Beaufort Settlement Improved, But…..

It’s good news that PWC have revised their proposals for the administration of Beaufort and the return of client assets. No doubt due to the efforts of ShareSoc and others. But it still leaves many issues that need properly tackling. These are:

  1. The Special Administration Regulations that allow client assets to be used to cover the costs of the administration. Client assets should be ring fenced and they are what they are called – client assets not assets of the broker or bank.
  2. The fact that most investors now have to use nominee accounts and they are therefore not the legal owner of the shares they hold. We need a new electronic “name on register” system and the Companies Act reformed to reflect the realities of modern share trading.
  3. The UK needs to adopt the Shareholder Rights directive as intended, so that those in nominee accounts have full rights. The “beneficial owners” are the “shareholders”, not the nominee account operator.

We must not let these matters get kicked into the long grass yet again due to the reluctance of politicians and the civil service to tackle complex issues.

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

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Protecting Yourself Against Administrations

Investors now know that when your stockbroker goes into administration, your assets are not secure (or “ring fenced” as your contract with them often says) because they can be seized under the Special Administration Regulations by the administrator to pay their costs. This has become clear from the Beaufort case. That means many investors are facing losses because Beaufort client accounts, like most stockbroking accounts now, were nominee accounts with the shares registered in the name of Beaufort.

There are two possible ways to protect your assets: 1) Hold your shares in the form of paper share certificates – not the most convenient format for trading and expensive to do so even if you can find a broker still willing to handle them; or 2) Hold your shares in a personal crest account, i.e. a “Sponsored Crest” account where your broker acts as the sponsor but the shares are registered in your name and traded electronically.

Some doubts arose in my mind about whether the latter would actually provide the protection required. For example, would an administrator be able to transfer the shares into their name, or stop the transfer of the account and hence the holdings to another broker? So here are the answers provided by Killik & Co who. It provides some reassurance:

In order for a participant to change Sponsor, CREST require:  

  • For those Participants that are already Sponsored, 3 letters as follows – – One from the existing Sponsor stating they are happy for the Participant(s) to move away from them on a set date. – One from the Participant(s) requesting to move Sponsors on a set date. – One from the new Sponsor stating they are happy to take over sponsorship of the Participant on a set date.
  • However, our understanding is that, where the Sponsor is in administration, a letter is not required by the existing Sponsor.  We believe it would be possible therefore, for the sponsored member to instruct another Sponsor to take on the sponsorship of the account.  Note that CREST is not a custodian or a depository and the shares are actually held by the Sponsor, but in the name of the legal owner. 

Regarding the question of the ability of the administrator to issue instructions on the stocks or transfer them into their own nominee name, our understanding is that the administrator has no rights over the securities held in the name of the legal owner as specified on the legal register. 

This information is provided by Killik & Co to the best of their knowledge and belief. For more information contact Gregory Smith on 0207-337-0409.

There are few brokers that still offer personal crest accounts (Killik & Co are one of them), but that still leaves the problem that ISAs and SIPPs have to be held in nominee accounts. Until the administration legislation is reformed, the only solutions for them are to open multiple broker accounts so that no one of them contains assets worth more than £50,000 (the limited covered by the Financial Services Compensation Scheme) or to pick a broker which is large enough and with a balance sheet that is strong enough that it is unlikely to go into administration. Having multiple broker accounts can be wise for other reasons than the risk of administration even if it can make life very complicated and possibly less secure – for example IT meltdowns in financial services companies are not uncommon (RBS and TSB are examples). It can be very frustrating not to be able to trade even for a few minutes (as happened this morning with the LSE due to a technology problem) let alone days or even weeks as Beaufort clients are suffering.

It is perhaps unfortunate that these risks might make for an anti-competitive stockbroking market. Folks may be very reluctant to sign up with new brokers who have a limited track-record.

But we really do need some reform of the insolvency rules to stop administrators grabbing client assets, a new electronic “name on register” system that protects ownership to replace the nominee system (something I have been campaigning on for years), and the ability to hold ISA and SIPP holdings in our own name.

ShareSoc are running a campaign on the Beaufort case (see https://www.sharesoc.org/campaigns/beaufort-client-campaign/ ) and have also asked anyone who is concerned about this issue, as all stock market investors should be, to write to their M.P.s. Please do so. Only that way will we get political action on these issues. ShareSoc can provide a template letter you can use.

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

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