FlowBank bankruptcy 2024: What happened to customers?

FlowBank bankruptcy

On June 13th, 2024, FINMA announced that they were opening bankruptcy proceedings against FlowBank SA. They established that the bank did not have sufficient capital for its operations. There were also some concerns that the bank was over-indebted.

FINMA already took its first action against FlowBank in October 2021. There were already breaches of the supervisory law. FINMA ordered some measures to restore compliance.

Again, in June 2023, FINMA took action and appointed a monitor to watch the bank activities. The report was that FlowBank repeatedly breached the capital requirements.

Finally, in April 2024, the bank was unable to carry out a capital increase. This required FINMA to intervene and resulted in the bankruptcy. FINMA appointed a law firm (Walder Wyss AG) as a liquidator to carry out all the bankruptcy proceedings.

So, what happened to the 22’000 customers after that?

Freezing the app

As for June 13th 2024, following the bankruptcy, the platform was entirely closed for customers. From this point on, no further orders would be executed.

On the same day, all deposits in foreign currencies were liquidated and converted to Swiss francs. This amount is then added to the standard cash and will be considered for secured deposits.

Finally, FINMA also ordered the liquidation of all CFD positions. The results from this liquidation made it into a special account. And this will not be considered as preferential deposits. This means that CFD proceedings will be part of the bankruptcy proceedings.

Ten days later, the liquidators reopened the platform with read-only access for customers.

Getting the cash back

The priority of FINMA was to get back the cash deposits to the customers. In case of bankruptcy, 100’000 CHF of cash for each customer is considered as privileged deposits. These privileged deposits take priority during bankruptcy and should be repaid quickly.

Fortunately, FlowBank had enough cash to pay bank these privileged deposits. This is good because Esisuisse would need to have been involved otherwise and this could have taken longer for the customers to get back their money.

Overall, it took about two weeks for people to get back their cash.

For people with individual accounts, the transfer could be done directly from the FlowBank platform that was reopened with only this feature. The liquidators worked with FlowBank to amend the application to ease the liquidation process.

Other people, for instance with joint accounts, needed to request the transfer by email, to the liquidators. I have not heard of anybody in this case, but these requests were processed manually, so it could have taken longer.

For people with more than 100’000 CHF in cash, this will take longer, since these assets will then be considered as standard assets and will be returned (if possible) during standard bankruptcy proceedings.

Getting the securities back

For most people, the most important was to get back their securities. All people I have discussed with had ETFs and stocks with FlowBank. And these people had significantly more securities than cash, so they cared more about this.

About a month after the beginning of the bankruptcy proceedings, the liquidators enabled the transfer of securities from FlowBank to another broker. So, impacted customers needed to create another broker account if they did not already have one. Then, they could start the transfer from FlowBank to the new broker for all of their shares.

Even though they enabled this feature after only a month, it took them much longer to then process the transfers. I am actually surprised at how long it took because these transfers are supposed to be automated. And the worst is that they already supported share transfers (in both directions) before the bankruptcy. So, I cannot believe how slow the process was.

They also did some brokers in priority (like Saxo and Swissquote) while others took longer (like Interactive Brokers). I am not sure whether this is fair, but I guess they had a reason to do it that way.

The first person I have heard that got shares back had to wait three months. Yes, September 19th is the first I have heard of anybody getting the shares back. Of course, it does not mean that nobody got shares before, but it also likely means that some other people got their shares later.

During these 3 months, these shares generated some dividends. While people got their shares back, they did not directly got back their dividends. So, after getting the shares, investors still had to wait longer

As expected, people got their shares back. However, it took about three months for people to start getting their shares back. So, we need to be prepared to lose access to our shares for a while. For some people, it took almost six months to get them back!

Or selling the shares

A month after the first people received their shares, many people still did not have their shares transferred. At this point, around mid-October 2024, many people still did not get their shares, after four months.

The liquidators and FlowBank then offered another way out: selling the shares and getting the cash out. This was done through the customer area and the customer could choose which day he wanted to sell.

On one hand, it is good that they offer a way for people to get their money faster, especially for people who may be in trouble because of that. But on the other hand, it would be better if they focused on transferring the shares faster rather than on selling the shares.

Even when done quickly, selling the shares and transferring the proceeds has one disadvantage: it gets you out of the market. You can expect to be out of the market for a week. And if you are unlucky, the market may have gone up significantly during that week. In the very long term, it probably does not make a huge difference. But in the shorter term, it can definitely matter.

Fractional shares

While people could transfer out their standard shares, fractional shares are a different story. Indeed, fractional shares are not directly traded on the stock market. The broker itself will buy the shares and then split them between their customers. So, the shares belong to the broker and cannot be sold back in fractions to the exchange.

In the case of FlowBank bankruptcy, customers had to wait two months just to know what would happen with fractional shares. It appears that liquidators did not really know what to do with them and kept delaying a decision. In the end, fractional shares will have to be sold by the liquidators and then each customer would get back its fraction in cash, through a bank transfer. As of early December, at least some investors (maybe all) did not yet get back their fractional shares.

This is a significant disadvantage of fractional shares, since it means your shares are out of the market. Standard shares were kept invested, while fractional shares did not stay invested. Furthermore, I am not sure about what happened with dividends during the bankruptcy proceedings. It appears the liquidators were not prepared to deal with fractional shares at all.

For me, this is one further sign that we should avoid fractional shares when possible.

What have we learned?

While this bankruptcy is awful for both customers and FlowBank, we can learn a lot from it.

First, it looks like the process works relatively well in the simple situations. Customers got their cash back relatively quickly. And people with only stocks and ETFs also were able to get back their securities in a reasonable amount of time.

However, even in the best case, it took about two weeks to get back the cash and more than three months to get back their securities. So, you must not depend on what you invest, since you could be locked out of your money for a while. During the accumulation phase, this would not be too bad. However, for early retirement or whenever you need the money, this could have been a major issue.

FlowBank already had support for share transfer before. Even with that, it took a very long time to get back the shares. So, I cannot imagine how long it would take for brokers that do not support this feature. Therefore, brokers with share transfer should be preferred.

This is not really new, but this bankruptcy confirms the fact that Contracts For Difference (CFDs) should be avoided. Most people will lose money when investing in them. And in case of bankruptcy, you may have nothing left since everything is done over the counter.

One interesting thing I learned was that FINMA and the liquidators will work together with the bankrupt company to implement a way for the customers to get back their money. I was expecting everything to happen on the backend, but most transfers were done from the front-end, with changes done to the e-banking. Of course, it does not mean it will always happen like this.

This bankruptcy reinforces the fact that fractional shares are truly inferior to standard shares. In the case of bankruptcy, they are likely to be simply liquidated, and you will get cash instead. As a result, you could lose out on potential returns and dividends. Moreover, they pose extra complexity for the liquidators, meaning it takes longer to get it back.

What can we do?

Here are a few things we can do to improve our situation in case of another broker bankruptcy.

1. A good rule is to not have more than 100’000 CHF in cash with a broker. It is better to stay below the deposit insurance threshold.
2. We should avoid fractional shares since they are more complicated to liquidate.
3. We should (of course) avoid anything like CFDs.
4. If we need the money to be available, we should probably consider a second broker account.

In our case, we are already following the first three rules. But we are considering opening a secondary broker account in the future to protect against bankruptcy of one of the two brokers. I will share about this once we do it.

Conclusion

The FlowBank bankruptcy story is not yet over, but many people got heir money and shares back. FINMA took great care to work with FlowBank to give their assets back to customers.

Overall, it took about 2 weeks for the first customers to get back their cash. And then, it took at least three months to get back the shares. Since this was a relatively small bankruptcy, we can expect that with a larger event, it would take longer. I would have expected the shares to be distributed faster than that. And for some people, it took almost six months.

In the end, I am not aware of anyone having lost money as long as they used only shares and cash. So, the system is working and we can back the shares. However, it is very slow. In the case of a larger event, it could take much longer.

I think it is good to know what happened with this bankruptcy. This allows investors to be better prepared for the next bankruptcy.

If you would like to learn more about this general subject, you can read my other article about broker bankruptcy.

If you went through this bankruptcy process, how was your experience?