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in Gorman v. Littlefield in so far as the circumstances permitted. Duell v. Hollins and Barlow Clowes v. Vaughan show that the problem of shortfalls can be dealt with in a sensible and fair way.

The rules established by the United States Supreme Court in Gorman v. Littlefield and Duell v. Hollins have since been affirmed and refined by federal legislation. The Securities and Investor Protection Act of 1970 (SIPA)41 gives clients of financial intermediaries a proprietary interest in all the shares held by the intermediary on client accounts irrespective of whether the shares have been appropriated to particular clients or not.

American case law not only supports the position taken by the Court of Appeal in Hunter v. Moss, it protects investors to a greater extent than the English case. In Hunter v. Moss the trust related to a part of an identified bulk. In American case law there is no requirement for there to exist an identified bulk.

7.3.3.3 Policy considerations

The result in Hunter v. Moss is also supported by policy considerations. Investors entrust brokers and custodians with their assets. They have two options. They can decide that they are not concerned about the solvency of their chosen service provider and that they are content with a contractual claim to have securities delivered to them. On the other hand, they may feel that they prefer to have property rights in the securities held on their behalf by the broker or custodian to be able to claim their assets in the intermediary’s insolvency.

The law should facilitate both of these arrangements. Parties should be able to use straightforward language in their documentation without having to work their way around irreconcilable case law.

Moreover, an onerous requirement for appropriation disadvantages retail investors. If a retail investor wishes to be protected by a property interest, the law should not make compliance with this request difficult by imposing onerous requirements. The more cumbersome the requirement for appropriation, the less likely it will be that intermediaries feel able to offer property-based arrangements.

Strict requirements for appropriation also have the disadvantage of increasing the likelihood that parties will not comply with them because they are unaware of them or because they intentionally neglect to observe them. Clients, in particular retail clients, for whose protection property rights will have been put in place by the parties

41 PubL 91-598 December 30, 1970, 84 Stat. 1636.

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concerned, have no practical means of ensuring that their assets are in fact kept in accordance with the formalities imposed by the law. This may lead to undesirable results.

There are also, as the Law Commission pointed out, strong economic reasons favouring a proprietary claim of investors holding indirect securities. Such investors take the risk associated with the securities they hold. The intermediary does not share this risk, and is not liable to the investor if the issuer defaults or if the securities fall in value. The intermediary merely acts as a conduit for the capital, income and other economic benefits that flow from the underlying securities. The intermediary’s financial interest lies in the fees and service charges associated with the services provided. Giving the intermediary’s creditors a claim over client assets would result in a windfall; it would give those creditors access to funds to which the intermediary made no contribution.42

Moreover, creditors are likely to be aware of the fact that securities held on behalf of clients do not belong to the intermediary and therefore do not rely on their availability when entering into a credit relationship with the intermediary. In Re Goldcorp,43 for example, the allocation requirement operated in favour of a bank whose claim was secured by a floating charge. When granting the secured loan the bank must have known that Goldcorp had guaranteed to all of its customers that it would store gold allocated to them so that each customer would have a proprietary interest in the gold stored. The bank must have assumed that Goldcorp actually stored the assets accordingly. When the bank granted the loan, it had no reason to believe that it would later acquire an interest in customer gold. Nevertheless, the bank was able to take advantage of assets that in economic terms belonged to Goldcorp clients and received a windfall benefit.

The rule in Re Goldcorp makes it difficult to set up property-based arrangements. Documentation will have to be carefully drafted to protect clients whose assets are kept on an unallocated basis. This exposes investors to the insolvency risk of their intermediary.44 Retail investors who are less able than professional investors to protect themselves by

42Law Commission, Project on Intermediated Investment Securities, Second Seminar: Issues affecting Account Holders and Intermediaries (June 2006), available from http://www. lawcom.gov.uk/docs/investment_securities_seminar_paper_2.pdf 11

43[1995] 1 AC 74 (PC).

44Roy Goode, ‘Ownership and Obligation in Commercial Transactions’, [1997] LQR 433 at 453.

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seeking legal advice and using appropriate documentation are most likely to be affected by this risk. Hunter v. Moss goes some way towards remedying this disadvantage for registered securities. The American authority discussed in this book makes it possible for English law, by relying on common law authority, to develop further towards achieving a regime that protects the interests of retail as well as professional investors.

The approach adopted in Hunter v. Moss helps to create a balance between the legal protection available to professional and retail investors. Statutory reforms have set out to reduce the risk involved in securities transfers. These reforms have benefited professional investors and have fallen short of assisting retail investors. To give two examples:

*CREST was implemented to reduce the risk involved in transactions effected on the stock exchange. CREST provides for a delivery versus payment mechanism which allows for title in the securities to pass to the buyer only if she can at the same time pay the purchase price. This mechanism reduces the time period during which one party is exposed to the other party’s insolvency risk. But the mechanism is available only to CREST members who are predominantly professional market participants.

*CREST also enhances the legal position of professional investors by reducing settlement periods. Under Talisman, the last of the paperbased settlement systems, system members first acquired an equitable interest and then had to wait until the end of the settlement period to receive legal title. CREST, at first, shortened the time period between payment and transfer of legal title and, in 2001, made legal title available simultaneously with payment of the purchase price. Again, this improvement has increased the safety of CREST members and not of retail investors who hold securities through an intermediary.

The rule in Hunter v. Moss and the US authorities supplementing it remedies this imbalance by establishing a legal regime that makes it very easy for clients to assert a proprietary interest in property held by an intermediary.

Hunter v. Moss is the leading authority on the point of property rights in registered securities kept in an unallocated bulk of securities of the same kind. The case was decided by the Court of Appeal and so provides clients wishing to rely on it with some certainty. Because of the Privy Council’s advice in Re Goldcorp, however, the position in English law is also burdened with some uncertainty. It is no surprise that the Financial

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Markets Law Committee (FMLC) put forward a proposal for reform. Based on the FMLC proposal, the Law Commission has launched a law reform project relating to indirectly held securities. Both initiatives support the approach taken by Hunter v. Moss. The FMLC proposal and the Law Commission project will be analysed in subsection 7.3.3.4.

7.3.3.4 Law reform

The rules governing property rights in indirectly held securities have been the subject of a proposal for law reform. FMLC, which is located in the Bank of England, has put forward a proposal for the implementation of a statutory regime. The FMLC was established to identify issues of legal uncertainty or misunderstanding in the framework of the wholesale financial markets which might give rise to material risks, and to consider how such issues should be addressed. It published a report in 2004 on the need for legislation on indirectly held securities.45

The authors of the report concluded that the position as stated in Hunter v. Moss is good law.46 They also recommended that, in order to avoid any lingering doubt, a statutory regime be introduced which makes it clear that, unless otherwise agreed, investors in a particular issue of securities held by an intermediary in a common pool have co-proprietary interests in the pool.47 The report does not contain a proposal giving the account holder a new form property right hitherto unknown to English law. It continues to rest on the protection afforded to beneficiaries under English trust law.48

The Law Commission took up the proposal put forward by the FMLC and announced a law reform project on intermediated securities in March 2005.49 In March and in June 2006, two seminars were held where members of the public in general and representatives of the London financial market in particular were invited to give their views and comments on the proposed law reform. In order to facilitate the

45http://www.fmlc.org/papers/fmlc1_3_july04.pdf (last visited 27 June 2006).

46FMLC, Issue 3: Property Interests in Securities (London: Bank of England, 2004), available from http://www.fmlc.org/papers/fmlc1_3_july04.pdf 14.

47FMLC, Issue 3: Property Interests in Securities 15.

48Law Commission, Project on Intermediated Investment Securities, Second Seminar: Issues affecting Account Holders and Intermediaries (London: Law Commission, June 2006), available from http://www.lawcom.gov.uk/docs/investment_securities_seminar_ paper_2.pdf 23.

49Law Commission, Ninth Programme of Law Reform, Law Com 293 (London: Law Commission, March 2005), available from http://www.lawcom.gov.uk/docs/ 9th_Prog_Final.pdf.

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discussion at these seminars, the Law Commission published two seminar papers.

In the first, the Law Commission stressed that securities held by an intermediary for an account holder should be protected from the intermediary’s liquidator and creditors.50 In the second, the Law Commission confirmed the view that the position as stated in Hunter v. Moss is good law.51 The Law Commission concluded that this makes it possible in most circumstances for parties to create an express trust in favour of investors holding securities indirectly.

Nevertheless, the Law Commission expressed the view that the financial markets would benefit from clarifying the position, both generally as regards commingled securities and specifically in the case of accounts that mix customer and intermediary assets. The Law Commission proposed that the securities credited to an account holder’s account should be considered outside of the intermediary’s estate without the need to consider further whether or not they can be allocated for trust purposes.52 There is no mention, however, that this is to be achieved by way of abandoning the traditional approach adopted by English law. On the contrary, the analysis presented by the Law Commission in both of its seminar papers was firmly rooted within the trust law analysis prevailing in England. Moreover, the Law Commission stressed, with a view to commenting on the possibility of adopting a harmonised European regime, that different legal systems have developed various means of ensuring that commingling of customer securities in a pooled account does not affect their protection against claims by creditors of the intermediary. The protection afforded by any European legal framework should be without prejudice to the protection given earlier and additional rights that an account holder may have under domestic law to the extent that such rights do not conflict with the legal framework rules.53

50Law Commission, Project on Intermediated Investment Securities, First Seminar: Objectives for a Common Legal Framework (London: Law Commission, March 2006), available from http:// www.lawcom.gov.uk/docs/seminar1.doc#_Toc129072694 14–5, 26.

51Law Commission, Project on Intermediated Investment Securities, Second Seminar: Issues Affecting Account Holders and Intermediaries (London: Law Commission, June 2006), available from http://www.lawcom.gov.uk/docs/investment_securities_seminar_ paper_2.pdf 17.

52Law Commission, Project on Intermediated Investment Securities, Second Seminar 19.

53Law Commission, Project on Intermediated Investment Securities, Second Seminar 26.