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David Kempton: my outrage at Beaufort fallout

Our experienced private investor columnist, a former customer of failed stockbroker, says use of client money 'seriously worrying'.

 
David Kempton: my outrage at Beaufort fallout
 

I was a client of Beaufort Securities for a brief period five years ago, when they held three stocks for me, whilst my main account was at Investec and my ISAs at Barclays (no longer, but that’s a saga to be told another day).

After I’d sold these stocks and closed my account, they continued to email me with daily market comment, often of relevant interest, much of it focused on the 60 companies where they acted as broker. Sadly no longer and Beaufort is now in administration with £850 million of client assets frozen and its discretionary fund management arm insolvent.   

Along with many others I want to voice my deep concern at the plundering of the private client account money to pay for the transgressions of the stockbroker. We thought our money with any UK broker was ring-fenced, sacrosanct and protected by regulation, but apparently not. Our money can be seized and used to pay off liabilities like any other creditor. 

This is seriously worrying, not least for the smaller private stockbroking community where investors may now wish to seek  reassurance. Seemingly our money lodged with a broker is not safely ring-fenced, but can be used by the broker or their agents, without our consent – a nasty shock and of great concern. 

The facts appear to be as follows:

Beaufort fell into administration in early March, then holding £850 million of client assets. The following week the United States Department of Justice issued an indictment in which Beaufort Securities with others were charged in relation to securities fraud and money laundering.

An FBI agent, working under cover with the firm, exposed a ‘pump and dump’ manipulative share trading scheme in US companies generating $50 million proceeds for clients and a device to launder some money by purchasing a Picasso painting in London, then reselling.

Separately the Financial Ombudsman Service (FOS) had received over 500 complaints about Beaufort’s operations. The firm's insolvency means they have been passed over to the Financial Services Compensation Scheme (FSCS) to work with the firm’s appointed administrators, PricewaterhouseCoopers (PwC).

With minimal available funds at the firm, PwC then ring-fenced £50 million of the clients’ £850 million to go towards their costs and other advisers in a complicated insolvency process.

Earlier this month PwC released the insolvency papers revealing that client assets ‘owned’ by Beaufort’s 14,000 clients, already reduced to £800 million, would be further cut to £500 million since much of the assets were illiquid, with some of the bigger clients standing to lose 40%. 

Furthermore PwC initially indicated their estimated costs at £100 million over a four-year wind down period whilst piecing together a complex process of customer paper trails. This has now been revised down to £55 million, with the process expected to take two years, according to the Financial Times.

If you are caught up in this, do contact the excellent ShareSoc who are ably fighting the cause for investors.

25 comments so far. Why not have your say?

HillStreetfan

May 24, 2018 at 12:01

Like you , I am disgusted that money and shares that clients consider to be ringfenced , and therefore safe , can be plundered at will . Fortunately , I am not personally affected ; I did have an account for 2/3 years , but closed it as the service was very poor . It seems that PwC have come up with a massive and totally arbitrary sum of £100m with no justification and can take whatever they want from clients' accounts . How can this be right ? To whom do they account for their "expenses" ? Also , how can it take 4 years to sort out ? It should be quick to work out how many shares and how much cash each client owned ; the details are in their portfolios . Surely the FCA should be taking action here ?

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Keith Cobby

May 24, 2018 at 12:27

The fact that clients assets may have reduced in value is irrelevant. They should be transferred to the client or another willing fund manager.

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Doug Sammons

May 24, 2018 at 15:54

Outrageous.If assets are not ringfenced, as we all were told.

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Andrew Vincenti

May 24, 2018 at 16:15

FCA - do we expect them to do anything? They have never protected the small investor in the past so why should they start now. Fortunately, I was never a client of Beaufort. Met them 2 years ago and thought they were too smooth.

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Roger Lawson

May 24, 2018 at 16:24

Yes it's an outrage that client assets are not protected. How did the ability of insolvency practitioners to use client funds in a Special Administration ever get through Parliament without public scrutiny? It's truly an abomination. The law and insolvency regulations need to be changed a.s.a.p.

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horshamtim

May 24, 2018 at 16:45

Beaufort operated at the more exotic end of the market, and what they did and how they did it, appears to be open to legitimate challenge. Even without the administrators' cut, it seems likely their investors would have not got all their money back.

I was not an investor with them, but I share many people's concerns over the wider issues. Anyone who has more than £50k in a nominee account with one platform - which will include ISAs and SIPPs - should take notice.

Some of the popular such platforms are owned by relatively small private companies, who could struggle in a downturn. There are two separate issues - can insolvency practitioners legally raid such client funds, and who controls the amounts they seek to take.

The answer to the first is yes they can, if there are insufficient company funds. The costs of winding up the company have to be paid, and the alternative would be out of public funds - that is by taxpayers. As most of these do not have even £50k in such assets let alone more, this could be difficult to sell politically as fair.

The answer to the second appears to be more open, and those of us who could be affected should be lobbying to make sure that someone has this responsibility.

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Hanif Motiwala

May 24, 2018 at 16:49

I have regretted the day I joined Beaufort and transfer my SIPP account. I am nearly retiring and absolutely shocked that client's money is taken as the FCA and PwC are both responsible for this saga to unfold. The process should be simple with transfer of portfolio to another provider of client's choice. The problem is PwC is loan shark and having worked in NHS over the years, I have seen them how they skin the money. It is outrageous as they failed to answer how they come up to 20% charge of entire portfolio? These firms should be regulated. I will be forced to work for few more years because of stock broker's unregulated illegal activity. Any firm can have this scenario so it is frightening.

I never thought that this would happen

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Roger Lawson

May 24, 2018 at 17:05

Stockbrokers regularly go bust, and Beaufort was not a particularly small one. The threat to your assets in any administration is now very obvious.

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horshamtim

May 24, 2018 at 17:18

@Roger Lawson. Changing the law is not going to happen anytime soon - for the foreseeable future Parliament is pretty much tied up with all the Brexit legislation, and even without this is unlikely to be a priority as too few of the electorate will benefit. Unless you can come up with an alternative way of funding the insolvency costs, the Treasury are unlikely to go along with it.

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Andrew James

May 24, 2018 at 17:40

The contributions by horshamtim are by far the most sensible that I have seen on this topic. I have funds in several nominee accounts, although I try to invest through a CREST sponsored account in the main. Obviously not an option for ISAs and the like.

People are totally confusing t(and conflating) the quantum of the fees that PwC are claiming with the basic point that someone has to pay the charges of whoever is appointed to clean up the mess. No private sector firm is going to do it for free and it seems to me to be fair that the affected account holders pay their share, rather than expect a State indemnity.

The lack of control those holders have over the costs of administration is the issue to focus on, in my view. Although I am a ShareSoc member and firmly support virtually all of what they do, I very much doubt that this is a straightforward exercise that can be done at the push of a few buttons. It is in all likelihood a hugely convoluted mess that will cost a lot. However, I think that much more justification is needed as to the eye watering costs proposed. The legislative changes may not have been well known, but I do not think that they were flawed, although they probably need refinement. They were a response to the huge array of problems triggered by the Lehman Bros insolvency.

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Tom Bourne

May 24, 2018 at 18:45

I agree this is outrageous. Should investors revert to paper rather than use stockbrokers nominee accounts?

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Roger Lawson

May 24, 2018 at 19:58

I do not believe that Beaufort's accounts were in anything like the same mess as Lehman Bros. In the latter case it was very clear that they had not segregated client funds and assets from their own (i.e. they were breaking the law). Hence the problems. But at Beaufort there is no suggestion yet that client assets were not properly segregated. If there is not sufficient cash to pay the administrator (and all financial organisations have to have "regulatory capital" to cover such emergencies), then the company has a liquidator appointed (as per Carillion) and the Government picks up the tab. That seems fairer and more reasonable to me as the investors who held assets in Beaufort were not at fault in any way and were assured their assets were protected by segregation in a separate company. Administrators cannot normally seize the assets in a failed company that were held in trust (e.g. a company's pension scheme). What should be different in a Special Administration which was a system specifically set up to ensure a prompt transfer of the client assets held by a bank or broker to another firm so as to protect the interests of investors. As it's turned out the Special Administration scheme does nothing of the kind. PWC are saying it's going to take them years to do the work when it should be a FEW weeks .

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I M

May 24, 2018 at 20:33

We have all read that our assets are ring-fenced and protected from creditors and that is how it must be. The government forces us to hold ISA and SIPP assets this way and so has an obligation to ensure we have the protection needed.

I think that any broker holding ring-fenced funds in nominee accounts should be legally obliged to have insurance to fully cover any potential liquidation. That way the Administrator has to get its funding from the insurance company, not from seizing clients assets. The big insurance companies are capable of taking on the likes of PwC and lobbying government if needed something individual investors cannot do (though all credit to ShareSoc for the tremendous fight they are putting up on behalf of individual investors).

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BILLFISH

May 24, 2018 at 20:50

Absolutely outrageous. I would suggest a fairer solution would be for the regulator to require PWC to conduct the administration on a pro bono basis as one of the many acts of contrition required to compensate the investing community for their useless audits at the many companies that have subsequently gone bust.

In fact if the big 4 were all required to conduct all administrations, pro bono,on a round robin basis maybe would see an element of robustness return to the audit process.

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Andrew James

May 24, 2018 at 21:00

This is never remotely going to happen. To the extent that any of the audit firms have messed up, they should be penalised for that/those transgressions. The idea of requiring the brokers to take out insurance or reserve funds to meet administration costs is much more credible, but it will inevitably be an extra cost passed back to the clients. There is no such thing as a free lunch. If all of this pushes Government to look very critically at the whole issue of nominee accounts, so much the better, but it has driven down costs - at a price.

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BILLFISH

May 24, 2018 at 21:13

Andrew,

You say there is no such thing as a fee lunch. From where I stand as far as PWC are concerned ,not only do they want a free lunch, but dinner and a day at the races as well. And it looks as though they are going to get it.

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Andrew James

May 24, 2018 at 21:27

I have every sympathy with the proposed fees for PwC being heavily scrutinised. They should be. Just don't expect PwC to turn into a charity - or any other firm that is competent to carry out the task, for that matter. The truth is that they will be well aware of the huge negative publicity and will have factored that in. That is simply self-interest and how capitalism works in practice.

I expect that when the full facts come out, it will become clear that this special administration is far from a few weeks' work. None of us know the full facts at the moment. PwC will clearly want to maximise their fees, but I do not think that they are so stupid as to come up with a proposal that will damage the entire organisation. They also do a massive amount of work for Government and so they will have come under political pressure as well. I am not in any way defending them, but simply pointing out how things work. The shareholders are always going to take a hit when there is an insolvency. By definition, the cash has run out.

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Alan Selwood

May 24, 2018 at 21:42

I am entirely in agreement with the last 5 comments.

Investors should be permitted to hold their ISA and SIPP accounts as Crest accounts, and then the solvency of the platforms would not be relevant.

If this is refused, then there should be insurance in place to cover the shortfall on ALL client assets of any value.

Ring-fencing should mean ring-fencing. For a client's investments to be ring-fenced means that it cannot be taken for other purposes - to allow the appropriation of ring-fenced assets denies the meaning of the term 'ring-fenced'.

Parliament should repeal Rule 135, which is what permits the appropriation of ring-fenced assets. If that prevents administrators from rushing to act, so be it. It would be their problem, not that of the innocent investor.

Write to your MP and the national newspapers. Kick up a fuss. Nothing else will unsettle those who were foolish enough to enact the current legislation.

Concentrating on Brexit is not an excuse for not doing other things - it's called multi-tasking.

I have to say that my own MP's response was bland to the point of being a disgrace. He owes me an apology.

People like this do not deserve their seats, and will probably be dumbfounded when they lose their seat at the next election.

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BILLFISH

May 24, 2018 at 22:14

Andrew,

I take your point but we are not talking about capitalism here. Capitalism is only a term used by politicians to describe something they do not want to be associated with. If this country truly embraced capitalism we would not have RBS,TSB or HBOS,they would have been swept away by stronger forces long ago.

PWC and the like are an oligopoly and should be treated as such. I find favour with the system the Yanks use, where servants, civil or otherwise are subject to competitive election every four years. A system which breaks the link between patronage and privilege.

Just imagine how much better our regulators would be, over many areas, if their customers i.e. you and me could vote directly on their performance every so often.

Your quote "The shareholders are always going to take a hit when there is an insolvency." is the wrong way round is it not.

In this case it is the holders of shares i.e. Customers who are taking the hit.

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andy

May 25, 2018 at 06:40

For my two cents worth ...

1. Agree totally that while I am not affected - I assumed ring fenced meant exactly that. Does anyone know if the same applies - for example - with lawyers holding client money?

2. What is the point of paying extra to have it ring fenced when the government - a Tory government - can appropriate it?

3. Agree that nothing is going to happen while the government is having internal war over BREXIT and absolutely nothing else will happen for the next probably 10 years (if we are lucky it will only take that long - and thats assuming they roll over to all countries when it comes to the trade negotiations and evidence to date suggests they are totally deluded as to their negotiating strength) while they sort the mess out.

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CHMM

May 26, 2018 at 11:37

Freom an account holder who was at the various meetings, and stands to make a considerable loss (1) PWC are billing Beaufort at £900 per hour (that's not a typo) (2) the FCA were not at a single meeting (3) Beaufort's debt, on it's own b/s, is tiny - so a buyer should be found for the whole operation, alongside BF debt and equity written off.

There has to be another way.

The FCA is not fit for purpose.

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retired investor 2

May 26, 2018 at 15:29

Looks like FCA is keeping its head down, isnt going to defend the indefensible and so has gone to ground. No where to be found when there's trouble. There is a complaints route to complain about the FCA-Complainst Commisioners- ,it may be toothless of course as all our regulators so often seem to be.

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The Colonel

May 27, 2018 at 01:23

Most administrators are Crooks and most Administrations are not honest. There is rarely anything left for the Creditors.

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kirk walton

May 27, 2018 at 09:43

When all these problems occur and companies become insolvent etc how is that the auditors did not discover the issues before thorough checks, i.e- audits, due diligence etc. What actual audits are taking place or is it just tick box to justify their fees. I agree we need to question our MP's or raise a petition through the Parliament website enabling raising the question in Parliament. The large audit firms have a monopoly on this business with no competition and no incentive to perform real checks. Fat fees, incompetent checks and not fit for purpose is what the administrators and auditors now represent to the detriment of ordinary savers and shareholders. Unless something is changed this will keep on occurring.

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Colin Gregg

May 28, 2018 at 17:23

Yes, I'm another one affected.

It is quite clear to me that the whole scheme is faulty and strongly favours the administrators, not the clients who have lost out through no fault of their own.

Whilst PWC make hay, we can only sit on our hands awaiting re-distribution of our assets, unable to trade, or set protective stop-losses and fearing the next market crash will smash our portfolios.

With clients' monies ring-fenced and "insured" by the FSCS up to £50,000, PWC have taken the logical, if immoral, view that they can charge top-whack for their services and then take their fees from the clients' funds (apparently legal - but WRONG!)

They know that the FCFS will cough up (most of) the money that the clients will then be missing. In effect, the FCFS is acting as the pay-master for PWC's profits!

A badly corrupted system needs rectifying before the next financial firm goes bad.

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