STOCK EXCHANGE (COMPLETION OF BARGAINS) BILL (Hansard, 27 February 1976)

I beg to move, That the Bill be now read a Second time.

In the few minutes that remain to me I shall attempt to deal with this Bill, the purpose of which is to enable the Stock Exchange to introduce a new and more efficient settlement of stock transfer system and to facilitate the procedures relating to the transfer of securities generally.

The average investor who deals on the Stock Exchange is probably quite unaware of the settlement process. He gives instructions to his brokers to buy some shares, receives his contract note, sends off a cheque and sits back to wait for the certificate to arrive. The investor probably knows that his broker's first task is to execute his order at the best possible price with the jobber. He may well not realise that this has to be followed by a complex process to complete his bargain.

Behind the scenes a great deal of work has to be done. This includes payment, internal accounting between the brokers and jobbers concerned, certifying and stamping the share transfer and registration of the buyer as the new owner of the securities.

The procedures involved are inevitably difficult and time-consuming, especially as the number of transactions which have to be settled at the same time run into hundreds of thousands, and purchases and sales rarely match in quantity. Company securities are normally dealt in "for the account", that is, all the deals entered into during the period of the account, which is usually two or three weeks, are settled on account day. In busy periods there may be as many as a quarter of a million transactions worth £500 million to be settled. The volume of work and the amount of paper generated is enormous.

Under the present system the whole settlement process is concentrated in a few days around account day. There is a very heavy peak work load and 871 resulting scope for errors and delays, especially in periods of heavy trading, when the system occasionally reaches near breaking point.

Several years ago, the Stock Exchange set up a City working party to consider ways of alleviating problems while maintaining all the advantages of the Stock Exchange's existing dealing arrangements. "Talisman", as the new settlements system is called, is the result. The initial stages, which established a central accounting system, are already functioning. This Bill will enable the final stage to be brought into operation. The Stock Exchange hopes to start doing this early in 1977.

Talisman is designed to simplify the documentation and disperse the work load over a period by the use of modern data-processing methods. The essential feature of the new scheme is that a seller of securities, as soon as possible after his order has been executed, will transfer the legal title to a central Stock Exchange nominee company to be known as Sepon Limited, which will hold the legal title to the securities in the course of transfer. Purchase of securities will similarly involve transfer of the legal title from Sepon to the purchaser.

The intervention of Sepon will not however affect the passing of the legal title that is held by Sepon, and it will not affect the beneficial owner's entitlement to dividend, rights issues, and so on. The advantage of the new system is that the time-consuming process—and it is very time-consuming—of preparing sold stock for delivery to the buyer will be spread over a period rather than be concentrated into a few days. Also, the internal market accounting will be greatly simplified and the paper work much reduced.

The management of Sepon holdings will be the responsibility of the Stock Exchange Centre. The centre will maintain stock accounts for each jobber in each stock in which he deals, and will keep track of the movement of stocks and the transfer of legal and beneficial ownership of these stocks. The centre will also be responsible for the payment of stamp duty and for handling dividends, bonus issues, rights issues, takeover bids, and so on, in respect of shares held by Sepon, and will ensure that they are 872 allocated to the appropriate beneficial owner.

Inevitably, the introduction of a computerised system of this sort will be very costly. It has been estimated that the total cost will be some £13 million over eight years. On the other hand, this investment will achieve considerable savings. In autumn last year, a leading firm of management consultants reviewed the computerisation programme in the light of expected increases of costs, but concluded that, even assuming very low levels of turnover, the new system would result in cost savings and provide a more efficient service.

It will, I think, interest the House to know that it is estimated that the gross savings to member firms of the Stock Exchange when the scheme is in full operation will be about £13 million a year, representing just under one-third of their present settlement costs. It is also estimated that an additional £10 million to £12 million a year will be saved by the securities business generally. Savings from the simplification of the system will greatly benefit institutional investors, including insurance companies, trade unions and pension funds.

The new settlement system will benefit all those concerned with the Stock Exchange. It will greatly reduce the amount of time members of the Stock Exchange have to devote to paper work and to settlement of bargains. This will free them to concentrate on providing a better service for their clients. Company registrars will benefit from a much more even flow of transfers for registration which will enable them to organise their work more efficiently. Investors, many of them small investors, will benefit not only from reduced costs, but from a better service. In future, they should receive their certificates more quickly and also their dividends and rights issues.

This is a very important benefit which all small investors will derive from the Bill when it is enacted, as I greatly hope that it will be. At present there is often a long delay when securities are sold cum-dividend or cum-rights in transferring those dividends or rights from the seller to the buyer. Under the new system these problems will be sorted out centrally by the Stock Exchange Centre and the buyer will therefore receive his 873 dividends or rights more quickly. This is particularly important in the case of rights issues to which he may wish to subscribe.

To clear up one potential misunderstanding about Talisman, I should explain that it is solely a computerised settlement system. It is not concerned with computerised dealing. It thus has nothing to do with Ariel which is a computerised system of securities trading set up to enable institutions to deal direct among themselves in a limited range of securities.

The introduction of Talisman represents a most important move towards modernising and increasing the efficiency of the Stock Exchange's procedures. It will help the Exchange to continue to carry out its vital functions of raising finance for industry and attracting investors both from this country and abroad. It will enable the United Kingdom to remain in the forefront of the world's security markets.

There are, however, some changes in the law which are necessary if the system is to be able to function effectively. These are two subjects on which amendments are necessary. One is stamp duty. This is, however, a matter for the Inland Revenue and I understand that it is discussing the position with the Stock Exchange and that any necessary legislation will be included in the Finance Bill.

Another is the law relating to companies and the transfer of securities and this is what the Bill is concerned with. All the changes are minor and technical, but they are nevertheless essential for the efficient operation of the new system. The first important amendment is to provide that, when shares or other securities are being transferred, the legal title is primarily held by Sepon. The company need not issue the certificate to Sepon. This exemption from the normal requirement is necessary because the amount of stock held by Sepon will be changing from day to day and no useful purpose would be served by requiring companies continually to have to issue and re-issue certificates. This would impose a quite unnecessary burden on company registrars. Instead, the company will maintain in its registers a running title of the number of securites held by Sepon at any one time.

874 Secondly, an amendment needs to be made to the Stock Transfer Act 1963 to enable new transfer forms to be authorised for use when transferring securities to and from Sepon. This amendment is made in Clause 5. I understand that the opportunity will be taken to improve the transfer forms and to make them easier to understand and complete.

These, then, are but a few of the advantages that will accrue both to the Stock Exchange and to the securities industry generally if the Bill is enacted. I have very much pleasure in commending it to the House.