What would happen to my stock portfolio in the unlikely, unthinkable, event that Freetrade goes out of business? (event which of course will never happen)
Let’s assume I have a portfolio held with Freetrade currently worth £90,000, composed of £30k Apple (US stock), £30k Aviva (UK stock) and £30k gold physical ETF.
Freetrade closes operations. What happens?
For the sake of the examples below, let us assume the market price of the 3 securities remains stable.
Do I still maintain ownership of the 3 securities? (i.e. my portfolio is still worth £90k)
if yes, “where” are my securities? How can I trade them? Can I just open an account with another broker and have them transferred there?
if not, am I covered by the FSCS protection scheme?
does the scenario change at all between US and UK stocks?
Don’t mean to be negative or think about the worst! (it feels a bit like talking about life insurance with your partner in your 20s…). But I thought worth asking.
Apologies if the answer is obvious or the question has been asked already and I couldn’t find it.
I’m not an expert but I think this has been covered a few times on the forum over time.
Essentially I believe as with all UK regulated brokers, user assets are held separately from freetrades assets so in the event freetrade were to go bump, your shares would still be your property and exist away from anything freetrade could do.
As Wulfy says, your stocks & money are held separately so that they can easily be returned to you -
For each of our deposit banks and custodians we have a legally binding letter acknowledging that your assets do not belong to us, and can’t be used in the event of us entering administration to cover any debts we may have.
We maintain detailed records of who all the cash and stocks we hold belong to, so if something were to go wrong on our end, these can be quickly identified and distributed to you as the owner.
That quote’s from this blog post, which explains the safeguards in more detail -
I followed the story last year about Beaufort Securities being taken into administration story with some interest. If you remember at the time it looked as if some investors would not get all their money back, even although funds were in a ring-fenced client account (see Beaufort investors to get 'substantial' amounts back - BBC News).
I hope and trust Freetrade’s business model, charging structure and compliance are sustainable, but to be sure I’d suggest those using this platform keep below the £50K FSCS compensation limit (see What we cover | Check your money is protected | FSCS).
If the ring fencing of client funds is similar, then there could be some hair cut.
I would not go over £85K in any broker account, unless the broker is very well established. Even then, it is risky as the FSCS only covers up to £85K per broker in cause of fraud. I know securities are segregated, but you can have brokers committing mass fraud and not even buying securities.
I must also mention your stocks are only safe if you are holding paper certificates, with Freetrade the stock is not held in your name but held on your behalf. If there was major fraud, you would lose everything above £85K, major fraud being securities not even bought or some other dodgy stuff.
Whilst we can see Freetrade has done everything to answer this question, to me this is their biggest block to new customers
Equities would most likely be transferred to another provider, there would be an interim period where you wouldnt have access to them and a certainly a degree of worry
The likelyhood of administration I would consider fairly high. Its a startup, limited funding which could be switched off or run out at any point, no reserves, a high marketing cost, a non proven profit model
This then means for me only smallish sums to play with, which I feel would only hinder their business model
I am sure Freetrade would be delighted for people to move 100Ks worth of stuff across, but most of the customer base here won’t have anywhere near the FSCS limit (check out the votes on crowdfunding pledges as a good guide to start with). I am speculating, but I would bet 7 out of 10 accounts held on here and elsewhere will in total still be under FSCS for a single account.Since people should be sensible anyway (especially with startups) I don’t quite get your point. Unless small sums to you is 85k.
You would be liable for CGT at the point of sale if your net gains exceed £12,000.
How exactly is that going to kill money? The only short-term disadvantage you will face is paying the necessary proportion of tax in exchange for a higher basis of your investments’ value (i.e. if you went from £30,000 to £50,000, you’d pay £1,600 in CGT [assuming you are on a higher rate] but then your portfolio’s value [assuming you will reinvest elsewhere] will be £48,400 rather than £30,000 you had before). By not selling you are simply deferring the date when you will pay your tax, you do not lose anything, you will simply pay less next time you sell.
That is all, of course, a hypothetical scenario if, as you suggested, Freetrade when bust and could no longer be your investments’ custodian.
In a perfect world of £0 fees you’d certianly be better of with a broker who is least likely to fail - quite a difficult thing to predict and lack of cost-effective alternatives at the moment.
However, if the alternative to Freetrade will eat a proportion of your gains in a form of various charges, then you’d need to conduct some sensitivity analysis and see what is better - early tax if Freetrade fails or potentially 30 years’ service elsewhere with fees taken into account. Whilst the latter is more or less certain, there is still a chance that with the former you could have a cake and eat it (if Freetrade never fails).