WHAT DOES THE UK’S DIGITISATION OF SHARE CERTIFICATES MEAN FOR ADVISERS?

Digitisation and the removal of paper processes across the economy is an accelerating trend, driven in part by the UK Government’s ambition to improve efficiency, resilience and sustainability. This shift, as an example, is already apparent in the modernisation of laws regarding international trade, with the Electronic Trade Documents Bill moving to scrap paper bills of lading and other trade documents.

Now, investors and their advisers sit at the heart of another important digitisation mandate – that of digitising shareholdings and eliminating the use of paper share certificates. As details emerge and plans evolve, advisers will need to be aware of the benefits to them and their clients, as well as the potential opportunities for them to participate in, and help shape, the transition.

In July 2022, the UK Government accepted the recommendations of Mark Austin’s UK Secondary Capital Raising Review, which investigated the role of technology to transform how individual shareholders communicate with the companies in which they invest and participate in secondary raises. As key to achieving this, one such recommendation was the digitisation of paper share certificates in a way that allows existing paper shares to be transformed into electronic holdings with the same substantive shareholder rights.

Advisers Will Have A Key Role To Play

Digitisation could affect millions of UK investors and their advisers, along with the companies that issue the shares. Although most shares are already in electronic form, UK registrars (who maintain records of certificated shares) believe there are approximately 8.5 million UK shareholdings still held in paper form. This creates several challenges as finding, moving and posting physical paper certificates takes time and risks them going astray. By existing alongside issuance, settlement and communications processes for digitised shares, paper certificates may also pose an administrative burden on advisers, causing unnecessary friction in their engagements with clients.

Having accepted the recommendations of the Austin Review, the Government appointed Sir Douglas Flint, Chairman of asset manager abrdn, to lead a Digitisation

Taskforce. This Taskforce will help drive the initiative forward and one of its key objectives is to work with stakeholders across financial services to build consensus on change. Achieving this and determining the best mechanism is going to require broad industry collaboration, so stakeholders’ input will be vital along the way.

Since this will have a major impact on individual investors, the adviser community will play an important role. As details emerge, advisers will have the opportunity to help shape policy and transition and ensure their clients’ interests and concerns are tabled and addressed.

Building On Existing Digitisation Efforts

Digitisation promises to deliver significant benefits to investors - including in terms of the costs and management of their shareholdings - but may be new territory to some. However, the modernisation of posttrade echoes other similar digitisation efforts across financial services, such as the move to online banking. This called for a considered and well-crafted roadmap to support customers and deliver improved services and greater efficiency.

For many advisers, digitisation will not be an entirely new trend since the pandemic accelerated efforts in this area, including the move into the digital space by necessity. This became a critical way to engage with investors and offer services and advice during a period of disruption and financial uncertainty.

At Euroclear, we received positive feedback from the intermediary community about how customers primarily accustomed to dealing in paper, adapted to electronic formats during lockdowns. The benefits became clear in practice.

The Road Ahead

Advisers are now in a position to build on their work to date, but this is going to require a modernised regulatory framework to support their efforts. This is expected to emerge from the Taskforce, along with further clarity on next steps in the coming weeks and months. Interim recommendations are anticipated in the Spring of 2023.

Although the work to transition to the full digitisation of share certificates – which may involve a single digital register - is still very much in progress, it is clear from the outset that collaboration will be the key to success. The Taskforce and other industry participants will soon step forward and engage directly with the wider digitisation community – and it is through these dialogues that the right model will emerge.

Euroclear operates the UK's CREST settlement system, including for digitised shares, so will play a pivotal role in facilitating this change and helping enable a smooth transition.

This digitisation of the UK’s equity markets promises to be transformative. However, it calls for a considered, informed and co-ordinated approach to ensure all parties are given the opportunity to input and have the support they need. By sticking closely to this model of open dialogue and joint working, digitisation will be a win-win for advisers, investors and issuers and help cement the UK’s position as an innovator on the world’s financial stage.

RICHARD FENNER DIRECTOR, GOVERNMENT RELATIONS EUROCLEAR UK & INTERNATIONAL WWW.EUROCLEAR.COM