I'm using Scalable Capital as my broker. Once I buy ETFs through them, if Scalable Capital (or the bank they are partnered with) goes into insolvency, is my investment safe? I'm wondering if I should be using different brokers to split my investments through (but invest in the same ETFs) or is it safe to use the same broker for ever-larger amounts?
I'm German, but not a lawyer, so I can't really make sense of the statute of the Entschädigungseinrichtung alluded to in another answer. But the reputed German finance/consumer magazine "Finanztest" explains that your securities are yours and remain yours, even if your broker goes bankrupt. In case of bankruptcy, your broker has to transfer your securities to another broker or bank. They can't hold on to them, as they don't own them but only "hold" (verwahren) them for you. The worst that can happen is that during this time you won't have access to your securities for longer than you wish. (Source)
The Entschädigungseinrichtung comes into play when your insolvent broker has also defrauded you, for example by illegally lending your securities to a third party or by using your money for something else than carrying out your orders. In these cases, your broker or bank never held any of your securities (or at least not the volume you thought you would own), so if they become insolvent, there is nothing to transfer to another broker. The Entschädigungseinrichtung has been established through legislation to reimburse 90% of your claims in this case, but only up to a maximum of 20,000 Euros. Individual institutions, such as Sparkassen and Genossenschaftsbanken may offer a higher compensation voluntarily. (Source)
Your broker seems to be based in Germany and offer portfolios administrated by German banks, so they indeed are covered by the Entschädigunsgeinrichtung, but I don't know if they offer an additional safety net.
A simple insolvency or bankruptcy of a broker shouldn't affect that status of ETFs and stocks you own, because they are not part of the assets of the broker. This is different from fractional-reserve banking where the funds you deposit are reinvested elsewhere.
However, there is always the risk that a broker is acting dishonestly, and that the stocks their website claims you bought never even existed. Or the records of ownership could be incorrect or lost during the aftermath. Legal reporting requirements and audits are supposed to prevent this.
(I don't speak German but was able to trace this through Wikipedia, which mentions it as the relevant authority for brokerages. Banks are covered by a different scheme, but it seems to have similar coverage).
The cover is not complete, however:
The amount of compensation awarded to each investor under securities transactions is 90% of the claims against the securities trading company (not more than EUR 20,000). Compensation cannot be claimed unless the funds are denominated in a currency of a EU member state or in euros. Further exclusions are regulated in section 3 (2) of the AnlEntG.
So there is a hard cap at 20,000 euros compensation (compare to guarantees for bank savings accounts, which are often higher), and some types of investment may not be covered.
Brokerages can always fail.
MF Global was enormous and the CEO used clients funds — in segregated accounts to cover bad gambles (in Euro bonds default swaps I believe). USA investors had to wait for bankruptcy proceedings to complete — years to get their money and if there had turned out to not be enough funds they would have lost pro rata.
Many investors in small brokerages lose all their money when the brokerages go bankrupt.
In the fine print of your account agreement is their right to "re-hypothecate" funds — loan them out.
Split your funds among several brokers.
Keep an eye on their balance sheet.
Occasionally withdraw some money and see how smoothly it goes. Make sure you know the details of wiring out funds and have it ready.
Cross-contagion risk in the financial markets is now enormous.
ETFs are usually in a Luxembourg SICAV (shell company) which holds the shares bought by the ETF. As a holder of the ETF shares, you own part of that SICAV, and they are not on the balance sheet of the broker, while any cash you might have on the broker account is a debt of the broker to you.
However the broker holds all the shares of their customers in large portfolios at banks or central securities depositories and if the broker is bankrupt, it might take months or years to sort out who owns which parts of these portfolios.
In addition, you have to look at the composition of the ETFs. Normally, they hold stock or other securities outright, but they could also hold performance certificates issued by a third party, and such certificates are at risk if the issuer becomes insolvent.