Until about ten years ago – when the word crest still meant the curly foaming ridge at the top of a wave – share registers were about as important to captains of UK industry as passenger lists were to captains of trans-Atlantic liners. It was important to know who was on board as the ship set sail, and which passengers should be placed at the captain’s table, but otherwise it was a document of little interest. It was produced for ritual lifeboat drills and other set piece occasions, such as the captain’s reception; the rest of the time it merely gathered dust in the purser’s office.
The fate of the share register in the company secretary’s office was little different: it was also retrieved for set piece occasions (like the annual meeting), or dissemination of ritual information (such as that contained in the annual report), but was seen as having little other relevance to corporate affairs.
But this all changed in the mid-1980s. Technological advances, new legislation giving companies the right to identify their beneficial owners, and an environment rampant with takeover activity, all combined to create a strong demand for effective share register analysis.
In fact, some work was already being done in this field. Nominee data could be found in the Fulcrum red book and rudimentary register analysis was being undertaken in the darker corners of the offices of certain stock brokers and PR firms. But the advent of computer programmers able to build systems that could carry out speedy register analysis soon sorted out the serious players from the rest.
A few London consultancies – including Vallin Pollen (later Gavin Anderson) and Georgeson – had deep enough pockets to invest in systems; and a few stock brokers – SG Warburg, Cazenove – saw the advantages of having this capability in-house. Both these groups set about providing companies with analysis services. By the early 1990s they had been joined by many of the stock brokers who had shied away from this market in the first wave, but who had now concluded that they needed to be able to offer shareholder ID and stockwatch facilities to their clients.
Indeed, by the end of 1993 all the leading stock brokers had their own systems; and many of the company registrars – who had always been in an ideal position to enter this market – had also finally begun to offer analysis services to their registration clients.
By the beginning of this year, investment in share register analysis systems in the UK had probably cost the participants an aggregate 15 mn or more. Many of the people working in the departments responsible for that investment have had to justify the costs to senior management; in stock broking firms, in particular, there has been concern at both the capital and resource costs of running these departments.
Yet none of the current players can sit back and say that their investment is now complete; on the contrary, all the brokers and consultancies involved are currently engaged in system upgrade programmes. But while the ice floe of technology upgrades already surrounds these businesses, a major iceberg looms on the horizon, and only a few seem to have spotted it.
The early signs are there but they remain indiscernible to many. As with the QE2 at the time of her last refit, the eyes of those in charge are currently fixed firmly inwards – on improving existing systems.
Those who still rely on manually inputting data are busy investing in automation; others are upgrading from tape to disk or introducing the next database software development. Some even continue to invest significant sums in developing screen-based IR management systems, for installation at their clients’ premises, despite strong evidence of a lack of client interest.
But how many of them have yet thought about the effects of rolling settlement and the introduction of Crest on their ability to deliver to companies and advisers a fully analysed register in a timely manner? Those companies have become accustomed to a high level of service: weekly, monthly or quarterly reports on a set date and with information of a fixed age, revealing and analysing changes in their beneficial ownership with a high degree of accuracy.
And corporate financiers have come to rely on the ability of their IR departments to use their nominee databases to analyse share registers fast and efficiently. This comes into its own during bids and deals, or new issues. In the run-up to the sale of the government’s 40 per cent stake in Genco, for example, Kleinwort Benson Securities’ IR department was providing analyses of the shareholder register virtually on a daily basis.
Such exercises have raised client expectations. But the progressive shortening of stock settlement intervals and the introduction of Crest may make it impossible for providers of share register analysis services to continue to meet those expectations without substantial additional investments in both technology and manpower.
Settlement in the UK is already in the throes of change. It moved to the rolling ten-day system in July 1994, resulting in a significant, and connected, increase in institutional stock lending. The stock exchange, recognising that this could be a developing trend, and with five day settlement due to come in in June 1995, responded by offering the major investing institutions the opportunity to enter the Dematerialised Stock Lending system (DSL).
This would mean that instead of appearing on a company’s register as an identifiable holding, they would now appear on the register in the Stock Exchange Pool Nominees (Sepon). By the time DSL went live, only two institutions were believed to have signed up; and anyway, the anticipated increase in stock lending curiously failed to materialise. However, the stock exchange is believed to want all the major institutions in DSL before Crest itself goes live.
Richard Jenkinson of Carson Europe (formerly Fourth Quarter Research), a leading UK developer of share register analysis systems, believes that because of the inevitable trend towards more holdings appearing in pooled nominee accounts under Crest there will come a point where current share register analysis is meaningless.
The only solution will be for companies, or their authorised agents, to use their powers under s.212 of the Companies Act to elicit disclosure, increasing markedly the amount of paperwork and data inputting for those involved in share register analysis. In other words, whereas the s.212 registers of nominees currently held by shareholder analysis firms typically reveal most designated nominee accounts, they will not be able to identify the beneficial owners within pooled nominee accounts. Instead, the analysis firms will have to resort to sending out many more s.212 notices.
Richard Davies, a managing director at Fulcrum Research in London, is less concerned.
‘I think this issue can easily be over-played,’ he says. Indeed, he focuses on the advantages of Crest, rather than the problems. ‘Under Crest, share register changes will be made four hours after a bargain has been struck. For our purposes, that means we can get much more up-to-date feeds from registrars, which is obviously in the interests of our clients.’
Davies’ confidence assumes, of course, that the registrars are up to speed on the changes. Tom Morrison, chief registrar at the Royal Bank of Scotland Registrars, sees both sides. ‘Crest will bring pluses and minuses,’ he says.
‘On the positive side,’ Morrison goes on, ‘companies will get faster information and may be able to identify stock lending activity more clearly. On the negative side, there will probably be some loss of visibility of retail shareholders, because of the move to retail nominee accounts; and a loss of visibility of institutional holders because they are likely to make more use of pooled nominees. That will mean our having to send out more s.212 notices,’ Morrison acknowledges. ‘But the extent of the move to pooled accounts remains to be seen.’
Carson’s Jenkinson is far less sanguine about the changes. He says the move towards rolling settlement has put additional burdens on institutions’ stock settlement procedures and back offices, which will lead inexorably to their making much more use of custodians. Several have already started doing so. This will not matter for the purposes of shareholder register analysis provided the institutions are still identifiable on the register. But the more they use undesignated nominees, the more acute the problem will become.
Those seeking identification of beneficial ownership and fund management control for use in share register analysis will have to cut through not one but two additional layers of obfuscation. If only 40 per cent of stock is held in Sepon – with the prospect of much more under Crest – and most of that is held by custodians using undesignated accounts, then the additional burden will increase exponentially. Automated issuance of s.212 notices is already possible, but automated inputting is still some way off; in the interim firms will have no choice but to increase manpower – merely to maintain present service levels.
For investor relations teams who are still upgrading their existing systems this is bad news indeed; for those paying for the overhead it is even worse; and for users and advisers it is a major problem which most have not yet contemplated. The systems currently in place, even the most advanced, are now facing redundancy sooner than their developers’ worst predictions. The implications are profound.
None of the UK consultancies still providing share register analysis is making much money out of this business; and none really believes that the market for these services is growing. Some are still in the process of introducing the current generation of technology, others believe that major capital expenditure is now safely behind them. None appears to be actively recruiting staff in any quantity.
But if they wish to stay in the market and, in particular, to deliver their product at the same level of accuracy and within the same time frame as before, they face not only further bills for new technology, but higher payroll costs as well. In the present market they seem more likely to fold up their tents and quietly withdraw from this business, leaving the field to the stock brokers.
But the implications are serious for stock brokers, too. On the one hand, they recognise the benefits of being able to carry out share register analysis in-house; apart from anything else, it gives them a tangible product to deliver to their clients against a fee retainer arrangement and direct control over important data during corporate transactions. On the other hand, brokers are all concerned about the growing level of non- (direct)-fee earning overhead, which their investor relations departments now represent. At the top end, departments with staff numbers in double figures are now running up annual costs well into seven figures. Unsurprisingly, none of them wants to see that go any higher; but having created a level of client service expectation, what alternative do they have? It may be fanciful to suggest that the looming iceberg identified here is likely to sink existing businesses – stock brokers need a Leeson-sized iceberg to do that – but there can be no doubt that the measures needed to avoid it will be more expensive than some will be prepared to accept.
This will apply especially to consultancies, for most of whom the passenger list today simply doesn’t justify the crews’ wages. Some stock brokers, too, may decide that the cost/benefit equation no longer balances and opt either to provide a reduced service or to sub-contract (if there is anyone left wanting the business). Either way, rolling settlement and Crest are almost bound to mean the end of fast, detailed, share register analysis in the UK.
This is not a case of the crew rearranging the deck chairs; more one of their being forced to throw them overboard in order to miss the iceberg. Inevitably the losers will be the passengers: in this case that means the UK’s quoted companies.
