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Nominee account risks

By Justin Modray, published 07 June 2018.

You might have read something in the papers lately about a stockbroker called Beaufort Securities that has gone bust. What’s grabbed the headlines is that the administrator, PWC, has estimated it will cost tens of millions of pounds to sort out the mess and customers will end up footing the bill.

Beaufort customers mostly have ‘nominee’ accounts, which is usual practice across the industry these days. These have always been thought of safe because they’re ‘ring-fenced’ from the main business, so discovering that in extreme circumstances they might not be has hit the headlines.

For most of us there’s no need to panic. Provided your investments are held via a reputable and financially robust stockbroker or platform there’s little reason to worry.

But it is helpful to understand how all this works, and that in practice there’s little practical alternative but to continue using nominee accounts. You’ll probably come to same the conclusion as us: The Financial Conduct Authority (FCA) really needs to pull it’s finger out and revise rules to eradicate this risk, however small it might be.

What is a nominee account?

It’s a company, usually owned by a financial firm (e.g. stockbroker or platform), whose sole purpose is to hold investments on your behalf. This means the nominee company physically owns the investments and appears on the share and fund ownership registers, but you retain ownership as a beneficiary (technically it’s a form of trust).

The reason for this arrangement is convenience and cost. The stockbroker/platform can handle all administration without the hassle of share certificates (which cuts costs), while mixing and matching funds and holding within ISAs and SIPPs is a breeze. Low cost online share and fund trading would not be possible as we know it without nominee accounts.

Are there other options?

Not any practical ones for most of us. If you only want to hold shares outside of an ISA you could consider a CREST personal account, put simply an electronic form of share certificate allowing you to trade online while retaining physical ownership of the shares. However, very few popular stockbrokers offer this service and it usually costs £100-£200 a year. Otherwise, you could revert to share certificates, but this precludes online trading and dealing costs tend to be very high. Funds can be purchased directly from fund managers, but they tend to be most expensive versions and you’ll be limited to that provider’s funds in your ISA (if they offer an ISA, pensions not available).

How safe are they?

Nominee accounts are considered very safe provided the firm is regulated by the Financial Conduct Authority (FCA). In fact, until Beaufort, they were considered almost bullet proof since client monies are ring-fenced from the firm’s business. So you are safe, except for the costs of returning the monies or investments to you, i.e. administrator’s costs. In theory these fees should be nominal (the administrators job will be to shift the nominee accounts to another broker/platform if possible) and have negligible impact on customers. But in the case of Beaufort they appear to be significant, very significant, potentially making a large dent in customers’ accounts.

Why are the administrator’s fees potentially so high in the Beaufort case?

It appears many Beaufort customers held unregulated investments via a discretionary investment service which turned sour, and the firm has also been charged with fraud by US prosecutors. The upshot is an almighty mess and PWC has quoted a high price (both its fee and funding ongoing operations) to try and recover and distribute customer monies.

Could this happen with other stockbrokers and platforms?

Provided you use a stockbroker or platform that only handles FCA regulated funds and mainstream shares/investment trusts/exchange traded funds then the chances of a Beaufort style meltdown are negligible. But that is not to underplay the importance of this. The ring fencing of assets affects all platforms and funds. It is a central tenet of trust in financial services and a significant Achilles heel has emerged. It’s vital the FCA removes this and restores 100% confidence that client money is safe; the current 99.9% is not good enough.

It appears the FCA did look at this last year when reviewing its Client Asset (CASS) rules and decided it was fine for customers to foot insolvency administrative costs. In light of events since then we think it urgently needs to reconsider.