Policymakers in Ireland will in the coming months start making fundamental choices that not only have the potential to benefit shareholders, but could also drastically reduce the costs associated with trading securities and at the same time boost government receipts by streamlining the collection of stamp duty.
This unique opportunity has arisen as the implementation of CSDR – Central Securities Depository Regulation – reaches its penultimate stage. The process has been a drawn out one which started back in 2014, but from January 1st 2023 all new securities issued by EU based issuers and listed on a stock exchange or similar trading venue can only be held in an electronic form. By 1st January 2025, all such exchange traded securities must be held electronically.
It is estimated that there are currently about 500,000 unique holders of physical share certificates in Ireland. The process of digitising – or dematerialising – these certificates isn’t an overtly cumbersome one, but to effect this efficiently, it is the corporate registrars who need the ability to respond.
Updating processes for the 21st century would bring many benefits.
- Elimination of physical share certificates, removing the risk of loss or damage
- Simpler transfers with online stock transfer processes
- Lower transaction costs – no physical certificate to be exchanged and reissued on every buy or sell order
- Easier collection of stamp duties. This process can be automated and collected as part of the transaction, rather than requiring a physical exchange and stamping of documents with the Treasury.
Registrars already maintain records of holders so converting to an electronic process would deliver continuity with minimal disruption and ongoing issuances would be purely electronic. It is however important that ongoing processing fees are also tackled otherwise the true advantages of digitisation wouldn’t be realised.
The current situation seems to be that all sides are ready to embrace this opportunity for change, something which should pave the way for a fully automated electronic system. Book entry register holdings will be accessible to authorised market participants and transfers should also be fully automated, something which would also facilitate the online payment of stamp duty. Registrars and the Revenue will be required to invest to ensure their systems can accommodate this approach, but the long-term functional benefits and cost savings would be significant. Brokers already charge significant additional fees to cover administration costs when dealing with paper certificates. The cost of recovering stamp duties would have the ability to fall by more than 90%, whilst the time taken to collect the owed taxes would drop from several months to become a near instant action.
Policymakers in the UK will be watching these developments closely, too. CSDR is a pan-European initiative which predates Brexit and despite the legislative timetable being the same – for now – the UK has already scaled back from some commitments in terms of what it wants to achieve from reform here. There’s the potential for further delays or policy divergence to emerge, but given the efficiency savings for brokers, securities holders and revenue collectors, pushing back the automation aspects would come at a real economic cost.
This article originally appeared in the September 2021 edition of AIM Journal. You can can download a printable version here.