a compensation scheme, in the way there now is for bank deposits. There is not, and the protection that does exist works on an entirely different principle.
What protects an investor is not insurance. It is that your assets are not the platform's assets, so a failure of the business is not supposed to reach them.
The three things to remember
The Depositor Compensation Scheme covers deposits, not investments. Protection comes from custody and segregation. And market losses are never covered by anything.
The distinction that does the work
When you deposit money at a bank, the bank owns the money and owes you a debt. That is why deposit protection was needed: if the bank fails, you are a creditor. The Depositor Compensation Scheme now covers that up to $100,000 per depositor at each licensed deposit taker.
An investment platform is meant to work the other way. Your shares and units are supposed to be held for you rather than owned by the platform, usually through a custodian, and held on trust so they are separate from the platform's own property. If the business fails, those assets should not form part of what its creditors can reach.
| Bank deposit | Investment platform | |
|---|---|---|
| Who owns the asset | The bank owes you a debt | You do, held via a custodian |
| If the business fails | You are a creditor | Assets should be outside the estate |
| What protects you | The compensation scheme | Custody, segregation and trust status |
| Cover for a fall in value | Not applicable | None, ever |
This needs saying because the two get conflated. Custody arrangements protect you from the platform failing. They do nothing at all if your investments simply fall in value, which is the ordinary risk you accepted when investing. No scheme, structure or licence anywhere in New Zealand insures you against a market decline, and any offer that appears to should be treated as a warning.
The questions worth asking of your platform
An independent custodian matters more than any other item on that list. Where the same business both manages your money and holds it, the separation that protects you is a matter of internal discipline rather than of structure, and internal discipline is exactly what fails in the cases that end badly.
Pooled versus individually registered
Many platforms hold shares in a pooled nominee structure, where the custodian holds a single line of the shares and the platform's records determine who owns what. This is normal, it is efficient, and it is how most low-cost platforms operate.
It does mean your ownership depends on the accuracy of those records. Where holdings are registered individually in your own name, your claim is evidenced independently of the platform. The pooled model is not unsafe, and the individually registered model has one fewer link in the chain, which is worth knowing when comparing platforms.
What actually goes wrong
Genuine platform failures with proper custody are rare, and when the structure holds, the outcome is usually inconvenience rather than loss: the assets are identified and transferred to another provider, over a period of weeks or months, while you cannot trade.
| Scenario | Likely outcome |
|---|---|
| Licensed platform fails, custody intact | Assets transferred, trading frozen meanwhile |
| Records are poor or reconciliation has failed | Delay and cost, and possible shortfall |
| Assets were never segregated as claimed | You are a creditor, and recovery is uncertain |
| The platform was fraudulent throughout | The assets may never have existed |
| Markets fall sharply | Not a platform matter, and never covered |
The bottom three rows are the real risk, and only the last is unavoidable. The middle two are the reason the licensing question is worth asking before you invest rather than afterwards.
The Financial Service Providers Register lists who is registered, and the Financial Markets Authority publishes who is licensed and for what. Fraudulent operations frequently borrow the name of a genuine licensed firm, so check that the entity you are dealing with, the website you are on and the bank account you are asked to pay into all belong to the same registered business. Clone operations are one of the most common patterns the FMA warns about.
Practical steps that cost nothing
One caution about diversifying platforms
Spreading across providers reduces your exposure to any one of them failing, and it multiplies the fixed costs, the accounts to secure and the records to keep. For most people the greater risk is not platform failure but the errors that come from a complicated arrangement they no longer track. Two providers is a reasonable answer for a large holding. Six is usually worse than one.
What this guide does not cover
Custody and licensing arrangements differ between providers and between product types, and the disclosure documents for your specific platform govern rather than any general description. KiwiSaver schemes have their own supervisory arrangements not detailed here. This is general information rather than financial or legal advice, and none of it addresses whether any investment is suitable for you.
Related guides and tools
- Credit unions guide, for the protection that covers deposits but not this.
- KiwiSaver fees guide, for the scheme structure most New Zealanders already use.
- Investment scams guide, for platforms that were never real to begin with.
- Crypto custody guide, for the asset class where none of this applies.
Test Your Knowledge
Ten questions on custody, segregation and what protection actually exists.
Sources: the Financial Markets Conduct Act 2013 and the licensing obligations it imposes on managed investment scheme managers and discretionary investment management services, including requirements around independent custody and the holding of client assets on trust; and the Deposit Takers Act 2023 Depositor Compensation Scheme, which covers deposits and not investments. Arrangements differ between providers, so read the specific disclosure documents for the platform you use.
Related tools and guides
- Platform switching cost calculator: the cost of moving to a platform you trust more.
- Crypto custody and exchanges: the same question where it bites hardest.