Last week I wrote about the rules that help protect your account with a stockbroker in the unlikely event that the firm fails. To recap: your stocks, bonds or funds will usually be registered in the name of your broker’s nominee company, but the rights to them lie with you, not your broker or their creditors. If it goes bust, they should be returned to you, although this may take months or more to sort out. If anything is missing, the Financial Services Compensation Scheme (FSCS) will cover any shortfall up to £85,000 per customer (not per account). Several readers have since written in with questions that are worth adding to the original article.
Can I hold stock in my own name instead?
There is a type of account called a personal Crest account, where shares will be held in your name on the company’s electronic shareholder register. Very few brokers still offer this and fees are now typically very high. You can also still hold shares in certificate form, although trading costs will be higher. Neither option is available for an individual savings account (Isa) or pension, or for holding most funds.
Is £85,000 FSCS cover enough?
Based on past broker failures, this has usually been adequate for almost all clients. See cases such as Beaufort Securities, Pritchard Stockbrokers, Fyshe Horton Finney and SVS Securities for examples of what has happened before (these will also make it clear that the regulator’s special administration regime for failed brokers is rather slower and more costly than one would hope). There can be no guarantees, but my conclusion from past failures is that if your account is worth, say, twice the FSCS limit, losses would be very unlikely (assuming the broker isn’t a Ponzi scheme). If it’s more like ten times, the risks are probably still low, but splitting it across more than one broker might be prudent – especially if you hold a lot of cash.
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How else can I reduce the risks?
The simplistic answer I gave last time is to keep part of your assets with one of the large firms. These should be more closely watched by regulators. To be clear, this does not mean any large firm – you want one with fair fees and good service, which is not always the case. But if you prefer to use a smaller firm and you are over the FSCS limit, do more research: check its accounts, the history of its key people and news about its past activities. Focus on brokers that are well capitalised and have a good record in dealings with regulators and clients. Avoid those that push illiquid, risky or unregulated investments.
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