Diversifying across brokers for FSCS

epo1
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Diversifying across brokers for FSCS

Postby epo1 » December 31st, 2016, 11:17 am

I have ISAs with AJ Bell and iWeb, I am unhappy with the former and am thinking of switching. I had thought of Halifax but they and iWeb count as the same firm for the purposes of FSCS compensation.

For many of you, trying to keep ISAs below 50K in separate firms must be quite tricky, so what do you do?

Snorvey
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Re: Diversifying across brokers for FSCS

Postby Snorvey » December 31st, 2016, 12:18 pm

Don't worry about it. The money's ring fenced (as I understand it) and if it's fraud by an employee then I'm sure the broker firm will be more than keen to compensate you (I'd still prefer to stick with the bigger brokerages though)

doug2500
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Re: Diversifying across brokers for FSCS

Postby doug2500 » December 31st, 2016, 12:49 pm

While I accept it's a very small risk, I do take it seriously as the consequences are potentially large. The action of having a second account to mitigate it does not seem too difficult. I don't worry too much about being below 50K just that I have spread my assets.

There was a case (I'm sorry I can't find a link) where things were not ring fenced as they should have been, and the paperwork was not sufficient to align owners with assets. Even though people will probably get most of their assets back it's taking years.

These articles may help:

http://moneyweek.com/what-to-do-if-your ... ust-56514/

https://the-international-investor.com/ ... unt-safety

Breelander
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Re: Diversifying across brokers for FSCS

Postby Breelander » December 31st, 2016, 1:43 pm

doug2500 wrote:There was a case (I'm sorry I can't find a link) where things were not ring fenced as they should have been, and the paperwork was not sufficient to align owners with assets.


The 'broker' concerned was Pacific Continental Securities, as pointed out by mc2fool in post #72270 in this thread discussing FSCS compensation and diversifying across brokers...
https://web.archive.org/web/20140504133 ... sort=whole

GeoffF100
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Re: Diversifying across brokers for FSCS

Postby GeoffF100 » December 31st, 2016, 6:59 pm

It would be a very extreme fraud that sold all the client holdings at a big broker, without anybody noticing until settlement, and then made off with all the money. The £50K compensates you for your loss. That loss is likely to be a small proportion of your holdings.

jackdaww
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Re: Diversifying across brokers for FSCS

Postby jackdaww » January 1st, 2017, 9:40 am

many brokers including barclays have the phrase

"" if there is shortfall you may share proportionately "" in their standard conditions.

this is because they lend out your shares to counter parties , possibly for short selling purposes.

why this practice is allowed inside a government promoted ISA wrapper is beyond me.

i have not seen any words of comfort on this - 50k is woefully inadequate .

:roll: :roll: :roll:

77ss
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Re: Diversifying across brokers for FSCS

Postby 77ss » January 1st, 2017, 10:47 am

epo1 wrote:For many of you, trying to keep ISAs below 50K in separate firms must be quite tricky, so what do you do?


I certainly don't try to do that - much too much trouble.

I regard the likelihood of losing money due to fraud as being pretty remote - but I don't keep all my investments with one broker- just in case.

I am told that a more likely occurrence is probably a broker going bust, getting suspended (or some such event). This could render your investments (and dividends) inaccessible for a prolonged period while matters get sorted out.

A very good reason for having more than one broker.

PeterGray
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Re: Diversifying across brokers for FSCS

Postby PeterGray » January 1st, 2017, 12:07 pm

I certainly don't try to do that - much too much trouble.

I totally agree. It's impossible to manage once your investments get above a certain level.However, I do split them between 2-3 brokers - that both would help to limit losses in the extremely unlikely event of the sort of failure and fraud combined that would be needed for a significant loss from any of the broker I use - who are not tiny or fringe. It's also an advantage to have more than one broker as some tend to be good for one thing and some for others.

It's also not possible to expect a government backed scheme to protect all investments whatever the size against loss.

Peter

tjh290633
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Re: Diversifying across brokers for FSCS

Postby tjh290633 » January 1st, 2017, 12:22 pm

I don't do it. I had a period when my investments were split between a PEP and an ISA, until it became possible to amalgamate them. I found that money you wished to invest was always in the wrong place. I deliberately did not duplicate holdings between them.

With a major bank behind the ISA provider, I consider the risk to me minimal, if not non-existant.

TJH

mc2fool
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Re: Diversifying across brokers for FSCS

Postby mc2fool » January 1st, 2017, 12:24 pm

doug2500 wrote:There was a case (I'm sorry I can't find a link) where things were not ring fenced as they should have been, and the paperwork was not sufficient to align owners with assets. Even though people will probably get most of their assets back it's taking years.

I see Bree has provided a link to the Pacific Continental Securities saga. You can get the backstory by following through the links in that. On a quick flick through the latest (May 2016) information from the liquidators on http://www.pacconsec.com, AFAICS, their clients never did get their actual holdings back but got at most a £48K payout from the FSCS instead (the compensation limit was 100% of 1st £30K + 90% of next £20K when PCS went under). Those that failed to assign their claim to the FSCS will get a payout from the liquidation of :shock: 2p in the £. And that's after 9 years. There's no doubt PCS was a boiler room, but that doesn't mean that more major brokers are necessarily immune from the issues that affected them.

Folks keep on referring to fraud, but that's not the only reason assets could get "lost", although I do agree that using a broker where the brokerage is only a part of their business (e.g. a bank) makes it considerably more likely that if an issue does occur they will be both willing and capable of covering it. Still, there's no guarantees. After all, RBS and HBoS would have gone belly up had the govt not bailed them out, and what, if on going belly up, the administrators had discovered that in their broker services their systems couldn't properly align owners with assets...

Unlikely? Well, consider that RBS have twice in the last few years had systems meltdowns that prevented customers accessing their current accounts for a week or two (and longer for some subsidiaries). Nothing is completely foolproof.

Having said that, like others, I too consider a permanent loss a very small risk, albeit not zero; if events over the years have taught us anything it is surely that nothing is "impossible" and very unlikely things can and do happen, and as such I do use more than one broker. And, as 77ss says, perhaps a more likely situation is your investments (and dividends) becoming inaccessible for an indeterminate period, possibly only a short one (as per the RBS systems meltdowns), or for longer if there are more serious problems, and that's also a good reason for spreading them around.

As far as trying to keep to less than £50K per firm, Gengulphus did an analysis on TMF on the possible losses of amounts-over-50K vs number-of-brokers, which I can't be bothered to search for but can be basically summarised with the following example:

If you have, say, £250K of investments then clearly you need to spread them amongst at least 5 brokers to get full FSCS cover. If, OTOH, you only spread them across 4, equally spread that's £62.5K per broker. So, if one of those goes belly up taking everything with it, then after the £50K FSCS compensation your loss will be £12.5K -- which is 5% of your total. Does the (very small but non-zero) risk of losing 5% outweigh the hassle (and potential costs) of adding an extra broker? What if it were £500K and 15%?

That's for each of us to decide, after plugging in our own numbers and hassle factors of course ... ;)

greygymsock
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Re: Diversifying across brokers for FSCS

Postby greygymsock » January 4th, 2017, 2:29 am

jackdaww wrote:many brokers including barclays have the phrase

"" if there is shortfall you may share proportionately "" in their standard conditions.

this is because they lend out your shares to counter parties , possibly for short selling purposes.


i think your inference is invalid: i.e. the wording about sharing proportionately in any shortfall merely indicates that they use a pooled nominee account, and doesn't implicitly give them permission to lend out your securities. if they wanted permission to do that, they would need to write it into their terms explicitly.

for instance, iweb's terms - at http://www.iweb-sharedealing.co.uk/PDFs ... itions.pdf - have similar wording (at 10.3):

iweb wrote:Your investments will be pooled with investments held by our nominee company or sub-custodian for other clients. This means that your investments will not be separately identified from those of other clients and if there is a shortfall in any of the holdings of the nominee company or sub-custodian you may share proportionally in such losses.


but they go on to say explicitly that they can't lend out your investments (at 10.10):

iweb wrote:We will not lend or deposit by way of collateral any investments in your account to a third party.


i suppose you could argue that, had they not included the latter clause (10.10), then the earlier clause (10.3) would have constituted implicit permission to lend out securities. but i doubt it. (IANAL.)

AFAICR, some brokers, but not all, have similar clauses explicitly denying them the right to lend out securities. if barclays don't have such a clause, perhaps it would be worth asking them explicitly whether they believe their contract does give them that right. or are there any Foolish lawyers who'd care to venture an opinion on this?

the only broker (offering services in the UK) that i'm aware of that definitely does take a right to lend out securities is degiro. and they offer a different (more expensive) account type (a "custody" account) without security lending.

(the situation may be entirely different in other countries.)

TedSwippet
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Re: Diversifying across brokers for FSCS

Postby TedSwippet » January 4th, 2017, 9:36 am

tjh290633 wrote:With a major bank behind the ISA provider, I consider the risk to me minimal, if not non-existant.

Minimal perhaps, but not non-existent. From the FCA: Barclays fined £38 million for putting £16.5 billion of client assets at risk
Press Releases | Published: 23/09/2014 | Last updated: 30/08/2015

Barclays Bank Plc (Barclays) has today been fined £37,745,000 by the Financial Conduct Authority (FCA) for failing to properly protect clients’ custody assets worth £16.5 billion. As a result clients risked incurring extra costs, lengthy delays or losing their assets if Barclays had become insolvent.

tjh290633
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Re: Diversifying across brokers for FSCS

Postby tjh290633 » January 4th, 2017, 11:13 am

Good point, Ted.

I'm not with Barclays.

TJH

Julian
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Re: Diversifying across brokers for FSCS

Postby Julian » January 4th, 2017, 12:00 pm

tjh290633 wrote:Good point, Ted.

I'm not with Barclays.

TJH


After their announcement re fee increases nor will I be just as soon as the free transfer-out window opens up!

To the original question, I do split my holdings across multiple brokers but only did that when I had a big input of money from an inheritance. Up until that point I hadn't bothered and had built up about £200K within my single broker account (TD Waterhouse as it was called at the time). After the increase in my portfolio size I did decide to split across multiple brokers.

I chose to select only brokers that were affiliated with major banks on the (possibly mistaken) assumption that were anything to go wrong within their brokerage operation they would have sufficient resources thanks to their other operations to compensate customers more fully than a broker-only outfit and also the higher public profile and scrunity making it more difficult for them to not do the right thing. Also, if something went wrong in one of my bank's other operations the nominee nature of the broker holdings would protect my assets (maybe with some medium-term disruption) from that bank's collapse. Finally, I felt that a big bank would have bigger and better internal monitoring and anti-fraud departments to make it less likely that some employee could carry out massive fraud by selling out huge chunks of the nominee holding pool and getting the money out to a third party account where it couldn't be recovered.

Although I wanted to protect against both fraud and also administrative meltdown resulting in no loss of assets but temporary (possibly protracted) loss of access to capital and dividend income it was the later, particularly any temporary stalling of dividend payouts, that was/is my prime concern. Following on from this I split my HYP holdings across 3 brokers on the basis that I could live on two thirds of my divi income without too much difficulty were the income from one of my brokers to stall for a while. This still results in the holdings in each of my brokers being many times the FSCS limit but it's the "what percentage can I do without?" calculation that is the important one and also that I feel as comfortable as I can with each individual broker that I have chosen.

I now have a dilemma thanks to the aforementioned Barclays situation since Barclays is currently one of my 3 core HYP brokers and there are no other big-bank-related brokers left to me (I am already using Halifax and HSBC as my other two HYP brokers) so do I drop down to two HYP brokers or maybe switch the Barclays holding to either certificate form or maybe Hargreaves Lansdown as not a big-bank-related broker but at least a big player that can I hope have the scale and be able to afford to work up best-practice internal surveillance (anti fraud) procedures and resource the corresponding department appropriately? I've had certificates in the past and it can be a pain so at the moment my laziness is making me lean towards dropping down to 2 HYP brokers but there's probably still a few months before Barclays drops the fee-hike hammer in terms of actually switching my account to the new fee structure and forces my hand.

- Julian

GeoffF100
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Re: Diversifying across brokers for FSCS

Postby GeoffF100 » January 4th, 2017, 12:20 pm

Following on from this I split my HYP holdings across 3 brokers on the basis that I could live on two thirds of my divi income without too much difficulty were the income from one of my brokers to stall for a while.


This is a very exposed position. There are several historical precedents for dividends falling by 50% in real terms, and not recovering for twenty years or so, particularly in the US, where reliable records go back a long way. Hopefully, you have other potential income sources. A state pension, perhaps. What proportion of your assets can you afford to lose, is the right question to ask, but you need to include the capitalisation of all your assets in that assessment.

Splitting between too many brokers has two problems. The first is the administration overhead, which may become very onerous as we get older. The other is that to achieve it, you eventually have to use less reliable brokers, and may end up increasing your risk.

Julian
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Re: Diversifying across brokers for FSCS

Postby Julian » January 4th, 2017, 12:54 pm

GeoffF100 wrote:
Following on from this I split my HYP holdings across 3 brokers on the basis that I could live on two thirds of my divi income without too much difficulty were the income from one of my brokers to stall for a while.


This is a very exposed position. There are several historical precedents for dividends falling by 50% in real terms, and not recovering for twenty years or so, particularly in the US, where reliable records go back a long way. Hopefully, you have other potential income sources. A state pension, perhaps. What proportion of your assets can you afford to lose, is the right question to ask, but you need to include the capitalisation of all your assets in that assessment.


Thanks for the input. I was careful to talk about my "HYP brokers" because of the existence of other assets and in fact I should have been describing the brokers discussed in my previous post as my three core HYP brokers since I actually have 6 brokers in total plus VCTs held in certificate form (and multiple property investments). A loss of one of my core HYP brokers would, on current valuations, equate to a loss of about 8% of my total assets. I suppose on that basis you've perhaps inadvertently helped me with my dilema of whether to consolidate my three cosr HYP brokers down into two. It would put my broker failure consequence up from about 8% of all assets to about 12% (excluding attempting to attribute any capital value to my state pension which is due in 10 years) so not really too big a deal.

GeoffF100 wrote:Splitting between too many brokers has two problems. The first is the administration overhead, which may become very onerous as we get older. The other is that to achieve it, you eventually have to use less reliable brokers, and may end up increasing your risk.


I completely agree with your second point but only slightly agree with your first point. I suppose it depends on the individual but I am one who is very comfortable with spreadsheets and have a standard template for my annual tax returns where I can plug in my numbers before filling in my SA100 to get a rough idea of what I think the tax due is going to be. I have a sheet in that tax workbook for my nominee brokers and it really is only about 5 minutes of extra work once a year to enter the figures into that spreadsheet from 6 nominee brokers' consolidated tax certificates rather than one which then instantly gives me the totals to be typed into the appropriate boxes on the SA100.

Having said the above I do make some decisions about where assets are held to simplify admin. For instance I hold some funds domiciled in Jersey, Guernsey and Ireland and I keep all those in two of my broker accounts so that I know that all the other 4 are simple 100%-UK-divi accounts and so don't need to be split out further for my tax return. REITs are the other potential complication but I keep all those in my ISA so don't declare them at all.

OK, typing out that last paragraph made me realise that maybe there is, at least potentially, more merit in your first point than I originally though :). I'm still willing to accept the minor extra admin for the bit of extra peace of mind though.

- Julian

GeoffF100
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Re: Diversifying across brokers for FSCS

Postby GeoffF100 » January 4th, 2017, 7:18 pm

What I had in mind here is possible cognitive decline with age, or if that does not sound bad enough cognitive decline combined with failing eyesight. Paying someone to look after my investments would be very expensive. Even keeping things simple can result in complications. Simple cash accounts are often the most troublesome.

If you ignore my pensions, my maximum with any one financial services provider is about a third of my assets, and perhaps a sixth if you capitalise my pensions. Even a total loss of one of my accounts would not change my way of life.


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