Jennifer Payne

Intermediation and Beyond

In this short interview Jennifer Payne, Linklaters Professor of Corporate Finance Law, tells us about a recent research project on intermediated securities which resulted in a book published by Hart Publishing in 2019 - Intermediation and Beyond.

One of my recent projects tackled concerns around the growing use of intermediation as a mechanism for holding securities in the capital markets. This was a two-year project which Louise Gullifer and I ran involving a small group of experts (academics, practitioners and others working in the securities industry), domestic and international, and which culminated in an edited book, Intermediation and Beyond (Hart Publishing, 2019).

  1. What was the problem that you were looking to address? What was the existing wisdom at the time?

In recent years the holding of securities in the capital markets has undergone a significant change.  Rather than investors holding securities directly with the issuing company, or in the form of bearer securities, it has become the norm for investors to hold via intermediaries (often multiple intermediaries). While this has many potential advantages for investors, which we explore in the book, the starting point for the project was a sense that the law has not kept up with these changes. Thus, for example, the enforcement of debt securities is not as straightforward for those holding via intermediaries as it is for those holding directly, nor is suing the issuer for breach of contract. As the project progressed it became apparent that this was a much bigger issue than originally envisaged: it spanned all types of securities (debt and equity), it raised questions which were not confined to English law, and the potential solutions were not limited to UK legislative changes but could include wider measures and, potentially, structural change as to the whole operation of the system including innovative use of technology.

  1. Can you provide an example?

As an example of the sorts of difficulties that can arise, in 2019 there was a claim brought against Tesco plc by investors seeking to rely on a key investor protection provision in the Financial Services and Markets Act 2000: SL Claimants v Tesco plc [2019] EWHC 2858 (Ch). The investors held via intermediaries and Tesco challenged their claim on that basis; Tesco accepted that its construction would render the statutory regime ineffective in relation to claims by most holders of intermediated securities, but it contended that these consequences flowed from a failure of the law to keep pace with the development of the intermediated system. The judge ultimately dismissed Tesco’s claims (citing the arguments in our book in the process) but recognised that there is a problem if investors need to go to court to check whether they can utilise a key investor protection provision.

  1. What was your argument?

In the project and in the resulting book we explored the advantages and disadvantages of the intermediated system. Our view is that the advantages are such that the intermediated system should be preserved but that change is needed to tackle the difficulties that arise.  We set out a range of options for reform. We identified some immediate changes to current companies and securities legislation that would improve the position for investors, as well as some more significant structural reforms.  We examined the possibility of technology (particularly Distributed Ledger Technology) solving some of these problems but concluded that this is not sufficiently developed to provide a solution at present.

  1. Why is this research important? 

As part of our project we engaged with the UK Law Commission and succeeded in persuading them to put the issue of intermediated securities on their law reform agenda.  This resulted in a Law Commission Call for Evidence regarding Intermediated Securities in 2019 and a Scoping Paper on this issue in 2020. The Call for Evidence relied heavily on the arguments and proposals set out in our book and the Scoping paper adopts many of our recommendations, including legislative reform in this area, but also explores some of the broader issues of structural change which we put forward. 

To highlight just one example of proposed legislative changes about which I am particularly pleased, I have argued for some time that the approval level for UK schemes of arrangement needs to be amended. It currently contains two hurdles:75% by value and a majority in number. The latter requirement is problematic for a number of reasons, including where the securities are held via intermediation and I have been advocating the abolition of this majority in number requirement for a number of years (and did so again in chapter 9 of Intermediation and Beyond). The Law Commission has now recommended this reform in its 2020 Scoping Paper (para 4.56) and I very much hope that this recommendation will be implemented.

Our project and book highlighted a topic which is of huge importance for the functioning of the capital markets in the UK and globally and particularly for investor protection, and yet had been neglected and under-researched. Our project brought this topic to the fore, subjected it to rigorous and detailed analytical debate by expert academics, practitioners and market specialists from around the world and resulted in a series of reform proposals to address the problems we identified. There is every reason to hope that our proposals will result in changes to the law as a result of the Law Commission’s papers.  There is still more to do in this area, however.  In particular, the Law Commission’s focus is on the changes to domestic law which we highlighted in our project, but there are significant difficulties arising from cross-border issues that will need to be tackled at a supra-national level.  Our work in this regard is ongoing.