In response to a reader’s question, the Financial Times recently carried a detailed explanation by UKSA director Peter Parry of the problems posed by the pooled nominee system through which most individual shareholdings in the UK are held.
The Financial Times article entitled 'What happens if my broker fails?' can be found here.
Peter explained that holding shares in a nominee account is convenient for many private investors. Shareholders receive regular portfolio valuations from the broker and details of the dividends received by the nominee, as well as a consolidated tax certificate at the year-end.
It is important to understand, however, that when using a nominee account the nominee is the legal shareholder. This means the nominee’s name appears on the share register and the nominee receives the dividends. The private individual is the beneficial owner of the shares. The companies themselves do not know the beneficial shareholders and are therefore unable to communicate with them.
The beneficial owners therefore have no rights to attend the AGM or to vote. In terms of security, the investments and any cash or dividends are theoretically ring-fenced as if they were held in trust, so if the nominee goes bust the investor’s money is protected and cannot be used to pay the creditors. In practice, though, the situation is less clear. When Beaufort Securities was placed in special administration by UK regulators it soon became clear that Beaufort’s own assets would not cover the administrator’s fees. It was therefore suggested that investors with shares in the Beaufort nominee take a “haircut”, with a proportion of their money used to cover the administration costs. This would have led to an immediate and total loss of confidence in the nominee system. Fortunately, the regulator stepped in to cover the shortfall.
Another concern for investors is that their accounts will be frozen if the nominee fails. Investors could find themselves unable to trade their shares or receive dividends until the administration is completed. For those dependent on their dividend income this could lead to financial hardship. The inability to sell shares could also lead to financial loss. Investors who believe they have suffered a loss due to the failure of their nominee can make a claim under the Financial Services Compensation Scheme.
The only alternatives to nominee accounts are to hold paper share certificates or to have a CREST-sponsored account. Paper is often inconvenient and certificates can be lost and expensive to replace. The intention is to cease issuing paper share certificates from January 2023 and to withdraw paper certificates completely from 2025. Unfortunately few brokers now offer CREST-sponsored membership and most charge for them.
Below is a selection from our archives:
by John Hunter, March 2017
by Roy Colbran, March 2017
by Roy Colbran, January 2017
by Roy Colbran, November 2016
by Mohammed Amin, July 2016
by Roy Colbran, July 2016
by Roy Colbran, May 2016
by Mohammed Amin, May 2016