“When Brokers Go Bust” was the title of a fascinating article in Investors Chronicle on 11/12/2015. It covered the impact on investors when their stockbroker goes out of business. That’s pretty uncommon you might think. But it revealed the surprising fact that in the last five years alone more than 400 investment firms have gone belly up, based on data from the Financial Services Compensation Scheme (FSCS).
It spelled out two particular problems: 1) the difficulty in untangling pooled nominee accounts (which are the most common way shares are held nowadays); and 2) the risks of broker fraud or mismanagement. As the article says, “it may take the broker’s administrator several months to work out which shares belong to which client. This can quickly turn into a bureaucratic nightmare for clients who are unable to trade their shares and also bear the cost of the administrator’s fees”.
It gave some specific cases. For example, clients of recent failures Fyshe Horton Finney and Pritchard Stockbrokers have been waiting two and three years respectively to get their money back! The FSCS hardly protects you because it will only pay out £50,000 maximum in cases of default which for most investors is nowhere near enough.
The article is well worth reading, and quotes ShareSoc at length.
It is of course worth noting that this is a new problem introduced by the use of nominee accounts. If you hold shares via a paper share certificate, it does not matter at all if your broker goes bust because you can trade them through any other broker. The widespread introduction of nominee accounts is not just a dangerous practice but is also anti-competitive – we said this recently to the FCA on the subject of stockbroker transfer delays:
“It is also worth noting that the delays that are currently imposed by stockbrokers are anti-competitive in nature and deter investors from switching to lower cost brokers or those with a more attractive service. It is only in the last few years that the prevalence of the use of nominee accounts has created this problem. A shareholder holding a share certificate has no need for a broker to do anything because he can trade the shares via any broker. The widespread adoption of nominee accounts by stockbrokers, and their support in the ISA and SIPP regulations has introduced these obstructions and delays so giving shareholders some alternative system might help.”
As regards many aspects, the modern world of pooled nominee accounts is a retrograde step, when it would be a simple matter to devise an easy to use electronic, name on register, system.
Roger Lawson
Worth mentioning that another problem of failed financial firms generally is that they are all too often underinsured.
The FCA is supposed to check that they have adequate insurance – a requirement of that part of the FCA Handbook dealing with prudential requirements. However, the required minimum cover is set by the volume of fee income, not the value of the business being transacted.
As a result, perfectly good firms have to meet a much larger FSCS levy than they ought to, and many investors go uncompensated.
Robert Morfee