18 juli 2023 Lucy Fergusson Capital Markets - Equity - Corporate Governance

UK digitisation taskforce looks to abolish share certificates

​The UK's Digitisation Taskforce, led by Sir Douglas Flint, is consulting on recommendations to abolish share certificates and move to a more digital and efficient UK shareholding system.

The taskforce aims to create a cheaper, friction-free system which better facilitates the exercise of rights by investors, without developing an entirely new infrastructure (i.e. not using new technology such as Distributed Ledger Technology). Instead, retail investors would hold their shares through nominees offering improved service levels.

This will be of interest to listed companies with large retail shareholder bases as it will affect the way shareholders hold their shares.

Background

The Digitisation Taskforce was launched following recommendations to the Government in the UK Secondary Capital Raising Review. Its interim report was published on 11 July along with other “Mansion House reforms" to financial services (see here).

Proposals and scope

The report's proposals include:

  • Stopping the issuance of new share paper certificates and eventually dematerialising existing shareholdings. The preferred route for dematerialisation is to transfer holdings to a single nominee (which could be sponsored by the issuer, an intermediary acting on its behalf, or a collective industry nominee) with individual participants then being free to move their beneficial interests to a nominee of their own choice.
  • Requiring intermediaries to put in place common technology to identify ultimate beneficial owners to issuers upon request, especially in the context of potential secondary capital raisings.
  • Requiring intermediaries to be transparent about how, if at all, investors can exercise shareholder rights in relation to shares they hold through nominees and the related costs, so that retail investors can choose the level of service that is appropriate for them.
  • Where intermediaries offer access to shareholder rights, ensuring this includes the ability to vote and receive confirmation that the vote has been recorded, as well as efficient two-way communications between issuers and ultimate beneficial owners.
  • Replacing payment of dividends by cheque with direct payments to the ultimate beneficial owner's bank account.

Several of these changes would require amendments to the Companies Act, or changes to the Financial Conduct Authority's rules for custodians and nominees. Other proposals assume that the market will develop the appropriate systems and that competition will ensure sufficient investor choice in services.

The proposals are focused on publicly traded companies, although the taskforce's terms of reference include consideration of whether arrangements for digitisation could be extended to newly formed private companies and optionally to existing private UK companies.

Consultation questions

Questions discussed in the interim report include:

  • What timeframe would be needed for intermediaries to set up appropriate communications systems to enable information to flow to and from issuers and owners.
  • How to deal with current holdings of untraced shareholders (these exist in significant numbers on the registers of many companies with large retail shareholder bases), including the possibility of transferring proceeds of sale of such shareholdings to the UK's dormant assets scheme.
  • Whether there is demand for continuing to have a separate register outside CREST, instead of the taskforce's preferred solution of mandating holding through a nominee on the CREST register. The taskforce would particularly welcome feedback on whether the mandatory transfer of shareholdings to a central nominee would strike a fair balance between the legitimate aims of digitisation and the property rights of individual holders of currently certificated shares.
  • What the contractual requirements for intermediaries to supply information to issuers should be – for example, how often requests could be made, and the time limits for responding – and whether there should be restrictions on the use of the information obtained by issuers.

Timing and more information

Feedback on the interim report is requested by 25 September 2023, following which the taskforce plans to publish its final recommendations within six months. The final report will also set out more detail on the practical steps needed and the implementation timescale.

Click here for the interim report.