Safe custody assets: How secure are they?

For the vast majority of investments, the days of holding certificates and filling out stock transfers have long gone. Instead, shares are now acquired through an electronic trading system and registered electronically to assist clearing services in speedy settlement. However, this prompts the question, how secure are your safe custody assets?
 

What are nominee accounts?

You will likely come across the term nominee account when looking at clearing and custody services. The term "nominee" relates to a person or an organisation authorised to act on behalf of someone else. Concerning stock custody and clearing services, the nominee is deemed the legal owner, with the underlying investor considered the beneficial owner. There is a clear distinction between these two scenarios, which we will cover later.

As the legal owner of the stock, your stockbroker is allowed to instruct client stock to be released to settle the sale of shares. This ensures that clearing services can act as quickly and securely as possible to settle transactions.

 

How safe are overseas safe custody parties?

When looking at clearing and custody services, many people express concern about the safety of assets held by overseas parties. At Global Investment Strategy UK Ltd, we only deal with Tier 1 custodians, ensuring that client assets are safe and secure. We are very open and upfront about our overseas relationships, taking numerous steps such as:-
 

• Monitoring the performance of the custodian
• Ensuring that they retain regulatory approval
• Comparing and contrasting charges and services with other custodians
• Ensuring that client assets are secure at all times (practically and legally)

Regulations are incredibly tight for both local and overseas custodians as these are the heartbeat of market clearing services. Prompt and secure settlement of transactions is taken for granted today. However, behind-the-scenes work continues to ensure that assets held in nominee accounts and by overseas custodians are protected at all times.

 

What happens if your broker goes bust?

In the unlikely event that your stockbroker went out of business, the obvious concern would be your investments held in their nominee account. Thankfully, the structure of a nominee account means that the assets held in this separate non-trading company would not be part of the broker’s assets in the event of failure. While the broker has permission to instruct the nominee company to register and transfer stock to 3rd parties, at no time is the broker the beneficial owner.

 

What is the difference between legal ownership and beneficial ownership?

At first glance, it may be difficult to see the difference between legal ownership and beneficial ownership in this scenario. However, there are two main differences:-
 

• A legal owner holds the legal title under their name on behalf of the beneficial owner
• The beneficial owner enjoys the benefits of ownership even if the investment is not in their name

Therefore, if a nominee company or custodian were to collapse, the investments would be returned to the beneficial owner or transferred to another broker/custodian of their choice. When it comes to custodian services, the distinction between legal owner and beneficial owner is crucial.

 

Regulatory protection

The Financial Conduct Authority (FCA) is the body in charge of regulating domestic custodian services, including nominee accounts. The key to this regulation is simple; nominee accounts allow client assets to be segregated from company assets. This ensures protection in the event of failure of the broker and also protects the market from settlement defaults.

There are also stringent regulations when dealing with overseas parties regarding clearing and custody services. As nominees over client investments, brokers are legally obliged to ensure assets are safe and secure. The use of overseas custodians is essential for the settlement of overseas transactions. You will be pleased to know that at Global Investment Strategy UK Ltd, we only deal with Tier 1 custodian parties.

 

Security is important

The investment industry as a whole needs to ensure the security of client assets and prompt delivery to facilitate clearing services. Consequently, regulations are constantly being adapted and tightened to ensure full compliance. Moreover, market integrity is closely linked to clearing services and custodian services, two activities integral to the smooth running of investment markets.
 

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