3 answers to 3 questions: revisions to the Shareholder Rights Directive

The European Commission plans to evaluate and develop the Shareholder Rights Directive. Germany’s private banks believe strongly that further development will help to exercise shareholder rights more efficiently, thereby strengthening the European capital markets. However, if this is to work as intended, existing processes must continue to function reliably, and the revision must remove unnecessary barriers.

Why is the Shareholder Rights Directive being revised?

The existing regulations have already improved many of the processes between companies, intermediaries (such as banks) and shareholders. In practice, however, there are still complications: the interface companies use to connect to the chain of custody - that is the chain of institutions holding custody accounts - continues to lead to inefficient processes that often have to be manually reprocessed, multiple times in some cases.

This in spite of the fact that there have long been technical standards to ensure quick and secure exchanges of information. Intermediaries use modern infrastructures such as the SWIFT network and standardised ISO formats. Automated straight-through-processing systems speed up the flow of information - but only if all participants use the same standards. As such, amendments to the directive should focus on use of existing market structures, allowing for fully automated processes.

What amendments are Germany’s private banks calling for?

One key issue is the role of companies. They are the source of information on corporate events, such as general meetings or capital measures. To ensure that this information is efficiently transmitted to shareholders, the companies should provide it in a standardised, machine readable format.

If data is missing or is available only in the wrong format, it must be processed manually, leading to slower, more expensive processes. Companies should therefore be required to transmit their information in interoperable formats such as ISO, and also be required to accept such formats.

At the same time, European requirements should remove the barriers currently making automated processes more difficult. This includes individual requirements in the Implementing Regulation regarding shareholder identification, or on organising general meetings. Here, clearer and simplified rules would make processes more efficient across Europe.

The European Commission should also examine whether or not these requirements could be extended to certain non-listed companies. Whether or not shares are listed makes hardly any difference to intermediaries. Here, too, standardised processes would create efficiencies.

What role do retail investors play?

Retail shareholders need information they can understand. Technical formats such as ISO are well suited for automated processes between market participants, but not for communicating directly with retail investors.

Intermediaries therefore prepare the information in a manner that retail shareholders can understand, such as plain text or PDFs. Here, media discontinuity is necessary and must be taken into account when setting deadlines and creating reimbursement regulations.

In addition, Germany’s private banks believe that those who cause the costs should be responsible for paying them. Companies are required to inform their shareholders as to important events and must make it possible for them to exercise their rights. If they use intermediaries as service providers to do so, then the company should be responsible for the costs. Germany has already implemented a system for this, the German Reimbursement Regulation. It could serve as a model for a European regulation.