stockisa compensation

D1sa

What compensation is guaranteed for shares held in nominee accounts in companies such as Selftrade if Selftrade failed?

gadgetmind

From the selftrade Ts&Cs.

8.16

We participate in the Financial Services Compensation Scheme which is an independent body, set up under the Financial Services & Markets Acts 2000 (FSMA). In the event of our default and if you are an Eligible Claimant, compensation may be available to you under the Financial Services Compensation Scheme. The Scheme pays the first £30,000 of a valid claim in full and 90% of the next £20,000 up to a maximum of £48,000 of each investor.

Are my cash and holdings safe with Selftrade?

Yes. We are required to comply with strict financial resource requirements laid down by our regulator, the Financial Services Authority ('FSA'). These rules require us at all times to maintain enough financial reserves to cover our liabilities. In addition we are obliged by the FSA to keep all our clients' money and assets segregated from our own, in separate trust accounts.

Segregation of assets works in the following way:

FSA rules require that assets (cash and securities) held by you and all other clients at Selftrade are held completely separate from the assets of Selftrade. To ensure this separation, your assets are held in trust accounts. This means that under no circumstances can your assets be included in the asset pool of Selftrade.

Cash: Your cash deposits are held in a segregated bank account with a recognised FSA approved Bank. We use the Royal Bank of Scotland. Due to the trust status of this bank account, the Royal Bank of Scotland, is not permitted to offset any client cash balances against any amounts owed to it by Selftrade.

The Financial Services Compensation Scheme covers up to £50,000 from the 7th October 2008.

Securities: At the same time, any securities in your account are held in trust in dematerialised form within CREST in the name of LR Nominees Ltd, which is a wholly owned subsidiary of Equiniti Financial Services. Due to the trust status of these securities, Equiniti Financial Services is not permitted to realise any client securities balances against any amounts that it might owe to third party creditors. As a customer of Selftrade, your securities are thus afforded the same protection as those of Equiniti Financial Services custody customers.

Further protection is afforded to your assets by the range of insurance we carry, including a multi million pound per claim indemnity policy.

steady__eddie

A very helpful post I thoght Gadgetmind. I have been trying to get my head round this topic recently, perhaps you would confirm my understanding of it ?
F.S.C.S. max'm compo is £48k, so any portfolio in excess of £50k would be lost ?
Selftrade compo arrangements suggest that clients cash and shares are ringfenced and completely divorced from their own so would ultimately be returned to the client (no fear of a Goldman Sachs job). If this is the case, why do they go on to say, "Further protection is afforded to your assets by the range of insurance we carry, including a multi million pound per claim indemnity policy." ?
Sorry to appear so iliterate but diminishing grey matter means I have to have things spelt out nowadays.

gadgetmind

steady__eddie wrote: »

"Further protection is afforded to your assets by the range of insurance we carry, including a multi million pound per claim indemnity policy." ?

Maybe for in case something goes wrong and they haven't done what they said they'd do?

Dunno!

D1sa

My research now seems to show that for each provider the cash element is up to £85000 compensation and the stocks & shares are counted as one investment with max £50000 compensation. As with banks, you have to watch who providers belong to and whether they're independently registered.
So all you isa mllionaires out there keep your fingers crossed if you're with one provider!

steady__eddie

A lot of people warn about the dangers of maintaining cash balances above £85k with the same provider but until a few weeks ago, I was unaware of the £50k limit for equities. This may be down to my lethargy, or eyesight but I have not seen it widely publicised. After 20 odd years of occasionally dealing and admitedly a bit of luck now and again, my portfolio is well in excess of £50K so for peace of mind I can see a spot of diversification on the broker front is called for.

jimjames

D1sa wrote: »

So all you isa mllionaires out there keep your fingers crossed if you're with one provider!

If you have £1m cash with the ISA provider then you may have a problem. If it is invested in funds then where is the issue?

Each fund manager holds the funds themselves and assuming it isn't fraud then the funds are totally ringfenced from the nominee.

jimjames

steady__eddie wrote: »

A very helpful post I thoght Gadgetmind. I have been trying to get my head round this topic recently, perhaps you would confirm my understanding of it ?
F.S.C.S. max'm compo is £48k, so any portfolio in excess of £50k would be lost ?
Selftrade compo arrangements suggest that clients cash and shares are ringfenced and completely divorced from their own so would ultimately be returned to the client (no fear of a Goldman Sachs job). If this is the case, why do they go on to say, "Further protection is afforded to your assets by the range of insurance we carry, including a multi million pound per claim indemnity policy." ?
Sorry to appear so iliterate but diminishing grey matter means I have to have things spelt out nowadays.

I guess that covers fraud where the company is trading but an individual has been acting fraudulently eg Nick Leeson.

bowlhead99

jimjames wrote: »

If you have £1m cash with the ISA provider then you may have a problem. If it is invested in funds then where is the issue?

Each fund manager holds the funds themselves and assuming it isn't fraud then the funds are totally ringfenced from the nominee.

Assuming your funds / equities are registered in the name of, and controlled by, your broker / ISA provider / SIPP trustee, you have an extra layer of risk before you get to the assets.

For all you know, your nominee could be reporting to you that you have a holding in ABC Cautious Fund or FTSE Safeco plc, but this is an accounting/reporting error and actually you are invested in DEF High Risk Strategy Fund or AIMco plc. Or the nominee could cash you out of ABC fund at the bottom of the market by accident, missing out on 200,000 of gains over the year before your statement gets produced. Or a rogue employee (or corrupt management team trying to keep their company in profits) could transfer your assets from being registered in the name of "XYZ Nominees Limited account 1234JimJames", to be "XYZ Nominees Limited account 1235JohnJames", and have JohnJames cash it out and retire to Bolivia.

This would seem to be a quite separate layer of risks on top of the risk that the fund manager for ABC Cautious is a Bernie Madoff type who has themselves fraudulently run off with the cash, or a bunch of idiots who incompetently run the fund in contrast with its objectives and stated investment strategy.

"Further protection is afforded to your assets by the range of insurance we carry, including a multi million pound per claim indemnity policy."

jimjames wrote: »

I guess that covers fraud where the company is trading but an individual has been acting fraudulently eg Nick Leeson.

I suppose that depends on whether the 'range of insurance' goes beyond professional indemnity for giving you bad advice or failing to live up to their duty of best execution on a trade, and actually covers fraud, gross negligence, wilful default etc etc. Does it also cover the risk of losing all customer records in a natural disaster or act of terrorism? Or having all the assets signed over to some mad general in a military coup on the Isle of Man or whatever exotic location is the home to an obscure holding company in your service provider's group structure?

Does it insure against the risk of something going wrong shortly after they forgot to renew the insurance? Or how about an "administrative problem", such as when the directors of the company who would normally fill out the claim forms are in jail and their company's trading activities have been shut down for a huge public fraud scandal and tax evasion?

Clearly some of these risks are less likely than others but it's feasible that a multimillion per claim insurance cover does not cover every scenario they may face and is unlikely to provide 100% cover for every risk on every client asset.

The FSCS would give you some recovery I presume, but if all your eggs were in one basket this may be less than you were hoping for.

jimjames

In the scale of risks I think the one that the holdings being reported to you are not the ones you are actually invested in is probably so low to be off the scale of things I need to worry about.

Performance of a fund is another matter but that is nothing to do with compensation should the manager go bust. Again the risk of your holdings being sold without your permission seems to be another extremely low.

grey_gym_sock

i would take the risk of nominee holdings not being as reported a little more seriously. for one thing, many (most?) nominee accounts are pooled, i.e. they hold all the shares belonging to their clients in (e.g.) VOD together. so they are not giving you a report of the number of VOD shares in your individual nominee account; they are reporting the number of VOD which their records say you should have. the danger is if there are fewer VOD shares in the nominee than the total number all their clients should have. which could happen if there is either incompetent administration or fraud.

i would expect that the kind of indemnity insurance which self-trade apparently have taken out would cover all relevant eventualities. except for a company failing to pay the next insurance premium just before it goes tits up.

i wouldn't necessarily suggest sticking to £50k per provider. but to be aware if you're over that limit. and to consider the nature of the provider's business: how big they are, how established, how cautious with their own finances, how much would it be in their interests to do dodgy things to make a quick buck, ...

there is less case for keeping under this £50k limit than the £85k limit on deposit protection. things have to go very wrong (in addition to the provider becoming insolvent) before the £50k protection would be called upon. with deposits, you are an unsecured creditor, so an insolvent provider is enough for protection to come into play.