Law Commission Review of Intermediated Securities Consultation

I am writing to ask you to:

1. Send me examples and evidence we can use in our submission;
2. Consider making a personal submission yourself; and to
3. Update you on this important issue.

Submissions to The Law Commission Call for Evidence on the subject of dematerialisation, intermediated securities, shareholder rights and nominees/platforms must be made by 5 November.

The Law Commission “scoping” study will provide an accessible account of the law. It will also identify the corporate governance and other legal issues associated with intermediated securities, with an assessment of whether these issues cause difficulties in practice. It will consider the effect of intermediated securities on both retail investors and institutional investors. The project is intended to inform public debate, develop a broad understanding of potential options for reform and seek a consensus about issues to be addressed in the future.

What the government says it wants to achieve is better corporate governance and transparency.  We think it should be axiomatic that good corporate governance rests ultimately on all investors in a company having the right to attend meetings and vote, so all private investors must be enfranchised.  Transparency cannot be achieved as long as corporate managers are prevented from knowing who are their investors: and being able to communicate with private investors directly also calls for full enfranchisement.

ShareSoc-UKSA position

ShareSoc-UKSA’s position is that individual investors should be able to vote their shares, receive information from the company and exercise ownership rights. They must, by default, be provided with the information and tools needed in order to exercise rights associated with share ownership. Shares held via nominee do not provide these rights – this needs to change. Being the registered shareholder (i.e. with a paper certificate or owning via a personal crest account) provides these rights – the solution to dematerialisation of paper certificates proposed by the Registrars Group will preserve these rights.

Our preferred solution is to give every beneficial owner (i.e. ultimate owner) of a company’s shares the legal right to have his or her name and address on the register as the member, and hence to enjoy all the rights given to members by the Companies Act.

The Law Commission should also consider converting the role of nominee to that of an agent, in effect abolishing the practice of using the term ‘nominee’ on share registers.  Agents (ie stockbrokers) can continue to provide chargeable services as at present, even being named on share registers as such, but only in a subsidiary role to that of the investors named as shareholders. This is the separation of services from ownership, freeing investors from being trapped in nominees but leaving brokers and others free to derive the same sort of income as now. It is the power of computers and the internet that gives investors today’s ease of dealing in shares, not the use of nominees.

Examples and Evidence

ShareSoc-UKSA are keen to make our submission as effective as possible. The Law Commission are asking for examples and evidence which support submissions regarding the problems in the current ways that shares are owned and the difficulties of voting, receiving information and exercising ownership rights. In our response we will be referring to these examples, but are keen to include more.

If you can think of other examples, please can you send me details so that I can include them in our response. My email is Cliff.Weight@ShareSoc.org

Personal Responses

We will publish our response before the 5^th November deadline. We would also like members to make personal responses to the Law Commission. Please do so, as the Law Commission is keen to receive a representative selection of views from all constituents in the debate. We are keen that response of individual investors does not get overwhelmed in numbers terms, by the hundred plus responses expected from platforms, brokers, fund managers, companies and consultants. In a consultation by BEIS, on Corporate Governance, they counted the responses by number taking no account of the quality of the responses (which was faulty analysis) and used this as a reason to not accept our view (which was disgraceful). We do not want this to happen again.

Further background

Para 1.24 of The Law Commission Call for Evidence is important as it highlights how CREST works in the UK:

1.24  CREST is the only CSD in the UK. It settles securities in dematerialised form. Unlike CSDs in most other jurisdictions which operate this system, CREST has no proprietary rights in securities and it is not treated as “holding” securities for the company. Rather, CREST operates a register, which confers legal title on the person or entity named in the register. Each member on the CREST register holds directly from the company, is the legal owner of the securities and is the shareholder (or “member”) for company law purposes.

Further information on this is in Computershare’s 2014 report, Transparency of Share Ownership, Shareholder Communications and Voting in Global Capital Markets.  You can access the report online here.

Paras 2.91 to 2.98 of The Law Commission Call for Evidence highlight dematerialisation issues. Much work has been done in this area., e.g.

2.96  During 2016 and 2017, the Government actively engaged with industry participants on the process for dematerialising existing paper share certificates. The Government proposed as part of the engagement that shareholders currently holding paper certificates should remain direct shareholders after dematerialisation with no loss of shareholder rights. The work was suspended in view of the uncertainties about the UK’s approach to the CSDR and other matters after exiting the EU, but we understand that the assumption remains that these shareholders should retain their direct shareholder rights.

2.97  Against this background, we welcome views from consultees. In particular, we would like to know about the approaches being developed in relation to the proposed dematerialisation of paper share certificates. As set out above, the Government proposed that shareholders currently holding paper certificates would not lose their shareholder rights after dematerialisation. Could the approaches being developed for dematerialisation be applied to the ultimate investors in an intermediated securities chain to provide that they have the same or similar rights as direct shareholders?

The points I have highlighted in bold are particularly encouraging and signal an important victory for private investor interests.

We think the Law Commission may be wrong in para 1.28 to suggest that the broker has an interest in the ownership chain. The shares in the intermediary chain are owned by the Crest member (eg the nominee). The ultimate investor (you or me!) has an interest in those shares owned by the Crest member. The ultimate investor may have a contractually agreement with the broker who may send instructions to the Crest member. We will challenge the Law Commission about this point.

Para 2.42 raises the question of whether the regime post the changes following Lehmans is now sufficiently robust. We don’t think it is and will challenge this and paras 2.56 and 2.59 which suggest the FSCS compensation limit of £85,000 is adequate, which it clearly is not. The FCA’s conclusion, that it is adequate in the great majority of cases, is stunningly complacent.

The ISA Regulations show, any company shares held through an ISA should enjoy, automatically, better rights than are accorded by Part 9.

Also, Part 9 covers ‘listed’ shares only.  Despite the fact that shares on the Alternative Investment Market, now called AIM, are under the aegis of the London Stock Exchange, they are not regarded as ‘listed’.  It’s an anomaly that needs correcting.

So, Part 9 does not cover AIM shares.  Under Vince Cable, BIS was preparing changes to CA2006 to broaden the scope of Part 9, which were expected to include bringing in AIM shares, all of which the Secretary of State has the power to do.  However, another change took place, under George Osborne, which was to allow AIM shares into ISAs.  This automatically gave AIM shares in ISAs the benefit of Section 4 of the ISA Regulations.

It could be quite easy to legislate to give all investors using nominee accounts the same rights as those which the law already gives to ISA investors, thus making Part 9 superfluous, EXCEPT – and it’s a big exception – no regulatory body is interested in enforcing the ISA regulations on behalf of investors, which is a kind of Catch 22.

There is so much that could be done to increase the influence of individual equity investors.  Part 9 hasn’t done that.  Section 4 of the ISA Regulations hasn’t done that. The Companies Act is by no means perfect, but giving everyone whose money is used to buy company shares the right to all shareholder rights that are in the Companies Act would be a very good starting point.

Cliff Weight

Director, ShareSoc