One nuisance after another
Saturday 20 May 1995
In July 1994, the Stock Exchange set out to overcome the nuisance of delay and uncertainty inherent in the traditional two-week dealing period known as the "account". Until that time, all share transactions in one account were not due for settlement until the second Monday following the end of the period. That meant that it could sometimes be as long as three or more weeks before investors received the cash for shares they had sold or were registered as owners of shares they had bought.
Instead, the exchange introduced "10-day rolling settlement", where all transactions would be settled 10 business days after they took place. On the face of it, this looked straightforward enough. Investors would easily be able to predict when they would have to hand over their money or their shares. However, it simultaneously introduced the new nuisance - the need for faster administration.
Unless investors delivered cheques promptly, clearing times could mean that their funds were not available on settlement day. Similarly, any delay in delivering share certificates could lead to problems in receiving payment.
Now the Stock Exchange is making further "progress". On 26 June, the 10-day settlement period is reduced to five days. The tighter deadlines will make it even more important for the investor to have a reliable method of achieving settlement.
The solution for many people is to switch from holding share certificates in their own name to joining a "nominee company", run by a stockbroking firm or other financial adviser.
The firm then takes on all the administration of settling transactions on behalf of the investor and the investor no longer has the nuisance of having to check and keep share certificates.
However, this in turn introduces a new nuisance. While the investor remains the beneficial owner of the shares, he or she is no longer separately named on the share register. Consequently, he or she will will no longer automatically receive reports and accounts for the companies in which shares are held and can lose the right to vote, to attend meetings and even to receive shareholder perks.
Of course, it is possible for the investor to retain all these things while in a nominee - but usually at a cost.
There is an alternative, though, and one that is not often publicised. For some investors, it is worth just continuing as before. There are a few caveats but shareholders should not be bamboozled into joining a nominee without giving the matter proper consideration.
Confused? Here are a few questions you should be asking yourself:
How often do I trade in shares? If the answer is "no more than once or twice a year", the cost and nuisance of a nominee may outweigh the possible costs of settling a day or two late. Stockbrokers can make special arrangements with the Stock Exchange for non-standard settlement and investors should ask their advisers whether they can offer this facility.
How confident am I of dealing with the paperwork and taking the risk of possible late settlement? If you are confident, again there may be no need to go to the trouble of entering a nominee arrangement.
Do I trust a third party to hold shares on my behalf? If not, it may be preferable to put up with the administrative headache than pass ownership responsibility to a nominee. Of course, nominees are generally run by reputable organisations and special rules ring-fence their assets from those of the parent company.
Nevertheless, as Barings showed, there is a risk involved although it needs to be offset by the risk of holding, and possibly losing, certificates oneself.
Certain shareholders may already be in a nominee without realising it and need take no action. For example, PEPs are held by nominee companies, as are company share savings schemes. If your only shares are held in these ways, the new settlement rules will not affect you directly.
Progress, of course, is never-ending. The move to five-day rolling settlement merely paves the way for the next bit of progress, electronic settlement. This will arrive in about 18 months' time in the form of a system known as Crest.
The Stock Exchange hopes the nuisance of paper-based share trading will then be banished altogether. Far be it from me to suggest that it could possibly create a new nuisance, when shareholders suddenly find they have no certificate to prove what they own.
The author is business development director of Barclays Stockbrokers.
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