What are Segregated Bank Accounts?

Segregated accounts are used for a multitude of purposes by all types of businesses, and especially by those that operate in a tight regulatory environment such as investment funds, insurance companies, brokers, and payment service providers, of which Statrys is an example.

What are segregated accounts?

Very briefly, segregated accounts are separate accounts held by licensed corporations with an authorized third party, usually a financial institution, on behalf of customers.

Their main purpose is to safeguard client assets and money against any wrong use by the licensed corporation.

Additionally, segregated bank accounts can help protect clients’ funds from economic conditions that may adversely affect the financial stability of the licensed corporation, be it a brokerage firm or a grocery store.

If the company were to experience financial difficulties client money would still be safe.

Insider tip: If you are planning to use the services of providers that are required by law to keep your assets and money in a separate account, be sure to ask about their policies on segregated bank accounts to ensure that your funds are safe.

Some institutions might even allow for tailor-made segregated accounts.

Who Offers Segregated Accounts?

Generally, any licensed financial firm, unless specified otherwise by relevant regulations, has to offer its clients the opportunity to set up segregated accounts.

Significant, long-standing, and trustworthy financial institutions will have licenses from legitimate regulators.

But always be aware of deceptive practices and fraud.

The Advantages of Segregated Accounts

There are multiple use cases for segregated accounts, and as such, advantages can vary significantly depending on what these accounts are used for.

Essentially, common to all employments of segregated accounts is avoiding commingling assets, or mixing funds.

Segregated accounts are legally segregated from the firm's assets, meaning the company cannot use the funds stored to conduct business operations.

Furthermore, segregated accounts secure the client's funds if the firm goes bankrupt, shuts down, or any other unfortunate event that prevents them from doing business.

If that happens while the customer's funds are in the account, debt collectors cannot pursue those funds.

Should the company go out of business, the client's assets can be returned to them faster than if they were held in a different type of account.

The Benefits for Every Customer

One of the most significant benefits for customers from segregated accounts is the easy chargeback capability.

Should clients wish to reverse an operation, they would be required to issue a chargeback, as well as retrieve and provide a detailed bank statement of associated transactions.

With segregated accounts, chargebacks are facilitated by the institution that opened such accounts.

The third party in question is mandated by law to maintain an additional record of all transactions performed through the segregated account.

Moreover, they are required to provide direct access to funds and allow clients, the ultimate beneficiary, to retrieve the information they might need.

Therefore, segregated bank accounts offer a very safe, reliable, and simple alternative to banking for the clients of any financial institution.

The Benefits for Traders

Traders looking to store and protect their funds and investments have much to gain from segregated accounts regarding risk management and transparency.

For example, segregated accounts significantly reduce the liquidity risk associated with holding funds above the level insured by national schemes.

On top of that, traders can place their assets in segregated accounts with peace of mind knowing that the broker or custodian will be unable to perform fraudulent acts with their money, stockholdings, or bonds, even if they tried.

If the client's relationship with the broker changes in a way that drives them to withdraw their funds, they can do so easily with a segregated account.

The Disadvantage of Segregated Accounts

With so many benefits, segregated accounts seem like the perfect banking solution.

Well, there are a few downsides to these separated bank accounts.

The first is that they're relatively expensive to use; all those great benefits mentioned above come at a price.

The initial deposit required to open a segregated bank account ranges from thousands to tens of thousands, depending on the third party that is to open the account.

Another potential issue with segregated accounts is the regulatory requirements surrounding them.

This is a problem that companies have to deal with, not necessarily their clients.

There are many requirements large third parties must fulfill to be able to open segregated accounts for licensed businesses, which on their side, must pay a heavy price for this service and expect a return on their investment.

A Particularly Problematic Disadvantage: Fraudulent Segregated Accounts

Because of the complex regulations surrounding segregated accounts and the limited resources available to those in charge of ensuring these regulations are met, some companies have attempted to cut corners in opening and operating this type of account, while others took advantage of the situation to commit plain fraud.

Specifically, one of the most common forms of fraud involving segregated accounts is illegitimate offshore accounts that the licensed company claims are based in a white list jurisdiction.

This type of fraud is incredibly elusive and dangerous and is usually performed by brokers or custodians to gain control of traders' funds.

It isn't easy to detect because you wouldn't expect a regulated firm to do something like this, but it happens.

The lesson here is to verify that the broker you decide to trust with your money is trustworthy.

On a final note

In summary, segregated accounts are opened by licensed businesses and are mainly used by traders of equity, bonds, and FX.

The benefit of using these accounts is that client assets and money are completely safe and immune to misappropriation from the firm.

The downside is that these accounts are expensive to use, and they're so valuable that some companies will cut corners and employ deceptive practices to appear as though they offer them.

Remember to be safe with your money and verify your broker's legitimacy.

Are you looking for a safe way to send money as a business?

If you need to trade in foreign exchange for your business, consider signing up for a Statrys account and applying for a multi-currency business account.