ShareSoc-UKSA Response: Law Commission Review of Intermediated Securities – Call for Evidence

ShareSoc-UKSA submitted a joint response on behalf of individual investors, on 5 Nov 2019. The key points we made were:

Communication by email rather than by post is now the norm and assumed as the default position. Printing annual reports and shareholder circulars and sending them to shareholders by post is no longer necessary. Postage and printing costs were some of the key drivers of the nominee system. A modern system of intermediated securities should embrace and recognise modern technology and ensure the costs savings available are achieved and shared with the beneficial investors.

The current computerised processes mirror the old days of paper settlement and are no longer fit for purpose. It is time for a new approach, based on the administrative streamlining that modern technology can offer, with a simple ownership model directly linking companies and their ultimate investors.

We are moving towards Dematerialisation in 2023. This will require change and is the ideal opportunity to reform the way shares are owned in the UK and ensure all individual “shareholders” have their shareholder rights restored.

Many investors recognise that the current system of ownership has fundamental flaws which The Law Commission’s excellent analysis identifies. The most notable issue for private investors is that, when shares are held via a nominee, the beneficial investor is not the legal shareholder; the nominee is the shareholder. More importantly, the rights and obligations of legal share ownership are not effectively passed through to the ultimate (beneficial) investor under current rules:

• The ultimate investor does not automatically, as of right, receive communications from the companies in which they have invested.
• The right of the ultimate investor to attend and vote at AGMs is subject to facilitation (and may be at a cost) by the nominee;
• The ultimate investors’ funds are not entirely safe as the collapse of Beaufort and the subsequent debate about the administrator’s fees revealed.

Research shows that 940 out of every 1,000 individuals who own shares do not vote their shares. This is at least in part because the current system acts as a deterrent. This needs to change. Individual shareholders can greatly assist in corporate governance, effective company engagement and holding directors to account. Individual shareholders need to be better empowered so to do.

Shockingly, many people are not aware of the limitations of nominee accounts or of the fact that they do not own the shares they have purchased. Many private investors may not even be aware of the exact terms that are, in effect, being imposed on them. Hargreaves Lansdown’s terms and conditions, for example, run to some 14,000 words.

Our preferred approach is for individual investors to hold their shares directly (i.e. in their own names) on an electronic register. This was also the solution recommended by the Kay Review of UK Equity Markets (2012). Under this proposal the intermediary (Broker / Platform / Nominee / Bank) simply becomes an agent acting on behalf of the ultimate shareholder. As the agent they would offer a range of services, as at present, which they would charge for. An outline of how this would work in practice is shown below in our answer to Question 1.

This would:

• Allow ultimate shareholders to retain full rights of share ownership (receiving communications from the company, attending AGMs / EGMs and voting unless they opt not to do so);
• Ensure that the ultimate investors were not at risk of losing money as a result of administrative failings, malfeasance or bankruptcy of nominees;
• Allow the company to identify individual members, how long they have been members and the extent of their interest in the company;
• Enable the company to communicate more effectively with its ultimate owners;
• Enable ultimate investors to communicate with company management whenever they choose in their capacity as a registered member;
• Enable ultimate investors to communicate with other shareholders in order to explain issues and other views than the Board’s and to requisition shareholder resolutions.

Most importantly, this would improve corporate governance. It would resolve the current highly unsatisfactory situation in which those who are legally the members of the company (the nominees) and who are supposed to be exercising governance and stewardship oversight have no financial interest of their own in the business and have inadequate incentive to exercise proper, long-term responsibility in this respect.  The results are all too clear to see in the recent governance disasters (Carillion, Royal Mail, Thomas Cook, Persimmon, etc) and the egregious levels of CEO pay which, to a large extent, are now accepted by asset managers as the norm. As concern mounts about climate change issues and its implications for business, it is clear that stronger stewardship is needed. Far better that this should come from shareholders with money of their own invested, rather than it be left to pressure groups and those fund managers who burnish ‘green’ credentials for marketing purposes.

Our full response is here Law Commission Response from ShareSoc-UKSA

Click here for to read the The Law Commission Call for Evidence

Cliff Weight, Director, ShareSoc