A Private Equity Investor Manifesto

Thursday, 27th October 2016 10:43 - by Eric Chalker

Before the 2015 general election, the department for Business, Innovation & Skills, then presided over by the Rt Hon Vince Cable MP, had a section devoted to improving private investor rights and preparing for the end of paper share certificates as required by the EU. 

With the new government, there was some initial uncertainty whether this would continue, not least because of the then unknown outcome of the EU referendum.  However, it is pleasing to report that – especially with the advent of Theresa May as prime minister – this work has resumed, particularly for the latter step, known as dematerialisation, although no longer with a specified deadline.

Dematerialisation was once seen as a threat to the interests of private investors and still is by some, but I believe it can and should be used as a force for good.  I say this having been involved in the preparations for dematerialisation conducted by the Institute of Chartered Secretaries & Administrators’ Registrars Group, whose interests naturally lie with the preservation of individually indentifiable shareholdings.  I am in no doubt that this change can be used substantially to reduce the need for nominee accounts and thus give full shareholder rights to many more private investors and thus increase our influence on the companies we own.

Other steps are also necessary to enable all private investors to enjoy the full shareholder rights that Parliament intended when passing the 2006 Companies Act. Not least of these are the enfranchisement of those whose investments, for whatever reason, will still be held in nominee accounts and the provision of proper financial protection in case of nominee failure.  To bring all these matters together, I have presented the new department for Business, Energy and Industrial Strategy with A Private Investor Manifesto for Dematerialisation, Shareholder Rights & Investor Protection, which I am urging it to take into account in its deliberations.

Introducing the manifesto

 This is a statement of what is required to restore the ability of private individuals to own company shares in their own names when they choose to do so, to enable them to enjoy shareholder rights in all circumstances when investing in equities of their own choice and to be properly financially protected when legally obliged to invest only through nominee accounts.

These are necessary steps both to restore and develop further a strong relationship between those with savings to invest and the companies in which they choose to invest.  Savers should be encouraged to understand that increasing wealth and income depend on the efforts of commercial enterprise, they should be encouraged to exercise responsibly the rights of ownership and they should not be unjustifiably exposed to the failures of nominee account providers and custodians.

For the good of society as a whole, corporations need real owners, not intermediaries.  Managers must be held accountable and this is the responsibility of owners.  Intermediaries and agencies which invest other people’s money do not have the same interests as owners.  Capitalism suffers and therefore society suffers when corporations are, in effect, ownerless and this can only be remedied by encouraging and strengthening the right of individuals to become owners and to behave as such.

The manifesto

1. The dematerialisation of company shares (the expected abolition of paper share certificates) must be used by the government to re-establish and reinvigorate the direct ownership of company shares by private individuals.

2. With dematerialisation, the right of private individuals to own company shares in their own names and enjoy in full the shareholder rights given by Parliament must be clearly asserted.

3. After dematerialisation, stockbrokers who wish to have private clients must not be allowed to prevent or discourage them from exercising their right to personal ownership of shares purchased with their money.

4. Private client stockbrokers must be prohibited from charging higher transaction costs for direct share dealing in dematerialised form than those they charge for nominee account dealing.

5. Individual Savings Account (ISA) Regulations 4(6)(c) and (d) must be actively enforced by the appropriate regulator, to give all Equity ISA investors the rights which Parliament intended.

6. Enforcement of the ISA Regulations must include regulatory oversight of the charges made for providing these rights, to ensure that they are not prohibitive or disproportionate.

7. These Regulations must be extended to ensure that all ISA investors are legally entitled to receive full notification of all proposed Schemes of Arrangement affecting their shares (particularly takeovers using Part 26 of the Companies Act 2006), however their shares are listed. 

8. The same rights as are given to ISA investors must be made available, by equivalent regulations, to all individual investors using nominee accounts provided by private client stockbrokers.

10. Trustees of Self Invested Personal Pensions (SIPPs) must be required to provide equivalent rights to their beneficiaries as those that are given to investors in Equity ISAs. The Financial Services Compensation Scheme must be extended to give investors in Equity ISAs and SIPPs the same protection as is given to investors in insurance-based pension schemes, namely 90 per cent of value with no upper limit, because they are not the legal owners of their shares and are therefore exposed to loss of value through no fault of their own.

[For clarification of some points above, see my earlier blogs, What is a nominee account? and Investor rights in ISAs: what you may not know.]

Eric Chalker, UK Shareholders’ Association Policy Co-ordinator & Director, 2012-2016

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.