How safe are shares held in Stockbrokers' nominee accounts?

Brendan Burgess

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Those of us who liked holding share certificates and a Crest Personal Account through Campbell O'Connor are now reviewing our options.

I don't like the idea of nominee accounts as the Liquidator of Murroughs was able to dip into the clients' shares to pay his fees.

Degiro is the cheapest but I can't figure out how safe it is.


https://www.degiro.ie/helpcenter/faq/safety/1125

Are my investments safe with DEGIRO?

At DEGIRO you can rest assured that your investments are held securely. DEGIRO uses a separate custodian entity to hold your assets, this means they are completely segregated from the assets of DEGIRO. The sole task of the custodian entity is to administer and safeguard your investments. By law it cannot perform any commercial activities. In the unlikely event that something is to happen to DEGIRO, your investments will not be treated as recoverable assets to DEGIRO's creditors, but will remain in the safeguarding of the custodian entity.

Is DEGIRO covered by any sort of Investor Protection Scheme?

The Dutch Investor Protection Scheme (Beleggerscompensatiestelsel) is applicable, as DEGIRO is a licensed investment firm authorised by the Netherlands Authority for the Financial Markets (AFM) for the provision of investment services.


This scheme protects individual clients up to €20,000. Information about the Dutch Investor Protection Scheme can be found in English on the De Nederlandsche Bank (Dutch Central Bank) website here.

Who regulates DEGIRO?

DEGIRO is a Netherlands based licensed investment firm and as such is under the financial supervision of The Netherlands Authority for the Financial Markets (AFM) and the Dutch Central Bank (DNB).


To see our license, please check the register of the AFM here.


DEGIRO performs it licensed investment services abroad from The Netherlands, under the so-called ‘MiFID passport’ or ‘MiFID-cross-border service’ regime.


Looks good to me. I don't keep cash in my stockbroker account, so I am not worried about the Investor Protection Scheme.
 
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I had a weird telephone conversation with De Giro.

"Who holds the shares?"
"It's just an SPV so they are held off balance sheet"
"What is the name of the SPV?"
"We have a non-disclosure agreement and so can't tell you"
"So it's not a third party custody account?"
"Yes, it is."
"So if you go bust I won't know where my shares are?"
"You will, we will tell you then and help you to get your shares back."


I suppose that it does explain why they don't disclose the information on their website.


Brendan
 
Thanks Zenith

I have read that and am none the wiser. It sounds just like DeGiro

"We keep them separately - but that is all we are telling you."
 
It's a real concern.



In the UK it was forecast that clients of Beaufort Securities might lose up to 40% of their assets to pay the fees of the Administrators - PWC.

Beaufort Securities’ clients in angry clashes with PwC



Some 700 clients with larger portfolios of more than £150,000 in cash and assets could lose up to 40 per cent of their ringfenced assets. Customers can claim from the UK’s Financial Services Compensation Scheme but only to a maximum value of £50,000.

The case has concerned customers of UK brokers who believed their money could not be used in the event their broker collapsed.
 
That is a worry. It seems extraordinary that this aspect is not regulated.
 
Brendan Burgess said:
Where are Davy's nominee shares held?

What happens if Davy's goes bust?

Brendan
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Where they are held is not of great importance, but in whose name are they registered that is the big issue. Basically if you’re broker goes bust and most of your positions are in ‘street name’ you are done for. In such cases you will have no choice but to deal with the liquidators. If you are the registered owner you can always request a new certificate, yes it is a bit of a hassle but not remotely close to trying to recover positions that are not registered in your name.
 
Brendan Burgess said:
"You will, we will tell you then and help you to get your shares back."
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This is just nonsense. Once the company is under the control of an administrator or liquidator they will not be in a position to do anything because they will have no legal authority to do so. Hell they probably won’t even be employed there never mind having access to the records etc.
 
Why would your shares be held in a SPV?? And what the hell does held off balance sheet mean? If that is the advice they are giving clients, they should be worried.

Nominee accounts are generally safe. You will always remain the beneficial owner and there are strict regulations with regard to reconciliations and record keeping. I don’t know too much about Beaufort above but from what I remember, the custody was with a related party that went bust as well rather than a completely separate third party.

To be honest though, I wasn’t aware that clients were liable for the cost of getting their shares back in the event of a liquidation. Probably needs to be looked at alright.

The alternative of everyone trading separate accounts is not straight forward either. Are people willing to pay much more transaction, custody and other fees?
 
Can someone expand on the background to the Morrogh case and this other case?

If I buy shares through any of the brokers, a nominee company of theirs becomes the legal owner of the stock whilst at all times I remain the beneficial (i.e. actual) owner?

In a bankruptcy scenario, how can a liquidator access something that was never the company’s?

Was there something about Morrogh where the shares were held in some other way?
 
DeeKie said:
That is a worry. It seems extraordinary that this aspect is not regulated.
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It is regulated under client money and asset rules. Cases where clients have lost assets with brokers have been where the broker broke the rules and it wasn't picked up

Sunny said:
Why would your shares be held in a SPV?? And what the hell does held off balance sheet mean?

Nominee accounts are generally safe.
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The use of "SPV" is probably confusing. They are probably keeping client assets in a fully separate legal entity to ensure it's remote from bankruptcy - which I guess is a "Special Purpose Vehicle" - but is often referred to as a Nominee Company.

Off balance sheet means they are not viewed as part of the assets of the firm i.e. they are recognised as client assets and therefore not part of any bankruptcy or liquidation. "Off Balance Sheet" = Not on the balance sheet or financials of the firm

Sunny said:
It means held and traded in the firm name e.g. Davy’s rather than your own.
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Not technically - street name would be the registration name used by Davy's to hold assets. They could have multiple street names for different purposes (proprietary trading vs client activity) though I'd hope Davy's isn't prop trading. So it would be something like "Davys' Re : client assets". Where assets are registered as "client assets" they should be "Off Balance Sheet" (see above) and therefore excluded from any liquidation or bankruptcy. Street name comes from the concept of "facing the street vs facing clients" - interacting with the other firms in the industry.

In a bankruptcy, in theory (unless there has been some illegal activity) there should be no cost to recover your assets. It should be as straightforward as instructing as normal to move the assets to another custodian / broker
 
EmmDee said:
In a bankruptcy, in theory (unless there has been some illegal activity) there should be no cost to recover your assets. It should be as straightforward as instructing as normal to move the assets to another custodian / broker
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But the theory is no good. That did not apply in Murroughs or in Beaufort.

And whom do you instruct?

Brendan
 
EmmDee said:
assets are registered as "client assets" ... and therefore excluded from any liquidation or bankruptcy.
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I love this. Have you ever met a liquidator, and I don't mean over a sherry.

Telling a liquidator that "these" assets are excluded is like telling a shark in a feeding frenzy that it can only eat those fish, it cannot eat these fish.

A liquidator will aggressively try every and any legal means to get his or her hands on any assets in the vicinity of a liquidation. That is their job. They are often very good at it.

How can you have confidence that the regulations are drawn tightly enough to safeguard assets in the face of a liquidators onslaught, and if the regulations are sufficient to safeguard assets that have been held correctly how sure can you be that the assets were in fact held correctly in such a way that they can avail of the regulations. That the regulatory package is watertight and that the assets have been correctly placed in the regulatory package.

The cases quoted above seem to suggest that assets are not always safe. You will never know until the tide goes out.
 
Sunny said:
It means held and traded in the firm name e.g. Davy’s rather than your own.
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Very rarely actually. Most times ‘street name’ means that the shares are held in some obscure name other than the brokers name.
 
Brendan Burgess said:
But the theory is no good. That did not apply in Murroughs or in Beaufort.

And whom do you instruct?

Brendan
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You would have no option but to deal with the administrator. The assets in the nominee accounts are pooled in various custodians. The custodians or fund administrators have no idea who the beneficial owners are. The only people with the correct records (hopefully) to reconcile the holdings with individual investors is the defunct broker. Therefore the administrator has no option but keep staff, systems, premises etc for a period of time to reconcile and distribute the assets. The cost of doing this should be met from the liquidation of the firms other assets. The problem is when there is a shortfall and there is not enough money to cover the administrators costs. Then the beneficial owner is liable to pick up the shortfall to have their shares returned to them.
 
Jim2007 said:
Very rarely actually. Most times ‘street name’ means that the shares are held in some obscure name other than the brokers name.
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It doesn't matter what the name used. Street name is the name of the entity used with dealers, custodians, transfer agents etc. I do a trade with a Davy's. They go and buy shares from Morgan Stanley. They don't do a trade between Sunny and Morgan Stanley. They do a trade between their nominee or omnibus account and Morgan Stanley. What they call it doesn't matter. The trade is still between Davy and Morgan Stanley as far as MS is concerned. MS don't care who the beneficial owner is. That is Davy's problem.
 
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