Within a decade paper share certificates may be consigned to history, making it particularly important to pay attention to the administrative side of share investing.
The European Parliament has passed legislation putting an end to paper share certificates. Known as ‘dematerialisation’, the new law is at present expected to be mandatory by 2025. However, whether this comes into force depends on the outcome of Brexit negotiations, as all EU laws may be kept, changed or removed. Yet it’s important to know what holding paper certificates or being a nominee account holder means to you as a shareholder, both in terms of your rights and the costs involved.
Buying shares in a company has traditionally been done through a stockbroker who carries out your instruction. Once the shares are bought, the company’s registrars add your name to the shareholders’ register. This registration is what makes you a ‘member’ of the company and gives you your participation rights.
Shareholders receive the formal certificate of ownership through the post, confirming how many shares they own. After that, all communication from the company will come via the company registrars - be it receiving dividends, company reports, or invitations to vote for directors and attend Annual General Meetings (AGMs).
All shareholders taking charge of their own certificates must make sure they’re kept in a safe place. Shareholders who’ve misplaced or lost certificates can find the process of tracing or replacing a certificate lengthy, as well as costly.
Shareholders who want more active participation in their investments may see direct communication and voting rights as one of the benefits of holding certificates. Shareholders are invited to vote on motions, which are put before AGMs, including the election and pay of directors and payments made to shareholders in the form of dividends. Depending on the type of shares you purchase, you may also be eligible for any shareholder perks and have the right to be informed about any ‘corporate actions’.
Recently, however, certificated share dealing has become far more expensive for investors and a number of brokers and investment services, including Barclays Smart Investor, no longer offer this option. Commission rates too have risen, while rates for an electronic nominee account service have fallen.
The way to go, electronically-speaking
When you buy your shares through an ‘execution-only’ service such as Smart Investor, your shares are held electronically in the stockbroker’s name but you still remain the ultimate owner - known as the ‘beneficial owner’.
The immediate advantage of this arrangement is that the stockbroker handles the administration side of buying and selling your shares for you. This means your transactions are settled far more quickly. Electronic handling means no postal delays or risk of certificates being lost in the post. Dealing costs are cheaper, too.
Since the Companies Act 2006 (implemented in 2009), nominee account shareholders have the right to receive information such as company reports and notices about shareholder meetings. However, you have to ask for it – this information isn’t sent automatically. The best way to be sure about using a nominee account and retaining your rights as a shareholder is to ask at the outset whether the service will make it possible for you to attend AGMs, and whether you’ll be contacted if a corporate action arises.
Key differences at a glance
Here’s a check list of the key differences between certificated and nominee accounts: