How Safe Are Your Shares In Nominee Accounts... You Might Be Surprised

[BrownField]

Been investigating this issue for my own peace of mind, spoken to the FSA, the FSCS and a couple of share dealing companies. Found out some interesting facts...

Did you know that if you hold shares in a nominee account you are not the legal owner of them, your share dealing company is. If that company went bust it would depend on the structure of that company whether you would have first call on your own shares.

If the firm is FSA regulated you are covered by the FSCS. For investments this is 100% to 30K and 90% for the next 18K so a total of 48K is covered.

However anything above that you are at the mercy of the administrators.

So the moral of the story is, nominee account = you don't own the shares someone else does.

[A.steve]

So the moral of the story is, nominee account = you don't own the shares someone else does.

I was lead to believe that this is why "CREST" was devised... to protect investors from the potential insolvency of individual brokers.

http://www.stocktradebroking.co.uk/infocen...count_info.html

[Injin]

Just a FYI.

The current monetary collapse will collapse the stete.

If you are relying on it or it's legislation to get you your stuff, forget it.

[evictee]

So the moral of the story is, nominee account = you don't own the shares someone else does.

Surely, nominee account = you do own the shares, you nominate someone else to hold them for you.

[Paddles]

Brownfield,

Thanks for doing this research, I'd been looking myself at this and had drawn a couple of blanks.

Do you have links to the various statements and clauses?

[BrownField]

I was lead to believe that this is why "CREST" was devised... to protect investors from the potential insolvency of individual brokers.

http://www.stocktradebroking.co.uk/infocen...count_info.html

Indeed, for anyone who doesn't read the link to summarise.... CREST is different from a Nominee Account... you have to sign up to it specifically and pay a subscription. Most online brokers use Nominee Accounts. If you didn't fill in a CREST form when you signed up you aren't using CREST.

Surely, nominee account = you do own the shares, you nominate someone else to hold them for you.

No it's you give them to someone else to hold on your behalf. They own them but owe you. Therefore when Mr Liquidator turns up they become his assets and you are nothing but a creditor (and probably last in a long line).

Thanks for doing this research, I'd been looking myself at this and had drawn a couple of blanks.

Do you have links to the various statements and clauses?

It's simply not well documented on the web. I took this up with the guy I spoke to at the FSA (investment department). He says it is documented online as part of the FSA handbook but it's a very technical document.

The long and short of it is that if the FSA regulates the company you are eligible for FSCS investment compensation (and deposit if you have cash there too). You can check if the company is regulated (make sure you use the exact limited company for your share dealer and not the parent company) at http://www.fsa.gov.uk/register

Links:

http://www.fsa.gov.uk

http://www.fscs.org.uk

Phone:

FSA Consumer Line: 0845 606 1234

FSCS Consumer Line: 020 7892 7300

Edited December 5, 2007 by BrownField

[evictee]

No it's you give them to someone else to hold on your behalf.

I think that's what I said.

No it's you give them to someone else to hold on your behalf. They own them but owe you. Therefore when Mr Liquidator turns up they become his assets and you are nothing but a creditor (and probably last in a long line).

I'd have thought finding out where in that line you'd be would be quite an important aspect of your enquires. Last seems extremely unlikely. Presumably you'd be at least as far forward as a bank depositor in a collapsed bank queue, and further forward than a building society saver. Surely further forward than any other kind of creditor. And unlike a bank the broker won't have been borrowing against all the nominee shares, so they'd have to go pretty spectacularly bankrupt to make a dent in the shares assets surely.

[BrownField]

I'd have thought finding out where in that line you'd be would be quite an important aspect of your enquires. Last seems extremely unlikely. Presumably you'd be at least as far forward as a bank depositor in a collapsed bank queue, and further forward than a building society saver. Surely further forward than any other kind of creditor. And unlike a bank the broker won't have been borrowing against all the nominee shares, so they'd have to go pretty spectacularly bankrupt to make a dent in the shares assets surely.

I suggest you take a look at the stories coming out about ETrade's money market funds woes. Basically as far as you know your broker could have invested in anything, like subprime... if it has well hmmm.

It could also have all sorts of liabilities where a creditor, or group of creditors, have priority over the other creditors like you (this is common practice with bank loans for example), some of it's shareholders may even have Class A shares that get the cash before you do. It's a minefield, I know this personally having lost money to a couple of companies that went bust.

I'm not the only one worrying about this, read this story in the Independent:

http://money.independent.co.uk/personal_fi...icle3189607.ece

The solution appears to be, don't use Nominee Accounts go for Personal CREST accounts instead.

Edited December 5, 2007 by BrownField

[Its time to buy]

Such a failure of a stockbroker has huge impact from the "system" as a whole - I would think there would be a domino effect and all stocks nominee or not would suffer a collapse or a lockdown until the goverment passifies the threat. A small risk, but not insignificant.

Dont hold all your wealth in paper assets.

[Its time to buy]

Heres a interesting quote out of interest -

http://www.pilling.co.uk/NomineeService.htm

To further put your mind at ease, we have written confirmation from the Stock Exchange that if you were to go back 100 years you would not find a case where a client had lost stock in a stockbrokers nominee company as a result of a firm going “bust.”

We havent had a bank run in 150 years , or a depression in er...............

100 years not a long term is it really.

[0q0]

I'm not sure what the legal position is. but I felt happier having mine certificated, so paid for a withdrawal and hold a cert. can make selling them more expensive though, can not will, depends on broker.

Yes do the 'certifiable' gag if you want.

[The Masked Tulip]

So does this mean people who have invested shares in funds from the likes of Fidelity, Gartmore, New Star, Jupiter, etc, are only covered to 30K in the same way as savings accounts in banks are?

This would be crap for people trying to put money away for their pension. No wonder people have got into BTL in such a big way.

[Its time to buy]

having a quick look around the internet at different brokers - they are all nominee accounts!

Are there any crest sponsored brokers out there?

Edited December 6, 2007 by notanewmember

[Goldfinger]

it's surprising who uses nominee accounts.when I was looking at using HSBC,it's nominee.Most small brokers use CREST--where,you are right ,the shares are yours.This is becasue then they do not have the hassle of passing dividends to you etc.I think HSBC do it mainly to give them more power over the boards as they then have your voting rights.Most stockbrokers carry reinsurance as a matter of course.

but you are dead right to be wary of nominee accounts.if they collapse,then the shares are viewed as THEIR assets.All you have to do is ask the question and not use anyone who does.Simple.

How about iii (they belong to HBOS)? Does anyone know? I was thinking about opening an ISA for gold shares with them. Not sure now.

Edited December 6, 2007 by Goldfinger

[Ursus Helvetica]

I'm not sure what the legal position is. but I felt happier having mine certificated, so paid for a withdrawal and hold a cert. can make selling them more expensive though, can not will, depends on broker.

You can transfer certificates into nominee accounts for free, where you can sell them at the discounted nominee commission; does take time, though.

Does anyone know of a broker that does certificated trades for a reasonable commission? Barclays charges £25 minimum; Hargreaves Lansdowne were good value at £15, but are upping their minimum commission to £25 at the start of Jan.

[Its time to buy]

Stocktrade in Edinburgh

Well done .

http://www.stocktrade.co.uk/icaward.html

they got the investors chronicle best online broker for financial security and admin 2006. Thats pretty respectable achievement in my book.

And for £10 a year fee - thats a pretty cheap insurance in this kind of climate

[Goldfinger]

Thanks for all the info. Good stuff.

So, a nominee account, is that one where they can short your shares?

[Its time to buy]

Thanks for all the info. Good stuff.

So, a nominee account, is that one where they can short your shares?

I dont see why not. Not everyone will be selling at the same time all their stock [normally].

They can then borrow your stock and short sell it - and then put them back into the nominee account. You're none the wiser - :angry:

[Buccaneer]

http://www.stocktrade.co.uk/icaward.html

From the stocktrade website

Features of the Nominee Account:

* Shares are held in our Nominee Company name.

* Funds held on deposit at an approved bank. The interest paid on these funds increases as the balance on deposit increases.

* Your fundamental rights are not impaired. You remain the beneficial owner of the shares held.

Could someone please explain how the shares could be considered the assets of the nominee if the shareholder remains the beneficial owner of the shares

Thanks

[Ursus Helvetica]

Stocktrade in Edinburgh

Nice one. Thank you.

They have a £20 minimum commission on certificated accounts, too: http://www.stocktradebroking.co.uk/infocen...commission.html

Was trying to find out if it's possible to get CREST ISAs, and found this page from the UK Shareholder's association: Why Nominee Accounts Are a Bad Idea

Which is an interesting read, but in respect to ISAs unfortunately says:

If you do choose to use a nominee account (and of course you have to for PEP and ISA holdings), then you should look carefully at the financial stability, ownership and financial strength of the nominee operator.

Another good UKSA article: Share Certificates, Nominees and Crest

CREST is now called Euroclear. Their website is here: http://www.euroclear.co.uk/basic/home.html

They have a list of brokers that allow personal CREST membership: http://www.euroclear.co.uk/basic/products/...m-sponsors.html

[Harry Sacks]

Great thread.

From the HB web site,

"What is CREST?

Share transactions are settled via a standard system all brokers use run by a company called 'CREST'. This is similar to the way you would also buy and sell a house, you exchange contracts (in the case of shares, agree a price and book the trade in the market) and then two weeks later your solicitor sends the money to the seller and you get the keys (in the case of shares, they are electronically sent to your portfolio with us).

You can download the CREST Transfer form by clicking on the link at the top of this page.

Back to top

Do you hold a CREST personal account?

We offer a nominee service due to the costs of CREST personal membership. With a nominee service you still receive dividends, reports and we can arrange DRIPs, perks and attendance at meetings which are the main reasons to want a CREST personal account. We also offer all these services at no charge - which means we believe the nominee account offers great services but no extra cost to you.

Back to top

How are my shares held with you?

We hold all clients assets in nominee - this means that they are segregated away from Hoodless Brennan in trust to protect your ownership.

Back to top

Are my shares safe with you?

Yes, as they are held in trust for you away from Hoodless Brennan even if we become insolvent your shares cannot be used to pay off any of Hoodless Brennan's debts. Nominee holdings also ensure that your holding is always up to date with any corporate actions as the Registrar amends actions electronically. When you come to sell therefore you sell an accurate holding."

[InternationalRockSuperstar]

I typed in Stocktrade on the FSA link that someone posted earlier amd it says that Stocktrade is "no longer authorised". That not good, right?

[Harry Sacks]

Are my shares safe with you?

Yes, as they are held in trust for you away from Hoodless Brennan even if we become insolvent your shares cannot be used to pay off any of Hoodless Brennan's debts. Nominee holdings also ensure that your holding is always up to date with any corporate actions as the Registrar amends actions electronically. When you come to sell therefore you sell an accurate holding."

So nominee accounts are safe then?

[AteMoose]

Hargreaves Lansdown look like there crest, sounds like it is something to keep an eye on

[jonpo]

Your all wrong. turn the thing on it head and ask yourself this if YOU went bankrupt do your creditors have a claim over your assets in a nominee account? the answer is yes they do. otherwise we would all be taking out unsecured loans and stashing them in nominee accounts. you might not be the 'legal' owner but you are the 'beneficial' owner ( the bank did not contribute to the cost of the shares).

House of Lords in Lloyds Bank -v- Rosset where the court held that the claim to a beneficial interest in the property could only be established by direct contributions to the purchase price.

really I am the beneficial owner of the shares in my nominee ISA etc. if my partner in the transaction (bank) is bankrupt I have rights as follows

may be able to prevent the sale or use of the property as security to raise a loan

is entitled to a share of the proceeds of the sale of the property based on her/his beneficial interest.

I am happy with the legal position W.R.T. nominee accounts. unless the shares were bought on credit provided by the broker secured against the shares, the bank has no claim to any beneficial interest or charges over ownership.

obviously there is a lack of case law to back up my position but the priciples are the same. I may not be 100% correct or be able to offer guarentees. but I am prepared to settle this argument in a court of Law.

Edited January 13, 2008 by jonpo