It’s been about three months since Alpari UK filed for bankruptcy and one of the major issues clients of Alpari UK have been asking themselves is why is it taking so long. After a long time during which the special administrators communicated exclusively through their own portal, Finance Magnates spoke with KPMG's Richard Heis and Samantha Bewick to clarify if there’s any room for conspiracy theories and what indeed is taking so long for clients to receive their funds back.
Finance Magnates: What is taking so long for clients of Alpari UK to get their funds back? What are the procedures necessary for the process to conclude?
Richard Heis: The reason why it was done this way is there are over 100,000 accounts. This is quite a lot when compared to similar brokerage bankruptcy cases. If you take MF Global as an example we’ve had 10,000 accounts. There’s a big number of lower value accounts and processing them one by one would be a very time consuming process. At the very start of the bankruptcy process all of the client money is pooled. The vast majority of the funds have been held in segregated accounts.
All of the funds were automatically pooled and everybody has a share in that
All of the funds were automatically pooled and everybody has a share in that. Because all clients have had access to the My Alpari portal and to the Trading Platform we decided to use the existing technological infrastructure in order to avoid all clients sending 100,000 claim forms. We carried on employing a number of Alpari’s technical staff to adapt the platform to a static claims management process rather than a live trading system.
I think it would have been a mistake to do it in any other way. By doing it manually, those most insisting might have gotten their funds quicker but the costs associated with processing 100,000 claims manually would have been much higher. In addition, the process would have been a lot slower overall. It might have been quicker for the first 100 clients or so.
Samantha Bewick: Each client has to agree his/her claim against the clients money pool and clients often dispute, so the claims portal which was built is a solution that speeds the process up materially.
When compared to the MF Global bankruptcy, this one is a lot more complicated
R.H.: The process of rewriting the code, testing the portal and making sure that the system can handle the requests and yield correct results took some time. We certainly kept the pressure on, but when compared to the MF Global bankruptcy, this one is a lot more complicated.
F.M. :A large number of accounts which have been inactive for quite a while and have less than $10 in deposits have clearly contributed to a lengthy process. Technically those sums are not even recoverable since a wire transfer would be more expensive to send than the amount.
R.H.: We have allowed people to claim these funds or waive their claims in cases when its not worthwhile. In fact, quite a lot of customers of Alpari UK have chosen to waive their claims.
S.B.: We are not actually allowed to make a decision which determines some claims as more valuable than others. We can not just ignore them because of the fact that costs associated with the recovery of the funds on the account are greater. KPMG has to deal with every customer of Alpari UK who asserts a claim. Even clients who apparently have nil balances may claim that they don’t actually have a nil balance.
R.H.: The process of recovering client money may sometimes seem to be a bit counterproductive. Because there is a strong level of protection overseen by the Financial Conduct Authority (FCA) over client money, if an appointed administrator does anything which compromises the funds in any manner then that's a regulatory breach and there are a lot of sanctions for all concerned. As per FCA regulation and the law there is no materiality when it comes to client money.
F.M: You mentioned that under the law, once a company goes bankrupt, client money is pooled together, could you elaborate on that point?
Even if the firm has purported to separate each client's funds from other people's, all of the client funds are mandatorily pooled
R.H.: The principle behind that is if you have a case where there is a shortfall (such as in the bankruptcy of World Spreads) what you don’t want is for one client's money being impacted and another one's intact. An argument ensues about whose money is missing from the segregated accounts. The law says that even if the firm has purported to separate each client's funds from other people's, all of the client funds are mandatorily pooled. Once all the funds are in the same pool, every client gets a claim against that pool.
F.M: Do you expect that some clients will actually not get their claims in full?
R.H: That will happen in some cases. We haven't put in an estimate yet, but we do have some clients who might not receive their claims in full. The costs associated with keeping Alpari going and legal fees will affect larger clients of the company. If there is a shortfall, they can claim against the unsecured creditors. In practice, so long as people are below a certain monetary limit, the easiest thing for them to do is file their claim with the Financial Services Compensation Scheme (FSCS), that will compensate them in full up to the limit of £50,000. Even in cases when a client’s deposit is not fully insured, effectively the FSCS takes the first £50,000 of a client's loss, so he/she still may receive full compensation on deposits up to £100,000.
The easiest thing for Alpari UK clients to do is file their claim with the Financial Services Compensation Scheme
S.B.: It's in every client's interest to log on and agree to their claims in order to be able to go to the FSCS. The faster clients agree to their claims through the client portal, the easier it is for us to deal with the client money pool, because we will have a better idea of what the claims distribution will be.
F.M.: What is the percentage of people who have opted to claim with the FSCS, do you have any estimates yet?
S.B.: About three quarters have applied to get their claims from the FSCS. They have the option to indicate that they would like to receive their funds from the compensation scheme. Once that happens we indicate to FSCS which clients they should be contacting.
F.M.: Why would people actually choose not to claim with the FSCS?
S.B.: Actually based on my experience with World Spreads, almost 100% of the clients who agreed to their claim went to the FSCS. There is no reasonable explanation about why a client wouldn’t file with the compensation scheme. That said, Alpari UK clients can always change their claim to the FSCS by logging into the claims portal and selecting the compensation scheme.
R.H.: What we don’t want to happen is for someone to be claiming against both the FSCS and KPMG. We agreed with FSCS that we will be paying on certain days of the week and they will at certain times so that we open a small time gap and avoid such cases.
F.M.: How would you respond to accusations by some industry players that Alpari UK clients have been kept with the firm just because KPMG could sell its assets easier this way?
R.H. The only reason why we have taken some time is the setup of the portal. The infrastructure which we needed was put into operation the moment when it could have been done. We released access to the claims portal in successive waves once we made sure that it was fully functioning. Even if we had done as you described, that would actually have resulted in a better outcome for clients and creditors of Alpari UK.
F.M.: What about the companies to which Alpari UK owes money? We have noticed rather a big exposure by Citigroup and FXCM. Are they likely to recover some of their funds?
Citigroup and FXCM will get a share in the general estate of Alpari UK
R.H.: Being creditors, they are not entitled to any portion of the client money. The amounts of their claim is something that we do need to agree upon and on the basis of the agreed claim they will get a share in the general estate of Alpari UK. The closeout of these claims is a complicated issue due to the market turmoil of the Swiss franc on January 15th. Before agreeing to these claims, all of the market Liquidity issued will need proper investigation.
F.M.: Do you have a time frame on how long that could take?
R.H.: We have a very detailed chronology of what happened over those 48 hours in the aftermath of the Swiss franc turmoil. We are in a position to review how claims were affected by the market conditions in the period just before Alpari UK filed for bankruptcy.
F.M.: What about negative balances incurred by clients of Alpari UK?
R.H.: There are two types of negative balances. There are those who owed money before the 16th of January, which are normal occurrences when people have been hit in the market and owed money to Alpari. Those are treated as normal collection cases which a third party is handling . The other cases, which need to be distinguished, are the ones which were created very quickly in the aftermath of the Swiss franc move.
They are a part of the valuation issue with which we are all presented with. We haven’t completed the work on that and we don’t want to ask people to pay amounts of money that we are not confident ourselves are the right amount. When that’s been done we will determine the methodology that will be used and this is the fair process which we will apply to everybody and then we will start collecting those debts. Obviously we need to treat people in a reasonable manner and treat them fairly. We’re talking to people along the way before that decision is made.
F.M.: What are the mechanisms that ensure that KPMG treats this situation in the best possible way?
KPMG's compensation has to be approved by a creditors' committee
R.H.: There are a number of systems of checks and balances that ensure fair treatment. The company continues to be regulated, so the FCA requires us to treat customers fairly. KPMG hasn’t been paid anything at all yet. Our compensation has to be approved by a creditors' committee, which will consider things like the amounts of the hourly rate and whether the time has been spent productively, as well as other criteria. There are five volunteers on the creditors' committee who will need to agree on the compensation. If they think that we are doing a bad job then that's going to be bad news for us. We have a very strong motivation to resolve this situation in the best possible way.
