The crisis at Northern Rock has had a salutary effect on many of us. Watching a British bank humbled in this way sharpens the senses. We never thought it could happen. It did. What else is supposed never to happen – but might?
One possibility is a problem with a nominee account. This is where you hold your shares with a stockbroker, but via a separate nominee company. Legally you are the beneficial owner of the shares, but the nominee company actually owns them. Whatever they may say, you don't own those stocks. You can write the script; a broker goes bust and, somehow, takes the nominee account with it; you stand to lose the lot.
Alternatively, and more realistically, the broker goes bust and the nominee account company survives, but there is a lot of wrangling about who owns what. This can be exacerbated by poor record-keeping by the broker. In those circumstances, you might well get your shares back, but not until you've undergone a fair amount of stress. And while it's all being sorted out, how do you sell a share you no longer wish to hold if the broker can't say if you own it, and is bust in any case? You are stuck. Imagine being lumbered with Northern Rock these past few weeks. You see the problem.
The UK Shareholders Association is a small but doughty body that tries to lobby on these matters. They point out that such a scenario is not, in fact, in the furthest realms of fantasy, but has happened recently to a UK institution, though admittedly not the sort of high-street name I'd be inclined to trust (no, don't mention Northern Rock again, thanks).
An outfit named Pacific Continental Securities specialised in promoting smaller companies such as AIM-listed stocks, and I've received a few of their unwanted and cheeky mailings in the past. I knew to steer clear of them because of the feeble and all-too-obvious way they tried to lure me in as a client. Lucky I resisted their sales appeal.
They were ordered to cease accepting new business by the FSA and soon after, in June, went into administration. The administrator subsequently sold some of the assets to Caspian Stockbrokers, which has since been renamed Brooklands Securities and operates from the same address as did Pacific Continental.
I have no idea whether they're any better, but let's say I'm not inclined to spend any time finding out.
Anyway, the shares purchased by investors from Pacific Continental were held by Pacific Continental in a nominee account.
After Pacific Continental went into administration the investors could not trade those shares until the administrator had established that they were the rightful owners of those assets, and had reconciled the claims of all the former Pacific Continental clients to the holdings on the share registers of the companies in which Pacific Continental had invested on their behalf. In effect, shareholders cannot obtain full title to the shares or sell them, even now.
The administrator doing their best in a difficult situation has had problems getting access to the details of the claimed holdings which are held by a third party. So even though the shareholders may well get the shares back, they'll probably be worth less than they were in the summer. There will be nowhere to turn to make good such a loss.
My fellow columnist, Derek Pain, has written a number of times about how hellish the brokers are making life for those who prefer the absolute title and certainty afforded by paper shares in their own name. Quite right.
The brokers are also none too keen on the alternative to paper and nominee accounts – the personal Crest account, though some offer the service, I'm pleased to say, such as Stocktrade, Brewin Dolphin and NatWest Stockbrokers. Crest is the electronic settlement system through which the London Stock Exchange settles bargains.
Participating shares (i.e. crest eligible) are held electronically, your name appears on the shareholders' register and it's about as easy to trade as it is with a conventional nominee account, though it can be a bit dearer. Most precious of all, your shares really are all yours.
You shouldn't need to do this, because the chances of the worst happening are tiny to nil, but then those of us who've lived through the Maxwell pension crash, the collapse of Barings and the near failure of Northern Rock may feel a little nervous about the supposedly impossible.