Investment Banks: Client Protection

Lord Bates Excerpts

Wednesday 13th June 2018 Lords Chamber

[Lord Lee of Trafford]

To ask Her Majesty’s Government, in the light of the current Beaufort Securities situation, what steps they are contemplating to ensure that client assets are protected and ring-fenced from administrators of failed stockbroking or fund managements firms operating under rule 135 of the Investment Bank Special Administration (England and Wales) Rules 2011 (SI 2011/1301).

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, the special administration regime is designed to accelerate the administration of failed investment firms, reduce costs and increase recoveries. The administrators’ plans for returning client assets and allocating expenses must be approved by the creditors’ committee and the court.

[Lord Lee of Trafford (LD)]

I hear what the Minister says but I ask him to look again at this situation. I do not think that he quite appreciates the seriousness of it. Unless this loophole is closed, the clients of small and medium-sized broking firms—very well-run broking firms—will leave those firms and go to larger ones. That is already happening, so will the Minister please look at this matter again?

[Lord Bates]

I recognise that the noble Lord has a long tradition of standing up for small shareholders in the field of investing. Small shareholders, like small businesses, are the backbone of our capital markets and we have to restore confidence among them. This issue of the fees was looked at. The noble Lord will know that last week the creditors’ committee, the Financial Services Compensation Scheme and PwC acting as the administrator met and reached an agreement which will mean that 94% of the fees will be covered by the FSCS. Out of 17,000 retail investments that the noble Lord and I are very concerned about, only 10 will suffer a loss under the current programme. We looked at this matter again with the Peter Bloxham review in 2012 and 2013, and we always keep all matters in this complex situation under review.

[Lord Donoughue (Lab)]

My Lords, I commend the noble Lord, Lord Lee, for his persistent, impressive work in defending investors’ interests. I declare a historic interest as a one-time partner in a City of London stockbroking firm. Further to the Minister’s reply, will he and the Government reconsider whether they should amend the special administration rules to stop administrators taking their inflated costs—and they often are seriously inflated—partly from the portfolio holdings of innocent private investors? Moreover, is he aware that a further big problem for these investors is that, on liquidation, their portfolios are frozen, often for months at a time? Is he also aware that there are now electronic trading systems that technically allow the transfer of stocks from portfolios in as little as two to three working days, but that they are voluntary? Will the Government consider making it mandatory for all security firms to belong to one of those systems so that the investors enmeshed in these unpleasant liquidations can have rapid access to their personal assets?

[Lord Bates]

This particular point was looked at by Peter Bloxham, as I have just mentioned. He found that the firm’s assets and the client funds are separated, and felt that a case had not been made as to why the creditors of the firm estate should effectively be liable for the costs of the investors’ pool when the administrator is acting to recover their investment. As I said, we keep these matters under constant review, as does the Financial Conduct Authority.

[Lord Naseby (Con)]

Is my noble friend aware that the total safety of client assets is absolutely vital? For my noble friend to say that only 10 are going to suffer on this particular occasion is not acceptable. While it has been looked at—and I do not chastise anybody for what came out of that—it has not worked and needs to be looked at again urgently because, for all I and other noble Lords know, another situation may be just around the corner. May we please hear from my noble friend that this will be looked at again so that the safety of all client assets is protected?

[Lord Bates]

I hear what my noble friend says, but progress has been made. We have announced that the current threshold of £50,000 for the protection of assets by the Financial Services Compensation Scheme will increase to £85,000 from next April. That is a significant step in the right direction and it underscores again our commitment to small investors and small enterprises.

[Lord Sharkey (LD)]

Can the Minister say what steps are required to be taken to advise clients of the risks to their money held in client accounts in the event of failure or administration?

[Lord Bates]

There is a complex process involving the courts, the Financial Services Conduct Authority and the creditors’ committee. The amount of the fees of the administrator must be agreed and presented. There must be a timely distribution plan for the proceeds, and this must be announced. Also, these are all matters that can be challenged through the courts by relevant parties, and the Financial Services Compensation Scheme has already indicated that it will be looking for an independent assessor to be appointed to look at the level of fees being charged by the administrator in this case.

[Lord Davies of Oldham (Lab)]

My Lords, I thought the Minister did rather well on this Question. Of course, it is the case that only 10 of the investors had to pay, because everyone else was covered by the scheme. But I hope he will put some pressure on and look again at the totality of the scheme, because it is the case that one category is effectively picking up the losses that have been partly incurred by the other category.

[Lord Bates]

I am slightly stunned by the noble Lord’s generous praise. It is very welcome, especially coming from him. As I say, the whole process of regulation in the City includes constant lesson learning. It is a fast-moving environment, and I am sure that lessons will be learned from this process. We will, of course, convey the lessons and the suggestions made by noble Lords back to the FCA for it to take into account.