The Financial Times published a long article by Jonathan Eley entitled “What price shareholder democracy?” on Saturday. It was in the FTMoney supplement and covered the issue of nominee accounts, dematerialisation and prospective EU legislation. Mr Eley covered most of the issues well but here’s a note I have sent him to explain a few points.
Dear Jonathan,
Regarding your article at the weekend on shareholder democracy and nominee accounts, which was generally very sound, a few points:
1. Not all listed companies like the nominee system because it effectively means they do not know who their real shareholders are, and also have no way of communicating with them. It is often particularly important to mobilise private shareholders and smaller institutional holders when a company is under attack by speculators or short term holders but it is very difficult for the directors to do that when the retail shareholders are in nominee accounts. Indeed I would argue that those companies who like the nominee system are often those where the management are major shareholders and are quite happy to have private investors disenfranchised – this happens quite a lot with AIM companies, where the directors often want to do what they want regardless of shareholder views.
2. You close the article by asking “who will pay for it [dematerialisation]? The answer from previous studies of the cost and benefits of dematerialisation is that it will more than pay for itself! Obviously there are some initial costs to be borne by brokers and Crest to convert their systems, but they will also make substantial cost savings from the reduced paper handling and otherwise simplified systems (assume all paper share certificates are dematerialised as recommended). So the industry saves money, but also private shareholders save a lot also because they incur substantial costs from such problems as lost share certificates. The current costs are high because there are still millions of holders of paper share certificates. In addition, at present you sometimes have to “rematerialise” a “dematerialised” holding to take advantage of corporate actions. For example I recently had to rematerialise into paper a holding in a VCT which was in my personal crest account so I could take up an “enhanced buy-back” offer. Basically the current system is a mess and paper share certificates are not just archaic but they are also a major security risk.
3. So far as ShareSoc is concerned, nominee accounts are an anathema for the reasons you partly explain in your article. The reason why stockbrokers like pooled nominee accounts is not simply the cost but because it locks their clients into their services. There is no cost difference between a nominee account or a personal crest account – indeed some brokers who offer both charge the same. In other words, the claims for cost benefits of pooled nominees are a myth. In essence nominee accounts undermine your legal rights, create major risks for investors, and destroy shareholder democracy. We think they should be severely restricted or at least clients made aware of the issues before they sign up for them. In addition we would like to have the regulations changed so that ISAs and SIPPs don’t need to be in nominee accounts.
Regrettably the Government seems to be listening more to those who would like to keep the status quo rather than introduce a modern electronic system based on dematerialisation (as recommended incidentally in the Kay Review). They are trying to delay implementation of the CSDR EU legislation when they should not be.
Shareholders should write to their M.P. if they wish to get a more sensible approach in place before it is too late.
Roger Lawson
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