Some customers of bust broker Beaufort Securities could suffer unexpected losses, says John Stepek.
When you invest with a stockbroker, your assets are ring-fenced from the broker's own. This means that if the broker goes bust, your assets remain intact, and the company's creditors don't have a claim on them. There may well be a delay in getting your money back, and the value of your assets may fluctuate during that time. But in principle, your assets should still be there. And if it turns out that this ring-fencing wasn't being observed by the broker, and that money has been lost or stolen, then the Financial Services Compensation Scheme (FSCS) covers up to £50,000 of any shortfall.
However, the latest stockbroker collapse has flagged up a risk that many investors may not have been aware of. Broker Beaufort Securities was shut down by the UK financial regulator, the Financial Conduct Authority (FCA), in early March, after the US authorities charged the company with being involved in fraud and money laundering. PricewaterhouseCoopers, the administrator, reckons that in a worst-case scenario it could take up to four years, and cost up to £100m, to return the £550m in cash and assets held by clients of Beaufort. The obvious question is: who foots the bill?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
And the answer, at least in part, is Beaufort's private-investor clients. While creditors have no claim on these assets, the FCA's special administration scheme means that administrators can cover their costs out of clients' money. To be specific, around 700 customers (out of 15,000) with portfolios worth more than £150,000 could endure haircuts of as much as 40%.
This is unfortunate for investors with the defunct Beaumont, but it's also worrying for anyone with a reasonable-sized pension pot. John Lee, a Liberal Democrat peer, notes that the idea of funds being up for grabs to pay an administrator hardly inspires confidence in dealing with smaller brokers. He is using his position in the House of Lords to pressure the government to fix this. Big brokers must also realise that any sort of uncertainty as to the security of their clients' assets is a major potential business risk they should be equally keen to see this issue tackled.
But what can you do meanwhile? Ultimately, Lee is right you have to consider the solvency of your broker. You could go to Companies House and check their accounts, but in practice, it's more likely to mean that more people will use the big brokers for the lion's share of their funds, and keep holdings with smaller specialists below the FSCS limit is hardly the way to encourage a competitive, healthy market.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
Will Poland’s new president stifle its stock market’s winning streak?Poland’s stock market has outperformed many of its European peers, but with a newly-elected populist President at odds with a Liberal government, what lies ahead?
-
Fund flows rose in April but did investors sell in May?ISA season prompted the highest level of inflows into investment funds during April but the mood may have changed in May
