Removing paper and dematerialising the share settlement system
Insights - What We Think

In the Chancellor of the Exchequer’s Mansion House speech on 10 July 2023 the Interim Report of the Digitisation Taskforce was released (amongst other financial services initiatives). See link below

https://www.gov.uk/government/publications/digitisation-taskforce

This is the anticipated roadmap for the dematerialisation of the share settlement system in the UK and the drive to provide effective shareholder rights for ultimate beneficial owners (UBOs). At Link Group, we welcome the move to bring about digital change for the industry and move towards a fully dematerialised model of operation but recognise that the recommendations present challenges for the settlement industry and our client companies.

Recommendations and timescale

This interim report provides a set of potential recommendations for the government and seeks feedback (by 25 September 2023) across a number of key questions, ahead of the publication of a final report to be delivered within six months. The interim report does not go into great detail and raises lots of questions. However, in brief the recommendations are:

• Legislate to stop the issuance of paper share certificates.
• Legislate to require dematerialisation of all paper share certificates.
• Consult on approach to residual paper certificates held by untraced members.
• Obligation on intermediaries to have system to respond quickly to issuer requests re UBOs.
• Intermediaries should be fully transparent about provision of shareholder rights to UBOs.
• Where rights are made available there should be a minimum standard and ability for two-way communication.
• Legislate, following dematerialisation of shareholdings, to stop cheque payments and pay direct into UBO bank accounts.

Dematerialisation – the Taskforce preferred approach

For full details see the link above. Please note particularly the “dematerialisation model” discussion starting on page 14. Four models were highlighted including the registrar Industry Model. However, the Taskforce’s preferred/leading model is as follows:

“The third alternative would be to mandate all certificated shares to be moved to the CSD, intermediated and administered through a nominee. This is the model through which the vast majority of digitised shares are currently held and administered. This would bring all shareholdings into a single CSD, removing the need for movement between sub-registers and the CSD.

We believe this represents the leading model for digitisation of paper certificates, especially when enhanced by the improved transparency and communication obligations (for UBOs) recommended later.”

This would mean all current “retail” shareholders with paper share certificates would have to move their accounts/shareholdings into a nominee structure for administration.

The Industry Model and other approaches

Models that support certificated shareholders becoming direct CREST members and one using Distributed Ledger Technology (DLT) (or Blockchain) are ruled out by the Taskforce.

The Taskforce lists the multiple advantages of the Industry Model for dematerialisation put forward by the registrars and many in the securities industry. However, the Taskforce believe this perpetuates one aspect of the current system that needs to be removed – “a second register of shareholdings, with consequential friction as shares move between the two registers.”

The Industry Model has much to commend it as low risk with minimal change for shareholders that will deliver paperless dematerialisation. However, we recognise that the Taskforce suggestion is an alternative that should be debated fully as we have experience of running nominee operations for issuer clients with our Company Sponsored Nominees. There is some way to go before a final decision is made and many hurdles to overcome. We will keep you informed as the proposals for dematerialisation develop.

The Taskforce report was discussed at the CGI Registrars Group meeting on 13 July and there will be further discussions and canvassing of opinion within the industry. We will be reaching out for opinion and feedback on the proposals and look forward to responding to the proposals in the consultation.