Ring Fencing

[terminal7]

Not sure whether this is the correct place for this subject - anyway here goes.

1. I have always understood that clients' portfolios with brokers are totally ring-fenced and that in the event of the broker going bust the clients' account are protected. Is this true?

2. Is this the same for platforms such as AJ Bell, HL etc?

3. Finally, what about the holdings (maybe held via a platform or directly) with asset managers such as Black Rock, Baillie Gifford etc. Is each fund within these companies ring-fenced? For instance if their equity based funds start to fail, are the gilts fund ring-fenced against contagion?

T7

[Dod101]

Not sure whether this is the correct place for this subject - anyway here goes.

1. I have always understood that clients' portfolios with brokers are totally ring-fenced and that in the event of the broker going bust the clients' account are protected. Is this true?

2. Is this the same for platforms such as AJ Bell, HL etc?

3. Finally, what about the holdings (maybe held via a platform or directly) with asset managers such as Black Rock, Baillie Gifford etc. Is each fund within these companies ring-fenced? For instance if their equity based funds start to fail, are the gilts fund ring-fenced against contagion?

T7

Your points 1 and 2 are true unless of course there is some breach in the systems but the fact that they are held in a broker's nominee should help. There has been a least one instance where some fees from the administrators/liquidators have been charged to the ring fenced accounts but I do not think it affected retail investors. It should be the same for all platforms.

I cannot help you with the answer to 3. but I should imagine that the answer is yes because these firms are all supposed to be tightly regulated.

In general though nothing can be completely watertight but the regulator or FCA or whatever the name is these days will compensate you if all else fails up to £85,000 per account

Dod

[terminal7]

Thanks Dod

Indeed I have used the compensation limit in terms of bank accounts ever since Northern Rock brown trouser debacle as the max I would deposit in any bank. However I have not followed this with platforms as their are some benefits of consolidation that just makes live easier for drawdown. This does worry me because £85k max compensation (which appears in my understanding from relevant platform websites) would leave a big gap in my pension pots if something bad happened in the financial jungle.

As for the asset managers, though I did not follow closely, I thought that Woodford funds suffered from contagion bringing that pack down. I remember reading that these funds have been rebranded that investors have not lost out apart from the dramatic fall in value of one of the main funds. Maybe I got this all wrong.

Regards

T7

[BrummieDave]

And remember the £85k limit is actually an EU regulation, and is in reality Eur 100k.

That's why it went up from £75k to £85k a few years ago; the change reflected Sterling's drop against the Euro.

It's surprising how many who work in the financial/banking sector aren't aware of this.

[Dod101]

As for the asset managers, though I did not follow closely, I thought that Woodford funds suffered from contagion bringing that pack down. I remember reading that these funds have been rebranded that investors have not lost out apart from the dramatic fall in value of one of the main funds. Maybe I got this all wrong.

Not quite sure what you mean by contagion. The Woodford fund that ended up being closed down did not directly affect the others (as in the now familiar C Virus) Certainly the name Woodford was a common feature but I think it was more because they all held a similar sort of portfolio with too much emphasis on smaller and unquoted companies. The Woodford name became highly unpopular and so the remaining funds (and the IT) were rebranded and of course by then Woodford had nothing to do with them anyway. With big organisations like Black Rock, Baillie Gifford and so on, whilst they almost certainly have a 'house style', I think individual funds managed by them are unlikely to be dominated by one figure (in fact I am quite sure they are not dominated by one figurehead)

Investment trusts are even less so since they are governed not by the investment manager (BG for instance in the case of Scottish Mortgage) but by their Board of Directors who are responsible to the shareholders and can and do hire and fire the investment manager. When it comes to funds, the investment manager tends to be everything, the secretary, manager and investment manager and general promoter so they have quite a proprietorial role which is usually absent with an investment trust.

Dod

[yorkshirelad1]

Not sure whether this is the correct place for this subject - anyway here goes.

1. I have always understood that clients' portfolios with brokers are totally ring-fenced and that in the event of the broker going bust the clients' account are protected. Is this true?

2. Is this the same for platforms such as AJ Bell, HL etc?

3. Finally, what about the holdings (maybe held via a platform or directly) with asset managers such as Black Rock, Baillie Gifford etc. Is each fund within these companies ring-fenced? For instance if their equity based funds start to fail, are the gilts fund ring-fenced against contagion?

T7

Re 1: IMHO, any broker that still uses the word "ring fenced" in terms of client assets in their broker nominee should be best avoided (and be taken out and shot). Client assets in a nominee should be held in a separate corporate entity to the broker. But clients of Beaufort (who collapsed last year, well discussed on TLF) won't forget how a percentage of their assets might have been used to pay part of liquidators' costs (under a statutory instrument) until the FSCS stepped in
Re: 2: I'd have thought e.g. HL are treated as brokers, irrespective whether they are called "platforms" or not.
3. Can't comment

IANAL

[GoSeigen]

Re 1: IMHO, any broker that still uses the word "ring fenced" in terms of client assets in their broker nominee should be best avoided (and be taken out and shot). Client assets in a nominee should be held in a separate corporate entity to the broker. But clients of Beaufort (who collapsed last year, well discussed on TLF) won't forget how a percentage of their assets might have been used to pay part of liquidators' costs (under a statutory instrument) until the FSCS stepped in

And note that the nominee will be a different legal person (different company) BUT it could be controlled by the same shareholders as the broker. At least one of my brokers has this incestuous arrangement.


GS

[monabri]

If the broker is FSCS registered then "retail" clients (like me and you) will (will) be protected for losses ( note, losses) upto 85k.

With regards to losses of up to 85k :
In the cases of Beaufort Securities (2018) and the more recent SVS Securities (August 19..lots of info on The Lemon Fool) you would have needed to have a considerable amount of shares + cash to have had any loss.

In the case of Beaufort, I calculated you would need to have assets over 850k before the FSCS compo ran out and you lost money. That was with the then 50k FSCS limits applying. Nowadays, it would have been an even bigger sum, well over 850k.

In the current case of SVS ( which affects me as it was one of my brokers).... the assets were found to all be in place ( qty of shares and cash was ring fenced).

In both cases, the issue was that the assets were/are not accessible ( even divis). Until the special administrators finish, everything is held in said ring fenced account, shares owned, cash balance and dividends accrued.

In the case of SVS, admin was on 6th August 2019 and the issue looks like taking another few months to resolve (assuming that Coronavirus doesn't slow matters).

[monabri]

Here's the thread on SVS if you are interested.

viewtopic.php?p=241348#p241348


In both cases, the companies were taken under "special administration". They, the administrators, can use your assets ( shares,cash) to fund their work. In practice ( Beaufort and SVS) the costs were met by the FCSC.

[monabri]

Re 1: IMHO, any broker that still uses the word "ring fenced" in terms of client assets in their broker nominee should be best avoided (and be taken out and shot). Client assets in a nominee should be held in a separate corporate entity to the broker. But clients of Beaufort (who collapsed last year, well discussed on TLF) won't forget how a percentage of their assets might have been used to pay part of liquidators' costs (under a statutory instrument) until the FSCS stepped in

And note that the nominee will be a different legal person (different company) BUT it could be controlled by the same shareholders as the broker. At least one of my brokers has this incestuous arrangement.


GS

The broker tries to minimise their costs by "doing it themselves" and not paying for an independent clearing house. That's my understanding of this "incestuous " behaviour. However aren't there regular inspections of brokers who operate with FSCS approval ( not sure if that's the right word) to check that what what should be ring fenced is indeed ring fenced?

[monabri]

Regarding the gilts question.

The special administrators provided me ( and the other 21000 clients) with a list of assets held ( shares and cash) to check that they matched our records/understanding. In the case of SVS they also were listing bonds held ( even if some were of dubious value). So, I guess ( and it is a guess) that gilts would also be listed. Then it is a case of whether you think a big organisation like BlackRock , or Baillie are "dodgy dealers". I reckon that , whilst it is a possibility, it is not a likely scenario!

The main thing in the Beaufort and SVS cases is the accounts being frozen for long periods. If you had just 1 broker and lived off dividends then it would be prudent to spread things amongst 2 or 3 brokers as at least you would have some income.

And as for these free trading sites , I wouldn't go near them .

[GoSeigen]

The broker tries to minimise their costs by "doing it themselves" and not paying for an independent clearing house. That's my understanding of this "incestuous " behaviour. However aren't there regular inspections of brokers who operate with FSCS approval ( not sure if that's the right word) to check that what what should be ring fenced is indeed ring fenced?

Exactly, but this creates an additional risk for the investor and as for inspections: really?? Do you follow Mark Taber's tweets about the chocolate teapot FCA? I've reported my concerns to the FCA about this particular broker, including the fact that the Compliance Manager didn't have their phone number registered with the FCA (which was required) and some of their staff registrations were out of date and they did the square root of FA...


GS

[monabri]

Its definitely an extra risk...maybe they should not permit the self clearing? I thought SVS was closed by FCA following a telling off/warning for selling dodgy bonds at high commission which SVS ignored. They were clearly watching SVS but they should have acted sooner and come down on them harder earlier on, making it clear they would close them down if they didn't cease & desist from selling high risk bonds to retail clients.

[terminal7]

Thanks everyone for your helpful contributions. I believe that consequently I understand the situations regarding Q1 and Q2.

However still unclear about Q3. What would a collapse at an asset manager leave in the ashes? I have to say I do not know what happened to all the products (some obviously profitable) at Lehman Bros after that collapse. Would the 'good' funds part compensate for the 'bad' funds in an administration in terms of the creditors? Or would the owners of the 'good' funds be protected?

T7

[gryffron]

And remember the £85k limit is actually an EU regulation, and is in reality Eur 100k.
That's why it went up from £75k to £85k a few years ago; the change reflected Sterling's drop against the Euro.

Yes, but...
It's written into UK legislation, in response to EU dictats. So it doesn't disappear on Dec-31st (or whenever), although the link to €100k might.

Gryff

[BrummieDave]

And remember the £85k limit is actually an EU regulation, and is in reality Eur 100k.
That's why it went up from £75k to £85k a few years ago; the change reflected Sterling's drop against the Euro.

Yes, but...
It's written into UK legislation, in response to EU dictats. So it doesn't disappear on Dec-31st (or whenever), although the link to €100k might.

Gryff

Yes, knew that, was just explaining where the otherwise random figure of £85k came from, which in my experience few people are aware of.

[JohnW]

Thanks everyone for your helpful contributions. I believe that consequently I understand the situations regarding Q1 and Q2.

However still unclear about Q3. What would a collapse at an asset manager leave in the ashes? I have to say I do not know what happened to all the products (some obviously profitable) at Lehman Bros after that collapse. Would the 'good' funds part compensate for the 'bad' funds in an administration in terms of the creditors? Or would the owners of the 'good' funds be protected?

T7

When you invest with Black Rock or similar, aren't the assets they buy on your behalf held by a custodian which is usually some big bank? They might even have several custodians. How much this protects one fund's assets against problems with another fund, who knows. But that's somewhere to start looking.

[stevensfo]

Not sure whether this is the correct place for this subject - anyway here goes.

1. I have always understood that clients' portfolios with brokers are totally ring-fenced and that in the event of the broker going bust the clients' account are protected. Is this true?
T7

Sorry for coming late to this, but this phrase 'ring-fencing' really annoys me and I've commented on it before. It's been discussed now for over 20 years, originating from TMF, before Lemon Fool.

We should consign this phrase to the scrapheap. Either the funds are protected by law, or they are not. You will not receive any confirmation of how safe your funds are from your broker, and they are only protected by the FSCS up to 85,000, same as cash.

You can repeat the mantra 'ring-fenced' till you're blue in the face, but it doesn't mean a thing unless it specifically refers to a law protecting your assets.

As far as I'm aware, you are only protected to 85,000. If I'm out of date, I'm sure someone will correct me.

If you give me a million pounds to look after, I will surround them with a smart, cute, little circular fence, painted white and decorated with daisies. Is that okay?

Steve

[ursaminortaur]

Not sure whether this is the correct place for this subject - anyway here goes.

1. I have always understood that clients' portfolios with brokers are totally ring-fenced and that in the event of the broker going bust the clients' account are protected. Is this true?
T7

Sorry for coming late to this, but this phrase 'ring-fencing' really annoys me and I've commented on it before. It's been discussed now for over 20 years, originating from TMF, before Lemon Fool.

We should consign this phrase to the scrapheap. Either the funds are protected by law, or they are not. You will not receive any confirmation of how safe your funds are from your broker, and they are only protected by the FSCS up to 85,000, same as cash.

You can repeat the mantra 'ring-fenced' till you're blue in the face, but it doesn't mean a thing unless it specifically refers to a law protecting your assets.

As far as I'm aware, you are only protected to 85,000. If I'm out of date, I'm sure someone will correct me.

If you give me a million pounds to look after, I will surround them with a smart, cute, little circular fence, painted white and decorated with daisies. Is that okay?

Steve

The law protecting your assets is Trust Law. The broker is holding your shares in trust for you.

https://monevator.com/nominee-accounts/

Your investments are held for you – on trust – in a nominee account. This means that while the nominee is the legal owner of the securities, you retain actual ownership as the beneficiary.

The upshot is that your broker can move and sell the securities on your behalf – and gets to handle all the lovely paperwork – but the assets still belong to you. They can’t be claimed by the broker’s creditors if things get messy.

The only problems with this are

1) If the broker fails due to fraud or if they were running things negligently and didn't keep records properly. In that case although the administrator would try to get all your money back there maybe a shortfall which would result in your having to resort to the FSCS compensation scheme.

2) The administration process may take a long time to complete and during that time you may not have access to your holdings.

3) In a few recent cases the administrators have attempted to get payment for their work from client funds despite this protection since the collapsing firms didn't have enough left to cover the costs of administration. As I understand it though the FSCS has covered these costs in those cases.