Replacing paper in financial systems by going digital in the UK

The UK government has set out its stand to supercharge London’s position as a global financial centre through a combination of modernization and reform. From enhancing shareholder democracy to digitizing shares, the UK has been handed a once-in-a-generation opportunity to strengthen its competitiveness as a capital-raising centre. Technology is the key, and millions of investors could benefit alongside the companies in which they invest.

Work is already in progress to attract future IPOs, with the 2021 UK Listings Review, chaired by Lord Hill, setting out a series of recommended reforms that are progressively being implemented. The 2022 UK Secondary Capital Raising Review, led by Mark Austin, is a key component in this mission.

It looked into improving further capital-raising processes for publicly traded companies in the UK. This included investigating the role of technology to transform how individual shareholders receive relevant information from the companies in which they invest and participate in the latter’s secondary capital raisings.

The government has appointed Sir Douglas Flint, chairman of asset manager abrdn, to lead a Digitisation Taskforce to eradicate paper-based processes in the securities settlement infrastructure for capital markets and make improvements to the UK’s shareholding framework. This includes enhancing widening retail investor participation in capital markets and enhancing shareholder democracy.

This move has the potential to positively affect millions of UK investors, their advisers and the companies raising capital, and forms part of a wider conversation about the digitization of markets globally. For many market participants, change is long overdue, but close industry collaboration between the financial ecosystem and government will be essential in delivering on the benefits of greater efficiency, transparency and economy.

Digitizing share certificates

The Digitisation Taskforce must prioritize and maintain operational resilience while enhancing existing processes – ultimately to save time and money, and make it much easier for people who own securities assets to manage them.

To take one example in the UK, a small but significant minority of shares that have not been digitized has posed a challenge for years because finding, moving and validating physical certificates takes time and resources, and risks them going astray. Moreover, the continued existence of such certificates requires companies, investors and their intermediaries to operate and fund separate and duplicative issuance, settlement and communications processes for digitized and paper-based shareholdings.

Industry and capital market stakeholders, under the chairmanship of Sir Douglas, are tasked with digitizing these certificates, which will allow companies to issue new securities in dematerialized form only and transform existing paper shares into fully electronic holdings.

In several Nordic countries, individual investors already hold digital “beneficial owner” accounts directly at their Central Securities Depository (CSD) – an enabler that not only supports innovation in flourishing fintech scenes in Sweden and Finland, but also levels of retail share investment are nearly four times as much. According to the OECD, shares represent 10.9% of household assets in the United Kingdom compared to 39.9% in Sweden – thanks in part to the popular tax-advantaged Investment Savings Account (or Investeringssparkonto – ISK).

Source; World economic forum

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