Paperless share dealing has arrived but private investors needn't panic

Most can hold on to their share certificates for the time being,
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The Independent Online
Monday 15 July saw the launch of Crest, the new electronic share settlement system. Share trades will begin to be settled through the new system from 19 August, when 19 companies, of which the largest is English China Clays, will transfer to Crest.

By April 1997, the vast majority of the 2,800 companies listed on the London Stock Exchange will have introduced the new means of paperless share transaction.

Before Crest, all stock market dealings involved the physical delivery of share certificates, the movement of large amounts of cash and a lot of associated paperwork. Crest does away with all this, offering an electronic alternative. It is being used by stockbrokers, banks and other finance institutions for settlement and replaces Talisman, the Stock Exchange's previous settlement system.

Many private investors are naturally worried about what the change will mean for them. Does this mean that all the near-10 million private shareholders in this country will have to manage their investments differently? In the vast majority of cases, the answer is no.

Most investors hold shares for the long term, irrespective of whether they buy for income or capital growth. Because of all the privatisation issues, most have bought their shares in the high street through their banks, building societies or other share shops or through newspaper advertisements and do not have a relationship with a stockbroker.

Despite the introduction of Crest, nothing need change for these investors. They should hold on to their share certificates.

Even those who do use a stockbroker but do not trade actively, should stay as they are. "If you are not going to trade, stay in paper," says Tim May of Carr Sheppards, another leading firm of private client stockbrokers.

The impact of Crest is going to be felt by those who use a stockbroker to trade in shares, dealing more than a few times a year,whether they use an execution-only service or the more traditional kind of stockbroker. If they are happy to have the broker deal with everything and do not want a direct relationship with the company they are investing in, they can put their securities into a nominee account.

This will mean the broker collecting together shares on behalf of many private investors, with only the broker's name appearing on the company's register. This will change the investor's relationship with the company Although the client is the beneficial owner the name that appears on the share register will be that of the nominee, the legal owner.

This could cause potential problems. Annual reports, other notices or communication and company perks are usually only offered to those names on the share register. Some companies, for example, will not offer perks or more than one annual report to nominees.

Some brokers offer "designated" nominee accounts rather than "pooled" ones. This means the broker will be sent the requisite number of accounts or perks for distributing to investors.

"If designated, the investor can be identified and dealt with directly," comments Tim May. "Shareholdings can be checked independently via the company registrar in a way that cannot be done with pooled accounts."

"If you elect to go into a nominee account," warns Gill Nott, chief executive of ProShare, which promotes wider share ownership, "ask your broker if he will send you information from the company, such as scrip dividends, notice of rights issues, and so on."

If investors want to retain title to their shares, having a traditional relationship and receiving notices directly from their companies, they can become a sponsored member. This is a new kind of account to allow dealing to occur electronically through the stockbroker. "Effectively the investor is setting up his own electronic record, with his or her own name on the register," says Tim May.

"Ideally all investors should be sponsored members," says Gill Nott, "and keep their own name on the company registers".

But do beware. Not all private client stockbrokers are offering the sponsored membership to clients. There are also significant differences in what those brokers offering the service will charge for the facility. Crest is charging pounds 20 for each sponsored member. Brokers such as Carr Sheppards and Brewin Dolphin are absorbing this and not making any charge to the client. Others, however, will be charging for the service which could be as much as pounds 70 or more.

And what of the millions of investors who will not be making the change, keeping their share certificates? The only difference they will notice under Crest is when they eventually come to sell their shares.

At present, the transfer of cash for buying or selling shares is meant to be settled five days after the transaction, called T+5. In reality, most private investors settle within 10 to 20 days after the deal.

Under Crest, the cost of dealing for investors who retain their share certificates will increase. Some time in the next year or so, Stock Exchange dealings are expected to move to T+3, settlement within three days of the transaction.

Because of all the paperwork involved, it will be impossible to physically transfer share certificates and money in this time. Investors could find the prices offered for buying and selling shares for will not be as keen as those they see on the stock market screens - maybe an extra penny or more either way. Brokers are likely to make an extra charge for handling share certificates. Many have yet to decide what this will be.

ProShare provides a free guide to Crest to anyone sending a stamped self-addressed envelope to ProShare, Library Chambers, 13-14 Basinghall Street, London CE2V 5BQ.

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