Most individual investors in the UK today hold their shares in a stock broker nominee account. This means that the nominee company that your stock broker uses to hold its clients’ investments is the recorded legal owner of the shares in CREST. You are the beneficial owner and have rights over the use of the shares and the proceeds from them, but the shares are not actually held in your name.
Some investors feel that holding shares in a personal CREST account provides you with more security in the event of your stock broker collapsing, because your name will be on the shareholder’s register as the legal owner. In contrast, in the nominee account your holdings are pooled with other investors, with the stock broker then recording which clients are the beneficial owner of all the shares held by the nominee company.
While this may sound very insecure, it’s important to be aware that when you hold shares in a regular nominee account, they are ring-fenced from the stock broker’s own assets. The nominee company is a legally separate entity whose only role is to hold client assets. If your stock broker collapses, your shares are still your property and cannot be claimed by the firm’s creditors.
The only point at which this ring-fencing should be in danger of breaking down is if there has been fraud and your shares are missing (for example, if the stock broker’s management or a rogue employee has sold client assets in a last desperate scramble for cash). The Financial Services Compensation Scheme (FSCS) provides some protection against this, although it can only pay maximum compensation of £50,000 per person per firm.
So at first glance, it may look like having a personal CREST account could be valuable in further reducing the risk losses due to fraud. But in practice, it probably doesn’t provide a significantly greater level of protection.
The problem is that your stock broker still has access to your personal CREST account, just as they do with a nominee account. They need to have – that’s how you are able to use them to buy and sell shares held under your name in CREST. As a result, an employee could still make unauthorised trades in your account if they wanted to.
As a result, personal CREST membership is not a certain defence against stock broker fraud. However, on the plus side, it seems likely that having shares recorded in your own name would make it easier to untangle exactly what you own if your stock broker collapses and its records are inadequate, as has often been the case when stock brokers have failed in the past.