Splitting the risks

northbob · 11 October 2016 at 4:05PM

I posted another question recently in which I mentioned that I prefer to split my investments between more than one platform, for the same reason as you may split cash between unrelated banks (the per institution compensation limits). The FSCS compensation is only £50,000 so would not help much, but by not having all investments with a single platform at least not everything would be lost.

I had replies back from knowledgeable members saying that funds on trading platforms are not at risk due to the structures in place and the way client investments are held.

However I came across this in the T&Cs for a trading platform and the necessity for a clause seems to acknowledge that there is a theoretical risk:

Our Nominee will act as custodian in accordance with the FCA’s client asset rules.
Investments will be pooled with investments held for other investors and your investments may not be identified by separate share certificates.
If our Nominee defaults and for example is not holding enough investments to satisfy its obligations to all its investors the investments will be shared out among them approximately in proportion to their holdings.

Can it really never happen?

EdGasket · 11 October 2016 at 4:24PM

Anything is possible I suppose, just unlikely. It's like saying might the Gov't default on its gilts (some other gov'ts have); might the banks be forced to 'tax' customers accounts as they did in Cyprus. I agree it's a good idea to spread money around. Also keep your own copies of contract notes so you can prove what you own if the worst happens.

Unfortunately due to costs, it is not so appropriate for Sipps where having all your pension in one place keeps things simple and cheaper. e.g. you wouldn't want to be paying three or more lots of fees for each UFPLS payment from different SIpps.

Linton · 11 October 2016 at 5:29PM

northbob wrote: »

I posted another question recently in which I mentioned that I prefer to split my investments between more than one platform, for the same reason as you may split cash between unrelated banks (the per institution compensation limits). The FSCS compensation is only £50,000 so would not help much, but by not having all investments with a single platform at least not everything would be lost.

I had replies back from knowledgeable members saying that funds on trading platforms are not at risk due to the structures in place and the way client investments are held.

However I came across this in the T&Cs for a trading platform and the necessity for a clause seems to acknowledge that there is a theoretical risk:

Our Nominee will act as custodian in accordance with the FCA’s client asset rules.
Investments will be pooled with investments held for other investors and your investments may not be identified by separate share certificates.
If our Nominee defaults and for example is not holding enough investments to satisfy its obligations to all its investors the investments will be shared out among them approximately in proportion to their holdings.

Can it really never happen?

"Really Never" is a very strong criterion. To be pedantic one could say anything that doesnt disobey the laws of physics could happen (and even if it did disobey those laws there could be some doubt). The more useful question is under what circumstances could it happen and are those circumstances worryingly likely compared to all the other risks we face in life. Has a regulated nominee ever been shown to hold insufficient shares? The only circumstances that I can see where it could happen is fraud or gross negligence involving a large number of different people including operational staff, auditors and regulators.

This is rather different to bank deposit compensation schemes where in the past banks have gone bust and depositors have lost money without any fraud or gross negligence - the rules under which banks operate explicitly allow this to happen.

EdGasket · 11 October 2016 at 9:32PM

Linton wrote: »

The only circumstances that I can see where it could happen is fraud or gross negligence involving a large number of different people including operational staff, auditors and regulators.

You mean like Polly Peck, Enron, Naibu Global, CamKids, China ChainTek and a host of other companies. Not Nominees I grant you but nevertheless fraud involving staff and where auditors, nomads, and regulators were utterly useless. Seemingly quite possible then.

grey_gym_sock · 12 October 2016 at 1:49AM

for a real example of a nominee share account failing, try pacific continental securities: see http://www.smith.williamson.co.uk/news/2304-advice-to-former-clients-of-pacific-continental-securities-uk-limited-pcs-uk-on-how-to-claim-compensation

i think there is a case for both
1) sticking to nominee accounts run by companies who are either financially very strong or "too big to fail"; and
2) if you are over £50k in investments, using several different providers (but not for keeping under £50k per provider, if that would mean using a silly number of providers) - e.g. start by putting ISA and pension with different providers.

northbob · 13 October 2016 at 7:10AM

Thanks for all the comments.

Linton wrote: »

"Really Never" is a very strong criterion. To be pedantic one could say anything that doesnt disobey the laws of physics could happen (and even if it did disobey those laws there could be some doubt). The more useful question is under what circumstances could it happen and are those circumstances worryingly likely compared to all the other risks we face in life. Has a regulated nominee ever been shown to hold insufficient shares? The only circumstances that I can see where it could happen is fraud or gross negligence involving a large number of different people including operational staff, auditors and regulators.

This is rather different to bank deposit compensation schemes where in the past banks have gone bust and depositors have lost money without any fraud or gross negligence - the rules under which banks operate explicitly allow this to happen.

This a a sensible question. But equally sensible, I feel, is the question: if it happened, do the potential consequences justify the cost and effort of reducing the impact? However remote the possibility, all investments on one platform allows for a theoretical total loss of everything over £50,000.

grey_gym_sock wrote: »

for a real example of a nominee share account failing, try pacific continental securities: see http://www.smith.williamson.co.uk/news/2304-advice-to-former-clients-of-pacific-continental-securities-uk-limited-pcs-uk-on-how-to-claim-compensation

i think there is a case for both
1) sticking to nominee accounts run by companies who are either financially very strong or "too big to fail"; and
2) if you are over £50k in investments, using several different providers (but not for keeping under £50k per provider, if that would mean using a silly number of providers) - e.g. start by putting ISA and pension with different providers.

I agree, depending on the amounts involved I think it may be worth the relatively small additional cost to split some of the investments types between platforms finding the best value for each.

bowlhead99 · 13 October 2016 at 7:32AM

northbob wrote: »

I agree, depending on the amounts involved I think it may be worth the relatively small additional cost to split some of the investments types between platforms finding the best value for each.

As you suggest, different platforms are better value for different asset types. For example one platform might be great for ITs and ETFs and individually held shares and bonds, and another great for UTs and Oeic funds.

The problem is that if your real estate investment trusts in one pot go up and the bond funds in the other pot go down, and you need to rebalance them to preserve your preferred asset mix, you can't rebalance without doing a transfer between platforms; this is a pain, and impossible or impractical when dealing with tax wrappers (presuming most people do their investments in an ISA or SIPP). You also lose the efficiency of having everything in one place for ease of administration, and the potential overall lower charges from being a 'big customer' in a place that has fee caps.

So, if you are going to split things up it does make sense to think through the practical implications, weighted against the likelihood of, for example, someone at Hargreaves Lansdown embezzling a billion quid of client funds meaning that they go bust with everyone losing a fiftieth of their assets once the liquidators have sorted out the mess.

Linton · 13 October 2016 at 8:51AM

EdGasket wrote: »

You mean like Polly Peck, Enron, Naibu Global, CamKids, China ChainTek and a host of other companies. Not Nominees I grant you but nevertheless fraud involving staff and where auditors, nomads, and regulators were utterly useless. Seemingly quite possible then.

I dont think the companies you mention were "regulated" financial companies. Nominee companies arent, generally, real independent companies but rather financially and legally separate non-trading entities within major financial companies. They are unable to build up liabilities. For example the nominee company for H-L is Hargreaves Lansdown Nominees Limited. However I guess you may believe you need to protect yourself against the risk that companies like H-L or Fidelity are actually smoke and mirrors fronts for organised crime and that the customer assets they claim to administer may not really exist. In that case you would be sensible to divide your wealth amongst as many intermediaries as possible. Personally I am more afraid of invasion from the planet Zog, or a Trump victory.

Splitting the risks

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