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Safety of Client Funds

UncleEbenezer
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Safety of Client Funds

#135668

Postby UncleEbenezer » April 30th, 2018, 9:02 am

Sharesoc blog tells us that supposedly-ringfenced Client funds from nominee accounts are to take a big haircut in the winding up of Beaufort Securities.

This begs the question: how safe are any of our assets in nominee accounts, with any broker? And what questions should we be asking now of our providers?

https://www.sharesoc.org/blog/brokers/b ... onference/

absolutezero
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Re: Safety of Client Funds

#135687

Postby absolutezero » April 30th, 2018, 10:08 am

This is the reason why, despite the tax advantages, I will not hold shares in nominee form.
Personal CREST account for me, with a few paper certificates.

johnhemming
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Re: Safety of Client Funds

#135692

Postby johnhemming » April 30th, 2018, 10:27 am

That's one for the FCA to look at as the admin charge of £100M sounds far too much.

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Re: Safety of Client Funds

#135697

Postby Alaric » April 30th, 2018, 10:32 am

johnhemming wrote:That's one for the FCA to look at as the admin charge of £100M sounds far too much.


For private investors, the assets are presumably still present, it's that the administrators are taking a chunk out of it. Also for private investors, if the administrators aren't taking more than £ 50,000 a head, would they get full compensation through the FSCS?

Sharesoc is an organisation for which I have the impression that it has a near irrational hatred of nominee accounts.

GeoffF100
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Re: Safety of Client Funds

#135698

Postby GeoffF100 » April 30th, 2018, 10:35 am

There is some risk however you hold your investments. There are only two registrars in the UK. The likes of Vanguard and Halifax Share Dealing are, however, much less risky than the likes of Beaufort Securities.

johnhemming
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Re: Safety of Client Funds

#135699

Postby johnhemming » April 30th, 2018, 10:35 am

Client funds are supposed to be held on trust. There may be a different issue if the client funds include "funds" that are managed by Beaufort and those "funds" are being liquidated and a charge made for that. That, however, would not be anything to do with client money regulations.

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Re: Safety of Client Funds

#135705

Postby Dod101 » April 30th, 2018, 10:44 am

I agree UE, and it is one reason why I am reluctant to transfer any more certificated shares in to my ISAs. When I mentioned this on anther thread I was more or less guffawed at but I must say it is a real risk in return for the undoubted benefit of a tax free environment. ShareSoc would say of course that our shares in the nominee accounts ought to be individually identified. That is all very well but would not I think guard against the possibility of a Beaufort.

I see no point in holding LTBH shares in so called Trading Accounts although I gather some people do this. I still have about 20% of my total portfolio in certificated shares and these are long term holds. I guess they generate about 25% of my dividends, well over the old threshold even before the reduction to £2000 for this year. I will pay some tax but so what?

Certainly a letter to your ISA manager and SIPP manager is a good idea although you will simply get a reassuring letter which does not mean much.

I think we can only assume that our assets are reasonably safe but we are totally at the mercy of the managers who operate the nominee accounts. I would think that the much maligned ATS is OK as they have Alliance Trust behind them but otherwise I would be concerned about them. They have been in loss making mode for many years and that would be a recipe for corner cutting,

I think I read somewhere that some of the assets in the nominee accounts of Beaufort quite apart from the fees to be charged by the Administrators.

Dod

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Re: Safety of Client Funds

#135734

Postby GeoffF100 » April 30th, 2018, 12:03 pm

Here is an article from the Torygraph, dated yesterday:

https://www.telegraph.co.uk/business/20 ... ng-frenzy/

I suspect that the OP's link may be alarmist.

mc2fool
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Re: Safety of Client Funds

#137261

Postby mc2fool » May 6th, 2018, 2:16 pm

ShareSoc undoubtedly has an axe to grind here, but thanks to a thread on the Pensions - Practical Problems board I see that Monevator now has an article on the matter, and from there a search link to some relevant FT articles, which I recommend folks read.

PwC scrambles to return assets to Beaufort investors: "The administrator added that the firms’ own funds were very limited and therefore clients would be likely to have to cover the cost of recouping their own money and assets..."

Beaufort Securities insolvency could cost up to £100m: "PwC said that “the majority” of clients had balances of up to £50,000 and are likely to receive the full value of their portfolios back from September onwards. However, it said that about 700 clients with portfolios of more than £150,000 in cash and assets might not be able to recover the full value."

PwC defends Beaufort Securities insolvency plan: "“In the absence of any other available resources . . . the overall costs of delivering [returns] to clients has to be shared appropriately by those to whom the assets belong,”".

This case highlights a point that I, for one, hadn't thought of and don't believe has been raised before in the (numerous) discussions of the (supposed) security of ring-fenced client funds and ring-fenced (in nominees) assets, being that such ring-fencing and separation is against other creditors. E.g. banks that the company owes money to, employees that have yet to be paid, etc. They can't dip into the ring-fenced assets for their recoveries.

However, the administrators/liquidators are always paid, before all other considerations, and of course if they weren't, or there was a risk they wouldn't be, in full, then nobody would do the job and the clients' funds and assets would be in perpetual limbo. So, what we're seeing here is what happens if there isn't enough in non-ring-fenced assets to pay the costs of administration/liquidation; it has to come from the ring-fenced assets belonging to the clients.

johnhemming
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Re: Safety of Client Funds

#137289

Postby johnhemming » May 6th, 2018, 5:12 pm

There is a question as to what the costs are of the process, however.

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Re: Safety of Client Funds

#137296

Postby mc2fool » May 6th, 2018, 5:46 pm

johnhemming wrote:There is a question as to what the costs are of the process, however.

Indeed, and I commented on that in the other thread. However the vital point to pick up on here is that, whatever those costs are, if they exceed the amount of non-ringfenced assets available -- and that's going to be pretty likely if the broker has gone belly up due to "normal" insolvency reasons (corporate ineptness) -- then the ring-fenced assets is the only place to go....

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Re: Safety of Client Funds

#137297

Postby absolutezero » May 6th, 2018, 6:11 pm

The way to avoid these concerns is to either hold your shares in certificated form or hold a personal CREST account.
A broker who will let you old your shares in CREST is seemingly getting more and more difficult to find these days.

Granted, you can't hold an ISA with a CREST account but I'm prepared to forego the tax free status in exchange for peace of mind.
High time they government legislated to allow ISAs to use CREST rather than nominee.

UncleEbenezer
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Re: Safety of Client Funds

#137355

Postby UncleEbenezer » May 7th, 2018, 12:31 pm

mc2fool wrote:However, the administrators/liquidators are always paid, before all other considerations, and of course if they weren't, or there was a risk they wouldn't be, in full, then nobody would do the job and the clients' funds and assets would be in perpetual limbo. So, what we're seeing here is what happens if there isn't enough in non-ring-fenced assets to pay the costs of administration/liquidation; it has to come from the ring-fenced assets belonging to the clients.

Sounds like something that *should* be covered by insurance.

I wonder if that's something the FCA could be asked to insist on? Insurance industry scrutiny of brokers seems to me a Good Thing. They have more expertise than most of us to assess risk, and with skin in the game they'll naturally set a premium to reflect the risk, thus rewarding the safe and penalising the dodgy.

Might there be a similar situation if a share registrar were to go belly-up? What about CREST?

absolutezero wrote:Granted, you can't hold an ISA with a CREST account but I'm prepared to forego the tax free status in exchange for peace of mind.
High time they government legislated to allow ISAs to use CREST rather than nominee.

You can't hold a pension in a CREST account either. How much of a half-million pension fund (enough to buy an index-linked annuity of similar size to the basic state pension) do you think should be at risk?

absolutezero
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Re: Safety of Client Funds

#137394

Postby absolutezero » May 7th, 2018, 6:20 pm

UncleEbenezer wrote: How much of a half-million pension fund (enough to buy an index-linked annuity of similar size to the basic state pension) do you think should be at risk?

None. Which is why legislation should be passed to allow ISA and SIPP holdings to be held in CREST.

UncleEbenezer
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Re: Safety of Client Funds

#137439

Postby UncleEbenezer » May 8th, 2018, 12:18 am

absolutezero wrote:
UncleEbenezer wrote: How much of a half-million pension fund (enough to buy an index-linked annuity of similar size to the basic state pension) do you think should be at risk?

None. Which is why legislation should be passed to allow ISA and SIPP holdings to be held in CREST.

You haven't answered my other question. Might not directly-held shares be at similar risk if a registrar were to go belly-up? And who is ultimately responsible for administering CREST: might they not pose a similar risk?

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Re: Safety of Client Funds

#137454

Postby stevensfo » May 8th, 2018, 8:22 am

However the vital point to pick up on here is that, whatever those costs are, if they exceed the amount of non-ringfenced assets available -- and that's going to be pretty likely if the broker has gone belly up due to "normal" insolvency reasons (corporate ineptness) -- then the ring-fenced assets is the only place to go....


So what does this say about the term 'ring-fenced'? That it doesn't actually mean anything at all? I have the feeling that they can talk about this term all day long, but it doesn't mean a thing if there is no law to back it up.

I also read that we are 'Beneficial owners' of the nominee shares, not 'Owners'. Some of the definitions of 'Beneficial owner' I've read don't exactly fill me with confidence.

Steve

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Re: Safety of Client Funds

#137459

Postby Midsmartin » May 8th, 2018, 8:44 am

Insurance was mentioned above. As far as I can tell the big name brokers I use do not insure my funds against fraud/failure at their end. And even if they did tell me they had insurance, would I believe them if it turned out there was fraud going on?

So can I buy this sort of insurance myself? I've googled a bit with no success.

Brokers offering CREST membership seem thin on the ground, and those I've looked at seem to only offer phone dealing not DIY online dealing.

There don't seem to be any great options available.

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Re: Safety of Client Funds

#137460

Postby PeterGray » May 8th, 2018, 8:57 am

So what does this say about the term 'ring-fenced'? That it doesn't actually mean anything at all?

It means they are ring fenced from the brokers creditors. The administrator does not come into that category.

I think a lot of the, quite justified, outrage here relates to the level of potential administrator charges.

The assets are apparently £850m, which PWC has started by writing down to £500m on the basis of illiquidity and other reasons, and they then propose to take several years and charge £100m to administer. Since they should be able to reregister the existing shares in the names of the new brokers of clients, or issue certificates, what does illiquidity have to do with it? They are not selling.

Did Beaufort hold a particularly unusual set of investments for its clients?

I do not share the view expressed above that brokers' clients should never be exposed to risk. If that is your view you should be invested in govt. securities only. However, while we all face potential risks from brokers going under, fraud etc - which we have to consider when choosing a broker, what clients should not be exposed to is the risk of apparent rampant profiteering by administrators when things go wrong.

Peter

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Re: Safety of Client Funds

#137463

Postby absolutezero » May 8th, 2018, 9:14 am

UncleEbenezer wrote:
absolutezero wrote:
UncleEbenezer wrote: How much of a half-million pension fund (enough to buy an index-linked annuity of similar size to the basic state pension) do you think should be at risk?

None. Which is why legislation should be passed to allow ISA and SIPP holdings to be held in CREST.

You haven't answered my other question. Might not directly-held shares be at similar risk if a registrar were to go belly-up? And who is ultimately responsible for administering CREST: might they not pose a similar risk?

This is similar to 'what if my bank are fraudulent and what if their records of account balances don't match mine?'
As far as I understand it, CREST and certificates (which are basically just a CREST print out made to look pretty) are about as secure as you can get.

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Re: Safety of Client Funds

#137464

Postby absolutezero » May 8th, 2018, 9:16 am

PeterGray wrote:I do not share the view expressed above that brokers' clients should never be exposed to risk. If that is your view you should be invested in govt. securities only. However, while we all face potential risks from brokers going under, fraud etc - which we have to consider when choosing a broker, what clients should not be exposed to is the risk of apparent rampant profiteering by administrators when things go wrong.

Peter

To clarify:
I mean we should not be exposed to risk from dodgy brokers - not from losses due to share price fluctuations and market activity.


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