Brokerage failures do happen from time to time, particularly in today’s difficult economic landscape. In 2018, Beaufort Securities became the most recent firm of note to go bust, with around 16,000 customers left wondering what was to become of their investments.
If your broker goes bust, is your money safe? The first thing to understand is…
Do you own your shares?
The answer is likely to be: indirectly. Around 63% of all shareholdings are currently held through a “nominee account” with a broker or online platform.
Is a nominee account safe?
In theory, yes. Your money should be ring-fenced from the broker’s own business. As long as shares held on your behalf are recorded under the nominee account name, they should be safe. Even if they were to collapse, creditors can’t access your money.
BUT it’s not always as simple as that. There are several factors which might complicate things.
To save time and money, some brokers will lump your shares together with lots of other clients’ shares and hold them under a single nominee name. The problem with this is that if the broker goes bust, it may take the administrator some time to work out what shares are being held on behalf of which client. Whilst you should still get your assets back eventually, you might have to wait a while.
In the worst case scenario you may find that due to fraud or negligence, client and firm assets may not have been segregated at all. This can put your money at risk of being lost through the administration process. If your assets cannot be recovered, there is some help available from the Financial Services Compensation Scheme (FSCS).
The Financial Services Compensation Scheme
In a nutshell, the Financial Services Compensation Scheme (FSCS) protects up to £85k of investors’ money in cases where a financial services firm is unable to repay that which it owes to its clients. If you invested on a recommendation of a financial adviser, you may be able to claim back losses of up to £85k if the advice was inappropriate.
Whilst this scheme does provide some peace of mind, there are limitations.
Most significantly, if the firm that went bust whilst holding your money was unauthorised, they won’t pay you anything.
And if you had significant savings, anything over the £85k threshold could well be lost for good.
How can you protect your investment?
Given the potential risks outlined above, what are your options?
Firstly, a simple check to make sure the firm is authorised with the Financial Conduct Authority (FCA) is the best place to start.
Secondly, consider limiting your holding with any one firm to £85k – the maximum you can claim back from the FSCS.
You may also consider removing some of the risk by owning your shares directly.
You can buy shares directly via the relevant company’s share registrar (Equiniti, Capita, Computershare). One downside of this option though is the physical paperwork involved. You will be issued paper certificates. These certificates must be updated and posted back to you each time you trade which can be time-consuming. And losing that piece of paper can be costly in terms of the extra administration required to replace it.
On the plus side, you can freely vote in the company’s AGM and will automatically receive shareholder perks without having to apply for them through your broker.
But you don’t have to manage without a broker. There is another option – finding a broker that lets you trade using a “personal CREST account”. These are quite few and far between and can be costly, but the advantage over buying directly is that you don’t have to worry about the paper. You can trade electronically.
A downside to both of these options is that you can’t use them to hold shares in a tax-free wrapper like an ISA or a self-invested personal pension (SIPP).
So, as with many financial decisions, there’s a degree of balancing the pros and cons of each option to decide which best meets your needs and provides the right level of protection.
If you have any concerns about your current broker or would like to discuss your options, please feel free to get in touch.