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  • FIRST POST
    • stphnstevey
    • By stphnstevey 3rd May 18, 8:38 AM
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    stphnstevey
    What would happen if H&L went into administration today?
    • #1
    • 3rd May 18, 8:38 AM
    What would happen if H&L went into administration today? 3rd May 18 at 8:38 AM
    Im using the largest UK fund broker as a worst case scenario, but what would happen if H&L, YouInvest, IWeb, XO etc were to fail and go into administration?

    What protections are there from the FCA?
    Would client money be ring fenced?
    Who would pay administrators costs?
    How long before any money would be returned?

    What other factors would need to be considered?
Page 2
    • eskbanker
    • By eskbanker 9th May 18, 11:56 PM
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    eskbanker
    This appears to be no more than the normal 50k FSCS compensation, do you interpret this differently?
    Originally posted by stphnstevey
    No, that was my point, that the protection scheme is working as intended, in response to your comment that the Lords position on legality of costs "Puts the FCA protection in perspective", what did you actually mean by that?
    • stphnstevey
    • By stphnstevey 10th May 18, 7:08 AM
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    stphnstevey
    No, that was my point, that the protection scheme is working as intended, in response to your comment that the Lords position on legality of costs "Puts the FCA protection in perspective", what did you actually mean by that?
    Originally posted by eskbanker
    That the FSCS protection is no more than 50k, beyond this it appears ring fencing of funds has no real consequence, the administrator can legally dip into these to pay their costs
    • bowlhead99
    • By bowlhead99 10th May 18, 8:24 AM
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    bowlhead99
    That the FSCS protection is no more than 50k, beyond this it appears ring fencing of funds has no real consequence, the administrator can legally dip into these to pay their costs
    Originally posted by stphnstevey
    Yes. If something goes wrong with your investment due to the failure of a regulated firm, the FSCS is only going to make you whole for the first 50k of losses that you suffered as a result .

    The situation being described is that the broker/platform went under and had to spend a lot of money on administrators/consultants to come in and identify and safeguard the assets they were holding and transfer them to the customers or some successor after a massive reconcilation job.

    Now the firm to whom you'd entrusted your assets is dead, you want to get your hands on the assets, and your choice is basically to not have your assets at all, or have the administrators sort through the rubble so that the good assets are in a position to be transferred out to the customers or some other intermediary. No other intermediary is going to have the ability or appetite to swoop in and take over your assets without that job being performed. There is no practical option of you going in and sorting through the rubble yourself, so you have to take the cost on the chin, or not be able to extricate your assets from the situation in which those assets find themselves.

    Fortunately, the FSCS makes good the first 50k of losses that resulted from the regulated intermediary /platform /broker firm going under. If your share is of the costs of fixing the problem and getting back your assets is more than 50k, you'll have some unrecovered losses.

    There are grumblings that the administrators/liquidators are allowed to touch the client assets. But the firm you contracted with that should pay them, went under, and they are not going to take on the work if they can't put themselves ahead of other creditors in the pecking order and use whatever assets they find to finance their cleanup operation. To decide you don't want them to come in at all, and just have thousands of customers turn up at the doorstep to look through the rubble themselves, is not workable. So, collectively customers have to accept it and take the cost and then chase FSCS to make them whole.

    As we know: there are risks to investing...
    • MK62
    • By MK62 10th May 18, 2:24 PM
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    MK62
    I think the core of the matter is the credibility of the FCA's client asset ring-fencing.

    The fact that the FSCS might cover any losses (up to 50k, and assuming you are eligible), while offering at least some comfort, isn't really the point.
    As our assets are not as "ring-fenced" as we might have believed, and as there is no way to estimate the level of any potential future loss, where does that leave us now?

    I suppose the only way round this would be to limit your assets in any one company, to 50k, and rely on the FSCS to cover you in the case of total loss. I suppose it's similar to what people do with bank deposits .....hardly comforting though!


    I wonder what would have happened if those same clients had owned the same assets, but with just 20% of the money in them, so the portfolio would only have been valued at 100M (rather than 500M). Given that it's the same number of clients and assets, and therefore the same amount of work to re-unite those assets with those clients, would they have been looking at total loss? (save for the potential 50k FSCS lifeline).

    Food for thought?
    • MK62
    • By MK62 10th May 18, 2:39 PM
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    MK62
    BTW....

    From https://www.fca.org.uk/consumers/claim-compensation-firm-fails

    Compensation is only paid to cover financial loss, so for investment claims the compensation paid will try to return you to the financial position you would have been if you did not invest.

    So you may not, in fact, even have your "losses" covered.....as well as differing interpretations the phrase "ring-fenced", it would seem that there are also different interpretations of what "losses" actually means......
    • davieg11
    • By davieg11 10th May 18, 9:38 PM
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    davieg11
    Yep. For those with large portfolios I guess its a question of determining how much in additional fees (and time) you are prepared to pay to negate this risk, e,g. 500k portfolio split across 10 platforms would still be overkill for me personally but everyone has their own level of comfort and risk tolerance.
    Originally posted by tg99
    When you say 10 platforms does that mean like Aviva, Standard Life, Royal London etc or if you have 500k in Standard Life and split it into different funds like Old Mutual, Baillie Gifford etc would you be covered for 50k for each fund?
    • grey gym sock
    • By grey gym sock 10th May 18, 10:14 PM
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    grey gym sock
    I think the core of the matter is the credibility of the FCA's client asset ring-fencing.

    The fact that the FSCS might cover any losses (up to 50k, and assuming you are eligible), while offering at least some comfort, isn't really the point.
    As our assets are not as "ring-fenced" as we might have believed, and as there is no way to estimate the level of any potential future loss, where does that leave us now?

    I suppose the only way round this would be to limit your assets in any one company, to 50k, and rely on the FSCS to cover you in the case of total loss. I suppose it's similar to what people do with bank deposits .....hardly comforting though!


    I wonder what would have happened if those same clients had owned the same assets, but with just 20% of the money in them, so the portfolio would only have been valued at 100M (rather than 500M). Given that it's the same number of clients and assets, and therefore the same amount of work to re-unite those assets with those clients, would they have been looking at total loss? (save for the potential 50k FSCS lifeline).

    Food for thought?
    Originally posted by MK62
    i think you're looking at it the wrong way.

    let's suppose there could be a fixed cost of 100m to distribute the assets from any failed platform.

    in which case, how about only using platforms that hold at lot more assets than beaufort - say, at least 10bn.

    then the costs of distributing assets would be no more than 1% of the value of the assets.

    so if you have no more than 5m on the platform, your share of the costs would be no more than 50k, which you could claim back from the FSCS.

    and even without FSCS, a 1% loss is not that big a deal, in the context of investing in volatile things like equities.

    as i said earlier in the thread, i think there's a case for sticking to bigger platforms for safety. splitting your investments across (e.g.) 10 platforms could be less safe, if you had to include some small operators because you couldn't find 10 big ones (that fitted your other criteria for a platform that meets your needs).
    • grey gym sock
    • By grey gym sock 10th May 18, 10:20 PM
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    grey gym sock
    BTW....

    From https://www.fca.org.uk/consumers/claim-compensation-firm-fails

    Compensation is only paid to cover financial loss, so for investment claims the compensation paid will try to return you to the financial position you would have been if you did not invest.

    So you may not, in fact, even have your "losses" covered.....as well as differing interpretations the phrase "ring-fenced", it would seem that there are also different interpretations of what "losses" actually means......
    Originally posted by MK62
    i'm not sure what the quoted sentence means. yes, on one reading, it could be a bit worrying. but it may be a bit over-simplified for this document. i think we'd need to see a fuller explanation of what compensation is supposed to cover to clarify this. rather than trying to interpret this single sentence.
    • tg99
    • By tg99 10th May 18, 10:35 PM
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    tg99
    When you say 10 platforms does that mean like Aviva, Standard Life, Royal London etc or if you have 500k in Standard Life and split it into different funds like Old Mutual, Baillie Gifford etc would you be covered for 50k for each fund?
    Originally posted by davieg11
    Sorry I meant different stockbrokers such as HL, iWeb, II, AJ Bell etc as opposed to the underlying platform they use. If you buy say 10 different funds like an Old Mutual Fund, a BG fund etc with one broker like HL then the 50k compensation scheme does not cover you for each one if HL went into administration as it is HL who hold the units in their nominee company hence if you held 50k in each of 10 such funds you essentially have 500k exposure to HL of which a loss up to 50k would be covered. (Although as alluded to in the posts above it is not entirely clear how such a loss might be calculated under the scheme.)
    • bowlhead99
    • By bowlhead99 10th May 18, 10:37 PM
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    bowlhead99

    as i said earlier in the thread, i think there's a case for sticking to bigger platforms for safety. splitting your investments across (e.g.) 10 platforms could be less safe, if you had to include some small operators because you couldn't find 10 big ones (that fitted your other criteria for a platform that meets your needs).
    Originally posted by grey gym sock
    Yes there is logic in that. Say you find 10 credible platforms for your million quid, but you believe some statistic that says one of those ten despite their high calibre will die in the next decade or so. You can just put your million with one of them and hope you don't suffer a greater than 5% loss from platform failure - pretty unlikely and it's most likely that there won't be any loss at all, it'll be one of the other nine that goes down. Alternatively you put your money across all of them, guaranteeing you will get a loss and a big hassle from the administration and extrication process - and cross your fingers it's not a 50% loss which exceeds fscs compensation.

    Personally I don't want to dilute service quality and convenience with the kicker that I'll now definitely suffer a platform collapse. So I stick with one or two. But, I'm a gambler by nature.
    • MK62
    • By MK62 11th May 18, 7:38 AM
    • 237 Posts
    • 168 Thanks
    MK62
    i think you're looking at it the wrong way.

    let's suppose there could be a fixed cost of 100m to distribute the assets from any failed platform.
    Originally posted by grey gym sock
    But there isn't any fixed cost....which is the point!
    The way things actually are is that the administrator will quote a figure to re-register the assets with alternative brokers, and that amount will be deducted from the supposedly ring-fenced client assets.
    From where we are now, we have no idea if that figure will amount to 1% or 50% or whatever %.
    The FSCS might protect you up to 50k, but over that, it would appear it's just tough!!!

    in which case, how about only using platforms that hold at lot more assets than beaufort - say, at least 10bn.

    then the costs of distributing assets would be no more than 1% of the value of the assets.

    so if you have no more than 5m on the platform, your share of the costs would be no more than 50k, which you could claim back from the FSCS.

    and even without FSCS, a 1% loss is not that big a deal, in the context of investing in volatile things like equities.
    Originally posted by grey gym sock
    I suppose most of us could probably accept 1%....but it's a fictitious figure as currently there is no fixed limit.
    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.


    as i said earlier in the thread, i think there's a case for sticking to bigger platforms for safety. splitting your investments across (e.g.) 10 platforms could be less safe, if you had to include some small operators because you couldn't find 10 big ones (that fitted your other criteria for a platform that meets your needs).
    Originally posted by grey gym sock
    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.
    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?....but that's another debate... )

    Fair enough, investments often require more work from the investor than deposits need from the depositor, so the thought of using say 10 platforms or more is not very appealing to say the least, and that's notwithstanding the level of fees it could involve.....

    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??....
    • MK62
    • By MK62 11th May 18, 8:00 AM
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    MK62
    i'm not sure what the quoted sentence means. yes, on one reading, it could be a bit worrying. but it may be a bit over-simplified for this document. i think we'd need to see a fuller explanation of what compensation is supposed to cover to clarify this. rather than trying to interpret this single sentence.
    Originally posted by grey gym sock
    You could be right.....but that's what it says on the FCA website linked!

    There is also a similar phrase on the FSCS website "explaining" their meaning of financial loss....

    What do you mean by financial loss? To be eligible for compensation you must have lost money because of your dealings with an authorised financial services firm. For example, for investment claims the compensation we pay would try to take account of the financial position you would have been in had you not invested.


    https://www.fscs.org.uk/what-we-cover/questions-and-answers/qas-about-claiming-compensation/#question8


    So there you have it....clear as mud!!....

    It does, however, at least imply that their interpretation of the meaning of "financial loss" may not be quite the same as many might assume it means.

    One would hope that this is more in reference to cases of bad advice being given which results in financial loss - in which case (assuming they agreed it was bad advice) they would put you back in the financial position you would have been in if you hadn't followed the advice....which is fair enough.
    However if that's the case, I wish they'd say it more clearly....
    • cogito
    • By cogito 11th May 18, 8:33 AM
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    cogito
    Further to my post above, the question put down in the House if Lords has now been answered:

    Q Asked by Lord Lee of TraffordAsked on: 24 April 2018
    TreasuryFinancial Services: InsolvencyHL7245

    To ask Her Majesty's Government what is the legal basis that allows administrators of failed stockbroking firms to levy charges on clients' assets held by those firms.

    A Answered by: Lord Bates Answered on: 08 May 2018

    The legal basis for the payment of administrators!!!8217; expenses from client assets is contained within rule 135 of the Investment Bank Special Administration Rules (England and Wales) 2011 (Statutory Instrument 2011/1301).
    The Investment Bank Special Administration Rules apply to a broad range of businesses which hold client assets and are authorised to carry on a regulated activity which relates to the dealing, safeguarding or administration of investments as agent or principal, including stockbrokers.
    Rule 135 sets out that client assets may be used only to pay the expenses which administrators have properly incurred as a result of the work undertaken to ensure that client assets are returned as quickly as possible. The rule also sets out the order of priority for payment of those expenses.
    Originally posted by tg99
    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.
    • bowlhead99
    • By bowlhead99 11th May 18, 8:46 AM
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    bowlhead99
    The FSCS might protect you up to 50k, but over that, it would appear it's just tough!!!
    Originally posted by MK62
    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.

    .
    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?....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
    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.
    Originally posted by cogito
    Yes
    Last edited by bowlhead99; 11-05-2018 at 8:49 AM.
    • MK62
    • By MK62 11th May 18, 9:44 AM
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    • 168 Thanks
    MK62
    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.
    Originally posted by bowlhead99
    You should have quoted the whole paragraph - the point I was trying to make isn't about the FSCS protection per se, rather about the fact that supposedly ring-fenced assets can be dipped into by the the administrator, to a "to be decided" level, and your only recourse is the 50k FSCS protection, beyond which it's tough.

    The current system is obviously the "way it is", but there certainly could be another way - they could actually ring-fence client assets, so that the administrator cannot dip into them, and the administrator could then wind up the business as they would any other where there are no ring-fenced client assets.
    Then, rather than pay compensation to the clients for the administrator's fee haircut of their assets, the FSCS could then haggle with the administrator over the cost of re-registering the assets and pay those fees instead. (or make other arrangements for this if no agreement could be reached with the administrator).
    • grey gym sock
    • By grey gym sock 11th May 18, 3:24 PM
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    grey gym sock
    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.
    Originally posted by MK62
    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?....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.
    • tg99
    • By tg99 11th May 18, 4:04 PM
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    tg99
    https://www.pwc.co.uk/business-recovery/administrations/lehman/client-assets-and-client-money-bar-date-notifications-8-june-2018.pdf

    So in the case of Beaufort looks like anyone with over 150k is likely to face a shortfall implying a c33% haircut (I.e. loss of over 50k hence not all covered by the compensation scheme).

    Wonder what these !!!8216;modest deficiencies!!!8217; were.........
    • pelirocco
    • By pelirocco 11th May 18, 4:29 PM
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    pelirocco
    Yes but all that goes out the window when there is fraud (like Madoff simply trousering the money and falsifying the records ) or loss of Data as A Nice Englishman points out - maybe the biggest risk.
    But Madoff was able to keep it to himself by effectively operating as a one man band, working on a nod and a wink and encouraging his clients to keep quiet by insinuating they were benefitting from insider trading. That really should have rung alarm bells because they say you can't con an honest man. You have to tell him he is getting something for nothing to get him to go along with it. Like the frauds we are seeing where unsophisticated investors have been trying to hide their parent's house in a trust to avoid it being used to pay care home fees, and have been conned out of it.
    As far as I can see big firms like HL couldn't do anything like that because too many people are involved to keep a serious fraud quiet.
    Ultimately though, you can't eliminate risk altogether.
    You have to trust the system to some extent.
    Originally posted by Glen Clark

    Or Cameron Farley , the FSA were more then usless in this case ( 113 million ? )
    Vuja De - the feeling you'll be here later
    • stphnstevey
    • By stphnstevey 11th May 18, 4:53 PM
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    stphnstevey
    Yes there is logic in that. Say you find 10 credible platforms for your million quid, but you believe some statistic that says one of those ten despite their high calibre will die in the next decade or so. You can just put your million with one of them and hope you don't suffer a greater than 5% loss from platform failure - pretty unlikely and it's most likely that there won't be any loss at all, it'll be one of the other nine that goes down. Alternatively you put your money across all of them, guaranteeing you will get a loss and a big hassle from the administration and extrication process - and cross your fingers it's not a 50% loss which exceeds fscs compensation.

    Personally I don't want to dilute service quality and convenience with the kicker that I'll now definitely suffer a platform collapse. So I stick with one or two. But, I'm a gambler by nature.
    Originally posted by bowlhead99
    This is sounding more like betting on a roulette table, trying to work out the odds of losing your money by placing all your money on one number or spreading it across multiple
    • Glen Clark
    • By Glen Clark 11th May 18, 5:09 PM
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    Glen Clark
    Or Cameron Farley , the FSA were more then usless in this case ( 113 million ? )
    Originally posted by pelirocco
    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?
    Last edited by Glen Clark; 11-05-2018 at 5:33 PM.
    It is difficult to get a man to understand something, when his salary depends on his not understanding it. --Upton Sinclair
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