Beaufort Securities: What happened?

The collapse of a major stockbroker is undoubtably a huge inconvenience and potentially expensive for its clients. Unfortunately for the 17,000 people with ISAs, pensions and investments at Beaufort Securities Ltd (BSL), they are realising the hard way.

BSL were, and continue to be, under investigation by the U.S. Department of Justice. On 2nd March this year the investigation prompted the Financial Conduct Authority (FCA) to declare BSL and its sister company, Beaufort Asset Clearing Services Ltd (BACSL), insolvent.

Administrators PricewaterhouseCooper (PwC) were called in as joint administrators of BSL and joint special administrators of BACSL, 80 jobs were lost, two of the three offices closed and all assets, including client’s investments, frozen.

From client to creditor

The process of understanding BSL’s assets, and who lays claim to what, is complex, lengthy and consequently costly.

Unwittingly, clients of BSL find themselves as creditors.

Originally PwC estimated the wind-down to cost £100 million, which would be paid for with BSL’s clients’ funds. Compounding the anguish was an estimated four year timescale, a significant period to be without your pensions and investments.

After a backlash from investors, costs were revised down to £55 million over a two year timescale. Subsequently however, on 6th June a fee cap of £10,000 per person was agreed, meaning individuals are able to claim back costs against the Financial Service Compensation Scheme (FSCS).

What went so wrong?

The United States Department of Justice have charged BSL, Beaufort Management Services Ltd, Loyal Bank Ltd, and Loyal Agency and Trust Corp and six individuals with conspiracy to commit securities fraud and money laundering conspiracy.

Allegedly the four Corporate Defendants and six individuals “engaged in an elaborate multi-year scheme to defraud the investing public of millions of dollars through deceit and manipulative stock trading, and then worked to launder the fraudulent proceeds through off-shore bank accounts and the art world, including the proposed purchase of a Picasso painting.” Source: Justice.gov 2nd March 2018

The FCA almost immediately imposed its own restrictions, requiring the firm to immediately cease all regulatory activity. All trades in process were stopped and client assets suspended. Clients were left powerless, without access to their investments for an unknown time.

The impact

PwC originally valued clients’ assets at £800 million. Unfortunately this has since been written down to £500 million.

The first clients to breathe a sigh of relief are in the minority, with a cash only balance less than £2,000. A small claims ‘distribution’ (read reimbursement), planned in conjunction with the FSCS, will see administrators pay these as a priority.

PwC think that some 700 clients with client portfolios valued in excess of £150,000 (per client) may suffer shortfalls in recovery of their entitlements in excess of the FSCS £50,000 compensation limit, which will therefore not be compensated to the extent of that excess. Clients who do not fulfil the FSCS eligibility criteria will not be entitled to receive FCSC compensation in respect of any part of their respective shortfalls in recovery.

Beyond the more fortunate few, the FCA have advised that PwC do not expect to start the process of reimbursing any funds until September, at the very earliest. They intend to publish a detailed distribution plan beforehand, which will need to be approved by invested clients first then a court of law.

Avoiding a similar situation

Whilst nobody can predict the future, advisers and planners should have robust processes to mitigate this type of risk. In this particular case, a lack of rigorous due diligence, by either a direct investor or a recommending adviser, will cost 17,000 people significant time, stress, and in the worst circumstances, financially.

At Foster Denovo we thoroughly research investment funds, providers and solutions; we adopt a best of breed approach. Supported by an extensive due diligence process using external investment specialists and in-house expertise, we design, build and monitor, what we believe to be a very well-researched and market-leading restricted investment proposition.

Ultimately, when it come to your financial security, put your faith in an advisory firm that is willing to meticulously test others.

Sources:
https://www.pwc.co.uk/press-room/press-releases/beaufort.html 2nd March 2018
https://www.fca.org.uk/news/press-releases/restrictions-imposed-beaufort-securities-limited-bsl-and-beaufort-asset-clearing-services-limited 2nd March 2018
https://www.pwc.co.uk/press-room/press-releases/beaufort-update.html 6th March 2018
https://www.pwc.co.uk/press-room/press-releases/beaufort-update-creditors-meeting.html 24th May 2018
https://www.pwc.co.uk/business-recovery/administrations/assets/beaufort_administratorsproposals_20180425.pdf 20th April 2018
https://www.fca.org.uk/news/news-stories/information-customers-beaufort-securities-limited-bsl-and-beaufort-asset-clearing-services-limited 29th May 2018
https://www.pwc.co.uk/press-room/press-releases/beaufort-update-cap.html 8th June 2018