A new report by the Department of Business, Innovation & Skills (BIS) has found that many UK private investors are unaware of the different shareholding options available and the shareholder rights attached to each option.
There are three main ways shares can be held in companies:
- Certificated - you hold a paper share certificate as evidence of legal title to the shares and your name is recorded on the company share register. You receive all dividends and shareholder rights directly, including the right to attend and vote at annual general meetings (AGMs) and extraordinary general meetings (EGMs); receive company accounts and annual reports, and any shareholder perks such as discounts on products sold by the company.
- Personal Crest account - your name is recorded on the company share register and in digital form within the Crest system (the electronic settlement service). You receive all dividends and shareholder rights directly.
- Nominee account- your stockbroker is listed as the legal owner of the shares on the company share register, and receives the dividends and shareholder rights attached to the shares directly. They then pass on dividends to you, the underlying investor, who is recognised as the "beneficial owner" of the shares. Nominee accounts can either be pooled, in which case the broker lumps the shares of a number of clients into a single client account, and keeps records of who owns what and what dividends are due to whom; or designated, in which your assets are held separately from other clients in an individual account.
As the BIS report stated, the knock-on effect of the nominee model is that investors may believe they are the owner of their shares but in fact they are dependent on their broker to facilitate access to their shareholder rights.
Roger Lawson, deputy chairman of ShareSoc and member of BETTER FINANCE, says brokers have an incentive to keep investors ignorant of alternatives to the pooled nominee account system as it is in their commercial interest to do so.
"Stockbrokers are really keen on nominee accounts because if you're on the share register the dividends go directly to you, but if you're in the nominee account, they go into the nominee account and typically they stay and the broker gets interest on them," Lawson says.
However, the report also says that most brokers believe their clients are happy with nominee accounts because they are cheaper to run than other types of accounts, and the reduced administration cost can be passed on to private investors. Furthermore, brokers reported that the number of investors who request their shareholder rights be passed back to them is low, suggesting most investors are not particularly interested in accessing their rights.
"The problem is that they don't know what they're missing because stockbrokers aren't telling them that they're losing the rights to vote and have a say in the way the companies they're investing in are run," says Lawson.
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