In short: When you buy stocks or ETFs through an online broker, your securities are held in custody and, under EU rules, must be kept separate from the broker’s own assets, usually through an omnibus nominee account. The aim is that your investments stay outside the broker’s insolvency estate. The statutory investor compensation scheme is a last-resort backstop (up to €20,000 per investor) if a failed firm cannot return clients’ assets. It does not protect against market price declines.
What is custody (holding your investments)?
When you purchase shares of an ETF or stock through an online broker, you do not receive physical certificates to store at home. Instead, your securities are registered and stored electronically in an account managed by an authorised financial institution. In financial terminology, this service is called custody.
The primary duty of a custodian is the administrative keeping of your financial instruments: maintaining accurate ownership records, processing corporate dividend payments, and ensuring your shares are readily available whenever you decide to sell. Some brokers levy a periodic fee for this service—often called a custody fee or platform fee—either as a flat monthly charge or as a percentage of your portfolio. Other brokers charge no recurring custody fee and cover operating expenses through transaction commissions. You can learn more about how platform charges function in our guide on how a broker works.
What is asset segregation?
The most fundamental protection for retail investors is asset segregation (in European regulation, the protection of client financial instruments and funds). Under European directives such as Directive 2014/65/EU (MiFID II, Article 16), investment firms are legally prohibited from mixing client investments with the broker’s own corporate balance sheet.
To comply with this rule, brokers establish a separate legal entity—such as a dedicated custody foundation (bewaarbedrijf), a ring-fenced nominee company, or an independent depositary bank. When you deposit money and buy securities, those shares become the property of this separate entity, held on your behalf:
- Bankruptcy protection: The aim of segregation is that your investments stay outside the broker’s bankruptcy estate if the broker becomes insolvent.
- Creditor shielding: Segregated client assets are not meant to be available to the broker’s general creditors.
- Asset transfer: Because the shares are held separately for clients, an administrator can in principle transfer client portfolios to another regulated broker. How smoothly this works depends on the firm’s records and the custodian.
What is a nominee account and how does it work?
In practice, retail investors usually hold securities through a broker’s custodian rather than directly at a central securities depository (CSD) such as Euroclear or Clearstream. Brokers therefore often use nominee accounts (also called omnibus accounts).
In a nominee structure, the broker’s custodian entity opens a collective pooled account with the central depository. On the central exchange register, the legal title is recorded under the name of the nominee vehicle “for the account of clients”. However, ownership is divided into two distinct legal concepts:
- Legal ownership: The registered legal name appearing on the central clearing registry belongs to the nominee company, which holds the title strictly as an administrative intermediary.
- Beneficial ownership: You remain the beneficial owner (economisch eigenaar). You hold full economic entitlement to the underlying investments, including capital growth, dividend distributions, and the proceeds upon sale.
To keep track of your rights, the broker keeps detailed records of how many units belong to each client.
Where does the investor compensation scheme apply?
Many investors confuse asset segregation with the statutory investor compensation scheme. In reality, they represent two completely different layers of protection:
- First line of defence (Asset segregation): Segregation is the operational barrier. In an orderly bankruptcy of a broker whose accounting is sound, you do not need a compensation payout because your shares are already separate and can simply be transferred to a new provider.
- Secondary backstop (Investor compensation scheme): The statutory investor compensation scheme, based on European Directive 97/9/EC, is a last-resort backstop. According to DNB it applies when a firm goes bankrupt and cannot return clients’ funds or financial instruments.
Under Directive 97/9/EC every EU member state maintains an investor compensation scheme. In the Netherlands, DNB states that an eligible investor receives up to €20,000 per investor (€40,000 for a joint account with a partner). Which country’s scheme applies depends on where your broker is licensed, so check that in your broker’s documents.
For uninvested cash, a different scheme can apply: the Deposit Guarantee Scheme under Directive 2014/49/EU. If your broker holds uninvested cash as a deposit with a licensed bank, that balance is protected up to €100,000 per depositor per bank. Check in your broker’s terms where and how your cash is held.
What is not covered by compensation schemes?
It is equally important to understand what statutory protections do not cover. Neither asset segregation nor investor compensation schemes protect you against market downturns. If the market value of your ETF declines due to macroeconomic conditions or broad market drops, that represents ordinary investment risk. Compensation schemes only address institutional insolvency and missing assets, never investment losses on the exchange.
Protection mechanisms compared
| Mechanism | What it protects | Statutory limit | What it does not cover |
|---|---|---|---|
| Custody & Asset Segregation | Stocks and ETFs kept in a separate legal entity | No fixed amount; relies on correct records and a sound custodian | Market price fluctuations, losses from poor returns |
| Investor Compensation Scheme | Missing investment assets if an insolvent broker fails to return them | Up to €20,000 per investor | Market downturns, loss of invested capital through price drops |
| Deposit Guarantee Scheme | Uninvested cash held in licensed bank accounts | Up to €100,000 per depositor per bank | Invested securities, shares, ETFs, money market fund fluctuations |
Frequently asked questions
Are my ETFs protected if my broker goes bankrupt?
Segregation is designed to keep your ETFs outside the broker’s bankruptcy estate, so that general creditors cannot claim them and the portfolio can be transferred. It depends on the broker keeping correct records and on the custodian. If assets are missing, the investor compensation scheme may apply, up to its limit.
Why do brokers use nominee accounts instead of direct registration?
A nominee holds the legal title on the register on behalf of clients, while you remain the beneficial owner with the economic rights to the investments, including dividends and sale proceeds.
Does the investor compensation scheme cover stock market losses?
No. The investor compensation scheme applies when a failed firm cannot return clients’ assets. It never compensates for ordinary declines in ETF or stock prices.
What is the difference between the €100,000 and €20,000 limits?
The €100,000 limit applies to bank cash deposits under the Deposit Guarantee Scheme (Directive 2014/49/EU). The €20,000 limit applies to missing investment securities under the Investor Compensation Directive (Directive 97/9/EC) if an investment firm fails and cannot return your holdings.
Further reading
- How a broker works: eight terms explained
- Compare brokers: neutral fee and protection overview
- Glossary of investment terms
- What does an ETF cost? Total cost of ownership
Sources and regulatory references
- European Union: Directive 97/9/EC (Investor Compensation Schemes Directive). Available at: EUR-Lex.
- European Union: Directive 2014/49/EU (Deposit Guarantee Schemes Directive). Available at: EUR-Lex.
- European Union: Directive 2014/65/EU (MiFID II, Article 16, client assets). Available at: EUR-Lex.
- De Nederlandsche Bank (DNB): Beleggerscompensatie (maximum per belegger, wanneer het stelsel geldt). Available at: DNB.
- De Nederlandsche Bank (DNB): “Nederlandse Depositogarantie” (statutory bank deposit protection rules). Available at: DNB.
This is general information, not tax or investment advice. For your own situation, consult a qualified tax adviser, a financial adviser licensed by the AFM (the Dutch financial markets authority) or the Belastingdienst.