FRCC ruling, P2P wind down plans and consumer protection

www.hl.co.uk/security-centre/how-safe-is-your-investment

The answer is "Yes"!  I was caught in exactly this situation when SVS was forced into administration by the FCA in 2019 and some of the clients did indeed lose out (mostly the clients speculating in currency dealing) but the FSCS covered UK clients' share of the administrators' costs up to £85k/client.  It took a couple of years to sort out and return cash & share holdings though some are still in dispute - the whole gory business is covered in a gigantic thread on the Savings & Investment forum at MoneySavingExpert.com.

The HL article above is a pretty good description - the subtext is to use a reliable platform that doesn't branch out into speculation - the SVS execution-only broker subsidiary was stable and was able to match its execution-only client holdings and liabilities perfectly but the FCA was not happy with the advised-investment subsidiary, unfortunately the FCA shut-down everything.  Eventually, I switched my ex-SVS holdings to JarvisX-O, with my S&S ISA at IWeb, a subsidiary of the Lloyds Banking Group. I've steered clear of the start-up online brokers and commission-free brokers preferring to spend the few pounds it costs to buy and sell holdings at a large and hopefully secure broker.  (But I refuse to pay monthly/quarterly/annual fees for just holding *my* share-holdings so not HL.)

spiral, I can only speculate about the problems of holding illiquid assets - I'm probably rather risk-averse so I tend not to invest substantial amounts in anything not quoted on the LSE.*

1. My first reaction to that statement by HL was a load chortle - who was it that promoted Woodford's funds that subsequently proved to have bought very speculative investments that couldn't be realised when the funds needed cash to repay disgruntled investors?

2. Anything that's potentially difficult or slow to sell when cash is needed is "illiquid". In the SVS case, this caused two problems: (a) how to put a value on an asset (to be able to allocate administration costs); (b) how to dispose of assets when the client wishes to remove their assets.

Taking the example of the administration of SVS in 2019/20, the administrators chose not to go the route implied in the HL document by "winding up" the business by disposing of all the assets and returning cash to clients - they chose to sell the nominee company which "owned" all the clients' assets together with the client list to a broker which wished to expand. The new broker paid a substantial amount of money (£100k+) for the rights - that money went to offset administration costs and SVS debts. The new broker was then able to set-up accounts for the ex-SVS clients and offer those clients a continuing service with the expectation of making an ongoing profit. A condition of the transfer agreed by all the parties (administrators, new broker, FCA & FSCS but not clients) was that clients would have the option for six months to withdraw all funds and to sell or transfer to a third-party broker at no greater cost than the fees that would have been charged by SVS. Many of the ex-SVS clients (myself included) chose to exercise this option. I alluded to this in my preceding post - it did not go well! The new broker appeared to be unprepared and under-resourced. Several third-party brokers who were expecting to liaise with the broker over the transfer of client accounts became exasperated with the lack of progress and some even complained to the FCA because the FCA rules on the time limits for account transfers could not be met. I refer you to the MoneySavingExpert forum for the catalogue of failure.

I referred to problems with illiquid investments as a generic reference to unusual, obscure stocks, such as shares available only on foreign stock exchanges. SVS had purchased stocks for clients at special request which were not available widely and in some cases the stocks now had negligible value; the new broker did not have the capability nor the wish to accept some of these stocks into their system resulting in some clients being unable to reconcile their holdings. And subsequently, a transfer-out of a client's holdings to a third-party broker could also be stymied by the same issue. I think that the HL document is referring not just to the risk that being forced at short notice to realise an asset might result in a loss to the client, but also the practical difficulty that the administrator might have in selling an obscure stock.

Your question "Is it the case that each portfolio was responsible for its own debt and for some of them they only had illiquid shares to sell?" can't be answered without access to all the individual client accounts. I don't recall any reference to this issue in the documents issued by the administrators or the FCA. Nor do I recall discussion on the amount of the share of the administration costs for individual clients - my recollection is that we were told (by the FSCS) something like: "unless we contact you direct, assume that the FSCS will cover all of your share of the administration costs" - I don't know what my share was. In the SVS case, no sale of any assets was undertaken in the actual administration - all the client assets, as registered in the SVS nominee's name, were handed over to the new broker by the simple expedient of selling the nominee company. If assets had to be sold by a client to cover their share of the administration costs beyond the FSCS £85k or by a client not covered by the FSCS, and whether that had to be done prior to the hand-over to the new broker, again, I don't know.



* Although many of us do make massive illiquid investments - buying a house, investing in long fixed-term savings accounts, etc.