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Risks of nominee accounts
I M
Posted: 23 September 2017 11:46:25(UTC)
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We have a significant amount of funds in ISAs with TD Direct and Interactive Investor and we are about to invest pension lump sums with both in trading accounts, having used our full ISA allowances already. The recent takeover of TDD by II made me start looking at the risk of having such large sums with one organisation, especially as I believe they are looking at merging the back office systems for TDD and II.

II is a privately owned organisation with over £3Bn AUM. The website states that the investments are held "within a nominee account, Investor Nominees Limited, which is a wholly owned subsidiary of Interactive Investor." So although the investments are ring fenced in line with the rules, they are held by a subsidiary of II. I appreciate that this means we are protected from creditors should II have problems but it does mean that there would be a real risk of losing the investments if there was any fraud at II. This might also be the case if II records were incorrect and so the true beneficiaries of the pooled investments could not be identified.

Investor Nominees Ltd is shown at companies house as a dormant company capitalised at £1, owned and controlled by Interactive Investor Trading Limited. There is no audit of Investor Nominees Ltd so there appears to be no independent check on what investments are actually being held by the company.

If there was either fraud or a failure of the II office systems it looks like everything could be lost with the only compensation being the FSCS £50,000.

I would welcome thoughts on how others approach this risk. Do you end up having to have a number of platforms and limit it to £50,000 on each?

Do you decide the risk is negligible? I could see this where the company is part of a major bank (though I read on this forum that there were issues around ring-fencing at Lehmans) but in the financial world II appears to be a relatively small private company.
3 users thanked I M for this post.
Mr Helpful on 23/09/2017(UTC), Guest on 23/09/2017(UTC), Guest on 23/09/2017(UTC)
Keith Cobby
Posted: 23 September 2017 13:38:52(UTC)
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Good thread. Clearly the FSCS limit is much too low, and lower than for bank deposits. I do think the risk is very small but wouldn't want to only use one platform. We use 3 although using too many would increase admin. For large portfolios I don't think restricting each to £50k is practicable.
3 users thanked Keith Cobby for this post.
I M on 23/09/2017(UTC), Guest on 23/09/2017(UTC), Micawber on 24/09/2017(UTC)
Sara G
Posted: 23 September 2017 13:58:30(UTC)
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HL being a large public company, may be a safer prospect if you are looking to use another platform, and the costs are reasonable if you are mainly in ITs and shares.

My SIPP investments are spread across 2 platforms (HL and II); this does not keep me within the £50K limit, but more than that would be impractical, especially when it comes to drawdown.

I'm about to consolidate my two ISAs with HL, however, since the rules only permit investment into one ISA per year, which limits flexibility, so I'll just have to take the risk of using a single platform.

I agree, that the FSCS limit is far too low, but can't see it being increased in the current political climate as the vast majority have assets below £50K.

3 users thanked Sara G for this post.
Mr Helpful on 23/09/2017(UTC), I M on 23/09/2017(UTC), Margaret Driver on 02/10/2017(UTC)
Mr Helpful
Posted: 23 September 2017 14:26:42(UTC)
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I M;51335 wrote:

The recent takeover of TDD by II made me start looking at the risk of having such large sums with one organisation ...

If there was either fraud or a failure of ..... it looks like everything could be lost with the only compensation being the FSCS £50,000.

I would welcome thoughts on how others approach this risk. Do you end up having to have a number of platforms and limit it to £50,000 on each?

Do you decide the risk is negligible?


As investors we are experienced at taking risk.
Unfortunately this is just another level of risk.

If operating an ever growing number of broker accounts to minimise risk, then as pointed out there comes a limit as to how many brokers/accounts may be practicable.
Can the investor reasonably afford to lose any account excess over £50k?
A decision we all have to address as individual investors.

Until the recent debacle had considered Barclays a relatively safe haven. But now not so sure.
Also unhappy about the TD to II change.
Will be spreading the net wider in future.

A timely prompt as we weigh the options.
Thanks
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I M on 23/09/2017(UTC)
Jeff Liddiard
Posted: 23 September 2017 14:39:37(UTC)
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IWEB Share Dealing and Halifax Share Dealing are both divisions of Bank of Scotland plc (Halifax Bank Of Scotland HBOS) probably as safe as anywhere else of that size.
3 users thanked Jeff Liddiard for this post.
Sara G on 23/09/2017(UTC), Mr Helpful on 23/09/2017(UTC), I M on 23/09/2017(UTC)
I M
Posted: 23 September 2017 17:55:55(UTC)
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Sara - thanks for the H-L suggestion. I agree they are relatively safe but I already have a 6 figure sum in my SIPP with H-L and wouldn't want to put any more with them.

Jeff - I am looking at iWeb at the moment for exactly the reasons you suggest.

I was looking through some older posts on these forums and noted that some people were holding significant investments with share certificates to get around the platform risk, but I don't think that is possible with ISA's or SIPP's? Does this restriction also prevent holding the shares under Crest?

Is it possible to hold Investment Trusts under Crest? If so does anyone know a platform that will let you do that?

Thanks
Ian
Alan Selwood
Posted: 23 September 2017 20:40:21(UTC)
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As far as I recall, any holding that is settled tbrough Crest could be held in a Personal Crest account, though sadly this does not extend to ISA and SIPP investments, that have to be held through a nominee.
It is getting harder all the time to find brokers that allow personal Crest accounts.
Try looking up Blankstone Sington and Redmayne Bentley for possible ideas.

Www.crestaccounts.co.uk also lists Charles Stanley and Killick as well as the above.
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I M on 23/09/2017(UTC)
Alan Selwood
Posted: 23 September 2017 20:52:55(UTC)
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Assuming the following use different nominees, and subject to suitability of the investments for your needs, you could spread quite a lot of money over various nominees by using some or all of the following:

Fundsmith (direct holding with Fundsmith)
Personal Assets through their own nominees
Baillie Gifford Savings Scheme
A J Bell
Halifax Share Dealing (or its stablemate iWeb)
Hargreaves Lansdown
TD/II
Jarvis I M
Fidelity
Vanguard

If you are prepared to risk double the guarantee limit on each, that takes you to £1,000,000

Or if there are two of you, you can spread that much while keeping within the £50,000 limit each.
5 users thanked Alan Selwood for this post.
I M on 23/09/2017(UTC), Guest on 24/09/2017(UTC), Jeff Liddiard on 24/09/2017(UTC), Sara G on 24/09/2017(UTC), Margaret Driver on 02/10/2017(UTC)
I M
Posted: 23 September 2017 21:51:00(UTC)
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Alan - Thanks, that is a really useful list. Despite being an enthusiastic holder of Fundsmith and BG funds (especially Scottish Mortgage) I hadn't thought of placing money with them directly. Until now my investments have only been SIPP or ISA and I have wanted to spread the investment across a number of funds and so wanted an open platform. However with a large pension lump sum your solution makes a lot of sense.
r heard
Posted: 24 September 2017 07:51:51(UTC)
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Joined: 12/04/2013(UTC)
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I read these posts with interest but have never felt confident or competent enough to join in. I have a question though, because obviously the compensation level is very low but if operating drawdown from a sipp wouldn't the cost of splitting between various providers prove prohibitively expensive? Though not as expensive as losing money to fraud etc. Help,please.
jeffian
Posted: 24 September 2017 22:35:55(UTC)
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I'm a bit confused by this thread. Surely the whole point of Nominee Accounts is that they hold assets for the investor quite separately from the platform owner. Ownership of shares held in Nominee Account rests with the investor; should the platform provider be insolvent, their creditors would have no claim on the assets in Nominee Account.

Am I missing something?
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Bellabeck on 25/09/2017(UTC)
DJLW
Posted: 25 September 2017 06:30:36(UTC)
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jeffian;51363 wrote:
I'm a bit confused by this thread. Surely the whole point of Nominee Accounts is that they hold assets for the investor quite separately from the platform owner. Ownership of shares held in Nominee Account rests with the investor; should the platform provider be insolvent, their creditors would have no claim on the assets in Nominee Account.

Am I missing something?



Staff Fraud for example because Nominee account controls proved insufficient to hold the assets "quite separately"
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I M on 25/09/2017(UTC)
Keith Cobby
Posted: 25 September 2017 07:05:25(UTC)
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I think because SIPP/ISA accounts have to be held by a nominee they should have full protection by FSCS.
Darrener2
Posted: 25 September 2017 07:36:08(UTC)
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Assets held in Nominee accounts are reconciled on a daily basis if held electronically, and at least monthly if held in paper form. Additionally, client assets procedures & controls are subject to review by the auditors in the annual audit, and a report is submitted to the FCA by them. Any system in any industry is subject to abuse/fraud by staff - it is the in-built systems & controls that mitigate that risk. If there was a shortfall in a client asset, the parent company would be liable to make good that shortfall as per the FCA Rules & Regulations.
4 users thanked Darrener2 for this post.
I M on 25/09/2017(UTC), Chris Howland on 25/09/2017(UTC), Sara G on 25/09/2017(UTC), Mr Helpful on 25/09/2017(UTC)
I M
Posted: 25 September 2017 10:20:03(UTC)
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Jeffian, Keith - I raised the thread because I don't think it is as simple as you suggest. The platform does have to put your investments in a separate nominee company and they are ring fenced in case the platform company goes bust, etc.
However there are circumstances where you could still loose:
1) as DJLW suggest, staff fraud at the platform company
2) the platform loses or mismanages the traceability of who the beneficial owners are (the nominee company pools all of the investments together so I believe it is the platform that keeps the records of who owns what). In this case there would be a major exercise to try and work out who owns what, which locks investments up for years and if there are any shortages the losses are shared between all of the platform users
3) FSCS protection only covers you for the first £50,000 of any losses, whatever the reason

Note that the investments are legally owned by the nominee company (they are the name on the share register), the investor is the beneficiary owner. I don't believe there is any external audit of these records. The platform company has its accounts audited, but the investments are not part of the company's assets and so not covered in the audit. The nominee company typically shows as a dormant company and so has no accounts or audits done (typically they employ no staff and have no assets). I believe the safety of the investments is totally reliant on the quality and rigour of the processes at the platform company. If the platform is a major UK bank then I have a high confidence that they would meet the requirements. However when the company is relatively small and not a UK bank will the same rigour be embedded in the organisation and its processes?

As others have commented the risk is very small, but it isn't non-existent. If Lehmans can collapse what guarantee is there for any organisation. When a major UK bank fails (e.g. Northern Rock) the government feels the need to step in because there are too many voters affected. However if a platform failed I suspect there may not be that many people with more than £50,000 to lose and those people could be seen as wealthy and so should have been aware of the risks.
3 users thanked I M for this post.
Mickey on 25/09/2017(UTC), Mr Helpful on 25/09/2017(UTC), Guest on 26/09/2017(UTC)
xcity
Posted: 25 September 2017 11:26:22(UTC)
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I M;51373 wrote:
I believe the safety of the investments is totally reliant on the quality and rigour of the processes at the platform company.

Agreed.
I won't use platforms where the back office seems inefficient.

I M;51373 wrote:
If the platform is a major UK bank then I have a high confidence that they would meet the requirements.

Not so sure about Barclays in the light of recent failures.
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I M on 25/09/2017(UTC)
I M
Posted: 25 September 2017 12:19:36(UTC)
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xcity - I agree. I am sure Barclays will sort everything out eventually but it is an important reminder. If Barclays can mess it up what are the risks that some of the traceability back to the nominee holdings get screwed up when II merge the existing II and TDD accounts on to a single platform, especially if they try to also merge the two nominee companies.
I M
Posted: 25 September 2017 12:23:25(UTC)
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Darrener2 - Thanks for that insight. That does give a lot of reassurance
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