Yacht Brokers/Dealers-How to safeguard clients cash

[Tranona]

Only when the next boat broker goes bust taking client account monies with them, will people start to think (again) that something needs to be done. In the meantime I think you're banging your head against the wall, sadly.

Not sure about this comment.

As far as I am aware, there has been no case of a Broker going bust and taking client account money with them. So we are waiting for the "first time", not the "next time".

I am not a broker, nor have I ever used one, so I have no axe to grind. I make the comments that I do because there is a lot of hot air talked about this subject and people see demons where they don't exist. Of course there are risks when you hand over money to other people without getting title to another asset. The whole purpose of a client account is to protect your money because it is always yours until the contract is complete. The weakness is that the trustee can access your money and if dishonest can easily steal it. However, there is no evidence that this happens.

When you look at cases where people have lost money when boat businesses go bust it is for the same reason as people lose money in any other retail type failure. They have entered into a contract to buy something in the future, paid a deposit (or even the full amount) and the vendor is unable to fulfil his side because he is insolvent. The buyer becomes an unsecured creditor - not a happy thing to be.

Not wishing in any way to dismiss the pain and anguish people experience when boat businesses go bust, the scale is insignificant compared for example with failures in other retail trades such as the Courts Furnishing collapse.

So, please keep a sense of proportion. Thousands of transactions take place successfully every year using brokers. It is a convenient and economic way of enabing people to buy and sell boats. There is no compulsion to use brokers, and if you do, no compulsion as JFM has pointed out to use client accounts.

There is a much bigger issue with buying new boats now that dealing direct with a builder is not so common, but there are mechanisms for protecting your money, including using client accounts. The main risk difference here is to my mind, the more extended time periods of the process and to an extent the cross border nature of the transactions - but thats another issue and only loosely related to this thread.

 

[Rebecca Jackson]

On behalf of Dominic Smulders, Chairman of the Boat Retailers and Brokers Association (BRBA), who has been monitoring the forum, I'd just like to expand on comments regarding the BRBA and its code of practice, posted by matt lake. I’m Rebecca Jackson and work for British Marine Federation.

The BRBA, an association within the British Marine Federation, represents all companies and individuals involved in the sale of new and second-hand craft. All members, of which there are over 190 marine businesses, must adhere to the BRBA Code of Practice. The code was enforced to heighten consumer confidence by providing a set of comprehensive regulations for brokers and retailers.

Back in 2008, after the Peters Opal case, the BMF and BRBA added a new clause to the BRBA code of practice regarding the handling of customers' monies. This clause was designed to increase the robustness of the system, boost consumer confidence and help promote the use of brokerage to buy and sell boats.

In order for brokerage companies to be a member of the BRBA they must have a separate client account in which to hold clients monies during the brokerage process. The guidance is applicable to all brokerage companies who are BMF members and is enforced by means of an obligation on firms to declare annually that the necessary arrangements are in place: when renewing annual subscription to the BMF/BRBA the company must provide a current letter from its bank to prove its client account. Failure to comply with the clause results in the loss of BMF membership, with the aim of protecting customers and maintaining the industry's integrity.

The BRBA and the ABYA have also introduced a new qualification that has been designed to promote best practice in the industry. The qualification, supported by the British Marine Federation, was formally launched on the Yacht Brokers Village stand at the PSP Southampton Boat Show and will ensure the highest standards in the sale of new and second-hand boats: http://www.britishmarine.co.uk/news__press/news_article.aspx?PressArticleId=2900

I hope that demonstrates the work that the BRBA is doing to ensure best practice in the industry and help both the industry and buyers do business in confidence.

 

[DAKA]

On behalf of Dominic Smulders, Chairman of the Boat Retailers and Brokers Association (BRBA), who has been monitoring the forum, I'd just like to expand on comments regarding the BRBA and its code of practice, posted by matt lake. I’m Rebecca Jackson and work for British Marine Federation.

The BRBA, an association within the British Marine Federation, represents all companies and individuals involved in the sale of new and second-hand craft. All members, of which there are over 190 marine businesses, must adhere to the BRBA Code of Practice. The code was enforced to heighten consumer confidence by providing a set of comprehensive regulations for brokers and retailers.

Back in 2008, after the Peters Opal case, the BMF and BRBA added a new clause to the BRBA code of practice regarding the handling of customers' monies. This clause was designed to increase the robustness of the system, boost consumer confidence and help promote the use of brokerage to buy and sell boats.

In order for brokerage companies to be a member of the BRBA they must have a separate client account in which to hold clients monies during the brokerage process. The guidance is applicable to all brokerage companies who are BMF members and is enforced by means of an obligation on firms to declare annually that the necessary arrangements are in place: when renewing annual subscription to the BMF/BRBA the company must provide a current letter from its bank to prove its client account. Failure to comply with the clause results in the loss of BMF membership, with the aim of protecting customers and maintaining the industry's integrity.

The BRBA and the ABYA have also introduced a new qualification that has been designed to promote best practice in the industry. The qualification, supported by the British Marine Federation, was formally launched on the Yacht Brokers Village stand at the PSP Southampton Boat Show and will ensure the highest standards in the sale of new and second-hand boats: http://www.britishmarine.co.uk/news__press/news_article.aspx?PressArticleId=2900

I hope that demonstrates the work that the BRBA is doing to ensure best practice in the industry and help both the industry and buyers do business in confidence.

I am pleased that someone recognises the is a problem.

I quote the section to which you refer

2. A separate client bank account whereby:
2.1 The member will set up a bank account exclusively for holding customer monies,
preferably with a separate bank to that which holds the business’s other accounts.

Now if you take the trouble to read the BAP judgement notes you will begin to understand how inadequate that suggestion is.

The use of words like 'preferably' just shouldnt be there.

Please read the thread and note how difficult it is to actually protect clients money in a high street bank account.

There needs to be much greater clarity in the advice and guidance notes on how to effect a trust account that safeguards clients funds.

 

[Tranona]

I am pleased that someone recognises the is a problem.

I quote the section to which you refer

2. A separate client bank account whereby:
2.1 The member will set up a bank account exclusively for holding customer monies,
preferably with a separate bank to that which holds the business’s other accounts.

Now if you take the trouble to read the BAP judgement notes you will begin to understand how inadequate that suggestion is.

The use of words like 'preferably' just shouldnt be there.

Please read the thread and note how difficult it is to actually protect clients money in a high street bank account.

There needs to be much greater clarity in the advice and guidance notes on how to effect a trust account that safeguards clients funds.

Pete

I think you are mis interpreting what the case said about the operation of the client account. There is no suggestion that money placed in the account was not there. Indeed I have pointed you to the part of the judgement that states that on more than one occasion. The problem was with clients' money that was NOT PLACED in the account despite the promise that it would be. By all means criticise individuals and collectively the company for not fulfilling their promises to clients. As the case noted they did make attempts to rectify the situation but failed to recognise that a trust would not be created that way. According to the report, the bank refused the transfer (of what was in effect the bank's money as the trading account was overdrawn) because there was sufficient funds in the client account to meet the liabilities of the account. That is the point of law which the case clarifies. It is unfortunate that such finer points only become an issue when something goes wrong.

As I suggested when you first raised this there does not seem any evidence that clients' money actually moved out of the account when they used the balance as part of calculating the overdraft. I suspect that would have been a breach of trust. I suggest if you are unclear about that practice and the impact on clients' money you take it up with Barclays. BTW I think that practice looks suspicious, but the case does not help understand its impact (if any).

Reading between the lines and looking at the timelines, it seems the change in the method of calculating the overdraft was a possible reason for BAP becoming insolvent. Maybe the bank realised that anything up to £1m (out of £5m) was secured on money that did not belong to BAP, nor for the most part ever would. If you think about it, clients' money representing brokerage transactions always belong to the buyer or seller except the proportion which represents commission and expenses. On the other hand deposits against new boats or boats owned by the company will eventually become an asset and are a good indicator of future cash inflows.

I know you are determined to find "fault" with the process of buying and selling boats, but not sure this is one of them based solely on the case report.

 

[DAKA]

In the notes above there is some clear case history pointed out that effectively states that if you take a £1 out of a trust , you cant later pay it back in.


Running a tandem overdrawn account in parallel with an automatic transfer in place is reducing the trust fund.


If you are suggesting (and the BRBA ) that

a Yacht Broker utilizing his clients account to credit his overdraft is good practice then we will have to agree to disagree.

How many reading this are happy to pay £100 000 to a yacht broker knowing that £90 000 will be credited to his overdraft by close of business ?

 

[Tranona]

In the notes above there is some clear case history pointed out that effectively states that if you take a £1 out of a trust , you cant later pay it back in.


Running a tandem overdrawn account in parallel with an automatic transfer in place is reducing the trust fund.


If you are suggesting (and the BRBA ) that

a Yacht Broker utilizing his clients account to credit his overdraft is good practice then we will have to agree to disagree.

How many reading this are happy to pay £100 000 to a yacht broker knowing that £90 000 will be credited to his overdraft by close of business ?

If you are referring to the commentary in the casse report, it does not say that at all. It only refers to an attempt to transfer funds IN that BAP had promised clients it would pay into the account but did not. There is no mention of funds being taken out with the exception of the attempted block transfer which the bank (probably correctly) reversed because the account already had sufficient funds to meet the trusts liabilities. Once again you are ignoring the fact that (according to the evidence) the account ALWAYS had enough funds in it to meet claims.

I have already said I am not sure the parallel ovedraft is good practice, but there is nothing in the case to suggest it was a central issue. However, I did suggest that discontinuing the practice may have resulted in the bank withdrawing its support (because BAP had exceeded its overdraft) and so becoming insolvent.

There is no point in us arguing about this issue because there is not enough known (by us anyway) about how this type of offsetting works, whether it is common, and whether there is any case law where it has affected the ability of a client account to meet claims made on it.

It is easy to see "demons" when there is a lack of information and all too easy to jump to conclusions that are not founded in fact, just because they suit your beliefs.

 

[Jim@sea]

To "DAKA" how well written and researched. This highlights the advantage of forums providing information. Anyway I went to a well known Boatyard/Boat Broker a few years ago with a view to buying a boat. But the warning signs were there. When I asked to speak to someone "They were all in a meeting" and so it continued all day. They went bump 2 weeks later. I wonder how many people paid deposits within those 2 weeks. And I do think the Banks turn a "Blind Eye" to where funds have come from to ensure that they are not disadvantaged. Look at the CROWN CURRENCY EXCHANGE fiasco, it doesnt matter if its a boat, house, or buying currency, its still clients money, and 8000 people are owed £16,500,000 which has gone forever.
Some of you may remember when Colin Chapman's (Lotus) empire collapsed, within his group was a boat manufacturer (Was it Moonraker??) anyway people had been making part payments whilst their boats were being made and some were completed. But when they went bump, the boats then belonged to the liquidator. Aparrently a creditor who had paid for a boat went along at night with a trailer, cut the locks, loaded his boat and took it away. "Brilliant" the point is that perhaps 30 years later, nothing has changed, deposits are paid to LIMITED COMPANIES, whose very being is to LIMIT the owners liability. So intelligent people still stupidly part with money without making sure that their money is protected against fraud. And fraud it is.

 

[DAKA]

If you are referring to the commentary in the casse report, it does not say that at all. It only refers to an attempt to transfer funds IN

If you read my first post you will see a copy paste from the report along with quoted case history.

If you take a £1 out of a trust you can pay a £1 back in but as it is not the same £1 then it is outside the trust.

Quote
the claim to beneficial ownership of money in a bank account
requires the continued existence of the money either as a separate fund,
or as part of a mixed fund, or as latent in property acquired by means of
such a fund. Where money is paid into a bank account, which then
becomes overdrawn, the fund ceases to exist. Equitable tracing therefore
cannot be pursued through an overdrawn account, and the beneficiary
cannot claim a proprietary interest in other assets belonging to the trustee
in priority to other unsecured creditors on the ground that his assets had
been misappropriated in breach of trust: see Bishopgate Investment
Limited -v- Homan [1995] Ch.211 per Dillon L.J. 216d-f and 218e – 220-h
4. tracing is only possible to the extent that the balance ultimately standing
to the credit of the trustee in the bank account does not exceed the
lowest balance of the account during the period since the money was paid
into the account: James Roscoe (Bolton) Limited -v- Winder [1915] 1


Irrelevant of whether you an I agree , at least we now have the attention of BRBA , and hopefully they should now be aware of my concerns.
Granted the concerns of one person dont really matter however I assume that others like me are also concerned about handing £100 000 to a Yacht Broker who is entitled to use this to offset against his overdraft.

These concerns will be depressing the market, it is in the interests of all Yacht Brokers to stop the practice of utilising clients funds for their own gains.
I have posted for years about Banks encouraging the use of the clients funds and you have said it doesnt happen, I have shown you one example BAP.

BRBA apparently have members clients account details and could easily request from a sample clarification along these lines
That the bank acknowledge receipt of your letter dated ****** regarding account number *********, called ************* clients account.
**********Bank confirms that they recognise this account as a client account and they agree that they are not entitled to combine the account with any other account, nor are they allowed to offset, make any charge, encumbrance, lien or take compensation, or any retention what so ever from this account.
******** Bank agrees that they can not take any charge,encumbrance, right of set-off,lien, compensation or retention, against any approved assets held for the clients account.


Again it appears we have dragged this out so long that very few will still be reading but if there is anyone still following a question if I may........


If you entrust £100 000 to a Yacht Broker who then uses it to offset against his overdraft.
Looses it.
legs it.

Would you be any happier knowing that he was a BRBA member and he is in line for a very stiff letter from Rebecca , or worse if he catches her at the wrong time , she could expel him , then he would have to join the BRBAP or similar.

Or do you feel that a Yacht Broker should not accept clients funds unless there is a compensation scheme in place.

If a solicitor mis uses clients funds they would expect significant consequences and a compensation scheme is in place.

If an Insurance Broker mis uses clients funds he is breaking the law and will also expect significant consequences, there is also a compensation scheme in place.

A yacht Broker can borrow clients funds, as long as he intends at the time of borrowing to pay them back then all he may get is a stiff letter from Rebecca or possible expulsion from the BRBA but will still be free to operate as a Yacht Broker and 'Borrow' from the clients account again.

 

[ColdFusion]

Again it appears we have dragged this out so long that very few will still be reading but if there is anyone still following a question if I may........


If you entrust £100 000 to a Yacht Broker who then uses it to offset against his overdraft.
Looses it.
legs it.

Would you be any happier knowing that he was a BRBA member and he is in line for a very stiff letter from Rebecca , or worse if he catches her at the wrong time , she could expel him , then he would have to join the BRBAP or similar.

Or do you feel that a Yacht Broker should not accept clients funds unless there is a compensation scheme in place.

That is the crux of the matter. A 'stiff letter from Rebecca' or expulsion from whatever association would be of no consequence to me whatsoever if the broker had fraudulently used my money. The only thing I need to see is a compensation scheme in place for the sole purpose of protecting clients' monies should a broker misuse them. Anything else is waffle.

 

[gjgm]

That is the crux of the matter. A 'stiff letter from Rebecca' or expulsion from whatever association would be of no consequence to me whatsoever if the broker had fraudulently used my money. The only thing I need to see is a compensation scheme in place for the sole purpose of protecting clients' monies should a broker misuse them. Anything else is waffle.

Why why why?
You pay the broker some money; you want someone else to reimburse you if it all goes sour. Just who do you think should pay for that? If you dont trust the broker and his client account DONT PAY HIM OR INTO IT. That is how client accounts function.Why should there be a special fail safe for a boat?
It's your money. Use another solution.

 

[Tranona]

I hope that demonstrates the work that the BRBA is doing to ensure best practice in the industry and help both the industry and buyers do business in confidence.

Rebecca

Thanks for your reply.

As you can see there are still some people who see a problem, so perhaps yopu could answer a couple of questions.

1 Do you know of any cases where a Yacht Broker has stolen funds from a client account

2 What is your view on the practice (as suggested in the BAP case) of using balances in client accounts against overdrafts of client accounts.

Look forward to your response.

 

[Tranona]

If you read my first post you will see a copy paste from the report along with quoted case history.

I am sorry Pete, you are just confusing yourself. You are taking that statement to say that funds were taken out of the client account. THEY WERE NOT.

Ths point that is being made here is that funds that SHOULD HAVE GONE IN did not, but were paid into an overdrawn trading account. This is part of the explanation as to why they were not considered to be held in trust because they could no longer be separately identified (remember the three tests for a trust?).

If you read what I said, I am not sure about how the offsetting practice worked, and it does seem to be against the principles of a ring fenced client account. However, there is no suggestion that anybody lost money because of it - except if, as I suggested the change in policy by the bank led to BAP insolvency

 

[DAKA]

Your post asking Rebecca to confirm how many Brokers shes knows that have STOLEN funds is misleading.
If she states the current ones she knows that are going through investigation now she will have a libel situation as the whole point of my post is that currently it is not theft.
It would only be theft if the Yacht Broker admitted that at the time he removed the funds he had no intention of paying them back in, he is currently free to 'borrow' the funds as BAP did.

There is a specific law that makes it illegal for some professionals to 'borrow' from clients account but this doesnt include yacht Brokers.

Please dont get bogged down too much with the specifics of the BAP judgement.

I only used it as an example to show that the theoretical issues I have been posting about for years are now actual issues in that clients have lost money and Yacht Brokers are using clients funds for themselves and or allowing the Bank to set up automatic transfers from the clients accounts to other accounts that can be overdrawn.

Sometimes you are arguing theoretical protection however when I point you towards a huge flaw in your theoretical protection you claim that it wouldnt happen in practice.

So what are we talking about ?

The practical protection being a strong letter from BRBA but without any compensation.

Or the theoretical protection that is seriously flawed.


It is my understanding but happy to be corrected that,

It was normal practice for BA Peters to pay clients funds into a clients account.
It was normal practice for Barclays to sweep the clients account of all funds less £10 000 and to use the clients account credit to reduce the £5.5 m overdraft.
This normal practice was only stopped at the end when it was realised the system had collapsed.

 

[DAKA]

Dear Tranona,

I respect your views and despite me arguing with you I do take on board many of your comments.

The forum and I benefit greatly from the wisdom you and other professionals choose to freely share with us, thank you.

In this case we are at variance but as neither of us are Yacht Brokers or buying a boat from one another I can agree to disagree and feel we should leave it at that.

Neither of us are getting paid for this and I am sure we both have paying clients we should be looking after, or at least counting our money or something more interesting.

From my point of view the post has been successful in bringing my concern to at least one marine organisation , who hopefully can take advice and spend a bit more time on it than we can.

In an ideal world several Brokers would have also read this and be checking their own client account is as safe as it can be and be working on escrow agreements.

Kind regards
Pete

( preferring to part on good terms )

I also feel as a courtesy we should let Rebecca have the last word .

 

[Tranona]

It was normal practice for BA Peters to pay clients funds into a clients account.
It was normal practice for Barclays to sweep the clients account of all funds less £10 000 and to use the clients account credit to reduce the £5.5 m overdraft.
This normal practice was only stopped at the end when it was realised the system had collapsed.

None of that is strictly correct, although the second would seem to be the case, but it is unclear whether this had any impact on the actual balance in the client account. The report clearly states that there was always enough in the client account to meet claims on it.

Read the case and it will answer your question on what was "normal" pactice in respect of deposits.

We do not know why the practice of sweeping the account was discontinued - you are only jumping to a conclusion, and I have made suggestions as to the reasons, but there may be other explanations.

I asked Rebecca whether there are any cases of Brokers stealing from client accounts because you (and others like Cold Fusion) are demanding a compensation scheme. If there have never been cases where people have lost in this way becaus of a lack of compensation scheme, where is the need? I know there are compensation schemes for other professions, but that is because there is a demonstrable need.

Once again you have to be clear in your own mind about the difference between a broker and a dealer. We are talking about brokers here who never have a financial interest in the asset they are broking. The losses in most boat related failures involve dealers buying and selling on their own account or building and selling boats direct to private individuals. In these kinds of transactions there are many different ways that buyers might be able to protect their deposits or stage payments and you only confuse the issue of brokers client accounts by trying to treat them all the same.

 

[ColdFusion]

Yes it would. There are several brokers on here so their views would be interesting. Sorry I can't post the letter till Monday, but will do it then and bring this thread back up to the top

jfm, just nudging this back to the top. Did you manage to find the letter?