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: https://www.lawcom.gov.uk/project/intermediated-securities/