Intermediated securities
The Law Commission published a scoping paper on intermediated securities on 11 November 2020, identifying issues concerning investors and businesses for potential future review.
Problem (Back to top)
In the modern era, when you decide to invest in shares or bonds, you are unlikely to receive a paper certificate. Instead, most investors “own” securities through computerised credit entries in a register called CREST, through a chain of financial institutions, such as banks, investment platforms and brokers (“intermediaries”).
This system of intermediated securities has made trading significantly quicker, cheaper and more convenient. It is now possible for individuals to buy shares in a matter of minutes, and to see all their holdings on a single electronic “platform”.
However, the system has been the subject of criticism from academics and practitioners over issues of corporate governance and transparency. There is also legal uncertainty as to the legal redress available to the investor, including upon the insolvency of an issuer of securities or an intermediary.
Project (Back to top)
This project forms part of the Law Commission’s Thirteenth Programme of Law Reform. We were asked by the Department for Business, Energy & Industrial Strategy to produce a scoping study, providing an accessible account of the law and identifying issues in the current system of intermediation. The purpose of the scoping paper is to inform public debate, develop a broad understanding of potential options for reform and develop a consensus about issues to be addressed in the future. We were not asked to produce a full report with detailed recommendations for reform.
Scoping paper
We published our scoping paper on intermediated securities on 11 November 2020. It was informed by the detailed responses we received to our call for evidence, published in 2019. Our paper analyses the law underlying intermediated securities, together with the concerns of market participants, and possible solutions to those concerns. Overall, it identifies two broad categories of issues. First, there are problems surrounding the exercise of investor rights, such as the right to vote or be counted in a scheme of arrangement. Second, there are several areas where there is legal uncertainty, for example if an intermediary suffers financial difficulties and becomes insolvent. Potential solutions considered include:
- Targeted legal intervention to address specific issues, such as creating a new obligation on intermediaries to arrange, upon request, for an investor to receive information, attend meetings and vote.
- Systemic change, such as removing intermediation altogether, or retaining intermediation and providing a genuine avenue for investors to hold their investments directly.
- Technological solutions such as distributed ledger technology.
At this stage, we are not making any formal recommendations for reform. The scoping paper provides a basis for further work, either by the Government or by the Law Commission, on identified issues.
Documents (Back to top)
Contact (Back to top)
Contact us if you have any queries about this project.
Email: int-sec@lawcommission.gov.uk.