UK Digitisation Taskforce Interim Report – Abolition of Paper Share Certificates?

Background to the Digitisation Taskforce

As a recommendation adopted from Mark Austin’s “Secondary Capital Raising Review”, which itself aimed to find ways to make secondary capital raising processes more efficient and effective, the UK Digitisation Taskforce (“Taskforce”) was established in July 2022 under Sir Douglas Flint’s lead. 

The aim of the Taskforce is to progress the digitisation of paper share certificates and generally seek to improve the UK’s system of share ownership by making it cheaper and friction-free.

Taskforce Objectives

The objectives of the Taskforce are to:

1. Work with stakeholders across the financial services sector to build consensus on change, to:
   • Identify immediate and longer term means of improving the current system of share ownership, so that:
     • Investors as beneficial owners are better able to exercise rights associated with shares held on their behalf
     • Issuers can identify and communicate more easily with investors as the underlying beneficial owners
     • Efficiencies can be identified to reduce costs and time delays in the existing system
   • Eliminate the use of paper share certificates for traded companies and mandate the use of additional options to cheques for cash remittances
   • Consider whether the arrangements for digitisation can be extended to newly formed private companies and as an optional route for existing UK private companies
   • 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
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

Interim Report Recommendations

On 10 July 2023 the Taskforce published their interim report, which produced seven recommendations:  

1. Legislation and company articles should be amended as soon as possible to stop the issuance of new paper share certificates
2. The government should introduce legislation to require dematerialisation of share certificates
3. The government should consult with issuer and investor representatives on the preferred approach to residual paper share interests and whether a time limit should be imposed for the identification of untraced ultimate beneficial owners (“UBOs”).
4. Intermediaries should have an obligation to put in place technology that allows them to respond to UBO requests from issuers within a very short time frame
5. Intermediaries offering shareholding services should be fully transparent about whether and the extent to which clients can access their rights as shareholders as well as any related charges
6. Where intermediaries offer access to shareholder rights, the baseline service should facilitate the ability to vote, with confirmation that the vote has been recorded and provide an efficient and reliable two-way communication and messaging channel, through intermediaries, between the issuer and the UBOs.
7. Following digitisation of certificated shareholdings the industry should, with legislative support, move to discontinue cheque payments and mandate direct payment to the UBO’s nominated bank account as the default option for payments to shareholders e.g. dividend payments.

The report suggests changes to the Companies Act 2006 (including Model Articles) and relevant FCA rules would be required to implement some of the above recommendations. The report does not explicitly state that the recommendations apply only to traded companies. However, we think this should be assumed. It will be interesting to see how the Taskforce’s thinking develops on the question of whether digitisation can be extended to newly formed private companies and exist as an option for existing UK private companies.   

Investor impact and digitisation more broadly

The digitisation initiative extends beyond the removal of paper share certificates to:

1. Facilitating access to shareholder rights
2. Improving the UBO’s visibility to the issuer
3. Improving the UBO’s ability to vote and take part in the governance of the issuing company

The underlying “Secondary Capital Raising Review” identified digitisation of the UK’s shareholding framework as a key reform. It noted that “digitisation” should encompass the eradication of paper-based processes, particularly share certificates, in the securities settlement infrastructure for capital markets. The Review looked into the role of technology to transform how shareholders receive relevant information and participate in secondary raises. 

Continued innovation in intermediary services is expected as part of a broader focus on improving capital-raising processes for publicly traded companies.

Opinion so far?

The Taskforce has stated that during its engagement with stakeholders it received overwhelming support from issuers and all sectors of the industry that support share trading and settlement. The administrative burdens and related costs of retaining physical share certificates are well known and it is stated that no party consulted is arguing that such inefficiency and cost is outweighed by benefits. Main areas of difference concern the timing and sequencing of the steps required to achieve full digitisation of share certificates and the manner in which newly digitised shares reside in a fully digitised ecosystem. The Interim Report considers sequencing and architecture of a fully digitised system in more detail and no doubt feedback on the Interim Report will further interrogate these points of difference between stakeholders.

What happens now?

The Taskforce requests feedback on the Interim Report by 25 September 2023. The Taskforce expects to publish its final report and recommendations within six months thereafter. Within such final report, the Taskforce will create a timetable for implementation setting out the practical steps.