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Published 20 July 2022
© Crown copyright 2022
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This publication is available at https://www.gov.uk/government/publications/digitisation-taskforce/digitisation-taskforce-terms-of-reference
On 19 July 2022, the government announced it would be taking forward Mark Austin’s Secondary Capital Raising Review (SCRR) recommendation to establish a taskforce driving forward full digitisation of shareholdings, led by an independent, neutral chair. The SCRR defines digitisation as encompassing the eradication of paper-based processes in the securities settlement infrastructure for capital markets, and improvements to the UK’s current shareholding framework.
The move to digitise shares is already well underway. The UK has already made significant progress, with most shares now existing in digital – rather than paper – form. However, the progress in digitising shares has not seen consistent or commensurate progress in improving the way that the rights attached to such shares flow to end investors. In particular, retail investors can struggle to engage in company decisions; companies can find it difficult to identify and reach their investor base for example on secondary offers; and it appears there is potential for more efficiency gains across the system, including in settlement.
Finally, there remains a small but significant amount of shares that have not been dematerialised, which represents potentially over 10 million share certificates still in existence. This mix of digitised and paper-based shareholding requires companies and financial market participants to operate different systems to manage the issuance and settlement of shares, and communications and corporate actions between companies and their shareholders – which includes costly arrangements for share certificates and payments.
Previous work has included the development of a model by some industry stakeholders to meet a deadline to eradicate paper share certificates by 2025, as required by the EU Central Securities Depositories Regulation (CSDR). This model focussed narrowly on eradicating paper certificates but, did not consider how the wider intermediated shareholding framework could be improved, nor what could be done to improve the efficiency of capital raising by companies. A Law Commission Scoping Paper on Intermediated Securities published in 2020 considered issues associated with intermediation, such as what could be done to enhance shareholder rights, and whether minimum levels of service should be universally observed by intermediaries to facilitate the exercise of shareholder rights by investors.
A significant part of the challenge lies in the need to identify and secure collective agreement on a set of co-ordinated and wholesale improvements which will benefit all market participants. This work will need to take account of significant changes that have occurred since the development of the industry model, driven in particular by advances in financial technology. There is a question whether certain practices – such as the maintenance of both certificated and uncertificated shareholder registers – are required, and how communications between companies and their investors, and corporate actions, can be undertaken more efficiently and effectively.
Considering the scale of market coordination and the varied expertise required to ensure digitisation delivers equitable outcomes, the Government has decided to appoint Sir Douglas Flint to lead a group of industry experts, to determine the best approach for the UK. In addition, HMT, BEIS and the FCA have proposed a set of principles for consideration by this expert group, to ensure digitisation delivers the greatest possible benefits.
The objectives of the Digitisation Taskforce are to:
1) Work with stakeholders across the financial services sector to build consensus on change in order to:
i. Identify immediate and longer term means of improving on the current intermediated system of share ownership so that:
investors as beneficial owners are better able to exercise rights associated with shares which intermediaries hold on their behalf;
issuers can identify and communicate more easily with investors as the underlying beneficial owners, including on secondary capital raising offers; and
efficiencies can be identified to reduce costs and time delays in the existing system.
ii. Eliminate the use of paper share certificates for traded companies and mandate the use of additional options to cheques for cash remittances.
iii. Consider whether the arrangements for digitisation can be extended to newly formed private companies and as an optional route for existing UK private companies.
2) Develop a timetable and plan for implementation of changes, and support progress.
3) Engage with the Government and regulators on progress, and advise on any legislative, regulatory or other changes that will be required to support the programme.
The Taskforce will need to ensure that it engages effectively across industry and considers the points of view of different stakeholders, including in particular those of institutional and retail investors, and both large and small issuers.
The Taskforce will consider new processes and technology, and set out a long-term as well as short- and medium-term vision of how shares will be held, settled, and administered.
The Taskforce will be chaired by Sir Douglas Flint. It will be for the Chair to decide the composition of the Taskforce and to determine the processes that will be followed in order to address the objectives above. The Chair is asked to provide a public report on the Taskforce’s progress and initial findings by spring 2023, and to publicly set out final recommendations and an implementation plan by spring 2024.
1) Digitisation must produce benefits
Digitisation should provide net benefits, and any model for digitisation will need to be supported by evidence. Paper certificates should be eradicated with costs apportioned in a fair and balanced way. Specifically, digitisation should reduce costs within the system, improve efficiency of communication between issuer and investor, and as far as possible should be achieved in a future-proofed way.
2) Rights of intermediated investors
Ultimate investors who hold shares with intermediaries should be able to effectively and efficiently exercise the rights associated with direct share ownership including voting, receiving information and other corporate actions. The ability to exercise such rights as a default should be universal, irrespective of the intermediary that an investor uses.
3) Rights of existing certificated shareholders
The removal of paper certificates should not result in the degradation of the rights of current holders of paper certificates to, for example, vote, receive information and participate in corporate actions.
4) Issuer rights must be improved.
Any model for digitisation should increase shareholder transparency enabling issuers, investors, and intermediaries to more effectively and efficiently communicate with a company’s entire shareholder base including investors as beneficial owners who hold shares with intermediaries.
5) Transition plan
Any model must be predicated on a logical and measured transition plan that minimises disruption and costs for issuers, intermediaries, and investors.
6) Efficient structure
To drive efficiencies and align with other advanced economies, the UK capital markets – both public and ideally private – should transition to having all digitised securities governed by a single set of rules and regulations. Consideration should also be given to how a reformed UK system would work efficiently with international systems.
Any model for digitisation should maintain an appropriate level of security and fraud prevention measures.
Digitisation should improve, and potentially automate, the arrangements for the holding and settlement of shares and the exercise of shareholder rights including communications between issuers, intermediaries, and investors.
9) The market should consider all digitisation options available, provided they meet the criteria presented above.
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