The days of paper share certificates are numbered – albeit nobody knows precisely how many they have left. They were due to be gone by 2025 as per European Union regulations; post-Brexit, the UK government’s digitisation task force is looking at how and when to permanently retire them in this country.
Paper share certificates are not as rare as you might think: the government estimates that there could be up to 10mn still in existence, although the values are in many cases quite small. For example, asset manager Abrdn (ABDN) has roughly 90,000 certificated shareholders, around 70,000 of whom hold fewer than 2,000 shares – positions that are currently worth less than £3,100.
There are obvious advantages to getting rid of paper share certificates. Trading and holding shares via a digital platform is quicker and more efficient for investors, not to mention that paper certificates can quite easily be forgotten or lost. Eliminating paper certificates would also mean that companies only communicate with their shareholders digitally, making it cheaper.
But the transition also looks likely to introduce other fundamental changes for holders of paper. The government’s task force says that turning all certificated shares into nominee shares is the “leading” reform option. But these two ways of holding a company’s shares are fundamentally different to each other.
With a paper certificate you hold the shares directly, so are the legal owner of your investments and your name appears on the company’s register. You receive correspondence from the company directly and can attend company meetings and vote.
Nominee shares, by contrast, are held via an intermediary such as a platform or a broker, so nominee shareholders technically own a “beneficial” interest in the investments. This means that they have no direct relationship with the company, and their ability to attend company meetings and voting rights are dependent on the broker or platform.
It has been getting easier for nominee shareholders to exercise their shareholder rights, with more platforms offering investors the option of voting digitally. But this is far from guaranteed and nominee shareholders often need to be proactive about securing these rights. Not all platforms notify their customers when a company in which they hold shares is holding a meeting and, in order to attend meetings, nominee shareholders need a letter of representation from their platform.
The digitisation task force does not entirely address this, only recommending that brokers and platforms are transparent on what shareholder services they offer and their costs, and those that do offer them meet certain standards. Share registrar Computershare argues that if paper share certificates are abolished in this way, nominee shareholders’ rights will “remain at the mercy of the pricing structures, terms of service, priorities and effectiveness of intermediaries”.
Technically, investing via nominee shares also leaves you exposed to the financial health of your platform or broker, although this is less of an issue because there are regulations in place to protect customers. Customers’ money must be kept separate so that if a platform falls into administration they will get it back – although the process could take months.
There is still some way to go before paper certificates are ditched. The digitisation task force is still consulting relevant parties and is expected to deliver its final report in early 2024. But when the time comes, it’s important that investors should – at the very least – still be able to engage with the companies they invest in.
