The scandal behind Beaufort Insecurities

Friday, 18th May 2018 15:14 - by Eric Chalker

 At the beginning of March, the Financial Conduct Authority (FCA) put stockbroker Beaufort Securities and its custodian BSL into insolvency.  As a consequence, many personal investors have lost access to their assets.  For most of them this will continue for much longer and some will suffer significant financial loss. 

Where does responsibility for this lie?  Naturally, with those responsible for the insolvency.  But the government is responsible for depriving investors of the rightful ownership of their assets and the FCA is jointly responsible for failing to remedy this.

I have written about this in my blog several times.  All posts are still accessible, including the first on 24th Jun 2016: “What is a nominee account?”.  There is a great deal more in articles I wrote for the UK Shareholders’ Association magazine, some of which is on the UKSA website and has recently been used by Private Eye in an article on the subject.

There are many angles, but they are all elements of the same fact: if your shares are in an ISA or SIPP, or any other nominee account, you don’t own them.  This is the scandal behind Beaufort Securities.  It is not as though governments have been unaware of this.  It is not as though nothing could be done about it.  Indeed, under Vince Cable, when he was Business Secretary, his department began to take action to reverse the erosion of what ought to be investor rights, but the election of 2015 intervened and momentum was lost.  Nothing, though, was done to implement the Kay Review’s call for a means of holding shares electronically.

Government responsibility

Even before that, governments should have been aware that investors in pooled nominee accounts needed better protection.  In 2011, the International Organization of Securities Commissions (IOSCO), of which the UK is a member, published its “Final Report on Regulation of Nominee Accounts in Emerging Markets”.  This emphasises the need for shareholder rights to be fully preserved when assets are held in pooled nominee accounts, even in third world countries.   Seven years later, the UK, a fully developed country, still doesn’t measure up to what IOSCO requires for emerging markets.  The report can be found here: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD362.pdf

Conservative governments used to talk about a property owning democracy, but with equities they lost the plot years ago.  The result has been a growing industry of so-called intermediaries, like Beaufort Securities, acquiring assets in their own names bought with other people’s money.  When one of these creatures dies, those in its clutches cannot escape intact.  To avoid this, all it required was to turn ISA providers into investors’ agents instead of nominee owners and to do the same for all investors held in thrall by their stockbrokers, (see “Will this be end of share ownership?” 5th Jan 2018).

So I say to the erstwhile clients of Beaufort Securities, by all means aim your fire at PwC as it takes its time to release your cash and investments, minus its cut.  But take action too against governments which encouraged you to invest in company shares through ISAs (and SIPPs) and then left you to the mercy of the financial services industry.  The government wanted you to invest your savings in ISAs, but it failed to provide you with the means of keeping ownership of those savings.  So HMG has a major responsibility for your lost savings at Beaufort Securities and it is the government which should pay for PwC’s administration, not you.

After all, where do the fines go that are paid by PwC, KPMG and others for their audit failures?  To the government, of course, not to the investors who lost money by those failures.  When a custodian fails, the government should use these fines to pay for all the costs and losses. 

What about the FCA? 

Unlike the Financial Reporting Council (FRC), which has consistently failed to recognise the interests of private investors (as my long experience dealing with it on behalf of the UKSA bears witness), the FCA has at least tried, but only for a time.  In the summer of 2013, the FCA set up a committee (on which I sat) to find ways of improving investor protection and rights for assets in nominee accounts.  It grew in size and in understanding of the issues, particularly because of the UKSA’s evidence, but it collapsed 12 months later without making any decisions.  Its chairman told us he remembered sitting on a Bank of England committee which had a similar remit and a similar ending, 14 years before. 

In practice, the FCA has repeatedly shown a lack of spunk when nominee providers have treated their clients badly; three come immediately to mind – Selftrade, Barclays and NatWest.  It also fails to enforce ISA Regulations 4(6)(c)&(d), for which see “Investor rights in ISAs” 5th Jul 2016.  When I produced, for  the FCA committee mentioned above, a detailed paper setting out custodian risks faced by investors (such as has happened at Beaufort), an official was wheeled in to quote from the rule book, as though simply establishing the rules gives sufficient protection.  Beaufort’s clients know that it doesn’t and there have been many such before. 

The FCA sets the rules, but (like its predecessor, the FSA) it isn’t really interested in what actually happens to individual investors.  For that, it thinks the Financial Ombudsman (FO) and the Financial Services Compensation Scheme (FSCS) are the answer, but the FO has no understanding of nominee account issues and the FSCS compensation limit is wholly inadequate, as the FCA already knows.

As I reported here on 31st Jan 2018 (What do you get if your SIPP or ISA provider goes bust?), the FCA has been reviewing the present compensation limit of £50,000.  It has now decided to increase it to £85,000, but only from April 2019.  This is nowhere near good enough, as can be seen in my earlier post.  It is sad not to see the name of any body representing the interests of savers and investors among the list of 103 contributors to the review.  The financial services industry was well-represented, of course.  It will be a long time before there is a further review.

Eric Chalker, UK Shareholders’ Association Policy Co-ordinator & Director, 2012-2016

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.