Jan 232013

In recent days, a few people have noted that UK broker Selftrade has stopped opening new client accounts. The text on the account page has been reading “We are undertaking a review to enhance some of our processes, so we are unable to progress your application at this time”, which could mean anything.

Today, an article on Money Marketing sheds a little bit more light:

Execution-only platform Selftrade has stopped taking on new customers with the platform voluntarily varying its permissions following discussions with the FSA.

Exactly what’s going on is still not clear, but the involvement of the regulator will not reassure some users. For obvious reasons then, Selftrade is at pains to stress that whatever it is has not involved any losses to clients or the firm: Continue reading »

What is a CREST personal account?


CREST is the central securities depository and settlement system for the UK and Ireland. It is responsible for recording the existence of demateralised shares (ie those that are recorded solely in electronic form – as most are these days – and do not have paper certificates) and transferring ownership between buyers and sellers when stocks are traded though a stock broker.

Most UK shareholders have their stocks held ‘in nominee’, which means that their holdings are pooled together with holdings from other clients of their stock broker. The legal owner of these shares is recorded through CREST as being their stock broker’s nominee company (which is a non-trading entity set up to hold client assets). The shareholder is the beneficial owner – meaning that they have rights over the shares – but they do not appear on the shareholders register.

However, it is possible for individuals to have their own CREST personal member account and have shares recorded in their name on the register. For this to happen, they need to be sponsored for CREST membership by a stock broker.

Individual CREST membership is not a particularly complex or costly process, but for maximum efficiency most stock brokers prefer to have all their clients hold shares in nominee, so relatively few firms offer CREST sponsorship and even fewer actively promote it. For a list of brokers that do, see the CREST personal account comparison table. Continue reading »

Nov 162012

Earlier this year, HSBC won a case against HM Revenue and Customs involving the payment of stamp duty on ADRs as part of its ill-fated purchase of US sub-prime lender Household in 2003. It wasn’t exactly a high-profile case and I only stumbled across it recently while searching for something completely different. But looking at legal commentary on it, the judgment raised an awkward question about the legal status of American depository receipts (ADRs).

ADRs in brief

An ADR provides a way for shares in a foreign company to be traded on US exchanges. The underlying foreign shares traded on the overseas exchange are deposited in a custodian bank and the depository bank issues a receipt giving the buyer rights over these shares. This receipt can be traded in the US markets – either on exchange or off-exchange depending on the nature of the ADR – just like a normal share. See here for a fuller explanation of how ADRs work.

The buyer of the ADR is not recorded on the company’s shareholder register, but they are entitled to all the economic benefits from them and we usually work on the basis that the investor is the beneficial owner. This is actually how most domestic shares are held these days anyway – rather than the individual investor being on the shareholder register, they are held “in street name”/”in nominee”, which means the legal owner is a non-trading subsidiary of your broker, but you are the beneficial owner (English law, and systems derived from it, allowing strict legal title to be separated from beneficial rights).

Crucially, beneficial ownership separates the shares from the assets of the stock broker, meaning that in the event the firm fails, they are not available to the broker’s creditors – the investor still has rights over them. So HSBC’s case against HMRC was interesting because the tribunal found itself considering the question of whether an ADR actually carries a beneficial ownership in the underlying shares. Continue reading »

Holding shares through Direct Registration in the US


Ever since physical paper certificates largely gave way to electronic stock holding, most US investors’ shares have technically not been held in their own name. Instead – as explained in the guide to brokerage account safety – shares today are usually registered ‘in nominee’ or ‘in street name’.

This means that the legal owner and the name that appears on the register of shareholders is a nominee company and not the individual buying the shares. The buyer remains the beneficial owner with rights over the shares.

However, in many cases it is possible to hold US shares electronically in your own name – a process known as direct registration. This carries two advantages that may make it useful for some investors Continue reading »

How safe are stock broker nominee accounts?


When you’re choosing a stock broker, cost is not the only consideration. You should also think about how safe your investments will be from fraud or loss.

Many investors don’t understand exactly how their shares are held and what the risks to their account are if the worst happens. So this article explains a few key points about how brokerage accounts works and what happens in the event of fraud or loss.

In particular, we’ll look at why nominee accounts and segregation can’t protect you from all risks, plus the main things you can do to protect yourself from the chance of a stock broker collapse. Continue reading »

Investor compensation scheme limits


Whenever you put your money with any financial firm, you want to be sure that it’s safe. So the most important question every investor should ask themselves before signing up with a stock broker is: “What protects me if this company goes bust?”

This even more important if you are planning to use a broker outside your own country. After all, most investors have some idea about the investor protection rules at home.

But these rules don’t apply when you put money into an overseas financial institution. Instead, you will be covered by the regulations in force there – which may be stronger or weaker than you are used to.

This note looks at the investor compensation scheme limits in a number of countries. It’s only a summary – you should check the detailed rules yourself before opening an overseas account. But let’s see how safe your money in the US, Singapore, the Isle of Man and many more.

Continue reading »