Investor Event

Why Share Certificates are Dangerous and We Need a New System

This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

The national press have covered the story of Deryn and Derek Hemment who face a demand for £25,000 from Capita to replace lost share certificates. They held shares in Compass Group worth £1.5 million and Capita posted them new certificates via second class post. But they never arrived and cannot be traced. Capita says it’s not their problem because their terms and conditions make it clear that certificates are sent at the recipients risk. Capita appear to have been acting as both stockbroker and registrar in this case.

The £25,000 being demanded is an indemnity required by the share registrar’s insurers to cover the risk that the shares represented by the certificates might be sold. This is a common complaint to ShareSoc in circumstances where certificates are lost or mislaid (not a rare event) but this is certainly one of the highest cost examples ever seen.

It has been suggested that the registrar could simply cancel the lost certificates, but the problem is that certificates are prima facie evidence of ownership and a stockbroker could accept a sale of them upon presentation by anyone. They have no quick way of checking against the register that the certificates are valid or that the presenter actually owns them and the broker might therefore settle the transaction, i.e. pay the presenter cash in a few days, before the problem came to light.

This is a long-standing defect in the share trading system but paper share certificates are archaic and have risks and costs associated with their use. There are a lot of paper share certificates still out there (for example received by employees of a company as in this case, or held by older investors who prefer to have their name on the share register). The alternative of using nominee accounts is problematic because they are both legally uncertain and dangerous if your stockbroker gets into financial difficulties (as they often do). Personal crest accounts are a better solution but few brokers offer them.

It highlights the point that we need a new low cost electronic share registration system and the sooner the better – see the ShareSoc shareholder rights campaign for more on this issue here: . There is a document available from that page called “Reforming UK Share Ownership” which spells out how we think the share ownership system should be improved.

In the meantime Mr and Mrs Hemment are threatening legal action on the basis that sending certificates by second class post was reckless for those of such high potential value. This could be a costly and complex legal claim however.

Roger Lawson

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