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Beaufort Securities insolvency – Will retail clients get their money back?

The news today that Beaufort Securities has been indicted by the US Department of Justice on fraud and money laundering charges has truly rocked AIM. With the firm being declared insolvent by the Financial Conduct Authority as a result of these charges, many private investors have been left wondering what will happen to the assets held in their Beaufort accounts. ValueTheMarkets.com has pieced together what is known so far and looked to the past for some indication of how this developing situation might pan out.

Drawing parallels with Hume Capital’s collapse

Stripping away the reasons behind the insolvency, Beaufort’s case has some similarities to the demise of Hume Capital Securities back in March 2015.

Like Beaufort, Hume was a highly successful broker that suddenly went into administration with little prior warning. Having incurred losses throughout 2014, in March 2015 Hume announced that it had suspended trading in its shares and had agreed with the Financial Conduct Authority to stop carrying on regulated activities, except in relation to the settlement of existing contracts.

The consequences for Hume were very similar to those announced today by Beaufort. Like Beaufort, Hume was instructed to cease all regulatory activity and not to dispose of any company or client assets without the FCA’s consent. Looking at what happened to Hume following its insolvency can therefore hopefully give Beaufort’s clients some indication of what will happen to their money.

What’s next for Beaufort’s clients?

The Financial Services Compensation Scheme

If Hume’s case is anything to go by, then one of the key players in getting back at least a portion of client assets from Beaufort will be the UK’s Financial Services Compensation Scheme. As Beaufort is FCA-regulated, the FSCS can award up to £50,000 in compensation to clients where the FSCS decide an investment business is in default and unable to satisfy any claims against it. However, according to the advice given by the FSCS this morning to ValuetheMarkets.com, this is only applicable in cases where ‘negligent advice’ has been given, and therefore would not cover execution-only accounts.

Despite this, late today, the UK Financial Services Compensation Scheme released an update on its website containing the following announcement:

‘The Financial Services Compensation Scheme (FSCS) is aware of the situation regarding Beaufort Securities Limited (BSL) and Beaufort Asset Clearing Services Limited (BACSL). These firms have entered insolvency and have ceased trading. The firms are currently unable to execute any new business or act on any instructions from clients.

‘FSCS is working with PricewaterhouseCoopers (PwC), who has been appointed joint administrators of BSL and special administrators of BACSL, to understand what this might mean for these firms’ customers. We will work as quickly as we can to provide some certainty for customers, and will provide further updates on our website as more information becomes available.’

While this announcement may not contain a great deal of substance, it is very similar in content to one released by the FSCS around the time of Hume’s suspension.

Encouragingly, two months after that notice came out about Hume, the FSCS’s then-director of operations Kate Bartlett signed a document stating that the body had determined to pay compensation to eligible Hume clients who had protected investment claims at or below the FSCS compensation limit of £50,000. Then, in a subsequent announcement released in August 2015, the FSCS announced that Hume’s customers had already begun to receive compensation.

Most important for Beaufort clients are the following lines from the 2015 FSCS Hume notice:

‘Customers who bought investment products offered by Hume Capital Securities PLC are protected by the Financial Services Compensation Scheme (FSCS). Customers must first agree their account balances with the joint special administrators, Leonard Curtis Recovery Limited. FSCS covers eligible customers up to the investment compensation limit of £50,000 per person. It will contact people who have agreed their balances and will compensate customers according to their agreed balances.

‘If we pay compensation, we will require customers to assign their legal rights in relation to their claim against Hume Capital to us. If we recover funds in the Hume Capital special administration, we will make further payments to customers that still have uncompensated losses.’

If the FSCS follows the same trajectory for Beaufort as it did for Hume, then it is likely that clients will have to contact Beaufort’s special administrator PWC, which they can do at: UK – 0800 063 9283 International – +44 (0)20 7293 0227. It is also worth mentioning here that PWC’s administrators have already said they will contact all Beaufort’s affected customers in due course.

Once customers have agreed their account balance, it could be the case that the money will be compensated up to the value of £50,000 per person if clients are willing to hand over their legal rights to the FSCS. It is still early days, but the precedent set by Hume here is encouraging – in 2016 the FSCS paid back £3.1m in relation to claims against Hume.

Beaufort’s administrator, PriceWaterhouseCoopers

The prospect of getting back £50,000 of your money is obviously positive, but many of Beaufort’s clients will have had a lot more than this in their trading account. It is therefore important to look at the other key player in getting money back from Beaufort: its special administrators, PWC.

In this court-appointed role, one of PWC’s top priorities is to ensure the return of client assets as soon as reasonably practicable and, in the FCA’s words, ensur[ing] that clients are given ample opportunity to claim their custody assets post-failure’. This is encouraging stuff and using Hume’s special administrators Leonard Curtis Recovery as a precedent, there is a decent chance of success.

Leonard Curtis actioned a distribution plan for Hume’s clients that involved acquiring the Hume’s custodian subsidiary and returning money from there. It was able to do this because the UK Government’s Special Administration Regime requires investment banks (as Hume was legally defined) to ‘relinquish control of its assets for the benefit of the client to the extent of the client’s beneficial entitlement to those assets’. This approach by-passed the time-consuming and expensive process of partitioning assets, which means shielding them from a firm’s owners of creditors.

The plan ultimately worked and the assets were either transferred to the new investment manager and returned or – for those who objected to this approach – were held via a trust under the administrators’ control. With the UK court describing Leonard Curtis’s approach as ‘a highly convenient method of achieving the objective of returning client assets’, there could be a good chance of history repeating itself.

Keep calm and carry on

It is still early days, and exactly what will happen to Beaufort’s customers’ cash is not entirely clear. However, judging by how closely the insolvency resembles Hume Capital’s collapse several years ago, there are plenty of reasons to keep positive, as it stands. It may take some months to resolve this and for Beaufort’s clients to regain access to their assets, but the precedents are encouraging. So long as nothing else untoward has happened, and so far there isn’t any indication of that, private investors should be safeguarded. Keep an eye on ValueTheMarket.com over the coming weeks, where we will be keeping readers up to date on all the news flow coming from Beaufort, the FSCS, and PWC.

In the meantime, here is a reminder of the important numbers you can call if you have any further enquiries:

PWC helpline number:

UK – 0800 063 9283

International – +44 (0)20 7293 022

FSCS freephone number:

0800 678 1100 or 020 7741 4100

FCA freephone number:

0800 111 6768 or 0300 500 8082

 

Authors: Daniel Flynn & Ben Turney

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