Derek Pain: Paper deserves its share of the market

No Pain, No Gain

The debate about paper share certificates has resurfaced. Regular readers will know I am opposed to the complete elimination of certificates although the mania for everything electronic captivates cost-conscious financial institutions.

Make no mistake, most City elements want all shareholders to switch to some form of bank account-like share registration statement or hold their shares in nominee accounts, mostly run by stockbrokers. The current debate centres on nominee – or pooled – accounts which not only disenfranchise shareholders but also annihilate the need for certificates. Still, despite an intense campaign, certificates have so far survived. But for how much longer?

It has been estimated nine million individuals – mainly buy and hold investors that regard the stock market as a sideline – are certificated shareholders. They are unlikely to be seduced by the argument that their liking for paper is now ridiculously old-fashioned and they should bow to the alleged merits of this electronic age.

The growth of nominee accounts has been persistent as stockbrokers (as well as companies) have enjoyed the cost savings they present. Many investors have already sacrificed paper and allowed their shareholdings to be placed in such accounts.

But there are obvious benefits from avoiding the nominee route. A reader contacted me a few months ago following my comments about Myhome International's abject failure. He wanted evidence that his Myhome shares had been accorded nil value. Yet accountant Ernst & Young, the administrator, had already confirmed that the shares, for tax purposes, had no value and had written to those whose names appeared on the share register.

The reader was one of those caught in a nominee account and his stockbroker could not be bothered to distribute the administrator's letter relating to the dismal fall of what I once regarded as a promising company.

There are other nominee disadvantages. In effect, the shareholder can be almost completely ignored – not receiving yearly reports, losing the right to vote and attend meetings. And any perks that go with the shareholding are also lost. All relevant communications go to the nominee, named on the share register.

Not all stockbrokers are quite so blatant. A few are prepared to distribute the necessary bumf. But there is no doubt that a nominee involvement can cut investors adrift from their shareholdings. It is also more difficult to change stockbroker once locked into its nominee system.

Some shareholders do not mind being disenfranchised, and pooled accounts are cheaper than allowing individual freedom. Many companies (and stockbrokers) regard small investors as a costly nuisance. Vested interests, keen to cut costs, are happy to promote nominee accounts. And not having to accommodate and answer questions from private shareholders at annual meetings must appeal to the more evasive company chairmen.

Certificated shareholders enjoy proof of ownership and get the benefits of being on a share register. I believe, despite all the high-tech electronic gadgetry, that certificates are the most secure form of ownership.

I have been an investor for more than 50 years and cannot recall any security problems over a certificate.

True, certificates represent the more expensive form of investing but I suggest the extra cost is worthwhile although some stockbrokers are so keen to discourage certificates that they charge unjustifiably high fees to press their case. One investor recently complained his stockbroker added an extra £12 for a certificated transaction. He's lucky. Many demand much more.

Beside the profusion of nominee accounts there is a strong movement advocating that share registrations should be online, or through some form of bank account-like statement or contract note. We all know just how unreliable online transactions can be. Hacking into supposedly safe computer systems does not seem to be much of a problem for the determined crook.

The no pain, no gain portfolio is a certificated exercise. I am happy with most constituents although my three walking wounded – Green CO2, Pubs'n'Bars and Private & Commercial - are creating anxiety. The other dozen members have, I believe, considerable attractions for buy and hold investors who do not spend their time glued to a City computer screen. But it is always advisable to keep an eye on developments – the investment scene at a company can sometimes change quite dramatically.