Wednesday, February 11, 2015

Bail-In vs CIPF vs SIPC vs FSCS

Dear readers,

Lately I have been answering many questions from clients in the USA and UK on the "Bail-In" legislation as it relates to your investment accounts.  And there seems to be a misunderstanding between the insurance (CIPF, SIPC, FSCS) that protects investors from a dealer going bankrupt and the protection from the Bail-In process. The Bank of England released their BRRD in July 2014 and said that starting January 2015 the Bail-In policy will take affect. The BIS has stated that the bail-in rules will be implemented in all qualifying countries.

So lets clarify a few points:

  1. Investor protection funds like CIPF in Canada, SIPC in America and FSCS in the UK only protect your account from the "dealer" going bankrupt. They do NOT isolate you from any government legislation which allows banks or brokers to put restrictions on your account or convert the qualifying cash in your account to bank stock as they did in Cyprus.
  2. This is the whole point of the Bail-In policy, to ensure the financial system remains solvent, and they are going to do it with YOUR money. No bank or dealer will go bankrupt so the insurance on these accounts is irrelevant because the bank will be allowed to convert your cash and securities into bank stock to ensure that the bank and financial institution remains solvent.
  3. Many people assume that by having multiple accounts to stay under the Bail-Inable qualifications that you will be protected. Again this is not true because the banks and dealers will not be allowed to go bankrupt.
  4. A simple way to understand this is to look at your bank statement and notice which column your balance is located, DEBIT side or CREDIT side? All banks give you CREDIT once you deposit your funds. Therefore you are an "unsecured creditor" of the bank. This means that the bank has borrowed your money and gives you a CREDIT balance on your account. 
For more information and white papers on these subjects please visit our Archives tab and read carefully the links to these topics.

Anyone interested in designing a "Bail-In Proof" strategy please contact us and we'd be happy to assist you.


Bosko Kacarevic