UK Dividends in the 21st century
Potential role of Custodians in UK Issuer Dividends
The 2019 Issuer Survey identified a view from issuers that the topical problem of shareholder transparency could be resolved through increased direct interaction with custodians.
Some respondents went further in highlighting the current UK market process for handling dividend payments from Issuers to investors. The current process requires pre-payment of dividend monies to share registrars, the subsequent loss of control of the credit risk of this cash followed by a significant proportion of this cash being distributed in the form of cheques with the associated manual processing and traditional risks involved.
Custodians, in the UK, account for a very high proportion of registered share capital. This is due to the predominance of institutional investors and the success of share trading platforms in handling retail investors whose holdings are collectively represented through nominees, also handled by custodians.
Inexplicably, the UK market appears to lag behind most other western markets in dividend processing. In the US, for example, a market that like the UK adheres to the right of investors to hold certificates and operates commercial share registrars (stock transfer agents), dividends are required to be paid to DTCC on payment date for onward distribution to shareholders on a same-day basis.
No credit risk, no time delay, no cheques.
For at least one major global issuer, this has led to an active investigation into alternative distribution channels. They found that Crest (EUI) has existing and efficient dividend distribution functionality and with the support of a few major custodians, who are active Crest participants, it should be practically possible to gain their agreement to receive their dividend entitlements on the payment day, through Crest.
Currently, UK dividend payments are handled by share registrars whose authority comes from their maintenance of the “certificated portion” of the shareholder register, in contrast with the Crest register which acts as the legal register during business hours.
Registrar activity is largely unregulated and, in contrast to the situation a decade ago, none of the main UK registrars are banks.
· Registrars require dividend payments to be made by Issuers three days before dividend payment date.
· This is the source of additional cost to issuers and actual credit risk where the deposit bank used for the dividend cash, has inferior credit ratings.
· One issuer reported that every quarter 160,000 cheques are sent out worth $0.5 billion.
· Some registrars cannot distribute Euros through bank transfers and can only use only cheques.
· Cheque use is declining by 20% year on year which means that the unit cost will go up. Recipient banks will start to charge for cashing cheques, which is not yet the case, but this has happened in Holland, for example, where banks charge Euros 75 for cashing a cheque. one UK bank themselves charge a £25 issuing fee as soon as a cheque goes abroad.
· Reflecting the international characteristics of the typical shareholder base of a FTSE 100 issuer, there is a need for shareholders to receive their dividends directly in dollars, sterling or Euro.
· Crest is quite capable of handling corporate actions like dividends (see below). But shareholders need to opt-in to the service. When a shareholder has not opted in, the registrars are entitled to send cheques which causes frustration, cost and risk to custodians.
· Until recently some custodians that had not opted in to receive dividends through Crest. One issuer understood that this is because it was argued that as long as everybody else on the issuer side was not using the facility, they would be facing multiple incoming channels of dividends. They would prefer the Issuers to move first.
· Issuers prefer the custodians to move first.
· One of the three main registrars, allegedly, is not technically able to distribute dividends through Crest.
· In many countries CSDs act as Notary (share registrar) removing the essential need for separate registrars, e.g Netherlands, France. Whereas in the US, DTCC mandates same-day payment of dividends.
· The cost savings to major issuers from using Crest for dividend distribution is said to heavily out-weigh any potential negative impact on registrar fees looking to recoup lost revenue. However, this needs to be tested through a cost/benefit analysis.
· Many company secretaries are said to be unaware of this facility. In one case, a FTSE issuer was unaware of the Crest dividend facility even though the company did in fact use Crest for dividend distribution.
Crest Dividend Payments:
[Excerpts from Crest Manual Section 12: Dividend Election Instructions and Dividend and Interest Payments]
In connection with the payment of dividends and interest entitlements, the CREST system provides functionality that:
· may be used by receiving agents to send Members tax vouchers in electronic form;
· permits input of mandate instructions in connection with the receipt of dividend and interest entitlements; and
· permits members to advise registrars of elections for an alternative to the default distribution type
The Dividend Election instruction (KMIN)
Many issuers offer their shareholders the opportunity to elect for an alternative to the default (typically cash) dividend distribution type. Where an issuer permits, Members may use the dividend election message (KMIN) to notify the registrar of an election for one of the available alternatives. This message allows members to elect electronically for a scrip, DRIP or alternative currency in lieu of the default entitlement. Use of the KMIN is entirely optional for issuers and Members (unless the Issuer’s terms governing the dividend alternative scheme mandate the use of a CREST election instruction). In determining whether or not to allow CREST elections, it is the responsibility of the issuer to ensure that the governing terms and conditions of the scheme permit acceptance of elections submitted in this manner.
If a participant wishes to receive dividend, interest or redemption payments in the CREST system, it must instruct EUI to make the necessary change to the participant standing details to indicate to registrars that, for those securities that permit such distributions in the CREST system, entitlements should be distributed via the system. For those securities which do not permit such distributions in the CREST system, the CREST mandate instruction has no effect.
Form of Instruction
If a participant wishes to amend the options selected, the participant must write to EUI in the form of the letter below, indicating that this is in respect of a change of options.
It is the responsibility of the recipient of dividend, interest or redemption payments via the CREST system to ensure that the cash memorandum account associated with the participant is enabled. If the transaction does not settle because a cap is not enabled, the receiving agent making the payment may choose to cancel the instruction and reissue the payment outside of the CREST system.