Law Commission seeks views on intermediated securities

The Law Commission is asking individual investors, institutions and experts for their views on how well the system of intermediated securities works and where improvement is needed.

The responses will inform the Commission’s scoping study into a system in which investors increasingly hold shares and bonds through a system of computerised credit entries administered by financial institutions, in place of traditional paper certificates held directly by the investor.

Intermediated securities have made the trading of shares and bonds quicker, cheaper and more convenient. However, the structure means that investors are no longer the legal owners of the securities. Concerns have arisen around its effect on corporate governance and transparency, and there is uncertainty over the legal redress available to investors if issues with the securities arise.

The Department for Business, Energy and Industrial Strategy (BEIS) has asked the Law Commission to conduct the scoping study, and as part of it we are launching our 10-week call for evidence, which closes on 5 November 2019.

Stephen Lewis, the Law Commissioner for Commercial and Common Law, said:

“The system of intermediated securities has brought significant benefits such as making trading more efficient but, at the same time, investors are losing out on some of the benefits of share ownership, with a wider impact on the governance and stewardship of the companies they invest in.

“We’re asking investors and businesses in the market to inform our work by letting us know where they think the system is working, and where it needs to be improved.”

The system of intermediated securities

The current system is the result of increasing “dematerialisation” and “intermediation”.

Dematerialisation means that companies are not required to issue securities with a paper certificate. The dematerialised security is instead represented by an entry in an electronic record and is transferred by updating the record.

The intermediated model results in a chain of intermediaries between the company issuing the securities and the person or institution with the ultimate economic interest in the securities. The chain can include several actors such as brokers, banks and other financial institutions.

The call for evidence

To inform the scoping paper, the Law Commission is asking for comments and views across issues related to intermediated securities, including:

  • Whether owners of intermediated securities find it more difficult to secure voting rights, vote and ensure their vote is counted, compared to investors who own securities directly.
  • The ability of the investor to obtain legal redress, for example if the company defaults on its obligations to its shareholders.
  • The impact on the investor of an intermediary becoming insolvent.
  • How new technologies, including distributed ledger technology and other conventional technologies, could make it easier for investors to exercise rights associated with ownership, particularly voting rights.

We are asking several questions about each issue. The responses to these questions are vital for informing the scoping study, which will highlight the issues arising from this system and assess the difficulties caused in practice. The call for evidence is open until 5 November 2019 and the scoping study will be published in autumn 2020.

Find out how to respond to the call for evidence here.

Notes for editors

Further information on the scoping study

This project was included in the Law Commission’s Thirteenth Programme of Law Reform. It is sponsored by the Department for Business, Energy and Industrial Strategy (BEIS). It consists of a scoping study of investor rights in a system of intermediated securities.

This call for evidence is the first step in the intermediated securities scoping study. Its primary function is to seek stakeholder views about, and evidence of, their experience of the intermediated securities system.

The responses to the call for evidence will inform the scoping study that will provide:

  • An accessible statement of the current law, including a clear explanation of how shares and bonds are “owned” and held.
  • A description of the corporate governance and other legal issues associated with intermediated shareholdings and an assessment of whether the issues cause difficulties in practice.
  • A range of possible solutions – both legislative and non-legislative – presented in sufficiently developed form to provide a basis for future focused policy development and consultation by BEIS.
  • A summary of technological developments that might make it easier for underlying investors to exercise shareholder rights.
  • A summary of the costs and benefits of the potential solutions (in a form that will be useful to BEIS analysts), and suggestions about where further analytical work might be needed (eg interview, survey, and/or behavioural research with stakeholders).
  • A view on whether systems being put in place to remove paper certificates by 2025 (with the issue of new paper certificates phased out in 2023) offers opportunities to enhance the rights of investors already holding shares electronically as well as maintain in full the existing rights of holders of paper certificates.
  • An account of the views of the main stakeholders.

You can find out more about the project here.