Digitising the UK securities market: the case against and proposal to enfranchise indirect investors

Abstract

A taskforce, appointed by HM Treasury, has recently proposed legislation to eliminate certificated (paper) shares and to require the investors currently holding paper shares to hold them indirectly through nominees. It has also suggested that disclosure combined with a common messaging protocol will enable the market to improve the ability of indirect shareholders to exercise their rights. In this paper we make a case against legislation eliminating paper certificates. We argue that the industry does not need the Government to remove paper certificates. If they want paper certificates to disappear, they should develop a model for holding uncertificated shares directly that is affordable for retail investors. The Government should nevertheless intervene. It should encourage the Competition and Markets Authority to investigate the price structure of accounts for holding uncertificated shares directly with CREST, which operates as a monopoly provider for such accounts in the UK. We further explain that the current system for holding shares indirectly disenfranchises investors and argue that this not only affects investors but also deprives issuers of oversight of their governance. We use empirical evidence to explain that disclosure combined with a common messaging protocol is unlikely to cause the market to develop a system that better enfranchises indirect shareholders. Consequently, we propose legislation to give indirect investors better access to shareholder rights.