Did you know that the shares, ETFs and funds1 you invest in through an online broker are not held in your name?

In the vast majority of cases, all these securities are held in the name of your broker’s nominee company.

A nominee company is a custodian charged with the safekeeping of investors’ securities. It should be a separate entity from the broker itself.

Your investments are held for you – on trust – in a nominee account. This means that while the nominee is the legal owner of the securities, you retain actual ownership as the beneficiary.

The upshot is that your broker can move and sell the securities on your behalf – and gets to handle all the lovely paperwork – but the assets still belong to you. They can’t be claimed by the broker’s creditors if things get messy.

So why do I bother to mention it?

Well, mainly because investing is anti-Ronseal. Very little does what it says on the tin, or sometimes the tin omits vast swathes of things you need to know.

Nominee accounts – joy oh joy – are no exception.

We’re all in it together

Nominee accounts are the ultimate in low-cost convenience, especially for your broker.

You might think that you’ve got your own nice nominee account and that it neatly cordons off your assets from everybody else’s. What’s yours is yours and everyone else can keep filthy mitts off.

But that’s not how it works.

Pooled nominee accounts

Most brokers lob everyone’s securities into one pot – known as a pooled nominee account or an omnibus account.

If ten customers wish to sell 1,000 Vodafone shares each, then the broker can just fish out any old 10,000 shares from the tank, rather than worry about administrating ten separate accounts.

Records on who owns what are kept by your broker, but the nominee system leads to disquieting small print like this2 – I’ve bolded up the important bits:

Any investments held on your behalf may be pooled with those investments of other customers. This means that your entitlement may not be individually identifiable on the relevant company register, by separate certificates or electronic records (other than ours, where they will be identifiable) and, in the event of an unreconciled shortfall caused by the default of a custodian, you may share proportionately in that shortfall

In other words, if the records don’t match the funds available then all customers will cop it, whether the reason be fraud, mismanagement or anything else.

UK investors should be protected in such an event to the tune of £50,000 by the Financial Services Compensation Scheme. (It’s well worth reading our previous article, because the scheme comes with plenty of wrinkles.)

Don’t assume you’ll be automatically protected by the FSCS, though. Follow the advice of the Financial Conduct Authority (FCA):

Nominee companies are covered if an authorised investment firm has accepted responsibility for their losses. If not, we will pay compensation only if the nominee firm is authorised by the Financial Conduct Authority. You can check this by using the FCA’s Firm Check service or by phoning the FCA’s Consumer Helpline on 0800 111 6768

If you hold non-UK securities then protection may be skimpier still. Your holdings may be lodged with an overseas custodian. If so, then that custodian may be held to lower standards when the grit hits the fan.

My own broker sums up the situation with the following hair-raising clause (again the bolding is my own):

There may be different settlement, legal and regulatory requirements and different practices for the separate identification of investments from those applying in the UK… We will not be liable for the insolvency, acts or omissions of any third-party referred to in this sub-clause except where we have acted negligently, fraudulently or in wilful default in relation to the appointment of the third party.

Do you hold Irish domiciled ETFs and trackers? This clause could apply to you.

It gets better. A later clause cheerfully explains that because of the practices in certain overseas markets, my nominee investments may be recorded in the name of my broker or its custodian. And if this happens then:

the Nominee investments may not be segregated and separately identifiable from the designated investments of the person in whose name they are registered; and as a consequence, in the event of a failure, the Nominee investment may not be as well protected from claims made on behalf of our general creditors.

This clause suggests that my overseas securities could be used to settle the claims of creditors if my broker failed. That wouldn’t happen to UK securities.

I asked my broker for clarification of this clause over two months ago. They have so far failed to supply a satisfactory answer. I’m not going to name the broker because I suspect that similar clauses are nestling within everybody’s neglected small print.

What I want to do is to raise the issue, and urge everyone to check the terms they have agreed with their broker. If you are subject to similar conditions then please question your broker about whether such clauses apply to your own situation.

Then move if you don’t get an answer you can live with.

Does it matter? Can the worst happen?

It’s rare, but yes it can. A US brokerage firm called MF Global is the poster child for this kind of FUBAR. The firm went bankrupt in 2011 after executives dipped into customers’ funds to cover company overdrafts.

Are there any alternatives?

Yes, but the perfect solution does not exist:

Certificates – In the old days your broker would send you a rectangle made from a now obsolete material called “paper”. The kids would never believe it, but it would confirm your ownership of the securities and you could use it to sell through any broker you liked. Even today you can use this arcane papery system, but it’s slow and expensive.

Designated or sole nominee accounts – Your securities are registered in the name of the nominee but this time your assets are walled off in your own account. Such a luxury is rarely available to retail investors however.

CREST personal member accounts – Theoretically CREST3 is the best of both worlds. Your name is recorded on the shareholder’s register but you can still deal electronically without any paper certificate faff. In reality, it costs extra, few brokers support the system, and CREST personal membership isn’t compatible with ISAs. If you want to dig deeper, the ever thorough International Investor can guide you through the brokers that support CREST accounts.

Unlike the last two alternatives, paper certificates do protect you from fraud and negligence because no naughty nominee or rogue record-keeper can spirit away your holdings.

Sadly though, paper is susceptible to fire, theft, the vagaries of the postal service, and being mislaid in the same place where the orphaned socks go.


Ultimately, I can’t complain because I’m forever urging investors to find the lowest cost solution and that’s what nominee accounts amount to in the era of electronic trading.

Any system that enables us to buy and sell at the press of a button is inevitably open to some element of abuse – that’s the price of speed.

I’m not fretting about it but I do think that brokers should fully explain how the system works – warts ‘n’ all.

Sadly transparent customer service is too often seen as a competitive disadvantage. Explanations of the nominee account system are generally buried in arcane small print or glossed over in brochure-speak accompanied by big ticks and smiley faces.

My best advice: Consider all the risks, diversify your holdings among a few brokers to reduce your risk, understand your right to compensation, and move on.

Take it steady,

The Accumulator

  1. I’m going to describe them all as securities for the rest of the article, for the sake of brevity.
  2. I’ve taken this quote from one of my broker’s Terms and Conditions document. Yours will likely feature something similar. Search the document for words like “pooled”, “nominee”, “omnibus” and “custody”.
  3. The central securities depository and settlement system for the UK and Ireland.

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