Sustainable investing: common goals, disparate implementation
The so-called dematerialisation of share certificates, not only in the UK and Ireland but across the EU, has been under discussion for more than ten years. The issues were crystallised by the EU Central Securities Depositories Regulation (CSDR), Regulation EU 909/2014.
Article 3.1, albeit in legalese, sets out what is to happen: “Any issuer established in the Union that issues or has issued transferable securities that are admitted to trading or traded on trading venues, shall arrange for such securities to be represented in book-entry form as immobilisation or subsequent to a direct issuance in dematerialised form.” Immobilisation is when shares still exist in paper form but the paper is held by a depository. Dematerialisation means that the shares exist only in electronic form.
The following paragraph continues: “Where a transaction in transferable securities takes place on a trading venue, the relevant securities shall be recorded in book-entry form in a CSD [central securities depository] on or before the intended settlement date, unless they have already been so recorded.”
This means that new and existing shares that are traded on a trading platform, such as a public stock exchange, will only be recorded in electronic form and their issuance and trading will be recorded by book entries at a CSD.
The regulation stipulates that the article will apply from 1 January 2023 for transferable securities issued from then onwards and from 1 January 2025 to all securities regardless of when they were issued.
Why is this happening?
The European Securities and Markets Authority, the pan-European regulator, explains that the aim of CSDR is to harmonise and bring discipline to a number of aspects of the post-trade settlement cycle.
The benefits for all parties, including investors and those involved in the execution and settlement process, will be speed, efficiency and lower cost, according to Deutsche Börse press office in Frankfurt. Currently, certificated equity trades are required to be settled within a ten-day period, compared to a two-day turnaround for electronic, dematerialised trades.
Equiniti, the business services organisation, currently chairs the UK Dematerialisation Steering Group. Steve Banfield, industry director at Equiniti, says that shareholders currently holding paper share certificates are subject to increased trading fees compared to electronic trades as the process is manual and carries higher risk. It also takes significantly longer.
More traditional investors who currently hold paper share certificates may be uncomfortable with the changes, but any concerns they may have are unfounded. In Steve’s words: “Although a significant majority of investors are moving online out of choice, there is a small number who might not have access to or be willing to switch to an online medium. These investors will be catered for and supported through any procedure required when it comes to accessing their information or trading. Those with characteristics of vulnerability would also be supported throughout the process.”
Those concerned about dematerialisation should also be comforted by the regulation itself, which will be implemented and enforced by regulators in each of the EU jurisdictions, and in the UK. CSDR specifically states: “Immobilisation and dematerialisation should not imply any loss of rights for the holders of securities and should be achieved in a way that ensures that holders of securities can verify their rights.”
Steve says the steering group will reach out to those who hold paper shares in a manner to be decided. Paper shares will be void but their holdings will remain unchanged and recorded in electronic form.
He also adds that there is a proposal to provide an online repository so that investors can access their holdings through a unique access code known as a holder key. This model, he says, minimises the disruption to the market place and the sector as a whole.
A remaining question is how shareholders would be advised that the dematerialisation is taking place. As yet, there is no guidance on this from official or market sources.
As with all nationwide changes in financial services practices, the measures taken will be aimed at the majority of stakeholders, while the few that remain to be covered will have to be dealt with on a case-by-case basis. One could imagine, for example, that when unaware shareholders pass away, their holdings may come to light and it may fall to executors to pursue the assets, as indeed would be the case at present.
The sector, collectively, should start preparing for the change now to avoid the risk of having thousands of share certificates to dematerialise three months before the deadline – something that would have major staffing cost implications and may even be humanly impossible.
Brokers should inform clients about the changes, and what actions they need to take, through their regular client newsletters, magazines and via their websites.
Market stakeholders are on the case and through the UK Dematerialisation Steering Group are actively progressing towards UK implementation of CSDR. While the project is a major, UK-wide one, which will likely require significant human and technology resources, in many ways the regulations are playing catch up to the current market reality. The bulk of share trading is already being electronically executed and managed post trade. The market has been driving this for some time, so it is reasonable to imagine that there will be few outstanding issues with dematerialisation by the beginning of 2025.
The full article appears in the July 2019 print edition of The Review. All members, excluding student members, are eligible to receive the quarterly print edition of the magazine. Members can opt in to receive the print edition by logging in to MyCISI, clicking on My account, then clicking the Communications tab and selecting ‘Yes’.
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