Dematerialisation of Shares – Certificates to be Abolished

There are in excess of 10 million investors who hold their shares in paper certificated form. So today’s announcement by the Government is of interest.

Lord Frost set out the below points about getting rid of paper share certificates today as part of a Brexit regulatory review.

Dematerialisation of shares – Although the majority of shares are held in electronic form, a minority are held in paper form. It is more expensive and takes longer for holders of paper shares to trade them and there is a risk of certificates going astray. The Government will work with industry, regulators and shareholders in the medium term to determine the best mechanism for converting these paper shares into electronic form, while preserving the rights of existing shareholders.

The full document is here https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1018386/Brexit_opportunities-_regulatory_reforms.pdf

 

This is not really new News. As I understand it, paper shares are being scrapped in 2025 anyway.

Dematerialisation” allows companies to issue securities without a paper certificate to evidence them. It also allows existing paper shares to be transformed into electronic holdings. The general trend towards holding shares electronically was formalised by EU legislation in the form of the Central Securities Depositories Regulation (“CSDR”).

The CSDR sets a deadline of 2023 for ceasing the issue in paper form of most new publicly traded securities and a deadline of 2025 for the dematerialisation of existing paper shares for publicly traded securities. Therefore, the CSDR affects individual shareholders who hold their shares directly through paper share certificates. These certificates will need to be replaced with an electronic form of holding shares.

Now that the UK has exited the EU, the CSDR requirements no longer apply.

However, regardless of the status of the CSDR in this jurisdiction, stakeholders have told us that dematerialisation is generally considered to be a positive step towards greater efficiency.

The issue was addressed by the Law Commission Review of Intermediated Securities, to which ShareSoc contributed. see https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2020/11/Law-Commission-Intermediated-Securities-Scoping-Paper-1.pdf

 

Cliff Weight, Director, ShareSoc

9 Comments
  1. Amin Mohammed says:

    We should not oppose the abolition of paper share certificates. However we should emphasise again the importance of having electronic ownership properly respect the rights of individual shareholders, in a way that nominee accounts do not do at present.

  2. Mark Bentley says:

    Given that personal CREST accounts have become virtually unobtainable, at reasonable cost, for individual investors, having a certificated holding is the only practical way that we appear on share registers and hence obtain full shareholder rights.

    It is therefore crucial that the Law Commission’s findings are addressed before certificates are abolished. BEIS must ensure that the Law Commission’s work is progressed ASAP and appropriate legislation introduced, so that beneficial shareholders obtain their full rights, irrespective of the mechanism through which they hold their shares.

  3. Mark Northway says:

    This is the perfect opportunity to address the disenfranchisement of beneficial owners that has accompanied the development of nominees in the UK. Regrettably reinstatement of shareholders’ rights is not currently on the BEIS agenda, although they are fully aware of the issues.

  4. rogerwlawson says:

    Thoroughly agree with all these previous comments. We need to pressure BEIS not to scrap share certificates before a “name on register” system is provided.

  5. Mark Bentley says:

    If BEIS don’t sit up & take notice pretty soon, I’m sure that the press would love a story about certificated holders losing their rights. A suitable quote from us could encourage those holders to write to their MPs. 😉

  6. David Nicholas Martin Starkie says:

    I believe that about 25% of over-75s never use the internet. Some of a younger age will live in areas with poor network coverage. I suspect few of these two groups own shares, but some will. How will they fair with dematerialisation? Is there not a presumption here that everyone engages with the internet and is comfortable doing so?

    • Mark Bentley says:

      Good point, David. There needs to be a readily available option to continue to receive paper communications (and vote using paper forms) for those who have difficulty with the Internet.

      Best,
      Mark

  7. Alan Selwood says:

    This is yet another move that disenfranchises certain members of the UK population by continued emphasis on ‘digital-only’.
    Cash payments get replaced by online payments and bank branches dwindle; renewal of driving licences and passports, etc becomes slow and laborious for those who do not apply digitally; shareholder rights get eroded by the emphasis on nominee accounts accessed online; personal Crest accounts become harder to obtain and at great extra cost, and are not available for ISA or SIPP holders; banks want to use online authentication methods for their services, and often make no effort to provide landline calls to those who (like me) frequently have 0% mobile network strength at home.

    I agree entirely that before share certificates are scrapped, proper methods should be provided, tested, and in place that ensure that shareholder rights are not only retained but enhanced.

  8. Richard Clarke says:

    I agree. The issue is not about whether pieces of paper are used as evidence of title but how the rights arising from ownership are preserved. There seems to be a widespread misunderstanding that equities are solely financial assets and a widespread failure of nominees to respect the wishes of the beneficial owners. (Where I have assets, like loan stock, which are overwhelmingly financial in nature I have no problem with the use of nominees/ trust systems where, inter alia, the systems for preserving non financial rights often work better than the more complex issues related to equity holdings.)

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