In July 2023, the digitisation taskforce, chaired by Douglas Flint and convened by HM Treasury, set out a series of recommendations on how they believe the UK can modernise the transfer, holding and exercise of rights to shares - notably with respect to the elimination (or ‘dematerialisation’) of paper share certificates.
Share digitisation and the role of Financial Market Infrastructure
The UK government's ambition to create a single digital register will bring the UK in line with other major jurisdictions and financial centres around Europe - benefiting the UK financial services sector and London’s status as an international financial centre.
Amongst the recommendations for potential next steps in their interim report are:
- legislative measures to stop the issuance of new paper share certificates and require the dematerialisation of all share certificates
- government to consult with issuer and investor representatives on the preferred ‘residual’ paper share interests and whether a time limit should be imposed for the identification of untraced Ultimate Beneficial Owners (UBOs)
- the need for intermediaries to implement technology as a condition of participating in the clearing and settlement system to respond to UBO requests from issuers within a very short timeframe
- improvements and further transparency in shareholder rights – the baseline that services should facilitate the ability to vote
- discontinue cheque payments and mandate direct payments to the UBO’s nominated bank account
Given the UK’s current use of paper share certificates and duplicative supporting processes, the interim report determines an ambitious agenda for the UK’s international financial centre and the issuers that rely on its capital markets. Stakeholders across the capital markets community have welcomed the ambition and the opportunity for all market participants to deliver safer, faster and better value, enabling firms to more effectively raise funds and investment, and investors to benefit from a smoother, digitally-enabled service.
In discussions on a future end state for securities holding in the UK, the digitisation taskforce names four potential models for a fully digitised infrastructure and alights on one as the 'leading model' in its estimation:
'To mandate all certificated shares to be moved to the CSD, intermediated and administered through a nominee. This is the model through which the vast majority of digitised shares are currently held and administered. This would bring all shareholdings into a single CSD, removing the need for movement between subregisters and the CSD. It would, however, require all certificated shareholders to identify and be accepted by a nominee to act on their behalf.'
A single digital register will bring the UK in line with other major jurisdictions and financial centres around Europe.
The CREST settlement system, operated by Euroclear UK & International is authorised under the Central Securities Depository Regulation (CSDR) and as the UK’s Central Securities Depository (CSD), looks after an average of GBP5 trillion in assets, under the supervision of the Bank of England. Euroclear UK & International is part of the Euroclear group, the world’s largest group of CSDs, with EUR36.8 trillion of assets under custody.
As a Financial Market Infrastructure (FMI), Euroclear UK & International is duty-bound under international standards and local laws to work in the interest of the public and perform a systemic risk management role. The CREST system provides real-time ‘Delivery versus Payment’ (DvP) settlement in central bank money (pounds sterling, US dollars and euros) to over 150 direct members - including the world’s largest banks and asset managers, as well as smaller regional intermediaries. As an FMI and Critical National Infrastructure (CNI), Euroclear UK & International operates to stringent operational and regulatory standards, and facilitates controlled change as the market requires it.
Euroclear UK & International is seeking to facilitate the UK government’s agenda for the competitiveness of UK plc. This will include, but is not limited to, digitisation and Open Finance models for financial services.
Resilience is a high priority for Euroclear UK & International and forms a large component of Euroclear UK & International’s strategy. Euroclear UK & International continues to invest in improvements to our system and procedures to increase its levels of resiliency and will continue to do so over the coming years.
Across the financial system, market participants recognise the benefits of authorised, resilient market infrastructures providing an open architecture environment for competition. In the case of the securities post-trade environment, we recognise a potential for innovation and greater competition between service providers to issuers and investors on a variety of levels.
CREST already provides a neutral and trusted platform for market incumbents and new entrants (i.e FinTechs) to compete and innovate, and digitisation will further support the creation of innovative products providing value-added services to the financial market. We can look to other successful developed markets for inspiration. Sweden, for example, has highly efficient issuer servicing and strong retail participation based on a single digital register and hybrid direct-indirect holding model that facilitates investor choice.
The Euroclear group has extensive experience of delivering dematerialisation in other jurisdictions including the recording of rights to such digital securities in single digital registries. As the last significant system in Europe to embark on the process of digitising its share register, the UK has an opportunity to learn from the experience of other markets and deploy modern technology and best practices in its transition.
As Euroclear UK & International already accounts for on average 99% of the FTSE 350 share register by value, there is no challenge to our capabilities and capacity to on-board the full register.
To support the work of the digitisation taskforce to tackle the more challenging issues (i.e ensuring shareholder rights, appropriate public communications) and seising the opportunities of digitisation (i.e increased efficiency, reduction of cost and risk), we are working with all parties to develop solutions to foreseeable challenges and set a vision for the future. In doing this, we will particularly consider the best elements of the single digital share service that Euroclear operates in a number of other jurisdictions including Sweden, France, Finland, and the Netherlands.
Euroclear UK & International works closely with the Bank of England as an integral part of Real Time Gross Settlement (RTGS). Following the ongoing modernisation of their technology we see opportunities to further evolve our partnership to improve the DvP model and payments for users of the CREST system. We are also closely involved in industry initiatives to explore the possibilities of innovative technologies including distributed ledgers and Central Bank Digital Currencies (CBDCs). The Euroclear group is investing in digital assets capabilities, including, in 2021, leading a consortium of banks to successfully deliver an experiment with Banque de France involving the DvP settlement of sovereign bond issuance against a CBDC.
Changes to a live and operating market must be managed incrementally and with precision and due care - but also in view of the benefits of delivering a digitisation agenda that will benefit the UK financial services sector and London’s status as an international financial centre. Ultimately we must deliver in the same manner as financial markets operate - digitally and at pace, but with safeguards and security to the fore.
Experience shows that the focus of any change of this nature must prise operational resilience first and foremost, and be undertaken alongside and with the confidence of the market. As markets continue to evolve with increased transparency, improved technology, greater focus on conduct and tighter regulations, we see enhanced market integrity emerging as a key differentiator across the industry.
As is the case for most market infrastructures and even central banks, we have experienced a very small number of system outages in our near 30-year history. When rare outages occur, they are managed to a two-hour recovery time objective, in accordance with international standards.
Under the oversight of the Bank of England and in consultation with our participants, we have and are taking a wide range of actions to further improve the way we deal with outages, address their underlying causes and enhance our operational resilience. Well-functioning markets generate confidence and support the efficient flow of capital, and so, fundamentally, economic growth.
As governments and regulators around the globe look to improve the way capital markets operate, they rely on the technological and operational experience of the FMIs to enable and support their ambitions to improve markets for issuers, investors and intermediaries.
