What if a broker goes broke?

[starter]

This FTX episode has made me wonder what happens if a stockbroker goes broke? Who owns the underlying shares they hold for the clients and how do we know that they are all there?

I know that this should be a straightforward question but I understand that for most brokers the shares now have the broker as the holder - that's why we don't get the option to attend AGMs. But what if the shares are leant out or only held by the broker on "paper" - perhaps some options setup as with the way occupational pension funds held gils?

What happens if my broker goes bust?

[monabri]

2 fairly recent failures, Beaufort Securities and SVS Securities ( SVS T Shirt holder).

Both were FCA regulated and were backed by the Financial Services Compensation Scheme. I'm not aware of any retail investors losing money with SVS but there might have been some losses at Beaufort for holders with serious amounts of money invested but I don't have the figures.

If regulated, I'd say the major risk is with your assets ( shares, cash, dividends) being totally suspended/untouchable by you until your assets are transferred to another broker. This can take an inordinate time...with SVS it was approaching a year.

Special Administrators can be appointed to handle this. Note..." Special", in theory they can sell some of your assets to pay for their ( bl##dy extortionate) costs per hour. This might equate to a percentage of assets ( 10%?).
Assume 10% Special Administrator costs, means that you need to keep below say £850k (eight hundred and fifty ) of assets ( FSCS covers up to £85k of losses).

If the "box is opened" and shares are missing, then someone is going to prison. If shares are out on loan, they need to be returned and added to the asset pool.

[starter]

2 fairly recent failures, Beaufort Securities and SVS Securities ( SVS T Shirt holder).

Both were FCA regulated and were backed by the Financial Services Compensation Scheme. I'm not aware of any retail investors losing money with SVS but there might have been some losses at Beaufort for holders with serious amounts of money invested but I don't have the figures.

If regulated, I'd say the major risk is with your assets ( shares, cash, dividends) being totally suspended/untouchable by you until your assets are transferred to another broker. This can take an inordinate time...with SVS it was approaching a year.

Special Administrators can be appointed to handle this. Note..." Special", in theory they can sell some of your assets to pay for their ( bl##dy extortionate) costs per hour. This might equate to a percentage of assets ( 10%?).
Assume 10% Special Administrator costs, means that you need to keep below say £850k (eight hundred and fifty ) of assets ( FSCS covers up to £85k of losses).

If the "box is opened" and shares are missing, then someone is going to prison. If shares are out on loan, they need to be returned and added to the asset pool.

Thank you. So the risk of being in one broker is that if you need the money quickly (I'm at acquisition stage of the pension) then you may be waiting for 1-2 years and that you are trading a lower risk of a 10% haircut on all of your assets rather than a higher risk of 10% of some of your assets.

Perhaps I need to shift some of my broker account into another vehicle in case I need access to the cash - but currently the convenience means I probably won't be dividing my pensions and SIPPs.

[yorkshirelad1]

Thank you. So the risk of being in one broker is that if you need the money quickly (I'm at acquisition stage of the pension) then you may be waiting for 1-2 years and that you are trading a lower risk of a 10% haircut on all of your assets rather than a higher risk of 10% of some of your assets.

Perhaps I need to shift some of my broker account into another vehicle in case I need access to the cash - but currently the convenience means I probably won't be dividing my pensions and SIPPs.

I think you've hit the nail on the head: this is often discussed on TLF. Maybe not everything with one broker, but once you start putting different assets with different brokers, at what point does it become self-defeating from an admin point of view compared to the risks.

[absolutezero]

Maybe not everything with one broker, but once you start putting different assets with different brokers, at what point does it become self-defeating from an admin point of view compared to the risks.

What admin?
It's all electronic and they send you statements and dividend information at the end of a tax year.
As long as you keep ETFs and foreign shares in ISA/SIPP and keep records of buying and selling prices of things outside ISA/SIPP (which the broker does for you anyway) then it's fairly straightforward.
You could always over-complicate it I suppose.

[monabri]

The other problem when the administrators are called in to handle the accounts is that they are tasked with finding you a new home for your assets. You have little choice as to the broker who takes on your account. You might wish to skim read of problems when my SVS holdings were moved to ITI Capital ( or "Crapital") to see what might happen. You might end up with a Russian backed broker ( emails to Russian addresses...seriously) who are woefully under resourced to handle x thousand new accounts and take further months to sort out their problems and, meanwhile, don't answer the phone.

viewtopic.php?p=329153#p329153

I'd suggest sticking with the big brokers...Interactive Investor, Lloyds ( iWeb, HSDL or Lloyds themselves), Fidelity, Hargreaves. The grief/time/worry when your broker folds is not worth the possible extra cost of being with the established players.

[monabri]

Maybe not everything with one broker, but once you start putting different assets with different brokers, at what point does it become self-defeating from an admin point of view compared to the risks.

What admin?
It's all electronic and they send you statements and dividend information at the end of a tax year.
As long as you keep ETFs and foreign shares in ISA/SIPP and keep records of buying and selling prices of things outside ISA/SIPP (which the broker does for you anyway) then it's fairly straightforward.
You could always over-complicate it I suppose.

IWeb and ii issue very easy to understand statements..dead easy to sort out info for any non ISA tax issues and it saves you any hassle. (Didn't get that with SVS...I believe they should have done but didn't !).

[absolutezero]

I believe they should have done but didn't !).

More red flags than a Russian parade.

[dealtn]

I know that this should be a straightforward question but I understand that for most brokers the shares now have the broker as the holder - that's why we don't get the option to attend AGMs.

No the broker isn't the holder. It will be a nominee, separate to the broker.

[Alaric]

What admin? .

Those with multiple brokers have mentioned problems with cash management. You want to top up a holding at Broker A, but all the cash is at Broker B. That may apply particularly to cash within tax shelters (ISA and SIPP).

[Lootman]

Maybe not everything with one broker, but once you start putting different assets with different brokers, at what point does it become self-defeating from an admin point of view compared to the risks.

What admin? It's all electronic and they send you statements and dividend information at the end of a tax year.
As long as you keep ETFs and foreign shares in ISA/SIPP and keep records of buying and selling prices of things outside ISA/SIPP (which the broker does for you anyway) then it's fairly straightforward.

You could always over-complicate it I suppose.

There are also corporate actions that need to be dealt with, and the details recorded, as they can affect CGT liability.

And at least in my experience the broker's records of cost basis may become incorrect after a corporate action, so a complete reliance upon that might be unwise.

Having multiple taxable accounts can also make things harder if you hold the same share in more than one account.

I am split between 3 different brokers and would not want more than that.

[tjh290633]

I think that having more than one account for ordinary shares can be a problem. Not so with collective investments. When we were unable to merge PEPs and ISAs, trying to run a portfolio split between them was not easy. Fortunately I did not duplicate any holdings in the ISA that I already had in the PEP. The problem is that, if you consider your portfolio as a coherent whole, and you have two ISAs or more, you cannot easily transfer cash from one to another. The cash often will accumulate in the wrong place to do what you want. The day when they could be merged came as a welcome relief.

TJH

[mc2fool]

I know that this should be a straightforward question but I understand that for most brokers the shares now have the broker as the holder - that's why we don't get the option to attend AGMs.

No the broker isn't the holder. It will be a nominee, separate to the broker.

Indeed, but having shares held by a nominee doesn't in itself guarantee security. One example would be Pacific Continental Securities where, after having gone bust, the administrators just couldn't reconcile what (little) was held by the nominee with either the company's records or those of the clients, and clients got just the FSCS payout and not much more. See viewtopic.php?p=336614#p336614 if you want to follow up on it.

There is no doubt that PCS was a dodgy bucket shop and the lesson, not just from them and as noted by others with painful but less disastrous experiences, is to stick with the big guys. Not that, as I note in the linked-to post above, they won't have cockups, possibly major ones, but there's much more chance of the big guys sorting them out and not turning into a disaster. Always fingers crossed.

Re more than one broker being more admin, well, slightly, but personally I think that's small beer to pay for not having all your eggs in one basket. I currently use two, IWeb and II, and have had it on my to-do list to add a third since II took over ATS, which used to be my third.

[GoSeigen]

I know that this should be a straightforward question but I understand that for most brokers the shares now have the broker as the holder - that's why we don't get the option to attend AGMs.

No the broker isn't the holder. It will be a nominee, separate to the broker.

Indeed, but having shares held by a nominee doesn't in itself guarantee security. One example would be Pacific Continental Securities where, after having gone bust, the administrators just couldn't reconcile what (little) was held by the nominee with either the company's records or those of the clients, and clients got just the FSCS payout and not much more. See viewtopic.php?p=336614#p336614 if you want to follow up on it.

There is no doubt that PCS was a dodgy bucket shop and the lesson, not just from them and as noted by others with painful but less disastrous experiences, is to stick with the big guys. Not that, as I note in the linked-to post above, they won't have cockups, possibly major ones, but there's much more chance of the big guys sorting them out and not turning into a disaster. Always fingers crossed.

Re more than one broker being more admin, well, slightly, but personally I think that's small beer to pay for not having all your eggs in one basket. I currently use two, IWeb and II, and have had it on my to-do list to add a third since II took over ATS, which used to be my third.

Another example would be iDealing, recommended recently on these boards, where the nominee is a separate legal person but owned and controlled by the same persons as the brokerage, at least when I last looked...

GS

[starter]

So in a SIPP there is £85,000 maximum FCTS relief.

If you have (say) £100,000 all invested in shares what would be the situation if those shares were held as nominees (and the nominees hadn't gone walkabout).

Would you get £85,000 back or £100,000 back?

If a broker goes belly up what is the chance that the nominee will go belly up. Are there things that I can see from the outside that will make a difference?

Also if I split my SIPP into two vehicles will this mean that I can retire early with pot one and keep pot two as a SIPP for another few years? How would that affect the 25% tax free from pot two?

[Alaric]

So in a SIPP there is £85,000 maximum FCTS relief.

Remember that the SIPP is held in trust outside the Broker, so it's not directly at risk from the Broker's liquidators. As many others have observed in this thread, £ 85,000 is the limit for deposits, not investments where the £ 85,000 relates only to losses that are not recoverable by regaining possession of the assets.

If a broker goes belly up what is the chance that the nominee will go belly up. Are there things that I can see from the outside that will make a difference?

Nil to minimal, the Nominee is usually a separate non trading Company. In other words a different legal entity from the Broker.

Also if I split my SIPP into two vehicles will this mean that I can retire early with pot one and keep pot two as a SIPP for another few years? How would that affect the 25% tax free from pot two?

Many SIPP providers will enable an existing SIPP to be split into two or more slices to enable phased retirement. When there are multiple SIPPs, 25% applies to the value of each one at the times the holder takes benefits.

[Urbandreamer]

Also if I split my SIPP into two vehicles will this mean that I can retire early with pot one and keep pot two as a SIPP for another few years? How would that affect the 25% tax free from pot two?

While the previous answer was correct, there are problems splitting pension funds. You can have more than one, but you can only contribute into one personal (the first P in SIPP) pension per year. There may also be problems chopping and changing which you contribute to.

FWIW, I pay into a SIPP and a company DC pension. I also have ISA's trading shares with three brokers at the moment. I'm not concerned about the security of any of them, though I do find the fact that I have to use a nominee to benefit from ISA rules irritating. I also lost a small amount that I had with FTX. Unfortunate timing, as I was careful to withdraw bitcoin relatively quickly.

[starter]

So in a SIPP there is £85,000 maximum FCTS relief.

Remember that the SIPP is held in trust outside the Broker, so it's not directly at risk from the Broker's liquidators. As many others have observed in this thread, £ 85,000 is the limit for deposits, not investments where the £ 85,000 relates only to losses that are not recoverable by regaining possession of the assets.

If a broker goes belly up what is the chance that the nominee will go belly up. Are there things that I can see from the outside that will make a difference?

Nil to minimal, the Nominee is usually a separate non trading Company. In other words a different legal entity from the Broker.

Also if I split my SIPP into two vehicles will this mean that I can retire early with pot one and keep pot two as a SIPP for another few years? How would that affect the 25% tax free from pot two?

Many SIPP providers will enable an existing SIPP to be split into two or more slices to enable phased retirement. When there are multiple SIPPs, 25% applies to the value of each one at the times the holder takes benefits.

Are there any warning signs that the nominee is not sufficiently independent? There clearly have been some forms of failures with nominee accounts in just the posts above. This could make the difference between mild aggravation and poverty with me. I would rather avoid having three brokers rather than the current one for my SIPP and ISA partly for convenience and partly because it gives me a whole picture for allocating assets.

[starter]

Also if I split my SIPP into two vehicles will this mean that I can retire early with pot one and keep pot two as a SIPP for another few years? How would that affect the 25% tax free from pot two?

While the previous answer was correct, there are problems splitting pension funds. You can have more than one, but you can only contribute into one personal (the first P in SIPP) pension per year. There may also be problems chopping and changing which you contribute to.

FWIW, I pay into a SIPP and a company DC pension. I also have ISA's trading shares with three brokers at the moment. I'm not concerned about the security of any of them, though I do find the fact that I have to use a nominee to benefit from ISA rules irritating. I also lost a small amount that I had with FTX. Unfortunate timing, as I was careful to withdraw bitcoin relatively quickly.

I'm in the same position re pensions, but I also have an ISA with the same broker as my SIPP. The SIPP is currently a residue SIPP where all my past pension pots sit and dividends are reinvested and my workplace pension is where the money is currently going. So if I were to split the SIPP it would be doing the same thing. I may at some point go contracting and the situation may change and I'll have to remember to only fund one SIPP per year.

I'm under the impression that a SIPP can be funded at the same time as a workplace pension, as that's what a lot of people are doing, so I'm not too worried about work status changing half way through the year.

[monabri]

So in a SIPP there is £85,000 maximum FCTS relief.

If you have (say) £100,000 all invested in shares what would be the situation if those shares were held as nominees (and the nominees hadn't gone walkabout).

Would you get £85,000 back or £100,000 back?

If a broker goes belly up what is the chance that the nominee will go belly up. Are there things that I can see from the outside that will make a difference?

Also if I split my SIPP into two vehicles will this mean that I can retire early with pot one and keep pot two as a SIPP for another few years? How would that affect the 25% tax free from pot two?

Assuming FCTS = FSCS ...

The nominee account should ideally be completely independent from the broker...another company. Your broker pays them to manage the pooled shares and transfer funds to them to do so....the honest broker will keep the honest 3rd party honest by checking the CREST system. I don't see any scope for dodgy deals there. However... the broker has to pay for the service of this 3rd party...so I believe some of the broker (eg SVS) decided to cut costs and manage the pooled accounts for themselves, saving money.

Once the shares are in a pooled account, and held in CREST, the chances of error are negligible. I don't think there is a way for you to check that your shares are there because they are pooled (if you could identify your shares then you'd be able to identify other owners - a data protection issue).

"Would you get £85,000 back or £100,000 back?" - you'd get the assets (shares & cash & dividends) transferred to another broker. You wouldn't get a cheque for £100k. Indeed, the value might be £100k on the day the broker goes belly up but it will be different amount by the time you get your hands on it.


With your £100k SIPP account, I reckon the biggest risk might be that you personally are investing in higher risk companies (for example, new start ups, companies with high yields that are high yield for the wrong reasons, companies that run into bad luck or are subject to outside interference, corporate actions - you cannot participate). If you broker fails, your account is frozen - you are stood on the sidelines and you cannot sell if suddenly one or two of your higher risk companies start to look iffy! If one of your companies goes belly up whilst your account is frozen...tough! There is no compensation claim even if you wanted to get out and cut your losses early on, you can't...the account is frozen.