Barclays cash switch could reduce protection

Investors Chronicle has had several phone calls and letters from concerned readers who have recently received postal documentation from Barclays Stockbrokers about plans to transfer funds held with the stockbroker to the parent company. This forms part of plans scheduled for the second half of this year which will see both Barclays Stockbrokers and Barclays Sharedealing transferring their business to Barclays Bank. On transfer of these businesses, all services and arrangements will be provided by Barclays Bank, although still be offered under the trading name of Barclays Stockbrokers. The company says this will simplify and streamline its structure.

The documentation sent to Barclays Stockbrokers clients includes a transfer consent form and an information brochure entitled 'Simplifying our Legal Structure'. In the brochure, the stockbroker highlights that investors' money will still be held by nominees, however, the company responsible for providing safe custody of investments (including those held in an Isa) will be Barclays Bank, in place of Barclays Stockbrokers and Barclays Sharedealing.

What it means

This might sound like a technical change, but it means funds will no longer be held as 'Client Money' under Financial Services Authority (FSA) Client Money rules. These rules dictate that cash be held with regulated banks separate from the stockbroker's own money and assets. Under the current model, client cash is held with a number of third-party banks with no more than 20 per cent of overall funds held within Barclays Bank. After the change, all money will be held by Barclays Bank as a banker and will be treated in the same way as a cash deposit in a bank account.

While clients' money will still be ringfenced from use if Barclays Bank becomes insolvent, FSCS rules dictate that in the event of insolvency, you are entitled to a claim up to a level of £85,000 for all cash held with the bank. If you already hold cash accounts with Barclays, or hold several stockbroking accounts for family members in your name, the balances combined may exceed the £85,000 compensation limit - which is per customer, not per bank account. So irrespective of whether you hold more than £85,000 if the bank goes insolvent you can only claim this amount. The remainder will need to be claimed as part of the liquidation process.

It is highly unlikely that Barclays will become insolvent. But readers still question why they should agree to this switch and "effectively get less protection," as one put it. Some have gone further, questioning whether Barclays is injecting risk into clients' funds and using the cash balances on stock broking accounts as a means to fund its Tier 1 capital requirements and avoid having to raise fresh equity.

A spokesperson for Barclays Stockbrokers claims the move will simplify and streamline the way its does business and will provide clients with complete transparency about where their cash is held, enabling them to take control and to make the most appropriate investment choices for their personal circumstances.

Barclays Stockbrokers has told clients it will confirm the transfer date nearer the time. Clients are required to sign a consent form (either paper-based or electronically). Those who choose to decline the transfer of their account to Barclays Bank will no longer be able to hold their account with Barclays Stockbrokers or Barclays Sharedealing.

Alan Dick, a certified financial planner at Forty Two Wealth Management, says that anything which reduces investor security without corresponding significant investor advantages is a step in the wrong direction. “Spreading client accounts between multiple banks is generally seen as good practice to protect against a bank going bust. Transact use five banks for this very reason.”

Readers have also questioned why the FSA has not spoken out about this matter. "Is this not a step in the wrong direction for client protection and more free money for the banks?" wondered one.

Investors Chronicle contacted the FSA. It said that supervisors who deal with tier-one banks were aware of the matter, but that it cannot comment on individual firms. "We are prevented by an Act of Parliament from commenting on individual firms [so as to avoid influencing the market]. The FSA can only comment on individual firms if this is in relation to an enforcement such as a fine or a special report that has been mandated," said a spokesperson.

David Dale, head of wealth management at law firm Dickinson Dees said: "It is difficult to comment on individual cases, but provided that the bank has ensured that their clients are in full possession of the facts, including the risks relating to the transfer, I think it would be unlikely to be something that the FSA felt required further investigation." Mr Dale added that clients shouldn't feel that they have to accept the default account being offered by their stockbroker.

Not just Barclays

Further investigation has revealed that Barclays Stockbrokers is not the only industry player making such changes. In November last year UK-based execution-only stock broker Selftrade became the country's first broker bank to be granted deposit-taking permission by the FSA. It gave existing clients a choice as to whether their money was held on deposit or remained as Client Money. New customers don't have that choice - their funds are held as bank money. That means that Selftrade holds money as the banker and not as the trustee, and the funds are not separately from Selftrade's own cash and assets.

The concerns raised have highlighted the importance of knowing what compensation cover is offered by your stockbroker. This can vary broadly depending on how accounts are structured. In the case of TD Direct Investing, for example, compensation is available to investors in respect of protected claims up to a maximum of £50,000 per claimant. However, deposits held at TD Bank NV are protected by the Dutch Deposit Guarantee Scheme which guarantees an amount of €100,000 per person per bank (regardless of the number of accounts held). Two persons holding a joint account each qualify for full compensation. The table below clarifies the holding of cash balance for different account types and where these are held.

*Does not apply to a Sipp account