What should you pay attention to when checking the safety of an investment platform?

The safety of an investment platform is not just a question of whether the platform can be trusted. To understand whether investing is safe, three separate questions need to be answered: whether the platform itself operates in a reliable and regulated environment, how risky the specific investment instrument is, and what happens to the investor's money if the platform stops operating. These questions are related, but they have different answers.

In brief:

• The safety of an investment platform starts with checking whether the service provider is licensed and supervised.

• Regulation of the platform does not mean that the investment itself is protected from losses. Investment risk must be assessed separately.

• Segregating client funds from the company's own funds is one of the essential investor protection requirements.

• The deposit guarantee, segregation of client funds and investor compensation are three different mechanisms, and they should not be confused.

• TWINO is an investment brokerage firm licensed by the Bank of Latvia. Its client funds are held separately from the firm's own funds.

Is investing on an investment platform safe?

The answer depends on what exactly we mean by the word safe, because the safety of the platform and the safety of the investment are not the same thing.

Let us imagine a simple situation. An investor deposits money on an investment platform and purchases a specific financial instrument. In this process there are at least three different levels of risk.

The first is the service provider itself. Is it licensed? Is it supervised by the financial market regulator? Does it have to comply with certain requirements regarding client funds and its operations?

The second is the investment instrument. Even if the platform operates in accordance with regulation, the specific instrument may still be exposed to credit risk, liquidity risk or other risks.

The third is the scenario in which the platform itself can no longer continue operating. Here it is important to understand how client funds are held and what protection requirements apply to them.

That is why the question of whether investing is safe should not be answered with a simple yes or no. It is far more valuable to understand how the entire structure is built.

How can you tell whether an investment platform is safe?

The first step is to check whether the provider of the investment platform's services is licensed and subject to financial market supervision.

In the European Union, the provision of investment services is regulated by the MiFID II framework, and in each member state this activity is licensed and supervised by the national financial market regulator. Regulators maintain public registers in which it is possible to check the status of a specific company and the licences issued to it.

In the case of TWINO, AS TWINO Investments is an investment brokerage firm licensed by the Bank of Latvia. The licence for providing investment services and ancillary investment services has been in force since 31 August 2021. Under the EU single licence, or passporting, principle, such a licence also allows services to be provided in other European Union member states.

What does such supervision practically give the investor?

It means that the platform is not simply a technology company that has created a website for making investments. A licensed financial market participant must comply with certain organisational, operational and investor protection requirements.

This does not mean, however, that the regulator chooses investments on the investor's behalf or guarantees the outcome of a specific financial instrument. Regulation sets the rules of the game, not the outcome of the investment.

What is the segregation of client funds and why is it important?

Segregation of client funds means that investors' funds are held separately from the investment brokerage firm's own funds.

When thinking about the safety of an investment platform, this is one of the most important questions. If an investor deposits money on a platform, it is essential whether this money simply becomes the company's funds or whether it is recorded and held as client funds.

EU regulation imposes an obligation on investment brokerage firms to hold client funds in an account or accounts that are separated and clearly identifiable from the firm's own funds. In Latvia, this requirement is set by the Financial Instrument Market Law. On the TWINO platform, this requirement is complied with; investors' funds are held in separate, segregated accounts.

Why is this essential?

Because the platform's operational risk and the status of the client's property are two different things. If the company runs into financial difficulties, the segregation of client funds helps prevent them from being automatically mixed with the company's own money.

However, here too we must be precise. The segregation of funds is not a guarantee that a specific investment will not lose value. It protects the separation of client funds from the company's own funds; it does not eliminate the risks of the investment.

Are the deposit guarantee and investment safety the same thing?

No, the deposit guarantee, the segregation of client funds and investor compensation are three different mechanisms that address different situations.

The deposit guarantee applies to bank deposits in accordance with the applicable rules. A financial instrument on an investment platform, on the other hand, is a different type of product with a different risk and protection structure.

For example, TWINO FLEXI is not a bank deposit and is not covered by the state deposit guarantee. FLEXI is an investment product based on asset-backed securities.

This is an essential clarification, because the name of an investment product or its liquidity does not in itself mean that it is subject to the same protection as a bank deposit.

A separate mechanism is investor compensation. In certain cases, if a brokerage firm is unable to meet its obligations, an investor may be entitled to compensation of up to 20,000 euros. This protection is not intended to compensate for losses arising from changes in the value of the investment itself or from its risk.

What happens to my money if an investment platform stops operating?

If an investment platform stops operating, it is important to understand what happens to your money and the investments you have made.

A licensed investment brokerage firm operates in accordance with requirements providing for the segregation of client funds. This means that the platform's technical or economic activity is not the same as the investor's ownership rights to financial instruments.

However, the specific situation may depend on the financial instrument, its issuer, the contracts and the applicable regulation. That is why, before investing, it is important not only to look at the name of the platform, but also to read the documentation of the specific product.

TWINO's documents section publishes information about client classification, suitability and appropriateness assessment, execution of client orders, costs and the risks of financial instruments.

Does a regulated investment platform mean that the investment itself is safe?

No, a regulated platform reduces certain risks associated with the service provider, but it does not eliminate the risks inherent in the investment itself.

If an investment platform is licensed, it means that certain requirements apply to its operations and that it is under supervision. However, the financial instrument that the investor purchases is still exposed to its own investment risks, for example credit risk, liquidity risk and legal risks, and there is a possibility of losing part or all of the invested capital.

How does instrument risk differ from platform risk?

Platform risk is associated with the intermediary, while instrument risk is associated with what generates the economic result of your investment.

For example, the asset-backed securities offered by TWINO are financial instruments whose economic basis consists of specific assets and the cash flows they generate. That is a different question from whether TWINO as an investment brokerage firm is licensed and supervised.

That is precisely why investors should not assess only the platform's reputation or only the potential return. A simple question should be asked: what actually generates the cash flow from which my return is formed?

If you want to understand the structure of asset-backed investments in more detail, it is essential to look at the underlying assets, the source of the cash flow and the main risk factors. As for the specific credit risk of loans, read more in the article on whether investing in loans is safe.

How can an investor check the safety of an investment platform?

Before investing, it is worth going through a few simple questions rather than relying only on advertising promises or the interest rate.

Check:

• Does the company have a licence from the financial market regulator?

• What exactly is the financial instrument you are purchasing?

• Where are client funds held?

• Are client funds segregated from the company's own funds?

• What happens to your funds if the platform ceases operations?

• What risks are described in the product documentation?

• Does the liquidity of the investment depend on demand from other investors?

• What compensation mechanisms exist and what do they apply to?

Such a checklist helps shift attention away from the question of how many per cent I will receive to the far more important question of how this investment is built.

If you are considering investing with TWINO, familiarise yourself with the terms, risks and prospectus of the specific product before making a decision. Understanding the structure is one of the most important steps in making a well-considered investment decision.

Email: [email protected]
Address: Dzirnavu iela 42, Riga, LV-1010, Latvia

This material is for informational purposes and is not individual investment advice.