The Digitisation Taskforce has published its final report recommending a staged approach to removing paper share certificates for publicly traded companies and eventually moving to a fully intermediated system of shareholding in the UK. The government has accepted the recommendations.
The digitisation of share certificates faces an unusual spread of issues. In most cases, it is not a real problem - Shell reported that CREST (the UK Central Securities Depositary) already holds 99.3% of its issued share capital. Certificated shareholders represent just 0.7% of its issued share capital. On the other hand, nearly 50% of certificated shares in the UK (average holding value £4,500) are in just five companies: Lloyds Banking Group, aberdeen, National Grid, BT and Centrica, seen as hangover from the original privatisation policies of the 1980s.
The Taskforce believes that the outcome of the full digitisation of share certificates will:
- Make it more efficient for companies that use those markets by lowering costs and improving the communication process with shareholders.
- Empower investors by facilitating easier access to the expression of rights and trading for certificated shareholders.
- Encourage retail investing,
The final report drew on over 3,000 responses from an Interim Report released in July 2023. The two leading models proposed digitisation were the so-called ‘Model 1’ and 'Model 3'.
- Model 1 is the creation of digitised shareholder registers outside the CSD to replicate current registers for certificated shareholders.
- Model 3 sees all shares being held through a chain of intermediary nominees in the CSD, which in the UK is CREST, operated by Euroclear United Kingdom and International (EUI).
There was generally strong support from industry, but also concerns. These included:
- Digital exclusion for older share certificate holders.
- Doubts about the willingness or ability of intermediaries to be able to onboard so many shareholders (estimated to be over a million holding paper shares) with the mandatory Know Your Client (KYC)/Anti-Money Laundering (AML) checks required.
- Legal and regulatory issues to onboard overseas shareholders.
The Taskforce accepted that it has been unable to resolve all the concerns, but it could recommend a direction of travel and what the next steps should be, which will include the creation of a Technical Group as soon as possible.
Summary of recommendations
The Taskforce concluded that there should be a staged process, with a temporary ‘Model 1’ approach pursued initially to achieve the removal of remaining paper shares while replicating existing arrangements for certificated shareholders. This would be done to move to a fully intermediated securities chain model after the rights of Ultimate Beneficial Owners (UBOs) and the intermediated system have been enhanced.
The final move to ‘Model 3’ should also be subject to a small number of exceptions (e.g. for companies with international listings if interoperability between CSDs has not improved), as outlined below in our final recommendations.
Step 1: removal of paper shares and establishment of digitised registers
- As a first step, following a period of issuer communication to existing certificated shareholders, they would be advised that their interests would henceforth be reflected solely within the digitised register already administered by the issuer’s registrar.
- Issuers would no longer be permitted to issue physical share certificates, and certificates would no longer have any currency.
- The government should establish a Technical Group of relevant experts as soon as possible to determine an implementation plan for this first stage, including an appropriate ‘go-live’ date.
Step 2: preparing for a fully intermediated system
Digitisation should transcend the simple conversion of paper processes into digital formats. An equally important goal is improving the intermediated system and addressing broader challenges, such as increasing retail participation in fundraising and voting. Preparations should include;
- A comprehensive package of measures to improve communications between companies and Ultimate Beneficial Owners (UBOs) in the existing intermediated securities chain.
- Payments to shareholders move to an entirely digital basis.
- There should be a ‘baseline service’ that intermediaries should have to provide to all shareholders.
- Measures to enhance the rights of UBOs, such as facilitating confirmation that their votes have been received and counted.
The Taskforce has created a ‘Bill of Shareholder Rights’ and acknowledges that many of the recommendations will require primary legislation.
Step 3: all shares transition into the intermediated securities chain
The final stage would be to move to a fully intermediated shareholding system.
- The government could legislate to make the digitised registers a ‘one-way street’, where shares can only flow out of the registers and not into them – i.e. no new shares could be created within these registers.
- Outward flow from the registers would arise when a UBO elects a nominee into whom their interests are to be transferred, including shareholder actions.
- At this point, the shareholder would be required to join the intermediated securities chain to execute their wishes.
- The Taskforce recognises that transfers to a nominee of choice would today require the accepting nominee to conduct/refresh KYC/AML due diligence. It asks the Government to consider whether this is necessary, considering the underlying UBO is already being serviced within the UK’s capital markets and in most cases, the servicing will involve transfers to a UK bank account whose owner will have gone through such KYC/AML checks.
- To avoid the digitised registers becoming depositories of dormant small shareholdings, it is recommended that the Technical Group consider whether a ‘sunset date’ should be set for all digital shares to be held in the improved intermediated system in future.
The Taskforce accepted that the improvements recommended for the intermediated system in Step 2 will need time to implement, and this precludes a definitive timeframe for the ultimate move to ‘Model 3’.
Full details outlining the role of stakeholders, recommendations, legislative changes and the timetable can be found in the full document.
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