Information on what you should do if you were a customer of the firms.
Will I get all my client money and custody assets back?
As you will see in the following answers, the administrators are working on establishing what can be returned, when and what the costs are of returning the client money and assets. The administrators have confirmed that more than 90% of clients who are eligible for Financial Services Compensation Scheme (FSCS) coverage are likely to have losses which fall under the £50,000 limit and so will receive back all their client money and custody assets.
What is the FSCS?
The FSCS protects consumers when financial services firms fail. It’s the compensation scheme for customers of UK authorised financial services firms. It has eligibility criteria both in respect of the people and businesses who are covered.
Are all the client money and custody assets there?
The administrators have confirmed that nearly all the assets and money which Beaufort Asset Clearing Services Limited (BACSL) should have been holding for clients are under the control of the administrators. There are some minor shortfalls in the custody assets which the administrators are in the process of reviewing. However, costs of distributions back to clients will be deducted from the money and assets. The FSCS will be able to compensate eligible clients for the resulting shortfall. However, this means a number of clients holding larger portfolios of client assets, and those who are not covered by the FSCS, may not receive all their money and assets back. In the case of those with larger portfolios of client assets, this is because the shortfall may exceed the FSCS compensation limit.
Why are costs being deducted from the ring-fenced client money and assets?
The administrators have to reconcile the money and assets held by BACSL in accordance with the legislation before being able to return these client assets to their owners. The legislation, in particular Rule 135 of The Investment Bank Special Administration Rules 2011, provides for the costs of distributions of client assets to be paid for out of the assets themselves. All costs incurred by the administrators will be subject to approval as set out in insolvency legislation and ultimately are subject to jurisdiction of the Court. A creditors committee has been appointed who represent the BACSL clients and who will consider and if appropriate approve PricewaterhouseCoopers' (PwC’s) costs.
Will clients have to wait for four years to receive their assets?
Four years is a worst-case scenario which has been used by the administrators when forecasting costs. PwC have been working to reconcile the client money and assets held and have sent out statements of each client’s holdings, with instructions on how to agree these holdings, through an on-line portal (or by post for any who prefer). They are working on a Distribution Plan that will need to be approved by the creditors committee and subsequently by the Court. If approved, distributions of assets should commence in September 2018 to those clients that have provided all information as is necessary (e.g. KYC documents, destination for assets etc.).
Will the FSCS cover any of the losses?
Yes, the FSCS will cover shortfalls in client money or assets for eligible clients up to £50,000. Generally, all Beaufort clients who are individuals are eligible. In relation to BACSL, these losses may include amounts caused by the administrators’ costs in returning client money or assets. The administrators have estimated that more than 90% of eligible clients who have client money and/or assets with BACSL are likely to have losses which fall under this £50,000 limit.
Some clients may have suffered losses caused by Beaufort Securities Limited (BSL) because of mis-selling, in which case they may bring a separate FSCS claim if they are eligible for compensation. If any clients have a Financial Ombudsman Service award in respect of BSL mis-selling then they can claim up to £50,000 from the FSCS. For further details please see the FSCS website.
Why did the FCA appoint an administrator?
The FCA had concerns about BSL’s discretionary fund management business and BACL’s client money and assets systems and governance. We placed requirements on the firms in October 2016, December 2016 and September 2017 to manage and mitigate risks of their activities. We continued to supervise the firms throughout the period, and in February 2018 we concluded that the firms were insolvent. On 1 March 2018, we applied to the Court to place both firms into insolvency proceedings. Following an emergency hearing, the Court placed both firms into insolvency; appointing three insolvency practitioners from PwC as administrators of BSL and special administrators of BACSL. We also imposed requirements on the firms, with immediate effect, which stopped the firms from conducting any regulated activities and stopping them from disposing of any firm or client assets without our consent. At the same time the US Department of Justice took action against BSL and various other parties.
How did the FCA appoint the administrators from PwC?
The FCA had detailed discussions with three different restructuring firms who had experience of insolvency of this nature and complexity, were able to undertake the work on short notice and had the resources and expertise to deal with large holdings of client assets. Following a review by FCA senior management, qualified insolvency practitioners from PwC were conflict checked and consented to act in the insolvencies.
In accordance with the Investment Bank Special Administration Regulations 2011, the appointment of the special administrator is by Court Order. In this case, this was following an application by the FCA which had been approved by the Regulatory Decisions Committee (RDC). The RDC is an FCA Board Committee that is operationally separate from the rest of the FCA and for these purposes was the final stage of decision making of the FCA.
Why the change in value of custody assets?
The administrators obtained an independent valuation of the custody assets which has provisionally valued the portfolios at around £500m. An independent valuation was needed because of various different valuations being produced following the administrators’ appointment.
What are the PwC costs estimates?
On 8 June 2018 PwC announced that they have agreed with the creditors’ committee and the Financial Services Compensation Scheme a cost allocation that will see the FSCS covering 94% of the costs for returning assets to approximately 17,500 retail and corporate clients. Therefore their assessment is that fewer than ten retail clients will bear any costs at all. Most of the remaining 6% of costs will be borne by corporate clients, although this percentage may reduce as the distribution plan evolves. This is based on a cost allocation that is a flat fee for securities, where maximum costs will be capped at £10,000 per client. The FSCS will cover this amount for all clients bar those who are not eligible (i.e. some of the corporate clients).
The estimated costs cover more than the administrators’ fees, with the figure being made up of operational costs (retained employees, various third party suppliers to the special administrators, such as IT service providers, telephony providers, electricity providers, landlords and others), PwC fees, lawyers’ fees, Reserves and VAT (at 20%). PwC’s initial cost estimates based on a four year administration were £100 million, however PwC have revised the duration of the administration to two years and accordingly revised down the administration costs to £55 million. PwC have confirmed that if the duration of the administration is shorter, then the costs incurred will be lower. PwC fees will be subject to detailed scrutiny by the creditors committee and ultimately will be subject to Court approval.
Is the FCA overseeing the administration?
The firms are still authorised by the FCA and they remain subject to supervisory oversight and the FCA’s rules. In relation to BASCL, the administrators have been appointed by the Court as Special Administrators, in relation to BSL, as administrators. They are officers of the Court and need to comply with all insolvency law. The individuals appointed are also licensed insolvency practitioners and supervised by the Institute of Chartered Accountants in England & Wales (ICAEW). We are continuing to liaise closely with the administrators.
Is it possible to hold shares ‘directly’ rather than in a nominee account?
The use of nominees allows a firm to hold clients’ assets in such a way that they are ring-fenced from the firm’s own assets, and firms are required to maintain appropriate books and records to clearly identify which assets are held for which client. There are a number of advantages both to firms and clients from holding custody assets in this way, including reduced costs to clients.
If a client wishes to hold shares directly then they can do this either by holding paper share certificates or using a sponsored CREST account. However, it is not possible to hold shares in these ways in an ISA or SIPP. Exercising voting and other rights is also set out as a specific requirement for assets held within ISAs.
What are the implications of holding client assets in a nominee account?
If clients hold shares through a nominee, they do not appear directly on the shareholder register, but they are still able to exercise voting and other rights, depending on the contractual arrangements with their custodian. Under the Investment Bank Special Administration Regulations 2011, administrators are able to deduct costs of distribution from all client assets a firm holds on behalf of clients, whether the assets are held in the name of the client or in the name of a nominee.
What happens next?
PwC are working on a Distribution Plan which will set out the details of how client money and custody assets will be distributed, they are hoping to start returning client money and assets in September 2018. For further details please see the administrators’ website.