Buried near the bottom of the government’s list of “Edinburgh reforms” for revitalising UK financial services was this: “Delivering the outcomes of the secondary capital raising review.”
I know what you’re thinking: committing to implementing your own review, which was published five months ago with recommendations accepted by the government and welcomed by regulators, is just the kind of bold, fresh thinking needed to secure the City’s future.
But within the review by corporate lawyer Mark Austin, which focused on how to raise money more quickly and easily, was an ambitious recommendation: technically difficult and tediously wonky, it aimed to tackle a long-acknowledged problem that a combination of inertia and vested interests means has remained unaddressed.
The jargon around this issue — dematerialisation and disintermediation — is so off-putting that Austin came up with a broader alternative: digitisation. But the basic problem is simple: listed companies don’t know who their ultimate owners are, and nor really does anybody else.
His review found that the average FTSE 100 company has a third of its investor base “unallocated” — effectively unidentifiable — according to Refinitiv data. In the benchmark index, 29 companies have more than 40 per cent unallocated. This is a lack of transparency at best. Companies themselves might have access to more information about their investors. But in reality, say practitioners, it is far from complete: this is part of the reason that certain corporate actions take such an interminably long time.
The current market infrastructure is costly, inefficient, doesn’t allow companies to communicate with their shareholders, and actively prevents equal participation by all shareholders in corporate events like fundraisings. Frankly, given the number of reports written explaining all this, it’s an embarrassment that the situation remains as it does. Douglas Flint, lucky enough to be both chair of Abrdn and heading a new digitisation task force, has the job of changing that.
There are two interrelated problems, combined with generally archaic legislation, rules and technology. The first is the survival of a two-tier system where an estimated 10mn investors still hold paper share certificates. Administering two systems, for certificates and “dematerialised” or electronic securities, is costly. It also slows capital raising and dulls innovation.
But part of the reason this persists is that there is currently no good way to scrap paper while maintaining the rights of individual shareholders. It is expensive and impractical for retail shareholders to invest through Crest, the UK’s central securities depository. So most hold shares through a nominee account operated by a broker. That muddies identification of ultimate owners and breaks the chain of communication: companies don’t know who their investors are, can’t communicate with them, encourage them to participate in AGMs, or in fundraisings. Individuals can even be charged if they wish to attend an AGM or exercise their votes.
Some platforms have been changing: Interactive Investor, owned by Abrdn, switched to assuming clients wanted to opt in for voting rather than opt out, notifying them of upcoming events. But improvements here and there shouldn’t excuse an outdated, second best state of affairs. The ambition, per Austin, should be for a fully digitised system that reduces cost, enables two-way communication and equal participation with the entire shareholder base and proper real-time analysis of the shareholder register. It could, he said, be “a key part of the UK positioning itself as a pro-innovation jurisdiction”.
There is a risk that this again ends up in the “too hard” bucket. Those wanting a quiet life, or with a business model built on shuffling paper around, have always demurred. Who bears the cost of modernisation is an old stumbling block. Meanwhile this is tricky stuff, operationally and legally. A not dissimilar project in Australia, aiming at modernising clearing and settlement using blockchain, recently collapsed after seven years amid much recrimination and at a cost of £250mn.
This project done properly could ultimately underpin some of the fancier government claims about UK agility and dynamism, or a sector at the “forefront of technology and innovation.” And after this year, making progress on something difficult but worthwhile might engender a little faith in the UK as a place that can actually get things done.