While the vast majority of shares are held in electronic form, there are understood to be up to 10mn investors who still hold their shares in paper form.
These will likely include shares from privatisations in the 1980s, and certificates passed down from earlier in the century.
The challenge for advisers is that trading and settlement of shares held in paper form is generally more expensive and often takes longer.
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.
The government says the time is right to consign these paper certificates to the past. In his Mansion House speech on July 19 2022, chancellor Nadhim Zahawi accepted the recommendations of the UK secondary capital raising review (Austin review), which included the digitisation of paper share certificates.
Inevitability, this will affect individual investors, so the adviser community will have an important role to play.He also appointed Sir Douglas Flint, chairman of Abrdn, to lead a digitisation taskforce and harness this process to enhance the rights of retail investors.
The move will allow for existing paper shares to be transformed into electronic holdings with the same substantive shareholder rights. And for many, change is long overdue.
The digitisation of paper share certificates is a key foundation in the modernisation of post-trade processing and will enhance the UK’s position as a fintech hub and premier centre for capital raising.
For advisers and their clients, it promises to deliver substantial benefits, including greater efficiency, transparency and cost savings. Crucially, it is a vehicle to protect and extend shareholders’ rights and empower individual investors to participate in the shareholder economy.
Collaboration will be vital
Although the government has given the green light to the move, the details of the transition itself are a work in progress. On July 20 2022, the government published its ambitious terms of reference, which set out objectives for Flint and the taskforce.
These are not limited to simply scanning certificates in as PDFs but extend to the digitisation of the holding chain and addressing the legal modernisations suggested by the Law Commission.
Defining the exact model will require broad industry collaboration and stakeholders’ input will be vital in determining the best mechanism. Indeed, one of the taskforce’s key objectives is to work with stakeholders across the financial services sector to build consensus on change.
Inevitability, this will affect individual investors, so the adviser community will have an important role to play. They will have the opportunity to help shape policy and transition and ensure investors’ interests and concerns are addressed in full.
The modernisation of post-trade echoes an accelerating and cross-industry trend to digitise operations and processes. Most sectors, arguably, have undergone some form of digital transformation and are at different stages in their journey.
The ambitious model for digitisation could open new opportunities, including the advent of evolved wealth-tech solutions.One notable example is the move to online banking, which required a well-considered and careful roadmap to support customers in the move and deliver improved service and efficiency.
The pandemic further accelerated these efforts, including, through necessity, the move by advisers and investors into the digital space. For many, digitisation became a critical way to engage with investors and offer services and advice during a period of disruption and financial uncertainty.
Many advisers approaching digital services for the first time have experienced the benefits. At Euroclear we have received positive feedback from the intermediary community about how customers primarily accustomed to dealing in paper adapted to electronic formats during lockdowns.
Firms are looking to build on this foundation but, to do so successfully, they need a modernised regulatory framework to support their efforts – and the taskforce, through consultation, will have a key role.
Investor participation
The digitisation initiative, however, extends beyond the removal of paper share certificates. The Austin review, which commenced in October 2021, examined the broader topic of improving capital-raising processes for publicly traded companies in the UK.
This included investigating the role of technology to transform how individual shareholders receive relevant information and participate in secondary raises.
A key focus, therefore, will be to improve the ultimate beneficial owner’s visibility to the issuer and also their ability to vote and otherwise take part in the governance of the issuing company.
The challenge for advisers will be having the means to relay information to their clients efficiently, and this can be solved, in part, through new and innovative services made possible by digitisation.
A precursor to greater innovation
The ambitious model for digitisation could open new opportunities, including the advent of evolved wealth-tech solutions that leverage the promise of open finance and deliver innovative services to advisers and their clients.
Open finance promises to empower investors by offering to combine their personal data with financial institutions’ technologies to analyse, move and manage their assets and risks.
This is just one example of the direction of travel and there are a number of transformational debates taking place. Others include the reduction in settlement cycles and the emergence of security tokens as digital representations of traditional securities.
The digitisation of share certificates is an important precursor and potential enabler of these wider narratives and potential future innovations.
Supporting advisers in the move to digitise
In the coming months, we can expect to see greater clarity on the transition as the taskforce and other industry bodies step forward and engage directly with the adviser and investor community.
For advisers, now is the time to be heard and play an active role in these interactions. Only by this process will the right model emerge.
Fully digitising the City will be transformational. However, it requires a careful, co-ordinated approach to ensure advisers have the support needed to implement the move fully and, ultimately, leverage the benefits it can bring to them and their clients.
Michael Carty is chief executive of Euroclear UK & International
