S&s platform risk

stphnstevey

I have seen some discussion here about platform risk, particularly in the light of Beaufort, with many discussions about how to try to negate this, as much as this is possible.

We each seem to evaluate a platform on different criteria and each choose different strategies to limit our risks. In doing so we each collate a lot of information that might be of use to one another.

I thought it might be useful to discuss this to share strategies, criteria used, platform research/information and other general considerations

stphnstevey

General Considerations
- Investment services are required by the regulator to hold capital, so they can cover administration costs if they stop trading. But if the administrator can’t recover fees from company assets, it’s legally allowed to do so from client assets instead.
- In this case investors will be able to claim under the Financial Services Compensation Scheme (FSCS), which can pay up to £50,000 to each investor. The £50,000 limit for investments is going up to £85,000 from April 2019

stphnstevey

Hargreaves Lansdown Plc is a FTSE 100 listed company

IWeb is part of the Lloyds Banking Group Plc which is also a FTSE 100 listed company

X-O (and shareDeal) is a trading name of Jarvis Investment Management Ltd, a subsidiary of Jarvis Securities PLC which is a AIM traded company

Thrugelmir

To put the matter in a wider context. Here's what the US DOJ published in March. Too easy to get carried away on the basis of headlines alone.

Six Individuals And Four Corporate Defendants Indicted In $50 Million International Securities Fraud And Money Laundering Schemes

Defendants Proposed that Undercover Law Enforcement Agent Purchase a Pablo Picasso Painting to Launder Fraudulent Profits From Stock Manipulation Scheme


A multi-count indictment was unsealed yesterday, in federal court in Brooklyn, against Panayiotis Kyriacou, Arvinsingh Canaye, Adrian Baron, Linda Bullock, Matthew Green, and Aristos Aristodemou; Beaufort Securities Ltd (Beaufort Securities), a brokerage firm located in London, United Kingdom; Beaufort Management Services Ltd (Beaufort Management), an off-shore management company located in Mauritius; Loyal Bank Ltd (Loyal Bank), an off-shore bank with offices in Budapest, Hungary and Saint Vincent and the Grenadines; and Loyal Agency and Trust Corp. (Loyal Agency), an off-shore management company located in Saint Vincent and the Grenadines.

The charges include conspiracy to commit securities fraud and money laundering conspiracy. Canaye was arrested yesterday and is scheduled to be arraigned this afternoon before United States Magistrate Judge Vera M. Scanlon at the federal courthouse in Brooklyn.

Richard P. Donoghue, United States Attorney for the Eastern District of New York, William F. Sweeney, Jr., Assistant Director-in-Charge, Federal Bureau of Investigation, New York Field Office (FBI), and James D. Robnett, Special Agent-in-Charge, Internal Revenue Service Criminal Investigation, New York (IRS-CI), announced the charges.

As alleged in the indictment, the defendants engaged in an elaborate multi-year scheme to defraud the investing public of millions of dollars through deceit and manipulative stock trading, and then worked to launder the fraudulent proceeds through off-shore bank accounts and the art world, including the proposed purchase of a Picasso painting,stated United States Attorney Donoghue. !!!8220;The charges announced today reflect that this Office, together with our law enforcement partners, is committed to holding accountable those who defraud investors, regardless of the complex schemes they use to hide their ill-gotten gains.; Mr. Donoghue thanked the U.S. Securities and Exchange Commission (SEC), both the New York Regional Office and the Washington, D.C. Office, the City of London Police, the U.K.s Financial Conduct Authority and the Hungarian National Bureau of Investigation for their significant cooperation and assistance during the investigation.

As alleged, in a series of unscrupulous and illegal trading practices, the defendants contrived a scheme to defraud investors of U.S. publicly traded companies by manipulating stock prices and masking the true ownership of their clients; financial interests; stated Assistant Director-in-Charge Sweeney. In order to discreetly receive their illegal proceeds, the defendants focused their efforts on laundering the money through a variety of means, including the art world, which they believed was a market free from direct regulation. Bringing to justice securities fraudsters and money laundering facilitators who engage in these types of schemes is and will remain a priority for the FBI and our law enforcement partners worldwide.

Since the Foreign Account Tax Compliance Act has been enacted, the financial expertise of our criminal investigators is needed now more than ever in this global economy, stated IRS-CI Special Agent-in-Charge Robnett. These allegations outline an intricate scheme to obscure beneficial ownership and launder illicit proceeds. This behavior harms the financial world abroad and here at home.


Securities Fraud and Money Laundering Scheme

As alleged in the indictment, between March 2014 and February 2018, Beaufort Securities, Beaufort Management, and managers Kyriacou and Canaye, collectively the Beaufort Defendants,together with their co-conspirators, engaged in a scheme to defraud investors and potential investors in various U.S. publicly traded companies by concealing the true ownership of various U.S. publicly traded companies and manipulating the price and trading volume in the stocks of those companies.

Beginning in or about October 2016, an Undercover Agent contacted Kyriacou and stated that he was interested in opening brokerage accounts at Beaufort Securities from which he could execute trades in several multi-million dollar stock manipulation deals.

In furtherance of the scheme, the Beaufort Defendants opened brokerage accounts for their clients in the names of off-shore shell companies with nominee shareholders and directors, and then conducted manipulative trading of stocks of U.S. publicly traded companies listed on U.S. over-the-counter exchanges. Beaufort Securities facilitated at least ten pump and dump schemes involving U.S. publicly traded stocks, generating over $50 million in proceeds for its clients. Notably, Beaufort Securities had affirmed to the Financial Conduct Authority (FCA) in the United Kingdom in July 2016 that it had taken remedial measures to correct deficiencies in the firms financial crime controls and anti-money laundering processes.

Additionally, between January 2011 and February 2018, the Beaufort Defendants; Loyal Bank; Loyal Agency; Baron, the Chief Business Officer of Loyal Bank and a Director of Loyal Agency; and Bullock, the Chief Executive Officer of Loyal Bank and a Director of Loyal Agency, together with their co-conspirators, devised and engaged in a scheme to launder securities fraud proceeds for their clients. To facilitate this scheme, Beaufort Securities transferred funds to corporate bank accounts at Loyal Bank opened in the names of off-shore shell companies that were controlled by the banks clients. Loyal Bank then provided debit cards to its clients to withdraw funds from those accounts in an untraceable manner to hide the source of the money and facilitate ongoing securities fraud.

Money Laundering Through Purchase and Sale of Art

Separately, between October 2017 and February 2018, Kyriacou; Aristodemou, the uncle of Kyriacou; and Green, the owner of an art gallery in London, United Kingdom, together with their co-conspirators, agreed to launder £6.7 million, the equivalent of over $9 million dollars, which the Undercover Agent represented to be the proceeds of securities fraud. After initially proposing the use of real estate investments to launder the funds, the co-conspirators devised a scheme to clean up the money through the purchase and subsequent sale of art. Aristodemou described the art business as the only market that is unregulated,and that art was a profitable investment because of money laundering. The defendants proposed the Undercover Agent could purchase from Green a painting by Pablo Picasso entitled Personnages, Painted 11 April 1965,and provided paperwork for the painting purchase. The money laundering scheme was halted prior to the transfer of ownership of the painting.

The FCA also took regulatory action yesterday against Beaufort Securities and a related clearing firm, including halting all regulated activities and initiating insolvency proceedings against both firms. The SEC filed a civil complaint today against Beaufort Securities and Kyriacou

The charges in the indictment are merely allegations, and the defendants are presumed innocent unless and until proven guilty.

The case is being handled by the Offices Business and Securities Fraud Section. Assistant United States Attorneys Jacquelyn M. Kasulis, Michael T. Keilty and David Gopstein are in charge of the prosecution. The Criminal Divisions Office of International Affairs provided significant assistance in this matter.

The Defendants:

PANAYIOTIS KYRIACOU, also known as !!!8220;Peter Kyriacou!!!8221;
Age: 26
Residence: London, England

ARVINSIGH CANAYE, also known as !!!8220;Vinesh Canaye!!!8221;
Age: 30
Residence: Mauritius

ADRIAN BARON
Age: 63
Residence: Budapest, Hungary

LINDA BULLOCK
Age: 57
Residence: St. Vincent/Grenadines

ARISTOS ARISTODEMOU
Age: 49
Residence: London, England

MATTHEW GREEN
Age: 50
Residence: London, England

BEAUFORT SECURITIES LTD
London, England

BEAUFORT MANAGEMENT SERVICES LTD
Mauritius

LOYAL BANK LTD
Budapest, Hungary and St. Vincent/Grenadines

LOYAL AGENCY AND TRUST CORP.
St. Vincent/Grenadines

bowlhead99

I think for large values of capital (but below the level one might comfortably want for retirement) it does make sense to diversify the platform risk.

Over a couple of hundred thousand per person, the FSCS is only covering the first quarter of your losses, yet it would be unlikely that a platform would lose more than a quarter of your assets due to incompetnce or fraud. Going forward in 2019 with the increased limit you could have £400k and still be 20% covered. But there is still theoretical exposure and as the amounts get bigger it could be worth splitting them. It's not like investment funds are something you need to access daily, so having two passwords instead of one is hardly the end of the world.

There are a few platforms that give you a break on their fee rate once you have (e.g.) £250k of funds on their platform which make it tempting to stick around with higher values rather than set up a new relationship with a different platform and lose the economies of scale and convenience. After all, platform failures (within the larger platforms) are not common.

There was a post on another thread earlier along the lines of, if you had £700k at risk on one platform with only £50k coverage, even if you split it you only get £50k coverage per pot so you still have £600k at risk and have not achieved a lot given that losing £600k would be devastating. But the point is that if one failure is rare, two at once would be very very rare and by diversifying platforms you are going a good way to averting what could be a personal crisis with that potential major (if unlikely) loss.

If nothing else, if these are funds you're not simply putting on the back burner until retirement but might want to access (or change, rebalance etc) the disruption from a platform failure and lack of access could be a right pain. So in the same way you would be glad of having a Mastercard during a temporary Visa failure, or an HSBC account during a TSB failure, it can be useful not to have all eggs in one basket of uncertainty while a platform issue gets sorted over the course of a weekend or several months.

So it's not just about 'losing' all the assets as an end result of a lengthy battle, but the inconvenience of not having the ability to keep accessing a decent portion of them even if just for rebalancing or for withdrawals to meet other obligations (like topping up your cash after you use your emergency funds on emergencies).

One thing to note is that if your pensions are with traditional 'insurance-based' providers, you get 100% coverage. So if for example you were looking to open a SIPP because in your workplace scheme it costs x% to get use the Scottish Widows version of Fund A and in a SIPP it only costs y%, the saving has cost you that fully insured guarantee. So it that was a major consideration you could think twice about doing the move if you're likely to sleep worse at night.

It is the sort of topic that one could write quite a lot on if one was full of advice and opinions (as many of us are:)).

But as you say in the OP: you have seen discussion of platform risk on other threads recently, with "with many discussions about how to try to negate this" and the extent to which we evaluate platforms or choose between options. So, I'm not sure that I can be bothered to go back and copy paste my thoughts again and sift through the debate on those other threads to see what I can add. Maybe just linking those other threads so people could see the key opinions and tangents would be enough to tease out the main issues if people wanted an easy jumping-off point to existing comments, without yet another thread on the topic.

Thrugelmir

Don't see the 3 names mentioned earlier getting involved in such practices.

bowlhead99

Thrugelmir wrote: »

Don't see the 3 names mentioned earlier getting involved in such practices.

Well, fraud and dodgy dealing can happen anywhere but you are probably right - decent corporate governance and scrutiny from the owners helps to prevent this sort of stuff unless the owners and the corporate governers are themselves in on it. In something like a Vanguard or an HL there is tens of billions of value so that even if the senior management conspired to collude with the systems staff and operational staff to run off with a couple of billion down their trousers and the audit firms came in and ran up a couple of billion of costs to investigate, that doesn't correspond to much of a percentage of the average investors' assets if it were to be apportioned among the company's clients on basis of their respective NAVs of their holdings..

I particularly liked the comment in the press release that, "The charges in the indictment are merely allegations, and the defendants are presumed innocent unless and until proven guilty." I think from reading the release, we can imagine that the FBI, the NY Eastern District attorney, and the IRS do not presume they are innocent at all.

jimjames

stphnstevey wrote: »

General Considerations
- Investment services are required by the regulator to hold capital, so they can cover administration costs if they stop trading. But if the administrator can’t recover fees from company assets, it’s legally allowed to do so from client assets instead.

Is this actually true? If there has been no fraud and client assets are secure, then I wasn't aware that the administrator could recover their fees from clients?

Is that definitely correct?

bowlhead99

jimjames wrote: »

Is this actually true? If there has been no fraud and client assets are secure, then I wasn't aware that the administrator could recover their fees from clients?

Is that definitely correct?

Where else would the administrator get paid from, if the platform has gone into administration due to not having enough money to stay in business? They are not doing it out of love and whichever company wants to take over the client book (which might be quite valuable in terms of giving them some extra instant AUM) may not be willing to pay them for the service of dealing with the wind down - they just want the customers, and they can't bid for the customers if nobody is going to complete an orderly wind-up of the old platform's affairs and ensure everything is in order.


IIRC someone posted the link or extract from the law / regulation on the Beaufort thread.

Thrugelmir

jimjames wrote: »

Is this actually true? If there has been no fraud and client assets are secure, then I wasn't aware that the administrator could recover their fees from clients?

Is that definitely correct?

Administrators often retain many of the existing staff to assist in winding down operations. Likewise offices and computer systems need to be maintained. Have to be paid from somewhere.

firestone

did ask in another thread - But am i to assume that money invested with the likes of Fidelity,Vanguard,HL are only at risk of fraud but not a business failure as technically funds should have been invested in funds/shares via a nominee account?