No Pain, No Gain: Paperless accounts betray small shareholders
Saturday 22 January 2005
These are increasingly anxious days for small shareholders. They are under pressure from the Government, the bullyboy tactics adopted by companies such as
mm02, and changes that could follow the Continental takeover of the stock market.
These are increasingly anxious days for small shareholders. They are under pressure from the Government, the bullyboy tactics adopted by companies such as mm02, and changes that could follow the Continental takeover of the stock market.
The most worrying development is the Government's apparent backing for an ill- considered proposal to scrap paper share certificates, the bedrock of private investors since the early days of share dealing. It seems that a scheme from an obscure lobby group, the European Securities Forum, to abolish certificates has won the support of Jacqui Smith, the Industry Minister. She believes the ESF plan "fits in well" with company law changes now under consideration.
I hope Ms Smith has a change of mind. The ending of paper certificates would be disastrous for many small shareholders, forcing them into nominee accounts that strip away most of their rights. For a government that allegedly has a high regard for the wellbeing of the small man such action is tantamount to betrayal. There have been recurring moves to eliminate certificates since electronic trading killed off eye-to-eye dealing on the stock market floor in 1986. Fortunately, they failed, partly because the Government was unconvinced they should be binned.
But Ms Smith's sympathy with the ESF absurdity could mean yet further erosion of private investors' rights. It is not as if we are talking about a few hundred Luddites refusing to embrace new technology.
About 10 million private shareholders still prefer to rely on share certificates, rather than go into electronic nominee accounts. And they pay for the privilege. For most stockbrokers charge extra for certification. Small shareholders are obviously willing to incur the extra expense of retaining paper and consequently offsetting any additional cost.
So, I wonder about the merits of the ESF claim that compulsory electronic ownership would save £110m to £230m over three years. Indeed, the yawning £120m gap in its estimate makes me wonder about the quality of its research.
I suspect its bid to outlaw paper certificates has more to do with the inane desires of Euroism than anything else. After all, the UK, as a share-owning nation, is well ahead of other EU states, and should it kill off paper trading it would, the ESF admits, send a signal to other countries still happily embracing certification.
There are, I realise, drawbacks to paper. A lost certificate can be costly and worrying. And the need to rely on our far from reliable postal system can create unease. But the disadvantages of holding shares through nominee accounts are huge. Shareholders, for example, are often cut off from the subject of their investment. All communications from the company go to the custodian (usually a stockbroker) of the account.
It is up to the custodian whether they are sent on to shareholders. Only a few custodians do - often charging for the privilege. Some hang on to dividend payments until they feel the amount is worthwhile sending to the shareholder. And it is a myth that electronic operations are infallible.
There is another point Ms Smith and ESF should consider. A shareholder who has a certificate and is named in the company's share register has an obvious legal claim; anyone with securities held through a nominee account is likely to be no more than a beneficial shareholder. Quite a difference.
I suspect mobile phone group mm02 is not too worried by the distinction. It is the latest to put the boot into the small shareholding community. As it was once part of BT, the major privatisation of the 1980s, it has many small shareholders - more than one million. They have, it seems, become too expensive to service.
So mm02 is attempting to give them the old heave-ho. It is being quite subtle. If members of this downtrodden army do not claim their shares by completing and returning a form, their holdings will be compulsorily acquired - admittedly at what may prove to be a reasonable price.
Still, it is a poor reward for those who backed the BT share issues, when Margaret Thatcher was promoting a shareholder democracy. They watched their shares climb to more than 1,500p, then crash. Subsequently, there came an invitation to take part in a desperate £5.5bn rescue cash call.
As for the takeover action swirling around the London Stock Exchange, there are obvious dangers that competition could be eroded if a deal is struck. The private investor would almost certainly be an early casualty. No wonder retail stockbrokers, those with strong private client portfolios, are fearful about any deal.
In my view, London needs its own independent stock market. There is a clear case for Westminster action. But with this government's acceptance of almost everything European, don't expect any.
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