Law Commission Error on Segregated Accounts

In a previous blog post on the Law Commission’s consultation on Intermediated Securities I queried their claim that all investors in nominee accounts had the option to use a segregated account (i.e. a “designated account” where your name is on the share register, not just the nominee operator’s). They claim this is mandated by an EU regulation. This is extremely important because a simple “pooled” nominee account that most stockbrokers use does not give you clear ownership of the shares. If the broker goes bust and has not properly recorded who owns what (as is often the case), you may have difficulty recovering your shares. It also means that the company you own shares in cannot communicate with you and neither can anyone else.

HAVING YOUR NAME AND CONTACT DETAILS ON THE SHARE REGISTER IS EXTREMELY IMPORTANT!

I have now actually looked into the true position with three different stockbrokers I use for ISA and SIPP accounts. This is what they said (in summary, edited for brevity):

  1. We are planning to offer segregated accounts and we expect this to be available mid-next year.
  2. We are working on implementing this with the expectation it will be an option for account holders next year, but it will be considerably more expensive than our current fees.
  3. These requirements come into effect as soon as the CSD, in our case Euroclear, receives its authorisation from the regulator Bank of England as a CSD – this is expected to be Q1-2020. We will offer segregated accounts when obliged to do so. Charges will be materially higher than for a pooled nominee account given the additional processing and operational costs involved.

In summary therefore, they concede it is legally required but they are not rushing to implement it and they will be deterring people from using that option by high and unjustified charges. In essence this is disgraceful.

I will be making this plain to the Law Commission.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Intermediated Securities – You Need to Respond

The Law Commission is undertaking a review of Intermediated Securities. What’s this about and why is it important? It is important because the use of nominee accounts has undermined your rights as a shareholder in public companies.

Nominee accounts have made it difficult to vote your shares at General Meetings, taken away other rights, and defeated shareholder democracy. The inability of companies or anyone else to communicate with all shareholders has also made it exceedingly difficult to tackle management when they are paying themselves too much or are simply not acting in shareholders interests. Individual shareholders have been particularly damaged by the use of nominee accounts which have taken over from paper share certificates for most holdings.

Another issue is that an EU Directive will soon be mandating “dematerialisation” of share certificates. All trading will need to be done in electronic form which implies nominee accounts only unless you happen to have a Personal Crest account (of which there are only 5,000 now) or unless a new “name on register” electronic account is devised.

ShareSoc has issued some information on the Law Commission public consultation on Intermediated Securities which you can read here: https://www.sharesoc.org/sharesoc-news/law-commission-review-of-intermediated-securities-consultation/

IT IS REALLY IMPORTANT THAT AS MANY PEOPLE AS POSSIBLE RESPOND TO THIS CONSULTATION SO PLEASE DO SO!

You can read my personal submission to this consultation here: https://www.roliscon.com/Intermediated-Securities-Consultation.pdf

One interesting point made in the Commissions consultation document is that it says “intermediaries are obliged to offer investors the option of a segregated account” – see page 8. This is now EU law and I understand it is effective in the UK. That means that all ISA and SIPP holders should be offered the option of a segregated, i.e. designated,  account where your name and address are held on the share register and not just the nominee operator’s. Such accounts are much better than “pooled” nominee accounts which almost all brokers use at present and which are positively dangerous as your assets are not separately identified. That means that when your broker goes bust there is frequently a shortfall and recovery of your assets in full is not easy. I am looking into whether my ISA and SIPP operators actually are compliant with the EU legislation and do offer designated accounts. I will advise later on the answer.

However a designated nominee account is still not the ideal solution – all shareholders need to be on the share register of a company, which is what my consultation submission says.

PLEASE MAKE SURE YOU SUPPORT SHARESOC AND RESPOND TO THE LAW COMMISSION’S CALL FOR EVIDENCE

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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