An earlier article addressed the pros and cons of s olicitors running their own nominee company (see [1998] Gazette, 13 May, 26).

It was concluded that, if solicitors wish to maintain or develop a private client practice, there is a strong argument in favour of offering an in-house custody service.The issue for those firms which choose to run their own custody service is whether or not to join CREST as a member, and what alternative types of membership are on offer.CREST'S shape -- now and in the futureCREST is the settlement system for UK equities which also offers a central dematerialized depository service.

It is owned and run by CRESTCo, a limited company owned by a wide consortium of firms in the securities industry.

CREST acts in a manner similar to a bank.

The vast majority of UK securities traded on the London Stock Exchange can be dematerialized and held in CREST.

Each CREST member has accounts in CREST containing records of his holdings -- either of his own account or for that of a customer -- of CREST securities.

CREST also allows one level of designation, so that the members can have a series of sub-accounts which hold individual clients' securities.Legal title continues to be evidenced by appearance on the share register.

CREST members rely on the CREST record of their holdings and so CREST reconciles its members' holdings with the share register.

All instructions that effect the balances on these accounts must therefore pass via CREST.However, CREST is entirely a voluntary system designed to offer faster and more efficient settlement.

Those who wish to retain certificates can do so, but all purchase and sale transactions have to go through CREST.

This means that all certificated sales have to be transformed and accepted into CREST by the selling broker before the trade can be settled with the broker acting for the purchaser.

Moving in an out of certificates slows the process and adds costs.

It can also effect the price realised for the transaction.Voluntary though it is, CREST has been an unqualified success and, over the next few years, will extend its role as a central depository to cover gilts, unit trusts and other instruments.

It will no doubt also build bridges to the main European exchanges.

For any custodian CREST membership is not an option to be dismissed lightly.Certified versus dematerialized holdingsIt is therefore not surprising that the introduction of shorter settlement periods and of CREST has led to growing pressure from brokers to have securities registered in their nominee name and dematerialized into CREST.

In the previous article, solicitors were cautioned against such a move if the practice wishes to offer a private client service, as it may well reduce the protection available to the client and his assets, reduce the custody-associated revenue to the firm, and weaken the contact and bond between firm and client.It was argued that private client firms should hold their clients' securities in their own nominee wherever possible.

If the nominee becomes a CREST member these holdings can then be dematerialized and held in CREST accounts.

This is not to say that all holdings should be dematerialized.

For inactive holdings there is an argument for leaving the holdings in certificated form, as the charges for the CREST service could well outweigh the benefits.

However, for the majority of holdings CREST has to be the answer.

Those practices which are CREST members and have dematerialized their clients' holdings, say how much it has improved the efficiently of their custody service, and not just the efficiency, but also the certainty.

Th ey no longer have to worry about transfer forms, nor about mislaid certificates and any associated indemnities.The security is enhanced with all instructions given as authenticated electronic messages.

Tracking bargains through the settlement process is now simply a question of interrogating the CREST databases.

Settlement will take place within the current T + 5 time frame for standard settlement terms which, as is the case in most other countries, is likely to decrease to T + 3 or even shorter.

CREST members will have no difficulty in meeting these time frames.

It is only by holding clients securities' in CREST that a practice can be sure of continuing to receive the best price for its clients at the most attractive commission rate.Membership alternativesThere are two main membership categories open to solicitors -- full membership or sponsored membership.

The former category requires a substantial financial and operational commitment, and as far as is known, not a single practice has opted for full membership.

However, sponsored membership is widely used by solicitors.In the experience of Lawshare, which acts as sponsor to almost all solicitors' practices that have decided to become CREST members, once implemented the practices just do not know how they managed with certificates.

Every certificated probate sale reminds them just how cumbersome the 'old system' was.

So how does sponsored membership work for solicitors?At its most simple, the solicitor's nominee company that holds the client's securities becomes a sponsored CREST member with all the same rights and responsibilities as a full member.

The main difference being that the sponsored member out-sources the day-to-day administration to another member who provides the infrastructure necessary to operate the membership.The main risk for the sponsored member is if his agent acts in error or improperly.

So it is important for firms to select their sponsors by reference to the quality of their operation, the speed with which mistakes can be detected and, finally, insurance arrangements.

As an additional safeguard, sponsored members can specify, directly with CREST, a limit on the daily reduction in the value of his assets in CREST.

Lawshare has carried out a careful analysis of the risks of sponsorship and concluded that sponsored membership carries no greater, and arguably lower, risk than those associated with the retention of certificates within the practice's premises.For any practice wishing to explore CREST membership in more detail, including the documentation requirements, the ability of trust and trust companies to become members, and the details of how sponsored membership works in practice, Lawshare has prepared a free booklet on the subject.

Telephone or write for a copy.