Last month we looked at the risks posed by the direction of travel the digitisation taskforce’s interim review appeared to be taking. Securities certification and the historical rights associated with that form an inherent part the democratic values associated with investing in the UK.
As it stands the proposals all appear to be taking a distinctly binary approach, an irony which cannot be overlooked given this reform is being driven by the ability to leverage the benefits that come with modern, electronic, share registers. So is there a way of providing issuers and investors with a comprehensive choice, that delivers the long overdue flexibility of a flexible register whilst still reflecting the needs of what appear to be some fairly sizable minorities?
Whilst we can agree that change is long overdue to ensure efficiencies can be recognised at every step of the way, at Avenir we already have the technology available to offer investors and issuers the choices that they need to ensure that the symbiotic relationship they have shared for years can be maintained. The key reason we can offer this is the fact that our technology has been built from the ground up over the last decade. We haven’t been encumbered by legacy systems which have been gradually adapted and enhanced as IT infrastructures – and volumes of data – have both grown.
What that means is that we already have systems configured which can operate Centralised Securities Depositary, a Corporate Sponsored Nominee, a Digital Register and Certificated System holdings concurrently. One master register that issuers and investors alike can interact with in a way that suits their needs whilst also achieving the long overdue digitisation of record keeping. This isn’t an abstract concept or an MVP, we have the technology at our disposal today. Suggestions that this multi-faceted approach is impossible to deliver has to be questioned.
There also needs to be a focus on enabling legislation. There are entire parts of the Companies Act 2006 that compel postal communication. This needs to be addressed to favour digital record keeping and communications. The reforms proposed are silent on the extent to which digitisation would extend private companies and it is important to consider a joined-up approach that allows scaling from start-up to IPO and ongoing fund raising.
Who should pay?
One key issue is also, who foots the bill? Whichever pathway adopted end users (the issuers and holders) will face a cost burden but even in this case democratising the approach appears to be most cost efficient, though some market participants may need to upgrade systems and then migrate the accompanying records at scale. All parties stand to gain from an open market approach to digitisation, in the long term, from the reduced administrative burdens and processing times, higher quality access to registers for the issuers, more convenience – and potentially reduced holding costs – for investors. The approach that allows for a choice of holding methods, with an emphasis on digital channels, would make the UK that much more attractive as a capital raising venue mean the beneficiaries here are widespread.
This reform has the potential to be the “big bang” moment for securities registry in the UK. But it is no small feat. Back in 1986 when the operations of the London Stock Exchange were overhauled, the preparation work took seven years and cost many millions of pounds to deliver. Whilst the overhaul of the registry system certainly isn’t as challenging, these numbers underscore the sheer cost and complexity of large scale reform. More can certainly be done to give issuers and holders the ultimate choice when it comes to how securities are held and they are represented on the shareholder register. Big spending by central government on overhauling the financial system is unlikely to be much of a vote winner, but with financial services such a big contributor to the UK economy and there being no escaping the fact that the London market continues to contract on a global basis, suitable incentives need to be on offer. Taking shortcuts here will serve no one well in the longer term.
An amended version of this article originally appeared in the September 2023 version of AIM Journal. You can download a printable version here.