Exchange's ambitious technology plans are hurting private investors
STOCK MARKET WEEK
Monday 02 June 1997
One leading investment house is believed to be planning to, in effect, give a discount to investors who are prepared to disappear into its nominee system.
But leading private client stockbroker Greig Middleton is doubling its administration charge for clients who want to retain paper certificates.
It is introducing a pounds 7.50 payment for contract notes "to reflect compliance and settlement costs" for clients on the nominee list.
"For those not in nominees, or otherwise unable to settle electronically, the charge will increase to pounds 15 in due course," a spokesman said.
Norman Andrews, GM's chief executive, said the doubled payment for non- nominee clients reflected the increasing cost of paper settlement, embracing transfer forms and certificates. "However we intend delaying the introduction of this higher charge to allow clients to transfer to a system of settlement compatible with Crest, such as our own nominee company," he said.
Crest is the computerised settlement system which has come in for heavy criticism from some private client stockbrokers.
It will face its biggest test yet this week as the huge Halifax flotation hits the stock market. Many market firms, big and small, fear the Crest performance will leave much to be desired.
There will, without doubt, be a Halifax stampede. Institutions need to buy and private client brokers are known to have long lists of orders; if trading is as heavy as indicated the Crest system could be choked. True, the old paper settlement arrangement would probably have been overwhelmed but the pounds 25m computerised set-up should, after all, be sufficiently sophisticated to take the strain.
Introduced last summer, it has had plenty of time to get its act together. Yet private client stockbrokers have complained bitterly their back offices are often forced to work late into the evening, incurring extra costs, because of the system's deficiencies.
It is the successor to Taurus, which has achieved an unenviable place in City folklore. After costing an incredible pounds 400m the most costly disaster to hit the Stock Exchange was abandoned in 1993.
Crest, of course, is a manifestation of the Stock Exchange's desire to keep pace with markets around the world. In these days of international trading, electronic settlement is clearly essential for any ambitious share market.
But, as is so often the case in the hectic scramble to satisfy the big boys, it is the small man, in this case the private investor, who loses out.
Under Crest private shareholders have five choices. They can operate through their broker's nominee company, join an outside nominee company, such as one run by a solicitor, or become a sponsored member of Crest, which should cost no more than pounds 20 a year.
There is also the opportunity to carry on as before, including collecting share certificates (at extra cost). The fifth and most damaging option from a Stock Exchange point of view would be if an uncomfortable number of private investors gave up stock market investing altogether.
If many did adopt such a policy it would be a disconcerting development for many stockbroking firms whose very existence depends on the small player.
There is no doubt life is getting much more difficult, and expensive, for the private investor. Settlement periods have been reduced, with instant settlement presumably the ultimate step, and the appearance of nominee accounts means the link, already fairly tenuous, with the company in which an investment is made is smashed completely.
Unless the nominee company is prepared to supply yearly reports they will no longer drop through private shareholders' letter boxes and such joys as attending the yearly shareholders' meeting will be difficult to achieve. Small dividend payments will be retained until the nominee company has collected enough cash to, in its eyes, make a payment worthwhile. And shareholder perks are often cut off.
Nominee arrangements have other disadvantages. There is the rumoured case of a group of investors putting cash into Halifax through a nominee. They were not pleased when they discovered their individual share entitlements were lost and they were forced to divide the single and smaller nominee allocation between them.
In the remorseless advance of computerised trading there seems to be few resolute souls around to champion the case of the small investor.
Although dwarfed by the institutional battalions in valuation terms they represent a substantial number of the daily bargains recorded.
It is time some relief was offered. The small player seems to have lost out in all the high technology initiatives. There must now be the looming danger that companies may feel the climate is right to press for dispensing with individual share certificates altogether. That would be a dispiriting development. With the gap between the needs of big and small investors looming wider and wider there may be a requirement for some form of two- tier market. Perhaps GM's decision to charge more for paper settlement is a tentative sign a dual-level market will eventually emerge.
Footsie fell sharply on Friday but still seems to be on course for the 5,000 points so many now predict. Second and third liners, however, remain on the sidelines.
The Blair blue chips surge has prompted Legal & General's investment team to lift its 12- month forecast from 4,200 to 4,700. "With a dividend yield sub 3.6 per cent investors should now be adopting a cautious posture just on economic fundamentals, let alone any possible damage inflicted on the corporate sector by Gordon Brown," the team says.
"However, we are not bearish. Dividend growth of 8 per cent looks to be a sustainable prospect and institutional liquidity remains historically very high. We believe this justifies a neutral position."
Boots is the main profits performer this week. On Thursday it should produce yet another healthy performance with year's profits of pounds 528m against pounds 493.5m. Today publisher Emap is expected to report year's profits of pounds 120m against pounds 86.5m. Others reporting this week include Railtrack (pounds 305m against pounds 261m) and Vodafone pounds 495m (pounds 467.9m).
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