Driving forward digitisation of the UK shareholding framework (part 1)
Insights - What We Think

In this series of articles, Lee Cooper, Industry and Strategy Lead, looks at the forthcoming digitisation of the UK shareholding framework, and sets out his considerations around the implications of proposed digitisation models, and which will be most suitable for companies, practitioners, and shareholders.

Our purpose is to connect people with their assets, safely, securely and responsibly. That’s why we’ve been working closely with our issuer clients and industry peers to help inform HM Treasury’s ‘Digitisation Taskforce’, who have been working to drive forward the full digitisation of the UK shareholding framework since 2022.

As part of their remit, the Digitisation Taskforce is looking at solutions to remove paper, including certificates, from share ownership or the transfer process, digitising communications as well as other processes.

The Taskforce issued an Interim Report in 2023 and invited comments from stakeholders across the financial services sector on the proposals they made to dematerialise the market. The main proposal from the Taskforce was that current certificated shareholders (circa. 10 million individuals) would need to transfer their holdings into an intermediated model administered by a nominee. The details of shareholders would no longer be held by the issuer companies but by external nominees such as those administered by stockbrokers. This potential future model has been called the intermediated model or model 3.

The other main model for future dematerialisation of shares that was considered, but rejected, by the Taskforce, was based on removing paper share certificates but leaving the shareholder records on the existing share registers of the issuer companies and removing other barriers to digitisation. This has been called the digital register or model 1.

The proposals are not detailed yet, but we thought it would be helpful to look at the implications for shareholders and issuer companies of moving to the intermediated model compared to the digital register model.

Implications for shareholders and issuer companies

Getting rid of unnecessary paper provides a great chance for us to work together to improve the securities market. But the industry must be fully confident that the model we take forward represents the best option for both issuers and investors. The main areas that any change needs to address are:-

• Increased shareholder and issuer costs
• Degradation of shareholder rights and choice
• Reduced shareholder transparency
• Lack of direct communication with shareholders
• Treatment of non-responders and overseas shareholders

Discrepancies between the models

Ideally any digitisation model implemented should deliver on all the principles set out as the basis for dematerialisation as detailed in the Digitisation Taskforce’s Terms of Reference found here. Below we have identified possible discrepancies between what the models deliver for shareholders and issuer companies.

Implications for shareholders

The number of shareholders involved is significant (circa. 10m) and the impact on this group and how they hold their shares should not be underestimated. Below we look at the impact each model will have on certificated shareholders.

We are  pleased that the government is looking to dematerialise the share settlement market – it will help the UK market be more attractive as well as benefitting investors. However, we believe that if the system is to be improved, a realistic look needs to be taken at the implications of both the proposed intermediated model and the digital register model. We believe that the digital register model will offer a lower cost and faster transition option without taking away shareholders’ rights or property.

In our next article we will look at the possible costs of moving to a dematerialised share market.

If you’ve found this article useful, and want to share your thoughts with our experts – please get in touch.