Beaufort Administration, Intercede and the Mello Conference

Yesterday I attended the first day of the 2-day Mello investor conference in Derby. There were lots of good presentations and some interesting companies to talk to. One hot topic of conversation was the collapse of Beaufort which was forced into administration (see two previous blog posts on the topic for details). There are apparently many people affected by it. There are a number of major issues that have arisen here:

  • The administrators (PWC) have suggested it might cost as much as £100 million to wind up the company and return assets to clients which seems an enormously large figure when the assets held are worth about £550 million. The costs will be taken out of the clients’ funds and as a result there will hundreds of larger clients who will suffer substantial loses (those with assets of less than £50,000 may be able to claim against the Financial Services Compensation Scheme – FSCS – but larger investors will take a hair-cut).
  • The assets (mainly shares) were apparently held in nominee accounts. Surely these were “segregated” accounts, i.e. not available to be treated as assets of the failed business? Most brokers who use nominee accounts will have wording in their contracts with their clients that cover this with often fine words that conceal the underlying reality that if there is any “shortfall” then the clients may be liable. But regardless, PWC are saying that because this is a “Special Administration” they have the right to take their fees out of the client assets/funds.
  • There will be a Creditors’ Meeting as required by all administrations but will the creditors be able to challenge the arrangements put in place by PWC and the costs being incurred? From past experience of such events I think they may find it very difficult. Administrators are a law unto themselves. It is alleged that there were offers from other brokers to take over the assets of Beaufort and their clients very quickly and at much lower cost, but that offer has been ignored. Investors need to ask why.
  • Note that the Special Administration regime was introduced during the financial crisis to enable the quick resolution of problems in financial institutions such as banks. This is where it is necessary to take prompt action to enable a company to continue trading and the clients not to be prejudiced. But in this case it seems we are back to the previous state where client assets are frozen for a lengthy period of time while the administrator runs up large bills at the clients expense.
  • I said only recently that the insolvency regime needs reform after the almost instant collapse of both Conviviality and Carillion. There may not have been a major shortfall in Beaufort and it might have been able to continue trading. But the current Administration rules just provide large, and typically unchallengeable, fees for the administrators who give the impression of having little interest in minimising costs. The result is the prejudice of investors in the case of a broker’s collapse, or of shareholders in the collapse of public companies.
  • Can I remind readers that part of the problem is the widespread use of nominee accounts by stockbrokers. I, ShareSoc and UKSA have long campaigned for reforms to reduce their use and give shareholders clear title and ownership after they purchase shares. In the meantime there are two things you can do: a) Avoid using nominee accounts if at all possible (i.e. use certificated trading or personal crest accounts so your name is on the share register); b) if you have to use a nominee account, make sure you are clear on the financial stability of the broker and that you trust the management. It would not have taken a genius to realise that some of the trading practices of Beaufort might raise some doubts about their stability and reputation.

I do suggest that investors who are affected by the collapse of Beaufort get together and develop a united front to resolve not just the problems raised by this particular case, but the wider legal issues. Forceful political representation is surely required.

See this web site for more information from PWC: https://www.pwc.co.uk/services/business-recovery/administrations/beaufort/beaufort-faqs.html

An amusing encounter at the Mello event was with Richard Parris, the former “Executive Chairman” of AIM listed Intercede (IGP). He was talking in a session entitled “The importance of the right board of directors” and he conceded that “separation of roles” is important, i.e. presumably he would do it differently given the chance. Richard, the founder of the company, has recently stepped down to a non-executive role, they have a new Chairman, and even Richard’s wife who was operations manager has departed. While I was in the session, there was even an RNS announcement saying the “Chief Sales Officer” had resigned (I am still monitoring the company despite having sold all but a nominal holding years back).

Richard pointed out to me that the pressure put on the company over his LTIP package back in 2012 meant that his share options are worthless as the performance targets put in place were not achieved. Well at least he is still talking to me and has joined ShareSoc as a Member apparently. Sometimes time can heal past disputes, and as I said, shareholder activism does work!

But it is regrettable that RBS are recommending voting against a resolution proposing a shareholder committee at their upcoming AGM. Perhaps not surprising, but a shareholder committee could avoid confrontation over such issues as remuneration and would be a better solution that confrontation.

I hope the Mello event becomes a regular feature of the investment calendar.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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4 thoughts on “Beaufort Administration, Intercede and the Mello Conference”

  1. Wise words in respect of Personal CREST accounts and certificates. The difficulty is that most private investors use ISA and SIPP accounts which, because of the way they are structured, preclude this obvious way of avoiding PWC ending up with a chunk of their life savings! Had they been unable to help themselves to that capital we might have found the rumoured ‘quick deal’ via other brokers would have taken place to the benefit after all clients and the compensation scheme.

    Client segregated money has always troubled me as I don’t believe it is a real nominee account, held by a separate legal entity, however it is typically a small proportion of the value of a client’s assets held with a broker. The ability to take fees from selling stock in actual nominee accounts is much more worrying and strikes me as a legal outrage. The administrator is being given control over assets, held in a separate entity, that is not in default. The only difference between that and, say a third party’s custodian, is the operational ability of the firm (and thus administrator) to sell and distribute the assets. The Special Administration scheme must have given the legal right to do this based on the ability to grab assets rather than legal entitlement. On this basis I even question whether a Personal CREST account, where authority to carry out transactions has been given to the broker, is safe, given the broking firm, and administrator, has control over its use. Is it not exactly like (or is actually) a nominee account over which the broker has control? I had an arrangement like that with Charles Stanley until they whacked the annual cost up from £60 to £240 (VAT inclusive). I suggest the CREST account should not permit the broker to instruct transactions, but buys and sells be matched and delivered to an account controlled by a third party, much as is best practice for an institution. This means that if a broker encounters difficulties, that broker cannot grab his assets and the client can continue working with another broker. This would not be cheap and for a long term buy and hold investor, going back to certificates is probably the sensible way.

    But all of this is of minor interest to most PI’s, who are obliged to use the nominee account operated (but not owned) by a firm to avail themselves of the benefits of ISA and SIPP accounts. The correct answer, surely, is that administrators should not be permitted to access assets owned by third parties, to settle debts of their client and their own fees. Simple.

    Disclosure – I am not a solicitor.

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  2. 55% of ISAs are worth £50k or less (According to Treasury Analysis). So most people are more or less covered in full by the Compensation Scheme.

    Perhaps PWC know that most people are covered by the compensation and their fees will be mostly paid by the tax payer via the Financial Services Compensation Scheme – FSCS .

    Does the FSCS realise that they are paying PWC fees?

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