Yesterday I attended the first day of the 2-day Mello investor conference in Derby. There were lots of good presentations and some interesting companies to talk to. One hot topic of conversation was the collapse of Beaufort which was forced into administration (see two previous blog posts on the topic for details). There are apparently many people affected by it. There are a number of major issues that have arisen here:
The administrators (PWC) have suggested it might cost as much as £100 million to wind up the company and return assets to clients which seems an enormously large figure when the assets held are worth about £550 million. The costs will be taken out of the clients’ funds and as a result there will be hundreds of larger clients who will suffer substantial loses (those with assets of less than £50,000 will be able to claim against the Financial Services Compensation Scheme – FSCS – but larger investors will take a hair-cut).
The assets (mainly shares) were apparently held in nominee accounts. Surely these were “segregated” accounts, i.e. not available to be treated as assets of the failed business? Most brokers who use nominee accounts will have wording in their contracts with their clients that cover this with often fine words that conceal the underlying reality that if there is any “shortfall” then the clients may be liable. But regardless, PWC are saying that because this is a “Special Administration” they have the right to take their fees out of the client assets/funds.
There will be a Creditors’ Meeting as required by all administrations but will the creditors be able to challenge the arrangements put in place by PWC and the costs being incurred? From past experience of such events I think they may find it very difficult. Administrators are a law unto themselves. It is alleged that there were offers from other brokers to take over the assets of Beaufort and their clients very quickly and at much lower cost, but that offer has been ignored. Investors need to ask why.
Note that the Special Administration regime was introduced during the financial crisis to enable the quick resolution of problems in financial institutions such as banks. This is where it is necessary to take prompt action to enable a company to continue trading and the clients not to be prejudiced. But in this case it seems we are back to the previous state where client assets are frozen for a lengthy period of time while the administrator runs up large bills at the clients expense.
I said only recently that the insolvency regime needs reform after the almost instant collapse of both Conviviality and Carillion. There may not have been a major shortfall in Beaufort and it might have been able to continue trading. But the current Administration rules just provide large, and typically unchallengeable, fees for the administrators who give the impression of having little interest in minimising costs. The result is the prejudice of investors in the case of a broker’s collapse, or of shareholders in the collapse of public companies.
Can I remind readers that part of the problem is the widespread use of nominee accounts by stockbrokers. I, ShareSoc and UKSA have long campaigned for reforms to reduce their use and give shareholders clear title and ownership after they purchase shares. In the meantime there are two things you can do: a) Avoid using nominee accounts if at all possible (i.e. use certificated trading or personal crest accounts so your name is on the share register); b) if you have to use a nominee account, make sure you are clear on the financial stability of the broker and that you trust the management. It would not have taken a genius to realise that some of the trading practices of Beaufort might raise some doubts about their stability and reputation.
I do suggest that investors who are affected by the collapse of Beaufort get together and develop a united front to resolve not just the problems raised by this particular case, but the wider legal issues. Forceful political representation is surely required.
See this web site for more information from PWC: https://www.pwc.co.uk/services/business-recovery/administrations/beaufort/beaufort-faqs.html
An amusing encounter at the Mello event was with Richard Parris, the former “Executive Chairman” of AIM listed Intercede (IGP). He was talking in a session entitled “The importance of the right board of directors” and he conceded that “separation of roles” is important, i.e. presumably he would do it differently given the chance. Richard, the founder of the company, has recently stepped down to a non-executive role, they have a new Chairman, and even Richard’s wife who was operations manager has departed. While I was in the session, there was even an RNS announcement saying the “Chief Sales Officer” had resigned (I am still monitoring the company despite having sold all but a nominal holding years back).
Richard pointed out to me that the pressure put on the company over his LTIP package back in 2012 meant that his share options are worthless as the performance targets put in place were not achieved. Well at least he is still talking to me and has joined ShareSoc as a Member apparently. Sometimes time can heal past disputes, and as I said, shareholder activism does work!
But it is regrettable that RBS are recommending voting against a resolution proposing a shareholder committee at their upcoming AGM. Perhaps not surprising, but a shareholder committee could avoid confrontation over such issues as remuneration and would be a better solution that confrontation.
I hope the Mello event becomes a regular feature of the investment calendar.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
Thanks Roger. The Beaufort situation is scandalous. ShareSoc will look to do what it can to support Beaufort clients, minimise their losses and press for reform of the insolvency regime. Watch this space for news.
If “special administration” can fail to protect supposedly-ring-fenced client money, what questions should ordinary investors be asking now of our SIPP and ISA providers?
@niq – sensible to visit Companies House – https://www.gov.uk/government/organisations/companies-house and check their latest accounts; also seems wise to stick with brokers whose integrity is unquestioned.
Certainly helps in terms of monitoring the financial stability of a broker, and their business activities, if they are a publicly listed company. One gets a lot more information in that case and can of course go to their AGMs and meet the directors. Such companies as the Share Centre, Charles Stanley, Barclays, Alliance Trust, Brewin Dolphin and soon to be listed AJ Bell perhaps.
My broker says the FSCS limit is £85k not £50k. Is that correct?
@tiswas No, that is not correct. The £85,000 figure applies to bank deposits only. £50,000 is the compensation limit for investments. See https://www.fscs.org.uk/what-we-cover/compensation-limits/
Mark. I asked the FSCS directly about idealing, one of my brokers, and they replied today. “idealing.com. is regulated and authorised by the FCA and therefore deposits are protected up to the amount of £85,000 …………”
Sorry, I should clarify that I am asking about the protection limits for cash held in my ISA account and separately compensation limits for the value of any nominee holdings that may be subject to fraud/malpractice etc. In which case I am still not sure if that is up to £85k for cash AND £50k for investments.
Think the FSCS misunderstood your question: iDealing are not a deposit taking institution. AIUI only banks are.
My understanding is that £50k is for the entire investment account, cash+investments. If in doubt, recommend you contact the FSCS for clarification. Cash in an investment ISA is NOT a deposit AIUI. I would expect a cash ISA to be covered by the £85k limit.
Well, I sought clarification for the third time in the event of an armageddon type scenario where everything disappears and their latest reply is as follows.
“A stocks and shares self-select ISA with idealing where I choose the investments and no advice is taken.
You will not be covered as we provide protection where there has been evidence of an authorised business misappropriating the funds; or you receive wrong or misleading investment advice; and if an authorised investment provider goes out of business.
You will be protected for up to £85,000 for your cash deposit.”
To be honest I still don’t get it.
Well I just received yet another different answer. I think different people on the helpdesk respond each time with prepared answers and no one is prepared to answer my specific question relating to the broker in question.
However, to back the last reponse above, the FSCS website page states:
“Deposits made by private individuals and small businesses to any authorised firms are protected by the FSCS. Slightly different limits and rules apply if you have a claim against a deposit firm that was declared in default before the FSCS became operational (1 December 2001). Please contact us for more details.
From 30 January 2017, the deposit compensation limit is £85,000.”
idealing is “authorised and regulated by the Financial Conduct Authority (FCA).”
So where does that leave us?
I might pick up the phone to the FSCS on Tuesday and ask to speak to a manager.
Hi tiswas, you are probably better off emailing them and getting a written response. Then you have some clear evidence if there were ever a challenge! I think the key issue here is what constitutes a “deposit”. I don’t think placing money into a trading account or ISA is considered to be a deposit. It is an investment AIUI.
There have been about six emails each way so far. That’s what I am quoting each time!
This is very important. I worry about this issue. What if the same were to happen to any of the other brokers out there? It makes a mockery of the client protection rules, what kind of protection is it exactly? Your ‘hard earned’ assets are your assets, not someone else’s – have they really ‘earned’ the right to take them away? Best of luck, Mark.
I am still waiting for someone senior from the FSCS to call me back but this is the reply from AJ Bell re a SIPP.
Under the FSCS, if anything should happen to AJ Bell as a company, you are protected by the FSCS for up to £85,000 in cash across your
accounts and up to £50,000 in investments, although as mentioned above, we hold customer’s investments separately to AJ Bell
Youinvest’s assets so these are safe anyway.
I assume the same applies for ISAs but I will post again when I hear from them.
Thanks Tiswas, that is very useful information, different to my previous understanding, if correct, and highly relevant to Beaufort clients.
It is worrying that even seasoned professionals (!) like us struggle to understand the rules although this does mirror what I had from another broker. I will be happier once someone senior from the FSCS calls me and confirms as like you I still have lingering doubts.
To further muddy the waters, I believe that some brokers segregate cash and others sweep it into general funds, at least in part depending on client classification.
Mark. I have now spoken with someone more senior at the FSCS who confirms it is indeed only £50k for a stocks and shares ISA which includes cash and investments. I have therefore been misinformed by 3 brokers, which is very worrying, and will be taking that matter up with them.
Sorry if this thread has confused anyone but I have only been quoting from correspondence received and was determined to see it through to a conclusion.
I will keep you posted as to how the brokers respond.
SIPP protection indeed appears to be superior to that for a self select ISA. So AJ Bell were correct in stating the SIPP protection as set out in my posts above but two self select ISA brokers appear to have given me duff info. Nightmare!
Thanks for the update tiswas, interesting.