What happens if your share trading platform goes belly up?
Investing in the share market has arguably never been as accessible thanks to the abundance of online trading platforms on the market and a steady decline in brokerage costs.
Around four in 10 Australians now have investments in the share market according to a recent survey conducted by financial comparison website Savvy - 40% of whom are holding an investment between $5000 and $40,000, and 25% of whom have more than $40,000 invested.
Like any investment, trading is not without its risks though, of which the most obvious is the possibility that the shares, ETFs or other equities held will fall in value.
Outside of those potential fluctuations though, one possibility that investors may not have given a whole lot of thought to is what would happen to their shares if their trading platform went under. While rare, there have been a few cases of Australian platforms and brokers failing, the most recent of which is Halifax which went into administration in 2018.
So if your trading platform did go bust, what would happen to your shares? And would it be as simple as moving them to a different platform? Well, that could depend on how those shares are registered.
If you've purchased ASX-listed shares before, chances are you've come across the acronyms CHESS and HIN, which are both fundamental parts of the share registration process.
"CHESS (Clearing House Electronic Subregister System) is the Australian Securities Exchange's (ASX) share settlement system," explains Chris Brycki, founder and chief executive of online investment adviser Stockspot.
"The buying and selling of shares (including legal ownership, the exchange of money and titles) is done on the ASX is via the CHESS system. CHESS users are allocated a unique Holder Identification Number (HIN), which is like a bank account number. Your HIN can be just for you, or you can fit under a commingled or custodial model where your investments are held in the same account with others."
The majority of share trading platforms in Australia, including the likes of CommSec and Westpac Share Trading, give investors the ability to own their Australian shares directly with their own individual HIN - a model which, Brycki says, is lower risk.
"With the CHESS-HIN model (as opposed to the custodian model), the risk to a client if a brokerage platform goes under is minimised. As mentioned, all investments are held on your own individual HIN so you retain full legal and beneficial ownership. The shares remain yours and in your name and you simply move the shares to a new brokerage platform."
Pearler, which is a share trading app and not a broker, is one of the platforms offering users access to CHESS-sponsored shares. According to co-founder, Nick Nicolaides, if Pearler shut down, the process for users wouldn't necessarily be painless, but at the end of the day the CHESS ledger would provide clarity of ownership.
"If Pearler goes bust, and let's not sugarcoat it, it would be inconvenient for any Pearler customer, and stressful. But, because their details, their portfolio and their assets are all held by a market participant broker and tracked by a centralized body, the ASX, there is no ambiguity that those assets are theirs.
"Pearler is reasonably well capitalized, but in the instance where a CHESS-sponsored broker goes bust, each individual investor would be aware of their unique identifier, their HIN, and they would be able to go to the prime broker and either continue to hold that portfolio with them, as in Pearler's no longer in the picture, or put in a fairly simple request with another share trading app to pull those assets across."
The custodian model
Direct ownership is not the only way Australian shares can be held though, as a number of platforms including the likes of IG and Superhero operate using a model in which an investors' shares are held by a custodian on their behalf. And more broadly, this is also how international shares are held.
Under the custodian model, the custodian is the registered owner of the shares and the investor is what's called a beneficial owner. As Nicolaides notes, one of the benefits of this model is that it allows platforms to reduce their costs and, in turn, pass on lower brokerage fees to their customers.
"What we've seen in the last couple of years is a few market entrants come along with some different structures. Now, that in itself is not bad. We have a well-regulated system where the rules around custody are clear, so people trying new things, as long as they're well capitalized and well resourced, is good, because it also serves to educate the market that there are other ways to do things.
"Custodial is probably the colloquial term, and the key benefit of custodial to date has been lower costs. Now the jury's out on whether, in the long-term, Australia will move towards a custodial, lower-cost system, or whether the CHESS system will maintain its position."
So what would happen if a platform operating using the custodian model went under? In this scenario, Brycki says, things could become more complicated for investors.
"With the custodian model, your investments are pooled with others and managed by a third party. You rely on their ability to accurately account for your investments.
"There is a risk that the shares may be sold or transferred without your knowledge, or worse, you may lose ownership of the shares entirely."
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