Stockbroker risk

[Apollo Zensen]

Hi all, a quick query with regards to what happens if a stockbroker goes bust - is there a limit to how much you are covered for? Or is everything kept ring fenced?

Thinking along the lines of bank accounts being covered to £50k but not above that.

Thanks

[louiebaby]

If they're acting to execute your trades for you, they charge a fee for that. If they go out of business, it shouldn't affect your position should it?

You'll need to find a new one though to unwind your positions, which might cost A LOT of cash if you struggle to get the trades done at the level you need to...

[DonkeyApple]

Apollo Zensen said:

Hi all, a quick query with regards to what happens if a stockbroker goes bust - is there a limit to how much you are covered for? Or is everything kept ring fenced?

Thinking along the lines of bank accounts being covered to £50k but not above that.

Thanks

It's a little different than bank accounts.

Under MiFID all retail client funds must be segregated from the broker's balance sheet meaning that in the event of it folding your funds are 100% safe as they do not form part of the broker's assetts.

However, it is very, very clear that not all FSA reg brokers are in fact segregating their clients' monies. This is something that everyone must double check and where not sure obtain written confirmation from the firm.

There is something else that should also be verified and this is where the broker's 'client account' is held. If that bank goes bust then you may be entitled to nothing as the broker may well be holding all client funds in a 'pooled' account which would not be subject to any form of asset protection from the Government or the ICS.

[Beardy10]

Use a stockbroker that holds all your shares for you in a CREST account. That way the shares are registered in your name with the copmany and you have nothing to worry about, it's all electronic so no share certs are issued.

If they don't use CREST I wouldn't use them.

[jfbrin]

Let's be careful here folks. A Crest account is simply an electronic account where shareholdings are held. Stockrokers tend to hold their clients' shares in a Nominee company which has a pooled account in Crest. The shares are held to the order of that Nominee company who in turn holds those shares on behalf of the Stockbroker's clients albeit in one Crest account. The underlying company's share register will show the shareholder as XYZ Nominees and not Mr Joe Blogs.

There is also a service whereby the underlying client can have the own Crest account with a broker which allows them to have their own name on the underlying company's register but that is less common than the pooled nominee arrangement.

The Nominee company should be a non trading entity that technically cannot go bust so assuming the administrators of that nominee company are competent and well regulated, the clients' assets should be safe. If the stockbroker goes bust, the underlying clients' assets should be ringfenced from the trading company and easily distributable to another stockbroker when the appointed administrator has reconciled everything.

As the previous poster mentioned, beware those stockbrokers who use client monies/investments when trading on their own account. Lehmans seemed to have this problem IIRC but this tends to be very specialist and not generally applicable to the smaller private investor.

In a worst case scenario, the FSA does have a compensation scheme that you can find on their website but it is quite limited.

JB