What would happen if H&L went into administration today?

MK62 wrote: »

The FSCS might protect you up to £50k, but over that, it would appear it's just tough!!!

Yes.

It can't be any other way. When you make investments you take on risk. That includes counterparty risk all through your investment structure. So not just the parties you engage with (your broker, platform or intermediary) but every level of your holdings - eg you invest in a fund via a platform and that fund themself contracts with a global custodian to safekeep its assets or buys a derivative underwritten by a bank or insurance company. You may get screwed one way or another but you can spread the assets to mitigate risk.

Regulated financial institutions follow rules that mean they have to compensate you if they mess up and treat you badly. If they are unable to pay you out for messing up because they've gone under, the FSCS steps in, up to the standard compensation limit. That's it.

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As the administrator is only supposed to be able to charge fees for the amount of work which is necessary, then it's not unreasonable to assume that a firm with 10x the assets under management would require 10x the work to "sort out" those assets in the event of insolvency.

To an extent, the job will get harder if there's more stuff to fix and more risk taken on by the administrator in getting it right, which makes bigger or more time consuming jobs more costly.

But there are economies of scale and restoring 200,000 records may not take materially longer than 150,000 records once your systems boys figure out what they're doing. Or, the fact that an institutional investor had ten lines of stock in mainstream holdings that happen to be collectively valued at £1 billion, doesn't take any longer to validate and reconcile than a retail investor who had twenty lines of stock worth £25k. There is more risk of being sued if you mess up the billionaire's account which is a risk to the consultant's profit margin, but there may be no more work at all and the bill for the service to the dead platform wouldn't be 40,000 times bigger just because there are more digits in the quantity or value of shares.

In terms of financial safety, if you applied the same logic to bank deposits you'd simply select one of the bigger banks and stick your whole £500k (example) in there.
Some might do that, but most will limit their exposure in each bank (or group of banks) to £85000, the limit of the FSCS protection.
(That does raise the question though, that if a bank did fail, would the administrator be allowed to dip into the ring-fenced deposits for the fees involved in reuniting those deposits with the owners?:shocked:....but that's another debate...:) )

Yes absolutely the administrator would dip in to the customer deposit accounts if it needed to get paid for its work because the money in the bank accounts belongs to the bank.

The money you put into your bank account is an asset of the bank and can be used to lend on loans or credit cards or mortgages or to pay the staff salaries of heating bills in the branches. The depositors who put their money in the bank are effectively just creditors who have been told they can get "their" money back in line with the account terms (fixed deposit for a year, instant access etc) Where the bank doesn't have sufficient assets for all the creditors to get paid off at once (or at all), they won't be seeing 100% of their money back.

If you don't see 100% of your money back due to whatever mismanagement or administration/liquidation cost, you have recourse to the FSCS up to the £85k limit. The limit for deposit protection is higher than for investment protection, to keep everyone's faith in the banking system under a model where you give a bank your money and they are allowed to use it as *their* money in *their* banking business.

At the end of the day though, it's about balancing the risk. There doesn't seem to be a whole load of regulated investment firms going bump (due, partly at least I suspect, to the FCA rules governing such firms).
Hopefully, for most of us, this will be a moot point in the end, as we will not experience such a failure - it's just that it leaves that nagging doubt of what if??....

Nobody fails from day to day, year to year... until they fail. It is a real risk but you would hope/expect that the customer assets of a failed platform firm would be taken over by another platform group, who would relish the opportunity to take over the business with an instant boost to their assets under administration and ongoing revenues, such that they would bid to take over the business at a price that doesn't leave the customers out of pocket.

The customer's access to their assets would be restored, though there could be a transition period with a lack of access which could be difficult for some customers who had plans for the money.

To insulate yourself from some risks (eg if you need to have access to liquidate at least £20k of assets at the drop of a hat, and waiting several months could cause a real problem), consider using more than one platform.

Plan for the worst, hope for the best

cogito wrote: »

I think this was asked because PWC are trying to grab £100m in fees to wind up Beaufort and the money belongs to its clients.

Yes

MK62 wrote: »

it's not unreasonable to assume that a firm with 10x the assets under management would require 10x the work to "sort out" those assets in the event of insolvency.

IMHO, it is unreasonable. (bowlhead's reply has covered this bit.)

I disagree. In terms of financial safety, if you applied the same logic to bank deposits you'd simply select one of the bigger banks and stick your whole £500k (example) in there.

firstly, i'm not saying the safest solution for investments is to put it all with one very big platform. i think the safest solution is to use a small number of platforms, but more than one, and only to use big platforms (completely avoid small platforms).

this is all on the assumption that you have too much invested for it to be practical (including considering possibly higher charges from using multiple platforms) to stay within the FSCS £50k limit per platform. if you can practically stay within the FSCS limits, then that's even better.

with deposit FSCS protection, if you can practically stay within the £85k limit, again that's ideal. (generally, there are not economies of scale (lower charges, or higher interest rates) by going over £85k deposits, so splitting is more practical for deposits.) if you can't, then i'd prefer to exceed the limit only with the "too big to fail" banks / building societies.

in practice, the £50k investment limit is so low that many, not wildly rich people will be going over it. whereas fewer people should have trouble staying within the £85k deposit limit. IMHO, the investment limit should be much higher: at least £250k.

(That does raise the question though, that if a bank did fail, would the administrator be allowed to dip into the ring-fenced deposits for the fees involved in reuniting those deposits with the owners?:shocked:....but that's another debate...:) ).

to clarify: there is no ring-fencing at all for deposits, so there is no question about ring-fencing being broken. there is only the guarantee by the FSCS to make up losses up to a limit.

unlike investments, which have both ring-fencing, and an FSCS guarantee.