What would happen if H&L went into administration today?
Comments
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I don't know much about the overall business model but companies like this clearly have to employ staff, rent premises, pay utility bills, advertise, run websites, pay industry levies, etc, etc, and presumably fund such costs from charges applied for buying, holding and selling investments (even though those investments themselves are ring-fenced).Glen_Clark wrote: »My understanding is that client assets must be held in a ring fenced account that doesn't trade so can't lose money.
So how did they go bust?
My assumption would be that, as with any other commercial business, if/when the costs exceed the income then the business ultimately becomes insolvent....0 -
Glen_Clark wrote: »I realise the FSA are pretty useless, and expect it will trake a USA investigation to get to the bottom of this, if we ever do.
I'd never heard of Beaufort or Cameron farley until they went bust, still don't know anything else about them and am wondering how they went bust.
My understanding is that client assets must be held in a ring fenced account that doesn't trade so can't lose money.
So how did they go bust?
As an example, when you buy stocks with Hargreaves they are held in the name of a separate non trading company Hargreaves Lansdown Nominees Limited with yourself as the beneficial owner. Hence whereas the nominee company should not go bust, Hargreaves Lansdown Group can just as any commercial enterprise/trading company can. It would appear that the nominee company assets however can still be used to cover administrator fees to return those assets to their underlying beneficial owners. I’m not totally sure how the assets were ring fenced at Beaufort and if there are different ring fencing structures that might give different levels of protection. Ultimately however the costs of returning the assets have to come from somewhere.
I had not heard of Beaufort until this recent episode but it appears them going into administration was the result of having their regulated activities closed down by the FCA and a US DoJ fraud investigation,0 -
Thats what I was thinking about - if they were trading they could lose a lot of money very quickly. When its not their money they are losing there is an incentive to place ever bigger bets to win it backit appears them going into administration was the result of having their regulated activities closed down by the FCA and a US DoJ fraud investigation,
Wheras the platforms that are not trading would just lose money by being unprofitable - making potential losses to investors far less. ?“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” --Upton Sinclair0 -
Glen_Clark wrote: »Thats what I was thinking about - if they were trading they could lose a lot of money very quickly. When its not their money they are losing there is an incentive to place ever bigger bets to win it back
Wheras the platforms that are not trading would just lose money by being unprofitable - making potential losses to investors far less. ?
I’m not sure of the details of Beaufort’s business model and what regulated activities they engaged in, however, the client losses we are discussing are those resulting from the administrator fees as from what I’ve read it doesn’t look like the FCA and DoJ involvement was because of Beaufort fraudulently using client assets that were supposed to be segregated. PWC have indicated that the segregation in place was satisfactory other than a some ‘isolated deficiencies’ (of the c4,000 lines of stock owned by Beaufort customers there were problems with 150 of them as a result of incomplete trades, corporate actions and issues around a technology upgrade. Some illiquid positions were also written down by PWC as they believed they had been overvalued).
Hence whether the outfit you have your investments with is a relatively low risk business with little debt or a higher risk business taking large trading positions with their own capital, as long as client assets have been properly segregated then the recovery rate of your assets should be similar in both scenarios assuming the administrator fees as a proportion of client assets is similar (which may or may not be the case). Segregation means the client assets cannot be used to cover the liabilities of the main business and hence whether the main business (i.e. outside of the segregated assets) has lost a load of money on trading positions or just become slowly unprofitable due to say over ambitious expansion coupled with a failure to attract customers should not materially affect the amount returned to clients.0 -
I’m not sure of the details of Beaufort’s business model and what regulated activities they engaged in, however, the client losses we are discussing are those resulting from the administrator fees as from what I’ve read it doesn’t look like the FCA and DoJ involvement was because of Beaufort fraudulently using client assets that were supposed to be segregated. PWC have indicated that the segregation in place was satisfactory other than a some ‘isolated deficiencies’ (of the c4,000 lines of stock owned by Beaufort customers there were problems with 150 of them as a result of incomplete trades, corporate actions and issues around a technology upgrade. Some illiquid positions were also written down by PWC as they believed they had been overvalued).
Hence whether the outfit you have your investments with is a relatively low risk business with little debt or a higher risk business taking large trading positions with their own capital, as long as client assets have been properly segregated then the recovery rate of your assets should be similar in both scenarios assuming the administrator fees as a proportion of client assets is similar (which may or may not be the case). Segregation means the client assets cannot be used to cover the liabilities of the main business and hence whether the main business (i.e. outside of the segregated assets) has lost a load of money on trading positions or just become slowly unprofitable due to say over ambitious expansion coupled with a failure to attract customers should not materially affect the amount returned to clients.
Well a commentator in the FT suggested PWC's estimate of £100 million administrative fees might include the cost of defending investors against legal action and fines by the US courts. Don't know if thats right or not - might just have been speculating as to how they could charge so much in costs, but it made me wonder.“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” --Upton Sinclair0 -
Glen_Clark wrote: »Well a commentator in the FT suggested PWC's estimate of £100 million administrative fees might include the cost of defending investors against legal action and fines by the US courts. Don't know if thats right or not - might just have been speculating as to how they could charge so much in costs, but it made me wonder.
Not a lawyer myself but would fund it hard to imagine how it could be lawful to fine, or bring legal action against, investors when presumably they have done nothing wrong. Surely the fine and legal action would be against the company itself which would be unable to pay the fines due to the lack of assets. I am not aware of there being any legal basis for clients’ segregated funds to be used to meet liabilities of the main business such as fines brought against it.
Latest article I read in FT from yesterday followed the creditors’ meeting at which PwC’s proposals were grudgingly voted through but with the understanding that costs should end up being a lot less than the £100m estimate which is supposed to be a worst case scenario.0
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