Worldspreads failure and subsequent administration, what the NFA could learn from the UK's FSA and FSCS..

As the scandal of PFG Best has exploded over the past 48 hours, and the ongoing crisis of the collapse of MF Global shows little sign of reaching any conclusion, attention may once again turn to the management of the collapsed UK spread betting firm Worldspreads which crashed in acrimonious circumstances on around March 16th 2012.

Removing the vastly different sums involved, the pathology and mechanics of all three collapses have been similar; a rumour, which then turns to fact and with lightning speed the offices and operation are closed for business within hours, with clients left locked out of the process whilst waiting for titbits of information from those appointed as 'money janitors' to clean up the mess. However, there's one distinct difference between how UK 'officialdom' has handled the collapse of Worldspreads versus their American equivalents and it can be described using two key words; transparency and efficiency.

Moving aside the reasons why and how the Worldspreads firm collapsed and the argument that the sum involved was not as great as MF Global, the speed with which the UK authorities moved to shore up the majority of clients positions after its collapse is in stark contrast to the veil of secrecy and inactivity that has enveloped the management of the MF Global collapse. If the PFG Best crisis follows the same tortuous pattern then the distressed clients could be left in limbo for months, or longer. Comparing and contrasting the management of how the UK administrators KPMG have handled the Worldspreads collapse to that of the progression of MF Global is quite alarming.

Springing into action

The Worldspreads Group company was put into administration late on Sunday 18th March, two days after effectively 'closing for business' after a £13m “black hole” was found in the accounts during the preceding midweek, which put 15,000 clients (the majority of whom were retail customers) at risk of losing almost half their money.

Administrators KPMG said clients were owed circa £30 million, which should have been held in a segregated customer account. However, the group’s total cash came to just £16.6m. It transpired that WorldSpreads broke the 'golden rule' - Client Money Client Money Client money refers to the money or margin – which may be any currency in the form of cash, check, draft, or electronic transfer – that a firm receives or holds for a client. Money held by a firm in the form of a stakeholder, which is are not payable on demand or immediately due, also refers to client money. The definition of client money does not apply to money held by businesses that operate in its own name on behalf of a client. Although the client does have to be in agreement before this arrangement is made. Who Owns Client’s Money?When clients transfer complete ownership of money to a firm with the intention of covering present or future, contingent or actual or prospective obligations, that money is no longer seen as client money once it is transferred out of the account to the firm. When a firm acquires full ownership of money through a collateral agreement, the firm has also taken an obligation to repay the client although distributed funds upon agreement completion are not considered to be client money. This transfer of full ownership of money is an example of a title transfer financial collateral arrangement under the Financial Collateral Directive, were once transferred that client’s money is no longer considered client money.Should a firm enter an arrangement with a client where a commission is rebated, those rebates are not considered client money until they become due with the terms of the agreements set forth between both parties. Firms are required to operate with the client’s best interest rule, which means that they are required to act professionally, honestly, and fairly. Client money refers to the money or margin – which may be any currency in the form of cash, check, draft, or electronic transfer – that a firm receives or holds for a client. Money held by a firm in the form of a stakeholder, which is are not payable on demand or immediately due, also refers to client money. The definition of client money does not apply to money held by businesses that operate in its own name on behalf of a client. Although the client does have to be in agreement before this arrangement is made. Who Owns Client’s Money?When clients transfer complete ownership of money to a firm with the intention of covering present or future, contingent or actual or prospective obligations, that money is no longer seen as client money once it is transferred out of the account to the firm. When a firm acquires full ownership of money through a collateral agreement, the firm has also taken an obligation to repay the client although distributed funds upon agreement completion are not considered to be client money. This transfer of full ownership of money is an example of a title transfer financial collateral arrangement under the Financial Collateral Directive, were once transferred that client’s money is no longer considered client money.Should a firm enter an arrangement with a client where a commission is rebated, those rebates are not considered client money until they become due with the terms of the agreements set forth between both parties. Firms are required to operate with the client’s best interest rule, which means that they are required to act professionally, honestly, and fairly. Read this Term should never be “commingled” with company money.

KPMG was hopeful at the time that clients would get close to all their money back. Clients had on average just £2,000 each on balance with the company, and this fell far short of the £50,000 automatic protection given under the Financial Services Compensation Scheme (FSCS).

The FSCS

The FSCS, funded by the financial services industry, will be liable for any shortfall after recoveries made by the administrators. At its peak, the Dublin-based company, which listed on Aim in 2007, was worth about £40m. WorldSpreads had no outstanding commercial loans bar a relatively small working capital facility.

The diary of events after Worldspreads collapse

Notwithstanding the fact that through the former website, www.Worldspreads.com KPMG has maintained a constant narrative and dialogue with the clients, KPMG have also provided a link on their corporate site to kept clients up to date with developments. The latest notice on the Worldspread site states;

Update for clients of WorldSpreads Limited (in special administration) (“the Company)

The Joint Special Administrators of WorldSpreads Limited are now able to send closing statements to clients of the Company. Each client will receive TWO statements. All statements are being sent to the registered email address of users. Paper copies of statements will only be sent out where the registered email address is no longer in use, or cannot be delivered. If you have not received your final statements within 7 days (if you are a UK client) or within 21 days (if you are an overseas client), please provide details of your account and current contact details, including email address, to WorldSpreads-enquiries@kpmg.co.uk.

Details about the FSCS process are on their website www.fscs.org.uk and will shortly include a further update relating to the claim process for WorldSpreads Limited. However, in order for the FSCS to begin their process your claim must be agreed with the Joint Special Administrators. Therefore you must confirm to the Joint Special Administrators as quickly as possible whether you agree or disagree with your statement balance. FSCS will only accept agreed balances from the Joint Special Administrators for use in determining client claims. There is no need to contact FSCS at this time as it will contact you separately regarding your claim.

In its latest publication, dated 22nd June 2012, the KPMG site states;

Jane Moriarty and Samantha Bewick of KPMG were appointed by the High Court as joint special administrators of Worldspreads Ltd, a UK based spread betting business, late on Sunday 18th March 2012. Worldspreads Limited is a wholly owned subsidiary of Worldspreads plc, a company incorporated in Dublin, Ireland. This website will provide the latest updates and information from the joint special administrators.

Update from FSCS

The Joint Special Administrators of WorldSpreads Limited have been working closely with the Financial Services Compensation Scheme (FSCS) since the firm was placed into Special Administration. FSCS will start emailing personalised application forms for compensation by the end of June to WorldSpreads clients. In some instances, where balances are very small, FSCS will ask that clients request an application form to be sent to them to complete.

Before this happens, an introductory email with further details of FSCS, their role, and the process for claiming compensation from them will be sent to you at the email address held by WorldSpreads. Please check your email inbox, including spam filters, over the coming days.

Should you not have received an email (containing an application form) from FSCS by 6 July 2012 and wish to make a claim for compensation from FSCS, please contact FSCS on freephone 0800 678 1100 or 0207 741 4100 to request an application form. An application form can be dispatched by post if requested. In order for the FSCS to begin their process your balance must first be agreed with the Joint Special Administrators. FSCS will only accept agreed balances from the Joint Special Administrators for use in determining client claims. For further information, please refer to the FSCS website.

Speed and transparency

The speed with which the UK Worldspreads situation was attended was commendable, clients didn't even have to contact the administrators directly, KPMG contacted each directly within days of being appointed administrators, advising of positions and the level of compensation likely to be achieved. Now some four months on progress is apparent, as it should be for the circa £900,000 fee KPMG is charging. Rumour has it that clients are weeks away from compensation, or at least weeks away from being offered part compensation. Quietly and efficiently the collapsed firm's affairs have been handled as befits such a reputable firm with certain management protocol in place. As to how another top ten accountancy firm Ersnt and Young (Worldspreads' auditors) failed to spot the glaring irregularities is a sorry story for a different day...

MF Global

The handling of the MF Global collapse couldn't be more extreme in comparison. MF Global collapsed in October 2011, retail clients are still kept in the dark with regards to any compensation. Over nine months after the shock event the lack of news must be making certain clients desperate. The chapter 11 Bankruptcy Bankruptcy Bankruptcy or insolvency constitutes a legal term and refers to being unable to repay debts. A business and a person can declare bankruptcy. When a person or company claims bankruptcy, it is described as a voluntary bankruptcy, and when your debtors force you into bankruptcy, it is referred to as involuntary. A voluntary bankruptcy occurs when the debtor or borrower, the party that owes the money files with the courts. Involuntary bankruptcy happens when your credits file a petition with the courts. Bankruptcy can only occur with a court filing. Since bankruptcy is a legal state, once the petition is filed with the appropriate court, local and state laws vary greatly. Different Kinds of Bankruptcy In the US, these legalities are referred to as Chapters 7 and 11, 12, and 13. Chapter 7 is a liquidation procedure, where all assets are sold, and the court oversees the distribution of the money to creditors based on their standing. Both businesses and individuals can file for chapter 7. Chapter 11 is a reorganization process where businesses are allowed to freeze their debts and continue to operate. In contrast, a method and procedure are negotiated through the courts to satisfy the obligations of the company. Chapter 13 is called a wage earner plan and helps people attempt to restructure their debts to repay their debts. This can include some debt forgiveness by creditors or reduced interest rates or balances. Not all private persons are eligible for Chapter 13, high amounts of debt don't qualify, and the person must file Chapter 11 or 7. Most individuals choose Chapter 13 over Chapter 11 or Chapter 7 because it aids them in avoiding foreclosure on their residence. The filing of bankruptcy is considered a last resort when businesses and persons have not been able to negotiate terms directly with their creditors. Bankruptcy or insolvency constitutes a legal term and refers to being unable to repay debts. A business and a person can declare bankruptcy. When a person or company claims bankruptcy, it is described as a voluntary bankruptcy, and when your debtors force you into bankruptcy, it is referred to as involuntary. A voluntary bankruptcy occurs when the debtor or borrower, the party that owes the money files with the courts. Involuntary bankruptcy happens when your credits file a petition with the courts. Bankruptcy can only occur with a court filing. Since bankruptcy is a legal state, once the petition is filed with the appropriate court, local and state laws vary greatly. Different Kinds of Bankruptcy In the US, these legalities are referred to as Chapters 7 and 11, 12, and 13. Chapter 7 is a liquidation procedure, where all assets are sold, and the court oversees the distribution of the money to creditors based on their standing. Both businesses and individuals can file for chapter 7. Chapter 11 is a reorganization process where businesses are allowed to freeze their debts and continue to operate. In contrast, a method and procedure are negotiated through the courts to satisfy the obligations of the company. Chapter 13 is called a wage earner plan and helps people attempt to restructure their debts to repay their debts. This can include some debt forgiveness by creditors or reduced interest rates or balances. Not all private persons are eligible for Chapter 13, high amounts of debt don't qualify, and the person must file Chapter 11 or 7. Most individuals choose Chapter 13 over Chapter 11 or Chapter 7 because it aids them in avoiding foreclosure on their residence. The filing of bankruptcy is considered a last resort when businesses and persons have not been able to negotiate terms directly with their creditors. Read this Term protection offers no protection or instruction to the small 'retail' clients who have perhaps lost savings, suffered a massive hit to their lifestyles, or seen their dreams of a safe and secure pension and retirement trashed. A visit to the MF Global website offers very little comfort to those who've lost funds.

There's another sting to the tail which anyone outside of the industry of speculation as investment may have missed, these failures may become ultimately an indirect taxation on us all, we may all end up paying..

Estimates suggest that the UK FSCS may have to find circa £600 million from its contributory based compensation scheme to shore up the positions of UK losses for MF Global and others over coming years, this cost will ultimately be borne by the brokers and financial firms who will (as night follows day) at some stage have to increase costs in order to protect their positions. Similarly their own individual and collective insurance costs will inevitably escalate as each major failure is discovered. UK FTSE 250 firm's costs have risen by 270pc under the FSCS compensation scheme, year on year, from 2009 to 2010.

Paul Holmes