No Pain No Gain: Getting rid of share certificates would be foolish

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The Independent Online

The threat to share certificates, the proof of share ownership favoured by many private investors, is increasing, as the campaign to eliminate them in favour of some form of electronic bank-like statement becomes more intense.

The Government has yet to pronounce, although indications suggest it will support what will be a highly unpopular move. It is exploring options for what is called dematerialisation - a word with a decidedly Orwellian ring.

The Institute of Chartered Secretaries and Administrators (ICSA) is currently conducting one of those consultation exercises so beloved by the change-for-change-sake brigade. Judging from its own comments it has decided there is no place for certificates - no longer the colourful documents they once were - in this hi-tech age.

It seems that dealing with what is regarded as old-fashioned paper is just too much trouble. It is also more open to fraud. And the costs are prohibitive. Globalisation is another influence included in the argument because seven countries, yes just seven, have opted for dematerialisation.

Yet the US has not joined the movement although of course there is a possibility - I put it no stronger - it may do so. So Britain should also switch; it must not be left behind, it is said. Why not, I ask, if the change is unnecessary?

Most of the other reasons put forward for compulsory electronic statements hardly bear examination. I accept there is, for the highly profitable securities industry, an element of inconvenience dealing with certificates. But it does get paid for all the extra effort. Don't forget most stockbrokers, indeed probably all, charge extra for certificates. It is therefore the investor who carries the extra cost - not the industry.

And with some nine million private shareholders willingly holding certificates I would suggest there is a good chance many registrars and stockbrokers could be out-of-pocket following any mandatory electronic move.

On the question of fraud the argument for and against certification is more balanced. I am no great admirer of the Royal Mail - indeed like most I have suffered from straying post. But in the near 50 years I have been involved with the stock market only one certificate has failed to reach me. And getting a replacement did not cost a penny, although there are claims that these days it would set me back around £100.

To pretend that dematerialisation would be foolproof ignores the weight of evidence. How many cases have there been of online fraud or attempted fraud? Not only is the internet far from secure from old-fashioned villainy it is not immune from human error and assorted malfunctions - ask the thousands not paid on time last week because of problems at the HSBC computer centre.

And don't forget some people are not computer compatible. The Government says that more than half the nation's homes are online. That means, say, 45 per cent are not. I bet many are share-owning households - mainly people of advancing years or those who ventured into the stock market on the back of privatisations. Are they to be cut off? A straw poll among my family and friends revealed 15 households, two of them share owning, without home computers.

At the moment there is a twin operation - paper and online. Some investors, mainly institutions and nimble footed players, are quite happy to accept electronic statements instead of certificates. Indeed it is worth pointing out that most day traders and some fund managers do not hold shares long enough to ever see a certificate. Electronic registering is also much quicker with three-day settlement. But that means little to the buy and hold investor.

I would have thought that the nine million people with certificates is too large a segment of the community to ignore. Yet that is the intention. They have - as I have - rejected blandishments to switch despite higher charges. Some of these investors may deal online but they want the comfort of a certificate which demonstrates their legal ownership of shares much more fluently than a name in a nominee account or a bank-like statement.

Under the existing regime many online shareholders are distanced from the company and do not receive all the rights attached to their shares. Admittedly, under the ICSA proposals, electronic registration would require shareholders to be registered - as they are now with certificates - on a company's register and to receive any communications from the company.

But mandatory dematerialisation is a step too far. If certificates are arbitrarily eliminated it will be yet another lurch towards the authoritarian state which is already attracting such discontent. Surely it is more sensible and simple to keep the electronic and paper systems operating in tandem. But sensibility suffers these days in the relentless pursuit of change.

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