Nominee accounts are commonplace nowadays, but do you understand the implications of using them?.
Ok, apologies for writing about a dull subject. But despite most of us holding at least some of our investments via nominee accounts these days, they're generally not well understood - especially when it comes to security and compensation scheme cover.
So please take a quick read, I'll keep things succinct.
Before nominee accounts...
Traditionally when you bought shares or funds, you'd be the registered owner and receive a certificate confirming this. This makes it very easy to sell shares via any stockbroker and your name will appear on the share register, ensuring you can vote and receive any shareholder perks.
However, the certificate system makes dealing cumbersome (as you have to send your certificate to the stockbroker before being able to sell) and expensive (more admin for the stockbroker). And it also delays switching funds between different managers - you have to sell units in one fund, wait for the proceeds then re-invest with the new manager.
What are nominee accounts?
Nominee accounts are separate companies owned by stockbrokers or fund platforms that hold shares or funds on behalf of all their customers. For example, suppose 100 customers of stockbroker A each buy 1,000 BP shares, then the nominee company (i.e. account) will hold 100,000 BP shares and be the registered owner. The nominee account's terms and conditions will state that the customers are the 'beneficial' owners of 1,000 BP shares each.
The same is true of fund platform nominee accounts - plus the platform will bundle together all customer buy and sell instructions for every fund each day, then place a single net buy or sell order per fund with the underlying fund managers.
Put simply, a nominee company owns the shares or funds but promises to pay customers what they're owed (i.e. dividends and proceeds when shares/funds sold, or the shares/units themselves if you move the nominee account to another broker).
Why are they popular?
Nominee accounts have become commonplace largely because they facilitate online and telephone dealing. The benefit to customers is faster, simpler dealing (cheaper too in the case of shares). Plus fund platform nominee accounts allow investors to hold funds from multiple fund managers - helpful when it comes to switching or holding them within an ISA.
Stock brokers like them because it significantly cuts down on their hassle and expense, while fund platforms collect a fee from either fund managers or customers for offering the service.
Are they safe?
Yes, but they're not immune to fraud.
Nominee companies are separate entities from the stockbroker or fund platform that set them up. If the broker goes bust the shares/funds/cash held in the nominee company are ring fenced, hence unaffected. It might take a while to get the assets re-assigned to you, but they'll be safe.
However, if the stockbroker or fund platform was illegally dipping their fingers into the nominee company then you could lose money.
Are nominee accounts covered by compensation schemes?
As explained above, if the stockbroker or fund platform goes bust your shares/funds/cash should be safe. But if fraud has taken place the Financial Services Compensation Scheme (FSCS) would normally step in (provided the stockbroker/platform is covered by the scheme - they should be if based in the UK and regulated by the FSA).
FSCS compensation gives up to £50,000 protection per institution per person, i.e. £50,000 of cover per stockbroker or fund platform. So hold more than this and you could potentially lose money in the unlikely event of fraud and the broker/platform not being able to repay what you're owed.
If you hold bank accounts or funds within a nominee account then these will normally be covered individually too,, i.e. cash will be covered up to £85,000 and funds £50,000 - both per institution (i.e. bank/fund group) per person. But this is protection against the underlying bank/fund manager not being able to repay you - a totally separate issue from the nominee account.
The pros & cons of nominee accounts
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The alternatives
Shares
It's still possible to deal using share certificates, but increasingly rare. If you want the benefits of online dealing while being the registered owner of the shares you'll need to use a Crest Personal Account. Stockbrokers must apply for this on your behalf and it costs them £10 a year, but don't be surprised if they try and charge you a lot more than this. The downside is that these can't be used for ISAs and few stockbrokers currently offer the facility.
Funds
The only current alternative is to buy funds directly from fund managers - straightforward, but quite cumbersome if you hold a number of different funds.
Summary
On balance I think nominee accounts are a good thing. Just make sure you trust your chosen stockbroker or fund platform. And, if you are worried, cap your holdings to £50,000 per broker/platform.
Read this article at http://www.candidmoney.com/articles/article238.aspx
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