Global Trader Europe ‘fiasco’ finally at end

Investment Week

Up to 400 former customers of failed derivatives broker Global Trader [GTE Europe (GTE)] are set for compensation payouts.

The Financial Services Compensation Scheme (FSCS) says it is in discussions with the firm’s liquidators to assess the value of potential payouts to affected customers, adding it has already received 85 claims against the company.

Under FSCS rules, payouts cannot exceed £48,000.

GTE was placed in administration in February last year after an unnamed client sustained heavy losses. It does not have the money to pay claims against it.

The firm’s principal business was the provision of Contracts for Difference and spread trading services to clients. The liquidators believe some 400 investors could have claims against the firm for the return of cash balances held.

At the time of GTE’s demise, the FSA came under heavy fire for allowing the broker to carry on writing new business for five weeks after it was first informed by GTE that it was facing a shortfall of regulatory capital.

FSCS spokeswoman Sarah McShane says the default will fall on the investment intermediary class although it doe not look like an additional levy to cover the claims will need to be raised. She says: ‘Yes IFAs will be hit by this but it is a fairly standard default and we don’t think this will result in higher charges.’ This year, advisers have been hit with hefty rises in Financial Services Compensation Scheme costs due to mis-selling claims against stockbrokers Square Mile Securities Ltd and Pacific Continental Securities Ltd. Investment advisers, who sit in the same FSCS bracket as such firms, face a £44 million levy this year compared to ‘just’ £9m the previous year.

‘Help is on the way for customers,’ FSCS chief executive Loretta Minghella says. ‘We are working closely with the liquidators, and hope to make the first payments to customers of the firm shortly.’

Thoughts: The problem with Global Trader was that a lot of the customers affected had CFD accounts which held their funds on a non-segregated basis. This meant that the client funds were pooled together and held outside the FSA’s client money rules.

Under the rules set out by the Financial Services Compensation Scheme, clients have protection for up to £48,000 of their funds at a spread betting company regardless of whether these funds are held on a segregated or non-segregated basis. The Financial Services Compensation Scheme will pay compensation where a firm is unable to meet its obligations to clients. They will pay 100% of the first £30,000 and 90% of the next £20,000. So a maximum of £48,000. But they will not pay until the firm has been ‘declared in default’. Hence as we can see the scheme is thinking of paying compensation only when the liquidators have established the shortfall – which explains the shocking amount of time that has elapsed for the compensation scheme to finally paying out.

This is another reason why it might be wiser to trade with one of the publicly quoted companies like Capital Spreads or IG Index both of which are publicly quoted in London and consequently their financial position is very much in the public domain.

Tags: Financial Services Compensation Scheme, FSA, FSCS, Global Trader, Global Trader Europe, GT247

This entry was posted on Monday, July 27th, 2009 at 3:53 pm and is filed under Industry News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.