Paper share certificates should be stopped immediately, says taskforce

In its interim report, out on July 10, the taskforce, which was set up to drive forward the full digitalisation of shareholding in the UK, recommended legislation should be put in place as soon as possible to stop the issuance of new paper certificates.

It said there was no reason the issuing of such certificates could not be stopped as quickly as within six month's time of setting a date.

The government should also set a date to withdraw all existing share certificates by mandating their digitisation, and consult with stakeholders on how to handle certificates whose owners can't be traced.

"We see no reason why legislation should not be brought forward in short order to eliminate fresh issuance for any purpose at an implementation date in the near term – say, within six months – to allow shareholder communication on the changes and for shareholders to nominate the destination for future digitised issuance," the taskforce, headed by Abrdn chairman Sir Douglas Flint, said.

"In the absence of a direction for future digitised distributions previously taken in scrip or through a Drip, issuers may choose to take powers to default such shareholders to take their dividends in cash."

The aim is to leverage technology to allow for existing paper shares to be transformed into electronic holdings with the same substantive shareholder rights.

There have been several studies into such reforms previously however they were unsuccessful in driving change because of questions over implementation.

The latest interim report recommended intermediaries who participate in the clearing and settlement system, should be forced to put in place common technology to handle requests from issuers quickly, and they should be open about their service to shareholders and their charges.

When their service includes access to shareholder rights, intermediaries should facilitate the ability to vote and a two-way communication between the issuer and the ultimate owner.

However, intermediaries should not be forced to offer such access, as long as they are transparent about the service they offer.

"One of the notable improvements evident in recent times has been the greater facilitation of access to retail shareholder rights through brokers, wealth managers and the major retail platforms in the UK," the report stated.

"There should be no distinction in access to rights between shareholders who are directly registered and those who hold their shares through intermediaries.

"As we are recommending that certificated shareholders should be digitised and their interests represented through a nominee structure, if we do not facilitate access to expression of their rights we would be removing access to rights that these shareholders currently enjoy – this would be a retrograde step."

'Finally caught up'

Flint was appointed by former chancellor Nadhim Zahawi in 2022 following the Austin review into UK secondary capital raising, which had recommended the digitisation of paper share certificates. 

The vast majority of shares are held in electronic form but there are an estimated 10mn investors who still hold shares in paper form, including shares from privatisations in the 1980s, and certificates passed down to them.

"The challenge for advisers is that trading and settlement of shares held in paper form is generally more expensive and often takes longer", wrote Michael Carty in a piece for FTAdviser.

"There is also the associated risk of certificates going astray during the process, creating an added administrative burden and hindering communications between advisers and their clients."

Currently, by law, shareholders can request their shares to be certificated and they can request reissue of a lost, damaged or stolen certificate.

Companies can issue paper certificates for new issuance, and shareholders in receipt of scrip dividends or participating in dividend reinvestment plans (Drips) can take these distributions in paper certificate form.

Shareholders can also sell part of their holding and request a certificate for the remaining portion or sub-divide their holding into multiple ownership with fresh certificates issued to record each interest. 

Richard Wilson, CEO of Interactive Investor, welcomed the recommendations, saying they had "finally caught up" with modern investing.

"The scope for unintended consequences when paper share certificates are kept in the bottom drawer is huge," he said.

"What we now have is a set of sensible proposals that seek to align the rights of shareholders with the rights of nominee shareholders. That means that beneficial owners should be better able to exercise their shareholder rights, and issuers can better identify and communicate with those shareholders, driving efficiencies in time and cost."

But he said there needed to be more than one solution when it comes to encouraging shareholders to actually vote.

"Today’s report notes that private investor voting numbers have been on an upwards trajectory; but the industry should not assume this trajectory will continue, even as more investment platforms begin to facilitate access.

"While Interactive Investor saw a 30 per cent increase in votes processed last year after we made our voting service opt out, rather than opt in, 92 per cent of votes still went to waste.

"At ii, we still have some technology innovations up our sleeve and coming soon, and which will make it even easier to vote. But this is not a ‘one and done’ solution. This stuff is hard. We want to see better, more retail friendly communications in the run up to and after an AGM. UK PLC must play its part."

The taskforce is accepting responses to its proposals until September, 25.

carmen.reichman@ft.com