14 May 2019 by Peter Swabey
On 5th May, the Department for Business, Energy and Industrial Strategy launched a major consultation on corporate transparency and regulatory reform
In recent years we have seen increasing disquiet about the lack of transparency in company ownership and the potential links between a lack of transparency and criminal activity. The debate has, like so many other political issues, become polarised not just between those who believe in absolute transparency and those who believe in the right to privacy, but also between those who advocate particular solutions to the conundrum.
There is a long-established principle under UK corporate law that the privilege of limited liability, which means that the owners of a company are only responsible for any debts that it incurs up to the limit of their investment, carries with it societal obligations. These include an obligation to disclose details about the ownership and management of the company. This transparency has been increased in recent years, with the launch of free public access to the data held at Companies House in 2015 and the introduction of the register of people with significant control (the PSC Register) in 2016.
According to the most recent Government figures, Companies House holds data on more than 4.1 million limited companies and other corporate entities; more than 6.5 million directors; and more than 8.3 million shareholders. This data was accessed over 6.5 billion times in the last year which as the Government notes, is “evidence enough that the information is of great use to businesses and the public at large”.
However, there have been increasing concerns that the data held at Companies House is not accurate and that some of it is open to misuse. One of the strengths of the UK company registration system is that it is simple, quick and cheap to set up a company, but this carries with it the corresponding drawback that there is no effective check on the data provided. Companies House is, fundamentally, a recorder rather than a verifier of data – there are checks to ensure that the required data fields have been populated, but not that the data with which they have been populated is correct.
In March 2018, Companies House successfully prosecuted one Kevin Brewer for falsifying filings after he formed a company falsely claiming that it was owned by Sir Vince Cable, the Liberal Democrat leader and former Business Secretary and another that falsely identified Baroness Neville-Rolfe, the government minister with responsibility for Companies House, and James Cleverly MP as directors. This was, reportedly, the first successful such prosecution but was also reportedly only identified when Mr Brewer blew the whistle on himself in an attempt to show how easy it is to register false details. UK companies and partnerships have been linked to the Russian and Azerbaijan laundromat scandals and the risk of criminals seeking to use UK companies for money laundering has been assessed as ‘high’.
As regular readers of this magazine will have seen, the high regard in which the transparency of the UK market is held, coupled with the lack of effective scrutiny of the data collected has touched a raw nerve in some of the Crown Dependencies and Overseas Territories (CDOTs), such as the Channel Islands, Isle of Man, British Virgin Islands etc., which are lambasted for a lack of transparency because ownership data, although readily available to regulatory and crime prevention authorities, is not in the public domain. They have argued, with some force, that the data does not need to be in the public domain if it can be accessed by those who need it and, more importantly, that because their systems require an element of authentication by a professional person, their data is significantly more accurate, and therefore more useful to the authorities, than in the UK – or, indeed, many other jurisdictions.
The public availability of the data can also be a problem. The Government has reported that “In the last three years there have been almost 10,000 complaints to Companies House from people concerned about their personal details, with worries including fraud and use of personal details topping the list”.
The Government has decided that the time is right to assess whether improvements to the UK regime can, and should, be made. Companies House is now “embarking on a major programme to update its systems, and complete its journey to a digital register, fit for the 21st century”. This creates an opportunity to consider a significant review of what the UK’s company register should look like in the future and a number of suggestions have been proposed.
Several strands of work are included in the consultation: Knowing Who Is Setting Up, Managing and Controlling Corporate Entities – the Government is proposing the introduction of identity verification – similar to customer due diligence – for all directors, officers and significant shareholders and also for any third party provider presenting information on their behalf. To a degree, this seems to move the UK towards the model operated in some CDOTs, but it is likely to require some significant changes in working practices for those forming companies and presenting data on their behalf.
Improving the Accuracy and Usability of Data on the Companies Register – the Government is considering other changes to improve the integrity of information at Companies House, in particular, reforms that would allow Companies House more discretion to question the information submitted to it and amend or remove information after it has been registered; and reforms to the information disclosed that will improve the utility of the information for those accessing company records, including potential extension of the PSC Register regime and a requirement that accounts be submitted in a more uniform format to facilitate automated checks. The Government will also review whether it is appropriate that dissolved company records be held on the register for twenty years although, rightly, it does not intend to change this policy.
Protecting Personal Information on the Register – the Government’s proposals will mean that more information will be held in the future and it is making a number of proposals about how this information can be held and accessed in the future. It is also considering whether all the information being collected about directors is necessary.
Ensuring Compliance, Sharing Intelligence, Other Measures to Deter Abuse of Corporate Entities – finally, the Government is considering “how Companies House will work with other agencies to ensure compliance and take action against offenders. It also proposes a range of additional measures to further deter abuse of UK-registered corporate entities”. This includes proposals relating to the approach to be taken to compliance and enforcement as well as ways in which information on the companies register might be cross-checked against other data sources as a matter of routine.
Two proposals tucked away in this section are of particular interest. One of the most common areas in which Companies House receives complaints – 7,000 in the year 2017/18 - is where companies have used other people’s addresses, often residential addresses, as their registered office addresses without permission. The Government is proposing to require that such addresses be verified prior to registration.
The other issue relates to multiple directorships, where “The government believes it unlikely that a person could reasonably be considered to be performing their duties as a company director where they are holding large numbers of directorships…The government is therefore considering the introduction of a cap on the number of directorships that an individual may hold concurrently”. This will obviously have a significant effect on companies with complex corporate structures.
Overall, my reading of the Government proposals is that they are to be welcomed and go a long way towards addressing some of the complaints that we hear from members and others.
There is a difficult balance to be struck between making company administration as simple as possible and protecting both companies and wider society from criminals; between transparency and creating opportunities for exploitation.
We are pleased to see the intention that Companies House be given the powers that they need to improve the accuracy of the data submitted and see an important role for company secretaries and governance professionals, as there already is in some overseas territories, in confirming the identity of directors and shareholders and validating that data before it is presented.
As the Government says in the consultation document, “If implemented in full, the proposals in this consultation would amount to the most significant reform of the UK’s company registration framework since a register was first introduced in 1844”. They will have material impacts on the work of company secretaries in all types of company and ICSA will be responding to the Government.
Members who have an interest in these issues and would be willing to help us are asked to contact firstname.lastname@example.org and let us know your views.