March 7, 2012 6:19 pm

Brussels plans to end paper shares in 2020

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All paper share certificates are to be abolished from 2020 under a Brussels proposal that would push millions of retail shareholders into the electronic age.

Under long-debated plans to shake up the Europe Union’s market infrastructure for settling trades, stock market investors who want to trade will be forced to move to a paperless system that Brussels sees as cheaper, faster and safer.

The so-called “dematerialisation” measures, announced by the European Commission on Wednesday, were largely opposed by Britain, which raised concerns for small investors not active in the market who might be bewildered by the technology.

Although the City of London is Europe’s capital for share trading, at least 7m UK shareholders still hold paper certificates, many of which have been kept in drawers since the wave of privatisations and demutualisations of the 1980s and 1990s.

Partly as the result of lobbying by British diplomats, the deadline for phasing out paper shares was moved back from 2016 to 2020 and some flexibility will be included to ease the transition. No shareholders, for instance, will be required to use a computer to manage their shareholding or in trading their electronic shares.

“Currently holders of paper securities, as long as they do not sell them through a regulated trading venue, will have the possibility to keep them in paper form until 2020,” the Commission said.

It takes three times longer to settle a transaction with paper share certificates than an electronic transaction with securities held in “book entry” form, according to the Commission. Abolishing paper-held shares is part of a plan to shorten the maximum period for settlement to two working days across the EU.

Resistance to the abolition of paper shares, which have been in circulation in Europe for more than 400 years, is particularly strong in the UK. France phased out certificates in 1984. Under the Labour government, ministers examined the case for dematerialisation but dropped the plan after resistance.

Some market participants fear that there is potential for problems during the transition period while paper share trading continues alongside a shortened settlement cycle for electronic transactions.

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