The Crest of a trading wave

In just over three months, a new share-settlement system will move into place on the stock market. Its impact will be revolutionary, and investors would be wise to be prepared.
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The Independent Online
Mention Crest and most of us probably think of toothpaste. However, investors buying shares are set to hear a lot more about Crest, the new electronic system for settling payments for sales and purchases of shares.

Considerable changes in the share settlement system have been implemented since an electronic system called Taurus was abandoned in 1993. The old account-trading system, which divided the year into two- or three-week- long "accounts" at the end of which the net balances owing were paid, has been abandoned. It allowed plenty of time for private investors and trustees to deliver stock certificates to the market and settle accounts. But share deals are now completed on a rolling-settlement basis, allowing five business days to settle an account. Once Crest is established, the settlement period is likely to be further reduced to three days. This will make it even more difficult for investors dealing on an advisory basis who currently hold shares in their own names, and in particular for those not using a nominee service that provides an administrative role in delivering stocks into the Crest system.

So what are the likely consequences of Crest? Under Crest all share dealings will be "dematerialised". Put simply, much of the cumbersome movement of paper will be removed and it is expected that the majority of shares will be registered electronically. Those who wish to hold certificates may continue to do so, but if a holding is sold the stockbroker handling the sale must dematerialise the stock in order to deliver it electronically to the market through the Crest system, adding to costs.

Crest will operate typically through stockbrokers and banks, which will be members of Crest and may also provide a nominee service. The cost of this service will vary, but in many cases may be provided free of charge by stockbrokers. Share deals will be settled electronically, with title being confirmed by regular statements from the investor's Crest member, in much the same way as bank customers receive statements showing movements and closing balances in their bank accounts.

Many brokers will already be encouraging clients to use a nominee service as it resolves any problems relating to delivery and enables a smooth transition when Crest's new electronic dealing system starts in July. But the radical changes that are taking place should force others to review their current arrangements. A key factor will be the cost of dealing. Investors can, at a price, continue holding on to share certificates; alternatively they may be able to deal more quickly and cheaply through Crest members. Further protection is provided by stockbrokers regulated by the Securities & Futures Authority.

Crest will have a large impact on investors and the financial services industry alike. It is a similar change to that which took place in the banking world with the demise of the pass-book. With the computerisation of settlement systems it will become increasingly difficult to deal using share certificates, so investors should review their options. There has never been a better time for investors to examine their position and consider how effective this will be in the future.

Fraser Gardiner is a director of Bell, Lawrie White.

The Crest options to consider

Designated nominee service Investor has final say

Advantages:

Investors can identify holdings

Ability to dematerialise certificates and deliver stocks into Crest

Dividends can be mandated to investor/bank or collected by nominee

Stockbrokers regulated by the SFA

Disadvantages

No direct evidence of ownership

Shares held by a third party - possible delay if changing advisers

Un-designated Nominee Service Investor has some say

Advantages:

Nominee pools client holdings

Ability to dematerialise certificates and deliver stocks into Crest

Dividends collected by nominee

Stockbrokers regulated by the SFA

Disadvantages:

No direct evidence of ownership

Shares held by a third party - possible delay if changing advisers

Dividends may be delayed

Full Discretionary Service For high net-worth individuals

Advantages:

Fund manager makes decisions within an agreed strategy

Services: Nominee and custodial services, portfolio reviews, valuations, tax and dividend schedules

Stockbrokers regulated by the SFA

Disadvantages:

Day to day decisions out of your hands

Management costs

Managed Portfolio Service

Advantages:

Pools investments in collective scheme run by fund manager

Invests in investment trusts or unit trusts

Services: Nominee and custodial services, portfolio reviews, valuations, tax and dividend schedules

Regulated by the SFA

Disadvantages:

Day to day investment decisions out of your hands

Managerial costs incurred

Shares Registered In Own Name Client has final say

Advantages:

Evidence of ownership always available

Flexibility in selecting brokers

Disadvantages:

Delayed settlement and more expensive

Poor dealing prices

No supporting tax documents

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