Law Commission begins review of intermediated securities system

The Law Commission has begun reviewing the system of intermediated securities in order to identify potential issues for both investors and companies.

Shares and bonds are increasingly held through a system of “dematerialisation” and “intermediation”. In other words, paper certificates have been replaced by a system in which most investors “own” securities through computerised credit entries held through a chain of intermediaries.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 in one place.

However, concerns have been raised about the effect of a system of intermediation on corporate governance and transparency, whilst there is uncertainty over what legal redress is available to investors, if issues with their securities arise.

The Department for Business, Energy & Industrial Strategy (BEIS) has asked the Law Commission to investigate the system of intermediated securities to identify any legal issues and potential avenues for reform. The Commission will produce a scoping report to inform future work on improving the system.

Stephen Lewis, Commercial and Common Law Commissioner said:

“Although the system of intermediated securities provides benefits and may make trading more efficient, it’s not working as well as it should, and it’s investors who are at risk of losing out.”

“We’re delighted that the Government has asked us to conduct this review, and we look forward to informing the debate on how the system of intermediated securities can be reformed.”

Business Minister Kelly Tolhurst said:

“I thank the Law Commission for taking on this review which will inform future work in ensuring our corporate governance frameworks continue to be the best in the world. Over 12 million individuals in the UK own shares and it’s vital that the rights and protections available to investors keep pace with changes in the market.

“We are committed to ensuring the UK’s largest companies become even more transparent and accountable, which is why we have implemented reforms to upgrade our corporate governance and continue to seek further ways to ensure the UK remains the best place in the world to work, invest and do business.”

The Law Commission will be publishing a call for evidence in Summer 2019, and a scoping report in Summer 2020. You can find out more about the work here.