First, Crest is a share settlement business managed by the Bank of England in the form of a company called CrestCo, with its shareholders drawn from the broking and banking communities. It stands independently of the Stock Exchange, which has opted out of being a settlement agency. Second, the system will, in the short term at least, make little difference to how the majority of private investors buy and sell shares.
It will, however, offer investors three choices as to how they hold their shares:
through a nominee account;
through retaining existing share certificates;
through sponsored membership of Crest.
For those who already hold their shares in nominee accounts - and who are therefore accustomed to never laying eyes on their actual share certificates - the industry's move to Crest will pass by unnoticed. Such investors will continue to buy and sell shares via their broker over the phone - and whether one particular stock has already passed through the dematerialisation process or not will not matter to them; the task of overcoming any unforeseen hiccups with the system will rest with the broker.
Similarly, for those who wish to retain their share certificates in paper form, little will change in the short term; Crest is designed to run parallel with the existing Talisman share transfer system and there is no obligation on investors to switch to electronic trading.
It is the third option, however - sponsored membership - which may initially cause confusion. The likely subscribers to sponsored membership are those investors who trade shares frequently but do not wish to open a nominee account with their broker.
Some investors feel uncomfortable with nominee accounts because although they own the shares, their name does not appear on the issuing company's share register. As a result, it is the broker, not the individual, who receives annual reports and who is entitled to vote at company meetings. In addition, certain shares carry with them perks not enjoyed by nominee customers; for example, P&O shareholders whose names are on the register qualify for discounts on ferries.
To become a sponsored member of Crest, an investor must first seek an authorised sponsor (a stockbroker or a bank, for example) and sign a sponsored membership agreement. The cost is pounds 20 a year, although some brokers may not pass on this charge. It is then simply a case of sending in the share certificates as and when the individual shares are due to be dematerialised. And herein lies a potential problem. For in an effort to avoid the trading of large volumes of shares which may clog up an as yet unproved system, the dematerialisation process, whereby listed companies create electronic share registers, is due to be implemented in phases. The transition is expected to take at least nine months to complete, with the first tranche comprising those companies identified by Crest as being unlikely to be affected by corporate actions, for example take-over bids. Therefore, an investor who opts for the sponsored membership route at the beginning of the transition could end up with some shares in paper form and some in electronic form. The result is likely to be a rather messy portfolio.
Like most stockbrokers, Ray Pinner, director of special projects at Greig Middleton, is advising his clients to hold off for the moment. "Crest should make share dealings much more efficient in the long run. However, those active clients who wish to retain share certificates will have problems if they become sponsored members now because they won't necessarily know when the individual stocks they are holding are due to be Crested," he says. "At the moment, therefore, we are encouraging potential sponsored members to open a nominee account until the efficiency of Crest is proved by the stockbroking and banking communities." The advice, then, is to let the institutions act as guinea pigs.
Although a nominee client would never see certificates for any securities, once the Crest system is fully operational, a sponsored member would still have to use transfer forms for gilts, unit trusts and overseas holdings and would relinquish only those Talisman securities that are eligible for Crest.
Not all investors are necessarily suitable candidates for nominee accounts, however, and the advice offered will depend to a great extent on the sort of broker you are speaking to - a point highlighted by Michael Savory, director of Midland Stockbrokers.
"I represent the nine million or so investors who hold only one or two shareholdings, picked up mainly from privatisation issues," he says. "The majority of my clients are not that interested in regular dealing and they are not too bothered whether it takes an extra day to settle their transactions. It would be uneconomic - both for me and for them - if I encouraged them to become sponsored members or to set up nominee accounts."
But some brokers are worried that not enough thought is being given to the problems that inevitably lie in wait for those investors who retain only one or two stocks in paper form.
It is expected that when Crest is fully operational in April of next year, the industry will reduce the settlement period allowed to complete a transaction from T+5 (ie, five days after the transaction) to T+3. Beyond that, there are already plans for a system called Real Time Cross Settlement, which would allow instantaneous dealing - in other words, T+O. As the settlement periods shorten, those retaining paper certificates will either struggle to find a broker who will transact for them, or if they do the costs may prove prohibitive. Some brokers have already hinted that they will be charging more for paper transactions come next April. This could leave the nine million or so investors that Mr Savory represents with a problem.
In its defence, Crest says that this is something for market forces to thrash out, and whether the cost of trading paper increases will depend on how many investors switch to nominee accounts or sponsored membership.
But given that many brokers would eventually seek to discourage the use of paper - for no other reason than that it keeps administrative costs down - Crest may unwittingly be sounding the death knell for paper transactions. The days of what is still essentially a quill and ink system look numbered.Reuse content