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What are Segregated Bank Accounts?

Statrys Team
Published: 25 Jan 2021

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    A segregated bank account is used by foreign exchange service providers and brokers to store clients’ funds in a separate bank account to keep clients safe from fraud.

    Essentially, a segregated account has no relationship with the bank itself or the brokerage firm’s bank account.

    The main purpose of segregated accounts is to ensure that customer’s funds will never be misappropriated.

    Most of the time, companies use segregated accounts for the secure storage of their clients’ funds.

    The money in a segregated account cannot be accessed by the bank, the employees of the company, or the economic conditions surrounding the funds.

    Pros
    Cons Traders’ funds are immune to misappropriation The initial deposit requirement is very high Firms can easily avoid the commingling of assets There are a lot of legal loopholes involved in opening segregated accounts Traders’ funds can be returned easily in the event of firm closure or fraud Such legal loopholes will lead some businesses to employ deceptive tactics Firms with segregated accounts appear more attractive to traders  Segregated account scams can be difficult to detect

    The Benefits of Segregated Accounts

    As a brokerage firm, the benefits of storing clients’ funds in segregated accounts is the avoidance of commingling assets.

    Segregated accounts are entirely separate from the firm’s assets, meaning that the funds stored therein cannot be used by the firm to conduct business operations.

    Furthermore, segregated accounts make the clients’ funds secure in the event that the brokerage firm goes bankrupt, shuts down, etc.

    If that happens while the clients’ funds are in the account, the debt collectors cannot pursue those funds.

    Should the firm go out of business, the clients’ assets can be returned to them without issue.

    As a client of a foreign exchange service provider or broker looking to safely store funds, segregated accounts reduce the risk of storing cash significantly.

    Traders are much more likely to trust firms that utilize segregated bank accounts to store their funds.

    Traders can store their funds in segregated accounts with peace of mind knowing that the broker will be unable to perform fraudulent acts with their money, 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.

    One of the greatest benefits for traders from segregated accounts is the easy chargeback capability.

    When traders want their funds back from a broker, they must issue a chargeback.

    For a client to get their money back, they must keep detailed bank records during the period in which they did business with the firm.

    This can be a headache because there could be a multitude of subtle factors to account for.

    With segregated bank accounts, chargebacks are facilitated by the bank from which the account was opened.

    Segregated bank accounts offer a very safe, reliable, and simple alternative to banking for the clients of foreign exchange service providers and brokers.

    In a sense, using segregated bank accounts is a win-win for both parties involved. 

    The traders looking to store their funds receive protective benefits from the segregated account, and the firms employing them will earn more trust from potential clients because of those benefits

    The Disadvantages of Segregated Accounts

    With so many benefits, it seems as though segregated accounts are perfect banking solutions, right?

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

    The first is that they’re relatively expensive to use.

    All of those great benefits mentioned above come at a price.

    The initial deposits required to open a segregated bank account range from thousands to tens of thousands of dollars.

    Depending on the bank through which you start the segregated account, expect a very high initial deposit requirement.

    Stockbrokers and forex firms must pay a heavy price to open these accounts, and they will expect a return on investment.

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

    This is a problem that companies have to deal with, not necessarily the traders doing business with them.

    There are many requirements large companies must fulfill in order to get segregated accounts opened.

    Additionally, there are some scammers out there that claim to possess segregated accounts but don’t actually have the licensure required.

    These scammers can convince a trader to store their funds with them, and misappropriate them.

    On top of that, it is much harder to file for chargebacks when the money was put in illegitimate hands.

    Since there is much regulation to adhere to when it comes to opening and operating segregated accounts, some companies will attempt to cut corners in an attempt to gain the trust of traders.

    One of the most common forms of fraud surrounding segregated accounts is illegitimate offshore accounts that the broker claims are a United States-based account.

    Fraudulent brokers will then use the funds of the trader for their own business purposes, investments, and so on.

    This type of fraud is especially elusive and dangerous.

    It’s difficult to detect in that you wouldn’t expect a company to do something like this, but it happens.

    As far as disadvantages go, that’s about it.

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

    Who Offers Segregated Bank Accounts?

    Basically, any large broker or foreign exchange service provider will have the license to open segregated accounts.

    Large, long-standing, and trustworthy brokers will have licenses from legitimate regulators.

    But always be aware of deceptive practices and fraud. 

    Generally, every newly established broker will offer a legitimate segregated bank account service, it’s up to the trader to look into the company and verify the legitimacy of the account.

    When preparing to use a segregated account, be ready for the fairly large first deposit required to get your foot in the door. 

    In summary, segregated accounts are opened by brokers of foreign exchange service providers and used by traders to store their funds in a secure manner.

    The benefit of using these accounts is that the trader’s money is 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?

    Maybe you want to engage in some commerce-level FX trading so you can get the currency your business needs.

    Sign up for a Statrys account and apply for a multi-currency business account.

    Is it a bank account?

    Not quite, but it is a Segregated business account. Check it out.

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    Statrys Limited is licensed as a Money Service Operator (No. 19-02-02726) in Hong Kong. Statrys UK Limited is a Small Payment Institution (FRM: 911226) registered with the Financial Conduct Authority in the United Kingdom. Statrys UK Limited (FRM: 902805) is a registered agent of PayrNet Limited (FRM:900594), an Electronic Money Institution authorised by the Financial Conduct Authority in the United Kingdom under the Electronic Money Regulations 2011 for the issuing of electronic money. Trade financing services are offered by our partner, Velotrade Management Limited, regulated by the Securities and Futures Commission of Hong Kong (CE Ref #BJL007)