13 December 2016 by Amy McMullan
The initial implementation of the PSC Register and its impact on transparency
The requirement to maintain a register of people with significant influence or control, more commonly known as the PSC Register, was introduced on 6 April 2016 as a result of the changes introduced by the Small Business, Enterprise and Employment Act 2015.
This legislation mandates all unlisted companies in the UK, including dormant companies and limited liability partnerships (LLPs), maintain a register that identifies individuals or legal entities that have significant control over the company.
The main aim of the new register is to increase the transparency of all companies, where it was often argued, and might well still be, that the real power is ‘hidden’ and that those individuals who call the shots are able to remain behind closed doors.
The Department for Business Minister, Baroness Neville-Rolfe said: ‘Companies that disguise who owns or controls them are not playing by the rules and have something to hide. This register, the first of its kind in the world, will help tackle abuse of corporate entities. This is part of our commitment to creating an environment of trust and accountability for business’.
Now, eight months on from the implementation of the new regulation, it must be considered whether there has been any significant impact on identified individuals, businesses and the overall governance, transparency and accountability of all UK companies.
It is important to remember that a PSC Register must be submitted as part of a company’s confirmation statement on an annual basis. At this stage of the year, many entities will have already submitted their new register and will have carried out all of the required background research to identify the relevant persons.
The impact, therefore, will have already been felt by many, including individuals and entities who have been recognised as PSCs. These companies are required to disclose the people who have significant control and those who have had to create and maintain the register.
The criteria to be recognised as a PSC is stringent. Many who would have previously been able to exert significant influence in a company without being recognised in the public arena are now required to publicise their personal details. The register is open to public inspection but, more importantly, the ‘snapshot’ disclosed within the new company’s confirmation statement is freely searchable online. This is a major concern for private clients, who for legitimate reasons would prefer to keep their financial affairs private.
Unsurprisingly, PSCs are concerned about the amount of information which has to be disclosed on a public record. This includes their name, nationality, date of birth (suppressed), service address, residency, the date that they became a PSC and the nature of their control.
However, a protection regime does exist under which a company, on behalf of a PSC, may apply to the registrar to request that they refrain from publicly disclosing information about the PSC. It should be noted that such a request may only be made if the company reasonably believes that disclosure will result in a serious risk of the PSC being subjected to violence or intimidation.
Any failure of individuals who are thought to be PSCs to respond to a notice to provide information has very serious consequences. This regime has ‘large teeth’ and failure to respond within one month can result in: a prison sentence of up to two years, an unlimited fine and restrictions being applied to their shares which may ultimately lead to a loss of dividend; a loss of voting rights; or a loss of other rights.
If a PSC intentionally omits or provides incorrect information, they are committing a criminal offence and will face the same consequences. The serious penalties attached to this regulation underline the main aim to increase transparency.
A company is required to take ‘reasonable steps’ to identify their PSCs through research and notifications to those who are, or could be, classed as PSCs. Many companies have been uncomfortable with this level of disclosure and have had to come to terms with the regulation.
Companies would have previously been able to operate without disclosing the source of major influence within their company. Companies must now account for the individuals who hold the power and who are in a position to significantly influence the board‘s decision making or the on-going operations.
The consequences for the company are the same as discussed above for the individual, which has ultimately left companies with no other choice but to take all ‘reasonable steps’ to identify the correct people. If a company fails to obtain a response from individuals, the regulation allows the application of restrictions to the individual’s shares.
However, the company has to consider the potential impact this may have on the daily running of the company, and the serious consequences to which non-compliance may lead.
The introduction of the PSC Register in this regard has led not only to accountability between companies and the government, but also accountability between the company and individual PSCs due to the significant penalties.
Although there is no requirement to have a company secretary in the UK, the obligation to submit the confirmation statement and the PSC Register will normally fall to the person in any business that carries out the company secretarial functions. It is also prudent, therefore, to consider the impact that the new register has had on them.
This is a complex and detailed piece of legislation, which has affected most companies – albeit for most UK owner-managed or family companies it has been relatively straightforward. However, for companies with multiple shareholders, external investors or overseas shareholders, and companies with different classes of shares, shareholder agreements or bespoke articles of association, it continues to be extremely burdensome.
The position is significantly more complex for the company secretary with regard to both the creation and maintenance of the register in these circumstances.
A number of common pitfalls have been identified by company secretaries regarding the implementation. There is a common perception that those with a 25% holding and/or total voting rights in a company should be entered on the register. However, the legislation clearly states ‘more than 25%’, meaning that 25.01% of shares in a company would have to be held before entry to the register is required.
Many company secretaries have also misunderstood the requirement regarding indirect interests, whereby the company secretary must look at the ownership and control of the company to identify if an individual or legal entity holds a majority stake (more than 50%).
It is crucial that all company secretaries fully understand the legislation before the creation and maintenance of their register. Further guidance is available to company secretaries, including guidance notes issued by the government and industry bodies. However, if any company secretaries are in doubt, they should immediately seek professional advice.
The process of filing the PSC Register is straightforward but there is an on-going obligation to keep it up-to-date. The consequences outlined above for both the individual and companies also extend to the maintenance of the register, meaning the importance of the register cannot be overstated – any non-compliance can amount to a criminal offence for all those involved.
The introduction of the new compulsory disclosure regime has increased transparency with respect to the ownership and control of companies incorporated in the UK and, as expected, this has had a positive impact on both accountability of and trust in UK companies.
A full picture of both the legal and beneficial ownership of business has been created and it is acknowledged that it will assist in the fight against tax evasion, money laundering and terrorist financing.
Transparency continues to be a main focus of the UK Government and it is anticipated that this will foster a climate of confidence among companies and consumers. It is expected that information about the ownership and control of UK corporate entities will provide benefits for law enforcement, business, civil society and citizens.
In making this information publicly available and free of charge, the Government has set a standard for other countries to follow. The EU has also introduced similar measures in the Fourth Money Laundering Directive, which must be implemented by all member states by 26 June 2017.
As the PSC Register has only recently been implemented, it is difficult to gauge the ultimate extent of the impact it will have over the next few years. We can say with certainty that the consequences of non-compliance are serious. However, the question still remains as to who challenges the accuracy of the PSC Register and how issues are identified, before the consequences are applied.
It might be a year or more before we see any of the real consequences affecting companies and PSCs.