There are investors, even today, who are still waiting for paper cheques in the post to receive their dividends. This must stop, says Chris French of Euroclear.
In 2022, the UK government appointed Sir Douglas Flint, chairman of asset manager Abrdn, to lead a Digitisation Taskforce with the aim to modernise the UK’s shareholding framework and retain London’s position as a global financial centre.
The driving force behind this overhaul is Mark Austin’s UK Secondary Capital Raising Review, which made key recommendations on how to make capital-raising more efficient for listed companies.
The report 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.”
The dematerialisation and automation of the processes within financial markets can enhance efficiency and boost London’s competitiveness in attracting investment. However, we still have a long way to go and much needs to be delivered to achieve this.
Receiving dividend cheques via mail entails various risks for shareholders, as they can easily be misplaced and in many cases, people often forget to cash them in at the bank.
The move away from cheque payments
For many issuers, investors and intermediaries, change away from paper cheques is long overdue. Far more efficient, safer, and less costly methods of dividend payments now exist in the market and should be implemented to help UK capital markets retain their modernity and keep their place at the forefront of the global financial landscape.
Receiving dividend cheques via mail entails various risks for shareholders, as they can easily be misplaced and in many cases, people often forget to cash them in at the bank.
Processing cheques is also a lengthy process as they take time to clear, on some occasions it can sometimes be five days before funds are settled in the payee’s account. This can cause problems for shareholders, particularly when they need quick access to their funds.
When we zoom out, processing thousands of cheque-based dividend payments also has a significant environmental impact, so dematerialising dividend payments will contribute towards boosting London’s ESG credentials.
In this way, the UK must fully digitise its dividend payment processes to ensure the future security of these payments and reduce long-term costs.
In with the new: Digital payment options
In the Secondary Capital Raising Review, a variety of alternative payment methods to cheques are recommended, ranging from online and real-time fund clearance to possible future developments like Central Bank Digital Currencies (CBDCs).
The majority of UK companies and investment trusts already pay dividends automatically via digital transfer to shareholders, and some shareholders also choose to receive dividends directly into their bank accounts via Bacs (Bacs Payment Schemes Limited) transfer. Compared to cheques, this provides a far more secure means of receiving dividend payments.
Bacs remains a viable alternative, however, in most European markets, standard practice is to operate dividend payments through the central securities depository (CSD) – the institution through which investors hold and transfer financial instruments, such as equities, bonds, money market instruments and mutual funds.
there has been significant progress in the greater adoption of dividend payments via the CREST system
CSD services in the UK are operated through the CREST system. This is a crucial part of the country’s financial market infrastructure, allowing buyers and sellers to settle securities trades efficiently, securely and at good rates.
As issuers and investors begin to recognise the benefits, such as same-day dividend payments, there has been significant progress in the greater adoption of dividend payments via the CREST system. Operating dividends through the CREST systems also unburdens the participant of the need to submit individual dividend mandate instructions for each shareholding. This benefits both issuers and investors, reducing the risk of payment error and rejection.
Similarly, automating private fund asset processes and moving them into the digital realm allows asset managers and investors to benefit from more streamlined and intuitive digital investment journeys. The funds market, not only in the UK and broader Europe but globally, is fragmented and operates without a streamlined end-to-end process between fund managers and final investors. Each step in the process requires a bilateral reconciliation of records between all players in the chain, including distributors, order routers and fund managers.
In recent years we’ve witnessed the emergence of platforms to support the different players in the chain, however the market is yet to achieve a fully streamlined fund management process. This is where using technology to support automation of end-to-end flows can come into play, linking existing operating systems with innovative platforms and leveraging interoperable standards. This could in principle connect all members of the fund ecosystem digitally, removing the need for paper and manual processes. In this sense, digitising private fund processes—as we have on Euroclear’s FundSettle platform—has huge potential to improve efficiency and streamline private fund transactions for the benefit of investors and fund managers alike.
Re-platforming asset classes is an iterative process and won’t happen overnight.
The journey ahead
Digitising established paper processes makes it easier for investors to participate in the companies themselves.
If issuers want to modernise and speed up their dividend payment processes, they must look to move beyond the outdated and inefficient use of cheques. Shifting to digital alternatives such as Bacs transfer or operating via the CREST system will work to lower operating costs, bolster ESG credentials and provide greater levels of efficiency and security.
Equally, the digitisation of the funds chain, will enable asset managers and funding administrators to digitise onboarding processes and grants them a real-time view of investor journeys.
They primary challenge will be ensuring that the market adapts smoothly to digitisation and convincing key market institutions to join and participate in this long journey towards automation and dematerialisation.
*Chris French is head of UK core product management at Euroclear UK & International
