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What you need to know about nominee accounts

Did you know that the shares, ETFs and funds1 you invest in through an online broker are not held in your name?

In the vast majority of cases, all these securities are held in the name of your broker’s nominee company.

A nominee company is a custodian charged with the safekeeping of investors’ securities. It should be a separate entity from the broker itself.

Your investments are held for you – on trust – in a nominee account. This means that while the nominee is the legal owner of the securities, you retain actual ownership as the beneficiary.

The upshot is that your broker can move and sell the securities on your behalf – and gets to handle all the lovely paperwork – but the assets still belong to you. They can’t be claimed by the broker’s creditors if things get messy.

So why do I bother to mention it?

Well, mainly because investing is anti-Ronseal. Very little does what it says on the tin, or sometimes the tin omits vast swathes of things you need to know.

Nominee accounts – joy oh joy – are no exception.

We’re all in it together

Nominee accounts are the ultimate in low-cost convenience, especially for your broker.

You might think that you’ve got your own nice nominee account and that it neatly cordons off your assets from everybody else’s. What’s yours is yours and everyone else can keep filthy mitts off.

But that’s not how it works.

Pooled nominee accounts

Most brokers lob everyone’s securities into one pot – known as a pooled nominee account or an omnibus account.

If ten customers wish to sell 1,000 Vodafone shares each, then the broker can just fish out any old 10,000 shares from the tank, rather than worry about administrating ten separate accounts.

Records on who owns what are kept by your broker, but the nominee system leads to disquieting small print like this2 – I’ve bolded up the important bits:

Any investments held on your behalf may be pooled with those investments of other customers. This means that your entitlement may not be individually identifiable on the relevant company register, by separate certificates or electronic records (other than ours, where they will be identifiable) and, in the event of an unreconciled shortfall caused by the default of a custodian, you may share proportionately in that shortfall

In other words, if the records don’t match the funds available then all customers will cop it, whether the reason be fraud, mismanagement or anything else.

UK investors should be protected in such an event to the tune of £50,000 by the Financial Services Compensation Scheme. (It’s well worth reading our previous article, because the scheme comes with plenty of wrinkles.)

Don’t assume you’ll be automatically protected by the FSCS, though. Follow the advice of the Financial Conduct Authority (FCA):

Nominee companies are covered if an authorised investment firm has accepted responsibility for their losses. If not, we will pay compensation only if the nominee firm is authorised by the Financial Conduct Authority. You can check this by using the FCA’s Firm Check service or by phoning the FCA’s Consumer Helpline on 0800 111 6768

If you hold non-UK securities then protection may be skimpier still. Your holdings may be lodged with an overseas custodian. If so, then that custodian may be held to lower standards when the grit hits the fan.

My own broker sums up the situation with the following hair-raising clause (again the bolding is my own):

There may be different settlement, legal and regulatory requirements and different practices for the separate identification of investments from those applying in the UK… We will not be liable for the insolvency, acts or omissions of any third-party referred to in this sub-clause except where we have acted negligently, fraudulently or in wilful default in relation to the appointment of the third party.

Do you hold Irish domiciled ETFs and trackers? This clause could apply to you.

It gets better. A later clause cheerfully explains that because of the practices in certain overseas markets, my nominee investments may be recorded in the name of my broker or its custodian. And if this happens then:

the Nominee investments may not be segregated and separately identifiable from the designated investments of the person in whose name they are registered; and as a consequence, in the event of a failure, the Nominee investment may not be as well protected from claims made on behalf of our general creditors.

This clause suggests that my overseas securities could be used to settle the claims of creditors if my broker failed. That wouldn’t happen to UK securities.

I asked my broker for clarification of this clause over two months ago. They have so far failed to supply a satisfactory answer. I’m not going to name the broker because I suspect that similar clauses are nestling within everybody’s neglected small print.

What I want to do is to raise the issue, and urge everyone to check the terms they have agreed with their broker. If you are subject to similar conditions then please question your broker about whether such clauses apply to your own situation.

Then move if you don’t get an answer you can live with.

Does it matter? Can the worst happen?

It’s rare, but yes it can. A US brokerage firm called MF Global is the poster child for this kind of FUBAR. The firm went bankrupt in 2011 after executives dipped into customers’ funds to cover company overdrafts.

Are there any alternatives?

Yes, but the perfect solution does not exist:

Certificates – In the old days your broker would send you a rectangle made from a now obsolete material called “paper”. The kids would never believe it, but it would confirm your ownership of the securities and you could use it to sell through any broker you liked. Even today you can use this arcane papery system, but it’s slow and expensive.

Designated or sole nominee accounts – Your securities are registered in the name of the nominee but this time your assets are walled off in your own account. Such a luxury is rarely available to retail investors however.

CREST personal member accounts – Theoretically CREST3 is the best of both worlds. Your name is recorded on the shareholder’s register but you can still deal electronically without any paper certificate faff. In reality, it costs extra, few brokers support the system, and CREST personal membership isn’t compatible with ISAs. If you want to dig deeper, the ever thorough International Investor can guide you through the brokers that support CREST accounts.

Unlike the last two alternatives, paper certificates do protect you from fraud and negligence because no naughty nominee or rogue record-keeper can spirit away your holdings.

Sadly though, paper is susceptible to fire, theft, the vagaries of the postal service, and being mislaid in the same place where the orphaned socks go.

Nomin-AIEE!

Ultimately, I can’t complain because I’m forever urging investors to find the lowest cost solution and that’s what nominee accounts amount to in the era of electronic trading.

Any system that enables us to buy and sell at the press of a button is inevitably open to some element of abuse – that’s the price of speed.

I’m not fretting about it but I do think that brokers should fully explain how the system works – warts ‘n’ all.

Sadly transparent customer service is too often seen as a competitive disadvantage. Explanations of the nominee account system are generally buried in arcane small print or glossed over in brochure-speak accompanied by big ticks and smiley faces.

My best advice: Consider all the risks, diversify your holdings among a few brokers to reduce your risk, understand your right to compensation, and move on.

Take it steady,

The Accumulator

  1. I’m going to describe them all as securities for the rest of the article, for the sake of brevity. []
  2. I’ve taken this quote from one of my broker’s Terms and Conditions document. Yours will likely feature something similar. Search the document for words like “pooled”, “nominee”, “omnibus” and “custody”. []
  3. The central securities depository and settlement system for the UK and Ireland. []

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{ 23 comments… add one }
  • 1 Under The Money Tree March 18, 2014, 9:51 am

    Very interesting article, and a little worrying to boot!

    I’d also suggest doing some decent research into the financials of your broker/s and treating them as you would any other investment.

  • 2 helfordpirate March 18, 2014, 10:16 am

    Omnibus/”street” nominee accounts are a good example of the old world (incl US) being stuck with a legacy solution! In the days when a 10MB database was something awesome, it was considered unthinkable that retail investors i.e. beneficial owners, might be registered directly at the CSD (Stock Exchange) – hence US, UK and most of Europe has omnibus nominee accounts “built into” the legal and regulatory framework. And of course it’s much simpler and cheaper for the brokers. Developing world countries started with a clean sheet and most have mandatory registration of the beneficial owner at the CSD – China CSD reportedly has 150m individual holders (and T+1 settlement!), India similar.

    The eurocrats have of course noticed all this and there is a new regulation being concocted called CSDR that as well as outlawing paper certificates will make the option of designated nominee accounts mandatory in all European CSD (at least last time I read an article on it, it did…!). So all “about” to change… 2020 I think…

    The other related issue which I think you have raised before is to be aware how your broker holds cash – some hold it as a bank e.g. ATS and some as nominee/trust e.g. HL. Different protections and pros/cons for each.

  • 3 mistersquirrel March 18, 2014, 10:44 am

    Is my understanding correct that individuals are protected separately for deposit vs investment accounts, ie £85k deposits, £50k investments – giving a total protection of £135 (which interestingly is close to the FDIC $250k). I accept that investment must carry risk, otherwise it’s not really an investment, but can’t help but wonder if there’s a way to increase the limits to make it more tempting for small investors.

    It’s no wonder “property” is the preferred saving/”investing” vehicle in the UK. “Save for your retirement, invest in equities – oh, but if your firm goes bust then you only get £50k back” is not a super-reassuring message.

  • 4 Richard March 18, 2014, 11:02 am

    I think ‘disintermediation’ is the way forward (an all electronic share register on which individuals are represented), as recommended in the Kay review and proposed in new European legislation (mentioned by helfordpirate above). I believe progress in getting this agreed is slow, and various deadlines have been proposed. There was a good article by one of the participating UK registrars in a recent ShareSoc newsletter. Until then investors can always diversify their nominee accounts.

  • 5 L March 18, 2014, 11:52 am

    Very interesting TA.

    We have the same broker (and somewhat disappointing you have yet to receive a satisfactory answer). Thankfully navigating to their terms is quite easy. Unfortunately, as you point out, making sense of them is another game entirely.

  • 6 Paul Claireaux March 18, 2014, 4:21 pm

    Hi Accumulator,
    Another informative piece.
    One argument I’d add against using certificates is to consider the mess you’ll leave behind in the event of your demise. We all have to leave planet earth at some point – and frankly it is an utter nightmare writing out to multiple registrars to notify them of a death and then complete forms to transfer ownership of each and every shareholding before sale can be made.
    As for shares listed on foreign exchanges well . . . ever tried obtaining separate probate to recover shares from Ireland?
    Keep it simple for your sakes – and those you leave behind. Use collectives and other such wrappers and consider trust arrangements too which can be accessed without any need for probate.

    Best wishes.

  • 7 dawn March 18, 2014, 4:56 pm

    disturbing info !
    the London Stock Exchange website states that’ nominee accounts are ring fenced from broker’s other activities so they are financially secure’
    also another site says if a broker ceases to trade ie goes into liquidation ‘ assets are ring fenced held seperatly and can be transferred to another broker of your choice’
    does this give us any reassurance?

  • 8 TCA March 18, 2014, 6:44 pm

    @dawn – ringfencing is fine, but it doesn’t protect from fraud or plain incompetence, with regard to the nominee accounts themselves. Have to say I’ve thought about this subject for a while and am still in two minds as to whether to split up my investments between platforms or just have everything in one place. Last time I spread cash about to cleverly keep it within FSCS limits, I ended up having to claim under the scheme (think Icesave and Kaupthing), but would have been fine if I’d left everything where it was. Given what I believe to be a very low level of risk, I’m tempted to move everything to my new iWeb account, but reckon I’ll wait a bit and see what happens with platform charging further down the line.

  • 9 Jon March 18, 2014, 8:14 pm

    I have a Charles Schwab USA account for extra diversification and use 2 UK brokers. I will probably open one more uk broker and leave it at that. USA SEC protects assets to $500k.

  • 10 dawn March 18, 2014, 10:00 pm

    yes, i have an i web investment account, i intend to put shares in
    got 3 in already. im going for a high yield portfolio of 15 uk blue chip shares rather than uk tracker as ive got £30,000 sat in premium bonds making nothing and can’t get it in an isa all at once, also drip feeding in i think is better for trackers than lump sums. ive also got equinti investment account too so now thinking i should put most of my shares in there to spread risk!. in april plan on opening an ss isa through i web and there i will put in a vanguard developed world ex uk tracker fund and drip in monthly installments im thinking funds are safer cos your money is in the fund not the platform’s account? might move accross my emerging markets tracker from legal and general ter 1.1% to blackrocks you can quickly get up to £50,000 so that the fscs out the window. the other option is buy the shares through fidelity they use CREST so your safe, your names on them ! but its £5.10 a month £61 a year for piece of mind. so monevator has thrown new light on my plans. why dont we just spend our money live for now and when weve none left live off the state. people on benefits seem to have a great life i know one couple do back to back cruise holidays on benefits!!! new car, conservatory hols in tenerife and neither work. claiming to be ill !! and look at us trying so hard to look after ourselves for later.

  • 11 ChrisB March 18, 2014, 10:51 pm

    Nominee accounts are essential for day traders and speculators.
    However I am a long term investor. So I have re-materialised some shares (those I intend to hold for many years) into certificated holdings.
    The advantage is two-fold: first, I have full security and ownership without worry as to what a nominee is up to. Second, because it is less convenient to do so, I am less tempted to “trade” and rather more inclined to sit out any market turbulence. It is well known that over-trading is costly to your wealth.

  • 12 Paul Claireaux March 19, 2014, 11:29 am

    To Chris B
    I like that argument.
    I guess it’s similar to the case for putting money away in a pension for retirement (as opposed to using only ISAs or other non-pension vehicles)
    Aside from all the tax breaks (of which the tax advantage on death is often forgotten) and possible employer “freebies” – the great thing about the pension is that you can’t (normally and legally!) touch those funds till you’re 55.
    Well, that assumes George doesn’t change the rules again today!
    All the best.

  • 13 Nathan March 19, 2014, 11:31 am

    I did have an attack of paranoia when I read through the t&c’s of nominee accounts a while ago. Along with banking they are quite clearly not fit for the purpose that I believed they were.
    Once you’re comfortable with the level of double think needed to give your cash to a bunch of philandering crooks for ‘safekeeping’, accepting that your other financial assets are held safely ring-fenced for your convenience and comfort is very easy 🙂

    I personally don’t worry about the specific risks of nominee accounts, they are just the cherry on the top of big pie of abstraction and fragility, none of which I can influence or control.

    So I spread financial assets around brokers, hold some hard assets outside of the financial system and just accept that it’s all good while it works and we’re all screwed if it doesn’t.

    @TCA – I had my stash in Kaupthing, the interest rates were attractive and they were recommended on financial sites, just like the Spanish bank I have my stash in now. What’s the quote about doing the same thing over again and expecting different results ?

  • 14 The Accumulator March 19, 2014, 2:12 pm

    Great post, Nathan.

  • 15 Kyith March 19, 2014, 3:39 pm

    With this in mind, if you have a VWRL in a nominee account, does it shield it from inheritence tax, since they really dunno who you are?

  • 16 TCA March 19, 2014, 7:44 pm

    @Nathan – yeah, I was with the perfectly solvent Kaupthing Singer Friedlander, Isle of Man. If that nice Mr Darling hadn’t frozen their deposits with their UK branch, then there wouldn’t have been a problem for my IOM savings. Took a year to get it back. Bitter? Yes, a bit. It certainly has made me read more into nominee accounts and compensation limits than I probably would have done otherwise. I can’t bring myself to have multiple pots of £50k though. I’ll stick with two platforms for now and see how RDR pans out.

  • 17 L March 19, 2014, 9:04 pm

    Paul Claireaux and ChrisB, I enjoyed your posts.

    From personal experience, I have to agree with Paul on share certificates, probate and other such issues. We realised that a passed loved one of ours held some shares in a company after we received notification that the company was being bought out. Three years after they passed away… Turning the house over, we eventually found the share certificates.

    Are the costs of nominee accounts worth it? Probably. We will find out.

  • 18 Paul Claireaux March 19, 2014, 9:10 pm

    To Kyith,
    I assume you’re joking but just in case . . . . the answer’s no.
    I assume that you are named on your account with whatever platform you hold your investments – regardless of the fact that the funds or shares within it are not personally stamped with your name.
    Sadly, you are obliged to declare all your assets for IHT purposes (and there are around 30 different IHT forms for those with very complex affairs.
    I believe also that HMRC have pretty wide powers of investigation where they suspect people of trying to hide assets. So best to plan to avoid that tax (it’s voluntary you know) if you’re concerned about it.
    All the best
    Paul

  • 19 Kyith March 20, 2014, 4:43 pm

    @Paul Claireaux, I am not joking. the Nominee account is not a UK account, and i have never filled in any IHT forms. so does it affect overseas investors?

  • 20 Paul Claireaux March 20, 2014, 5:45 pm

    “Overseas” is an interesting term.
    What the taxman is interested in is our Domicile.
    And, if you are UK domicile then IHT will, broadly apply to your assets worldwide. Holding them overseas is no escape.

  • 21 Paul Claireaux March 20, 2014, 5:48 pm

    Ooops – sorry wrong link.
    Genuine mistake – still had that other link on my clipboard.
    Should have given you this one http://www.hmrc.gov.uk/international/domicile.htm#9

    Anyway I’ve posted a couple of items relating IHT to Pensions and ISAs on my site today – so hope these are of interest too.

    Best

  • 22 Kyith March 21, 2014, 3:37 am

    @Paul Thanks for the link. perhaps i should clarify.

    I am a Singaporean and Singapore domiciled (likely) and I have a Singapore based trading nominee account, which access to London stock exchange. If i were to purchase VWRL through the nominee account, I wonder if i breached 325k pounds, will they be able to get inheritence tax from me

  • 23 Paul Claireaux March 21, 2014, 8:30 am

    To Kyith
    My understanding is that the amount of your non UK sited assets are irrelevant as regards UK IHT if (but only if) you are domiciled abroad.

    So you need to sure: a) of your likely domicile when you die (or transfer assets) and b) that those assets are actually classed as non UK sited.

    You might also like to consider possible wealth taxes that could be applied by Singapore. I have no knowledge of those but in general terms – simply escaping UK IHT does not necessarily mean you escape all wealth taxes!

    That’s as far as I can go.

    I would urge you to read up on this and pay particular attention to deemed domicile status and excluded property at the HMRC site here http://www.hmrc.gov.uk/cto/customerguide/page20.htm#10

    And I would urge you to take professional advice from someone qualified if this field (STEP minimum)

    Best wishes

    Paul

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