As we approach 2024, a small but significant minority of companies and investors still have to deal with paper cheques posted by mail to receive their dividends.
As the UK continues to modernise its shareholding framework, Chris French from Euroclear UK and International looks at how moving away from this antiquated approach can be a step towards securing London’s position as a global financial centre.
The UK government is determined to protect and enhance London’s position as a global financial centre. This year, the Z/Yen’s 33rd Global Financial Centres Index (GFCI) scored the capital as Europe’s top financial centre and the best-ranked European centre in terms of prospects.
To help remain on top, the UK government appointed Sir Douglas Flint, chairman of asset manager Abrdn, to lead a Digitisation Taskforce to drive the modernisation of the UK’s shareholding framework.
The basis of this modernisation is the UK Secondary Capital Raising Review carried out by Mark Austin, which made key recommendations on how further capital-raising by companies that are already listed could be made more efficient including through the digitisation of certificated shareholdings.
In July 2023, The Digitisation Taskforce released its interim recommendations which called for:
· Legislative measures to stop the issuance of new paper share certificates and require the dematerialisation of all share certificates.
· Government is to consult with issuer and investor representatives on the preferred approach to ‘residual’ paper share interests and whether a time limit should be imposed for the identification of untraced Ultimate Beneficial Owners (UBOs).
· The need for intermediaries to implement common technology as a condition of participating in the clearing and settlement system to respond to UBO requests from issuers within a very short timeframe.
· Improvements and further transparency in shareholder rights – with the baseline that services should facilitate the ability to vote.
· Discontinue cheque payments and mandate direct payments to the UBO’s nominated bank account.
The last point reiterates calls made in the UK Secondary Capital Raising Review which highlighted that “the longer-term reliance on cheques as the principal payment method (for dividends) should be phased out and replaced with payments using electronic communications.”
Increasingly fewer shareholders in all companies are now electing to receive their dividends by cheque.
However, in this day and age, dividend payment cheques are still arriving at the offices of the largest global institutions made by UK issuers to their shareholders. As potential legislative changes seek to remove cheques, we must be ready for new processes.
For many issuers, investors and intermediaries, change is long overdue, and a more efficient, safer, and less costly approach should be adopted to help ensure the UK’s capital markets are fit for purpose, now and in the future.
The issues with cheques
Mark Austin’s report outlines the phasing out of cheques should be done in a way that offers a range of payment and communication options so as not to marginalise particular investor groups.
Receiving cheques in the post when dividend payments have been due was, in the past, the more common method. However, there are risks to shareholders who receive payments in this manner, such as misplacing cheques or even forgetting to cash the cheque in at the bank.
Cheques also take time to clear, with some cases taking up to five days for the funds to become available in the payee’s account. This can be particularly problematic for shareholders if funds are needed more quickly.
On a macro level, the scale of thousands of dividend payments by cheque also has a significant environmental impact and phasing out this antiquated process will improve the ESG credentials of London’s financial centre.
This is why it is important for the UK to fully digitise our dividend payment processes and take up alternative approaches which can make payments more secure and reduce costs.
Different payment methods
Mark Austin’s report recommends various alternatives to the use of cheques as a principal payment method from online, real-time clearance of funds, automated payments by phone for those without access to web-based services and future developments such as a Central Bank Digital Currency (CBDC).
Currently, many investment trusts and UK companies already automatically pay dividends via an electronic transfer to those shareholders who hold their stakes on an investment platform such as Hargreaves Lansdown.
Some shareholders elect to receive dividends directly into their bank accounts via Bacs (Bacs Payment Schemes Limited) transfer. Traditional banking institutions use Bacs payments, as they provide a more secure means of receiving their dividends than cheques.
While Bacs remains a viable alternative – in most European markets, the standard practice for the payment of dividends is through the central securities depository (CSD). This is the
institution through which investors hold and transfer financial instruments, including equities, bonds, money market instruments and mutual funds.
In the UK, CSD services are provided by Euroclear UK and International (EUI) who run the CREST system. The CREST system is a critical, trusted part of the UK’s financial market infrastructure, enabling buyers and sellers to settle securities trades safely, efficiently and at low cost.
Dividend payment through the CREST system is currently optional for the issuer and investor. Only where both issuer and investor agree does the payment take place through the CSD.
There has been significant progress towards greater adoption of dividend payments through CREST as issuers and investors recognise the benefits from greater efficiency, significantly reduced credit risk, a full audit trail and a streamlined process. As an initial step, EUI has been working with the relevant stakeholders to make dividend payments through the CREST system the standard method of payment for equities.
One of the benefits of doing so for both corporates and their investors is that CREST offers same-day dividend payments in central bank pound sterling, euro and U.S. dollar.
Payment via CREST removes the need for the participant to submit individual dividend mandate instructions for each shareholding which reduces the risk of payment error or payment rejection benefiting both issuers and investors.
As of June 2023, approximately 95% of the value of FTSE350 held in the CREST system is held by participants who have signed up to accept dividend payments through the CREST system. As well as this, 68% of corporate participants have signed up to have their dividend payments paid to them via the CREST system – this is a steady increase as the percentage was just over 60% back in the summer of 2022.
It is vital that issuers who still pay dividends by cheque – look beyond what is a cumbersome task – to alternatives which can provide more safety, efficiency, and less cost.