Banking and transport have already been revolutionised by the removal of paper processing and a shift to electronic systems, and share ownership is next.

Historically, share ownership has been heavily paper-based, involving certificates, cheques, proxy cards, tax vouchers, transfer forms to name but a few. While the industry has moved a long way to make these processes more efficient, for many reasons, the UK and Ireland had always stopped short of removing paper share certificates.

But it is no longer a question of ‘if’ the UK sees ‘dematerialisation’ taking place, but ‘when’.

The EU Central Securities Depository Regulation (CSDR) will determine the exact extent of the regulatory change required, but it is expected that dematerialisation will be enshrined in EU law by 2014, and it could be implemented as soon as January 2015.

In 18 months’ time, shareholders could be facing a new system for holding, selling and investing directly in equities, and it will be seen as a radical change by some but is, in reality, an opportunity for positive change. We cannot afford to be caught without enough preparation. Not only agreeing on the best course of action, but communicating the change to the shareholding population becomes more pressing every day.

Protecting shareholder and issuer rights

The UK Government has been working on the text of the CSDR and, consequently has not fully engaged in the debate of what form the new model should take. Once the regulation is agreed, the Government must talk to industry and shareholders alike so that, as the deadline approaches, the market and any relevant legislation is fully prepared.

The key focus now must be how the new dematerialised system will operate - how to best preserve issuer and shareholders’ rights and benefits, and provide a more efficient market for all.

Although we are all comfortable with the current system, if we are honest with ourselves we would not build a model with paper certificates if we were building from scratch today. This mandatory change driven from the CSDR is an opportunity, if approached correctly, to bring benefits to issuers and shareholders, such as removing indemnity fees that shareholders currently pay if they have lost their certificate.

But the key elements of our system that are vital for good governance must be protected. In the current structure, investors benefit from the direct registered share system. If we moved to an intermediated model, whereby shareholding was purely through nominee accounts, shareholders would risk losing some of their current rights, or incur new costs. It is imperative that shareholders are free to choose how they hold their shares and I am pleased this fundamental right is almost universally accepted. Any alternative would be a backward step for the market - and a significant change in company law.

The ICSA Registrars Group, of which Capita Registrars is a member, suggests a model retaining the best elements of the previous system, without its inefficiencies. While the physical copies of share certificates would no longer exist, ownership rights would not change, and shareholders could continue to choose either to hold assets in their own name or via an intermediary.

The approach is based on several key principles:

• The current registration model must be kept.

• Dematerialisation must produce benefits.

• Any models adopted must be the best for each European market.

• Shareholder rights must be protected.

• Issuer rights must be protected.

• Any model introduced must have an efficient structure.

• Benefits must outweigh costs and costs should be apportioned in a fair and balanced way.

• There must be a logical and measured transition plan in order to move from the current system to any future system.

• The market should consider all dematerialisation options, provided that they meet the criteria presented above.

Recently, this high level model has been agreed with the majority of the market and the aim is to have the final details of the new system confirmed by the end of the year.

Communicating the benefits

Confirming the most appropriate model is only half the battle - communication with stakeholders will be vital to address their concerns. As the deadline for dematerialisation looms large, this will need to start in 2014. By then, we must be in a position to explain the change, and crucially, how it benefits shareholders, issuers and all other parts of the market.

There is no doubt the current system is inefficient. In its simplest terms, certificates need to be shipped by post and couriers around the country before a transaction can be made, making the settlement time for a trade around ten days. One vital message is the new process will be eight days quicker, minimising the time taken for shareholders to receive the proceeds of sold shares. This process is more efficient and it reduces risk.

Equally, removing current issues with the paper system is also a big positive. The problem of lost certificates will be eradicated, which usually incur unnecessary costs and delays for all parties, and it will reduce the potential for fraud that arises from paper certificates.

Removing physical certificates will cause some shareholders concerns - and the process must not risk alienating investors who prefer paper communications. It is crucial that those shareholders without internet access retain the ability to manage their assets in a way that suits them. Work is ongoing to ensure the final model for dematerialisation works for all shareholders and not just some.

By Michael Kempe, chief development officer at Capita Registrars