Nominee Accounts

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Nominee Accounts

Five-day trading, nominee accounts and all that.
In order to compete with stock markets around the world, the London Stock Exchange has been speeding up the pace at which deals are completed. Since June 1995, 'five-day trading' was introduced, meaning that payment takes place just five working days after shares are bought or sold. (This replaced ten-day trading, which itself replaced an earlier, rather more leisurely system of settling deals in bulk at the end of fortnightly account periods.)

Five-day trading is no problem for professional investors, but it is near impossible for those small investors, who are generally reliant on the postal system to receive transfer documents and deliver share certificates or cheques within just five days. Therefore, many brokers encourage their smaller clients to hold their shares through 'nominee accounts' and to open deposit accounts with the broker from which payments for deals can be made. With a nominee account, you cease to be the direct owner of your shares; instead, the broker owns the shares on your behalf. There are a number of potential drawbacks with this arrangement:

• As you are no longer the direct owner, you lose your automatic right to receive reports and accounts, to attend company meetings, to vote, and also the right to any share perks. Whether or not you can still exercise these rights depends on the services the broker offers as part of the nominee account.
• You may have to pay an annual fee for the nominee account, and there may be extra charges for collecting dividends, passing on information about company meetings, and so on.
• Deposit accounts with brokers typically pay less interest than a comparable building society account.
• The company holding the nominee account does not have to be authorised under the Financial Services Act. Make sure that your contract with the broker states that the broker (who must be authorised) accepts full responsibility for the nominee company, that way, you ensure that you have the protection of the financial services legislation.

You do not have to hold your shares through a nominee account. You can carry on dealing outside the five-day trading system, allowing longer for settling your deals. You may have to pay higher charges and/or accept a worse deal on share prices if you use the slower ten-day system. If you deal only occasionally, the slower system is likely to be best for you.

If you are a very active trader, consider the nominee route, but, shop around for a service that suits you. Alternatively, consider becoming a 'sponsored member' of Crest (an electronic share settlement system). With this route, you have your own Crest account (in the same way that stockbrokers do), in which you hold your own shares electronically, which means they can be rapidly delivered when you sell them.

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