At the start of July, the Government’s digitisation taskforce published its interim report on the progress that has been made so far when it comes to moving the UK shareholder framework into a purely electronic format. We need to remember that this is evolution not revolution and that many other parts of the world have progressed successfully towards such a basis. Indeed had we not abandoned parts of the Central Securities Depositories Regulations enshrined in UK law, such reform would have already been implemented in the UK. It is hard to understand why a pathway adopted both by the EU and USA was abandoned by the UK for a fresh review, but we are where we are.
Reviewing the proposals as they stand, the favoured approach lays bare the fact that if we are not careful, a once in a generation opportunity to make for easier access to data, facilitate a reduction in costs, and enable the deployment of technology to improve communication between issuers and holders will be missed. The risks are manifold, not just when it comes to transparency of ownership, but investors risk being lumbered with higher costs and even stock brokers may see their business models being squeezed.
Although a range of proposals have been suggested, the seemingly favoured approach would see all certificated holders placed into a nominee and for there to be no choice thereafter but nominees.
The risk to issuers
Issuers would be compelled to communicate with shareholders through nominees only. Whilst this has historically been a challenge for those who hold via nominees anyway, other channels of communication would end. Ensuring that the relevant narratives can be maintained will mean having to invest in additional communications tools and the proposal’s attempts to legally oblige nominees to respond critically omits details on timing. Issuers will also find it harder to understand ownership structures.
The risk to investors
This new approach will see the nominees taking on an increased administrative workload, which needs to be funded, with costs passed to any intermediary then onto the ultimate beneficial owner. It will also be harder for investors to exercise their rights as securities holders.
The risk to brokers
Perhaps an unexpected consequence is what this means for the broker community. They may have to face new nominee intermediaries as well as a concentration risk develop, as has happened with CSDs. The registrar will also be incentivised to further develop shareholder services, not only acting as the default execution provider in the event that existing shareholders want to increase or decrease their holding, but potentially offering tax wrappers, too. Whilst this is unlikely to be a dealbreaker for brokers, it certainly risks erosion of some valuable revenues.
In short, the favoured nominee model strips away shareholder choice, increases the cost of being a shareholder and constrains the rights of share ownership. It makes little sense to have a model for listed companies that does not allow for ease of movement of securities between unlisted and listed state, nor one that is so different to the pathways adopted by the bulk of the world.
A solution is however in reach. Either the existing CSDR model could be enhanced to address the market need once all certificates are dematerialised, or the current model can be readily digitised, leveraging the infrastructure and technology which is already in place. Ideally the legislation needed is one that facilitates choice (of certificates, book entry, nominee and CSD to operate concurrently) but more importantly tackles aspects such as Schedule 5 of the Companies Act by making e-comms the default as opposed to paper.
This is a complex issue and one that requires real investment to resolve. But if, as market participants, we stand idly by, the chance for meaningful reform that delivers a better outcome will be missed. The consultation period runs until 25th September – we owe it to issuers and investors alike to take that opportunity and make our voices heard.
The report is accessible at – https://www.gov.uk/government/publications/digitisation-taskforce
An amended version of this article originally appeared in the August 2023 version of AIM Journal. You can download a printable version here.