A City revolution, on paper at least
The Crest computer system is launched at the Stock Exchange tomorrow. Ken Welsby finds that convenience may come at a price for some investors
Sunday 14 July 1996
Tomorrow, paperless share dealing starts in the UK with the launch of Crest, the Stock Exchange's computerised settlement and registration system. Paperless, in this case, means without the need for share certificates.
The system promises convenience and greater security but there are concerns that small shareholders might find it harder, for example, to exercise their right to vote at AGMs or to take advantage of discounts and other shareholder perks offered to companies they invest in.
Under the present system, when you buy shares in a company, you receive a share certificate, although in some cases a stockbroker will hold the certificate for you. Every time shares change hands, the seller's certificate has to be returned and a new one issued to the buyer. The process is a never-ending paper chase that involves armies of "back office" staff at stockbrokers and share registrars. It depends on the reliability of the postal service and the ability of investors to keep certificates safely and return them promptly to brokers when they sell.
Most private investors think of share certificates as the shares themselves. In fact, legally, they are no more than records of entries in the shareholders' register. Strictly speaking it is this, rather than the certificates, that proves your ownership of the shares, and this is the information being handled by Crest.
Shareholdings will be recorded as accounts in Crest's computer rather than by the issue of certificates. The analogy, say Crest managers, is something like keeping your money in the bank rather than under the mattress. A Crest account will list your share deals and stakes.
The Bank of England started the system's development three years ago and its operation is now in the hands of CrestCo, a consortium of stockbrokers, banks, company registrars and the Stock Exchange, which has invested more than pounds 12m in the project. Over the next two years shareholdings in all UK equities will be "dematerialised" - Crest jargon for being converted from settlement using paper certificates into the electronic system. The first batch of 14 shares moves into the system tomorrow; it includes English China Clays and Yorkshire Food Group, which owns some of the Del Monte brands and businesses.
Most shares will be transferred in weekly batches from September to April next year, with most privatisation shares going around the end of this year.
What the change means depends on how actively you deal, your choice of broker, the size of your portfolio and the interest you take in the companies in which you invest. If, like many people, you are a "three deals a year - new issues and privatisations" investor, you will probably not even notice the change, says Fiona Hulme, Crest project director at ShareLink, Britain's biggest execution-only (no advice) broker. That is because investors will be able to stay "in paper" - receiving share certificates as before - and for these investors, this is the easiest option. The main problem, say brokers, is that dealing as a certificated holder may cost more.
More active investors may regard the opportunity of getting rid of fiddly share certificates as a blessing. For these people Crest offers two choices: using the broker's nominee account, or becoming a sponsored member of Crest. Both offer more convenience than keeping certificates but may also involve additional costs as well as other problems.
Many brokers are promoting their nominee account services. With a nominee the shares are held by the broker on your behalf. Legally the broker's nominee owns the shares, while you retain the beneficial ownership. Potential problems associated with this arrangement, however, are that you may not get shareholder information such as the company's report and accounts, you could lose the entitlement to speak and vote at AGMs and you may not be able to get hold of any perks otherwise on offer to a company's shareholders.
Ms Hulme stresses that nominee clients who want information can get it, and sometimes the perks as well. "We already have a large number of nominee holdings and if you want the report and accounts we can easily arrange it. With perks it depends on the individual companies. We spend a lot of time trying to persuade companies to include nominee investors, and with the move to Crest we will be stepping up the effort."
But look out for charges for these rights and perks (which would otherwise be available for free for shareholders with certificates), as well as charges for the administration of the nominee account.
ProShare, the organisation that promotes wider share ownership, has launched a Nominee Code to promote best practice. This tries to ensure that investors are aware of the costs involved, understand the safety of their assets and are able to receive company information. Only ShareLink, Fidelity and NatWest Stockbrokers have publicly signed up for the code, but investors may want to use these points as a checklist when it comes to choosing a stockbroker.
Some investors are also concerned that if a stockbroker goes bust they may lose their holdings from a nominee. This is unlikely, as most nominees are covered by the Investors Compensation Scheme. If you need reassurance check with the broker. Ask if the firm accepts responsibility as an authorised investment firm for shares held in nominee accounts.
The third option under Crest is sponsored membership, a personal Crest account operated through a participating broker, and is probably reserved for the most active investors. Sponsored members will automatically get full share ownership rights and, in the long-term, this could open the door to cheaper dealing costs. But most brokers will charge an annual fee, which needs to be set against the potential savings and any perks. Crest charges brokers pounds 20 a year for each member it sponsors, but the fees being sought by brokers from investors vary. Greig Middleton, which is one of the UK's largest private client brokers, says it "does not anticipate charging clients". At the other end of the scale Hichens, the City's oldest independent broker, expects to charge "up to pounds 100".
Do not be surprised if a stockbroker is keen to sign you up for its nominee arrangements. This gives the broker savings in back office costs as well as effectively tying you in to dealing with that firm. But not all brokers are convinced this is the right way to go. Among them is Keith Loudon, senior partner of Redmayne-Bentley, a big regional broker, and a director of CrestCo. He is adamant that his firm will not force, or even encourage, investors to move away from paper. "We do not believe that Crest should be used as an excuse to push a nominee service," he says. "When people put money into shares they don't expect to have to pay a second time for someone to look after them. Why should they? Using Crest to try to force people into nominees is, if not a stab in the back, at the very least a stab in the arm for the private investor."
q A free leaflet, 'Crest: What It Means For You', is available from CrestCo, Trinity Tower, 9 Thomas More Street, London E1 9YN.
How to choose the right Crest service
MOST stockbrokers are in agreement: you need take no action immediately, but should start to consider which Crest route to take. The time to act is either when all (or the majority) of the shares you own have been switched into the Crest system, or in March next year when the great majority of UK equities will have made the change.
When deciding which route to go, consider:
q How many times a year do you buy or sell shares? Fewer than five times a year? Do nothing. Stick to your present system.
q More than five times a year? Do you just want the money, or do you want information, perks and the right to attend the annual general meeting? If all you want is the money, either stay in paper (if you do a small number of deals and don't mind the paperwork) or use a stockbroker's nominee account.
q Are you an active trader and do you want to ensure you automatically receive company communications, perks and the rest? Consider becoming a sponsored member of Crest, but check that the fees involved will not outweigh the benefits.
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