Government adopts plan to digitise UK listed company shareholdings in stages

The UK’s Digitisation Taskforce has published its final recommendations for modernising the UK shareholding system through a staged approach. As a first step, paper share certificates will be abolished, but these paperless holdings will continue to be recorded on a separate part of the share register outside CREST. The ultimate aim is to move all UK listed company shareholdings into CREST, using intermediaries where necessary. Intermediated holding systems will need to be improved first, however, to make sure that investor rights are protected. This means that the whole project will take a few years to complete, and will require substantial technical input, including for the necessary legislative changes. 

Related proposals would also modernise UK law on electronic communications and payments to shareholders and managing untraced shareholders. Listed and other publicly traded companies will need to keep abreast of changes so that they can keep their shareholders informed and adapt their administrative arrangements. 

These proposals have all been accepted by the Government, which will establish a Technical Group to advise on the digitisation process.

Companies affected by the digitisation plans

The current plans will ultimately affect all UK-incorporated companies whose shares are publicly traded on the London Stock Exchange and other UK trading venues. Non-traded companies are not included in the current proposals.

The changes will be most important for companies with a large retail shareholder base, where the shareholders hold directly on the register rather than through a corporate sponsored nominee or retail dealing platform. These are typically consumer-facing companies, which have gone through privatisations or demutualisations.  

UK companies maintaining overseas branch registers are currently unable to have these in dematerialised form. A change to this rule will be prioritised to enable companies with Hong Kong branch registers to participate in Hong Kong’s share dematerialisation plans, starting in 2026.

Companies with dual listings face specific challenges and the proposals aim to improve the interoperability between central securities depositaries to accommodate these. 

The Taskforce also suggests its proposals should be a model for share digitisation in Jersey, Guernsey, and the Isle of Man.

The stages for moving to a digitised system

The Taskforce’s approach to digitisation includes the following steps:

• Step 1: Digitised share registers – Physical certificates will no longer be issued, and existing ones will cease to be evidence of title. Instead, shareholders’ entitlements will be reflected solely on the register of members, which is already maintained by the company or its registrar. For communications and dividend payment purposes, shareholders will need to provide the company with an email address and their bank account details. The aim is for this step to be achieved by the end of 2027. This was Model 1 in the Taskforce’s interim proposals and is also referred to as the “digitised share register” option.
• Step 2: Improvements to intermediated system –The Government will work, together with the Financial Conduct Authority and the financial services industry, to improve the intermediated system before mandating that all shares move into it. This will involve a range of measures including to:
  • enhance communication protocols between companies and the ultimate beneficial owners (UBOs) of shares throughout the chain of intermediaries;
  • require intermediaries to provide a baseline service to all shareholders, including rights to information, voting, and transparent fees; and
  • enact provisions of the Shareholder Rights Directive II (SRD II) to enable companies to identify their UBOs, and to provide for voting confirmations up the investment chain.

Other reforms to bring the law up to date for a fully intermediated system would include removing the need for a “headcount” test to sanction schemes of arrangement, facilitating requests to cancel public to private re-registrations, and specifically allowing for UBOs to bring compensation claims under Section 90A and Schedule 10A of the Financial Services and Markets Act 2000 for the publication of misleading information. 

• Step 3: Full transition to intermediated system – Once improvements are in place, all shares should move into the intermediated system. This was Model 3 in the interim proposals, or the “intermediated securities chain” option. This might occur gradually over time, starting with making digitised share registers a “one way street” by mandating intermediation for new shareholders or when they participate in corporate actions. It is seen as the most desirable outcome for full modernisation of the system and for facilitating interactions between companies and their investors (such as fundraising and voting), although it will take time to achieve. 

Other modernisations

There are also some other helpful proposals to modernise UK systems and make them more effective and cost efficient. They include:

• making electronic communication the default for all company-shareholder interactions, so that specific consent is no longer needed for electronic communications;
• mandating electronic payments as the default, with bank account details required for all shareholders, and cheque payments withdrawn unless otherwise agreed; and
• setting up systems to release untraced shareholder shares which are at the moment permanently frozen within Company Sponsored Nominees (i.e. to clean up legacy systems).

Legislative and other changes

A considerable amount of work will be required to achieve these reforms. The Taskforce has identified a number of legislative and rule changes, including to the Companies Act 2006, Uncertificated Securities Regulations 2001, Stock Transfer Acts, model Articles of Association, Financial Services and Markets Act 2000, and other legislation. The Financial Conduct Authority will also need powers to regulate baseline services and communication standards for intermediaries.

Background

The Digitisation Taskforce was launched following recommendations to the Government in the UK Secondary Capital Raising Review. Its two primary aims are to eliminate paper share certificates, and to improve the current system of listed share ownership, so that investors can more easily exercise their rights, issuers can better identify and communicate with investors, and systems are more efficient, cost-effective, and timely. 

An Interim Report was published in 2023 with other proposed reforms to financial services. 

Timing 

The Government has said that it will legislate to end the issue of paper shares by the end of 2027 at the latest (with the exact date to be agreed with the new Technical Group).

As a priority, and by Q2 2027 at the latest, the Government also intends to amend the Uncertificated Securities Regulations 2001 so that shares in UK companies can be held on overseas branch registers in uncertificated form. 

As a longer-term plan, to take place “over the course of this Parliament,” the Government will look to legislate to take forward the recommendations which need to be delivered to ensure investor rights are maintained. 

No timing has been given for when the Government will appoint an industry Chair to establish and lead a Technical Group on this topic, but it seems likely that this step will take place relatively quickly.

More information

The Final Report of the Digitisation Taskforce, and the Government’s response, are available here.