No Pain, No Gain: Millions to suffer this draconian modernisation
Saturday 28 October 2006
Nine million private shareholders, the Cinderellas of the investment world, are set to suffer more humiliation unless the self-appointed powers that dominate the City indulge in a little common sense.
The battle to retain paper share certificates, for years the accepted proof of share ownership and favoured by most small buy-and-hold investors, is not going well. Two recent surveys have favoured the introduction of some form of electronic registration. I remain convinced that the abolition of certificates would be a retrograde move. It would ignore the needs of the nine million certificates supporting small shareholders, many owing their stock market presence to high-powered Whitehall privatisation campaigns.
The continuing advances in online systems and perceived cost-savings for the securities industry are behind the campaign to consign certificates to the dustbin. It is appropriate that online registration is known as dematerialisation - an awful word that only internet nerds would embrace.
The Institute of Chartered Secretaries and Administrators (ICSA) is the driving force behind the attempts to kill certificates. Earlier this year, it carried out one of those consultations for the Government. The result - predictably - was heavily in favour of electronic registration.
But the whole exercise seems flawed. It was not structured for private investors - the main casualties - and only 206 views were received. In many walks of life, such a small sample would be treated with utter contempt. But no. The fevered dematerialisation brigade is undaunted and pressing ahead.
The 206 replies came not only from shareholders but also from such interested parties as stockbrokers, issuers, nominees, trade organisations and professional groups. I could have told the ICSA that the City likes dematerialisation. Indeed, I would be surprised if any of them voted for certificates.
Yet, even allowing for the heavyweight contingent, 31 per cent favoured the retention of certificates. A further 3 per cent declined to "give an opinion". Others gave qualified responses. So, the 66 per cent in favour, with its strong City element, is hardly a resounding shareholder endorsement. Even online supporters admit it is the small investor in the firing line. Many would face huge difficulties.
Certificates back around 15 per cent of shares - there are some 10,000 paper trades a month - with institutional investors representing the major force in electronic registration. And nullifying City moans that certificates are too costly is the fact that investors who require certificated trades pay extra for the privilege.
TD Waterhouse, the major private client stockbroker, has also conducted a survey that could threaten the continuation of certificates. It polled what it calls a cross section of 750 of its execution-only customers and no fewer than 80 per cent favoured the end of the paper chase "if the new system were to offer the same benefits and rights of ownership that certificates currently offer".
I wonder about the relevance of Waterhouse's contribution. Before the poll, it would have been aware of its customers who like certificates. I know, because I am a Waterhouse-certificated customer and, like others, pay for the privilege. Needless to say, my views were not sought.
Holding shares online is fraught with danger. As systems get more sophisticated, so do the crooks. And there are doubts, as Waterhouse seems to acknowledge, whether shareholder rights will be reduced. It also emerged there could be problems with some PlusMarkets shares. And what about unquoted companies?
With the extra charge for certificates, paper trades must at least wash their face, even if they are more troublesome for the securities industry. Otherwise, they would be banned or priced out of reach. Many small shareholders are buy-and-hold investors. They are not day traders; most would regard a deal a month as overtime. And with approaching half the population not online, it is likely that many would be cut off from their investments.
Dematerialisation advocates should also consider that there is, for example, no pressure for all bank accounts to be online. So why not let paper and electronic share registration continue in tandem? Compulsion is unnecessary and draconian. Surely a nine million-strong army does not deserve such callous treatment?
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