The Lemon Fool

I recently received my account summary for the last 6 months in respect of Foreign and Colonial Investment Trust shares within the F and C Savings Plan. Under the heading 'Compensation' was the following statement -

'The Plan Manager is covered by the Financial Services Compensation Scheme. You may be entitled to compensation from the scheme if the Plan Manager cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to £50,000.

Further information about compensation arrangements is available from the Financial Services Compensation Scheme. Please note F&C would not be liable for a default by a custodian or bank holding plan investments or cash.'

I am particularly concerned with the last sentence regarding the custodian or bank going into default. What if the financial crisis were to reoccur, and the custodian or bank were to default?

LooseCannon101 wrote:I am particularly concerned with the last sentence regarding the custodian or bank going into default. What if the financial crisis were to reoccur, and the custodian or bank were to default?

What exactly would the custodian default on? The assets that they hold would still exist, and would still belong to the nominee, even if they could not pay their electricity bill.

The custodian business is very conservative and, by its nature, isn't risking capital. In the 2007-2009 crisis, the big custodian banks like BONY/Mellon and State Street barely wobbled, even while all around them were losing their heads.

Let's say that the custodian does enter bankruptcy. The savings plan shareholdings are held by a nominee company controlled by the custodian. But the custodian does not own any of the nominee company's assets, so they cannot be claimed by its creditors. They are "ring-fenced".

The big risk here is that it may take some time to sell your holding, if you wanted to do so, because of the bankruptcy.

There are risks with any nominee system, basically fraud and incompetence (bad audit trail so clear title to nominee assets cannot be established). But these same risks occur with any asset held by an agent or third-party.

Whilst these are low probability events, I still choose to protect myself to some extent by holding many investment trusts (12 at the moment, 3 of which are via F&C's savings plan and most of the rest are certificated)..

SalvorHardin wrote:Whilst these are low probability events, I still choose to protect myself to some extent by holding many investment trusts (12 at the moment, 3 of which are via F&C's savings plan and most of the rest are certificated)..

Yes, I seem to remember that this was one of Luni's reasons on TMF for his basket strategy as although the different IT's could often share many of the same underlying normally UK-based income equities it spread risk were any of the IT's to be hit by an issue like dodgy accounting or fraud.

I have always felt the nominee account strategy for holdings within an IT to be safe enough (and similar I assume to what the online broker/trading platforms use?), but how similar is it to the type of segregated custodian structure used by ETF giant Vanguard which is also sold as offering investor protection?

GJHarney wrote:Yes, I seem to remember that this was one of Luni's reasons on TMF for his basket strategy as although the different IT's could often share many of the same underlying normally UK-based income equities it spread risk were any of the IT's to be hit by an issue like dodgy accounting or fraud.

The idea you are attributing to Luni involves holding 7 or 8 IT's to cover a single investment strategy, That might be fine if you only have one investment strategy., like UK income. But what if you have ten strategies? Does that mean you have to hold 70 or 80 investment trusts? The idea quickly breaks down. Some strategies don't even have that many IT's representing them.

It might have helped if Luni could cite such an alleged risk with ITs ever happening. But the one scandal involving ITs was with the split capital ITs and, in that case, buying a bunch of them would have done you no good because all of them suffered to some extent. There was also one case of fraud involving a particular IT in the 1990's but the fund manager compensated shareholders.

There may be a valid reason for redundantly holding several funds withthe same strategy and holdings, but that isn't it. I think most people do it to avoid the risk of picking the worst one.

Thanks everyone for making a comment. I will certainly be asking the directors about the custodian issue at the next AGM of Foreign and Colonial Investment Trust.

Kind Regards,

LooseCannon101