"The Biggest Reform of English Company Law since 1844": Why Corporate Transparency and Companies House Register Reform is on the British Government's agenda
Average read time: 6.5 minutes.
This summer the Department for Business, Energy and Industrial Strategy (BEIS) have been running a consultation on options that will serve to enhance the role of Companies House and increase the transparency of UK corporate entities.
Whilst government consultations (and the accompanying white paper) tend not to make the most easily-digestible content for business owners and company directors, this consultation has the potential to bring about what BEIS consider to be the biggest changes to the incorporation and management of UK companies since the original UK register was set up in 1844. The government's ongoing strategy to create a stronger and fairer UK economy has the potential to impact upon the way that all of us do business.
In this article we'll be considering:
- Why the government have undertaken this consultation;
- What's at stake;
- Some of the initial responses from industry groups, including the British Venture Capital Association; and
- Why these changes are significant to company directors (and shareholders) – and what can be done in the meantime to make sure that your company has a clean bill of health.
Background to the Consultation
The UK strives to be the best and easiest place to grow a successful business. The quality of our workforce and universities, London's role as a leading financial centre, the robustness of our legal system, attractive corporate tax rates and the enduring reputation of the world's 5th largest economy are all reasons why the UK is the preferred location for many entrepreneurs and multinationals to start and grow a company.
One very specific reason why the UK is such a good place to do business is the ease and transparency with which new companies can be set up and maintained. Companies House, the UK company register, maintains freely-accessible for the 4.2 million companies registered in the UK – information which was accessed more than 6.8 billion times during 2018. This data is a fundamental foundation for confidence in the UK economy, can be accessed by anybody and is an important tool in the fight against organised crime, particularly economic crime and money laundering.
In 2016 Companies House introduced a new 'register of people with significant control', which requires all companies to disclose the people who own or control the company. This helps to prevent misuse of companies and has been a valuable resource to anybody wishing to understand who they are effectively dealing with when engaging with a company.
However, the government acknowledge that more needs to be done to increase transparency generally and do more to prevent criminal use of UK companies, including introducing more effective checks to ensure that companies are filing accurate and honest information at Companies House. To this end, further transparency and accountability are being pursued in the expectation that this can be achieved without significantly increasing the burden or cost for individual companies.
Summary of the Government's Proposals
The BEIS consultation effectively proposed 5 areas of possible reform:
- verifying the identity of individuals holding key roles within a company, potentially including its shareholders;
- giving Companies House greater powers to investigate and corroborate information registered by companies, particularly where there appear to be obvious errors or attempts to obscure the true position;
- provide greater protection for personal information stored on the register, which will be significant if the proposals are implemented because of the imperative to protect personal information from unauthorised access;
- introducing new measures to prevent the abuse of corporate entities, including cross checking data held by Companies House against data held by other government and private sector bodies, limiting individuals from holding large numbers of directorships (an approach often favoured by criminals) and preventing abuse of company names and addresses (including the use of innocent and unwitting third parties' details to try and legitimise criminal activity); and
- the steps required to implement these changes, including further legislation and significant changes to the way that Companies House is staffed and operated.
Summary of Publicly Available Responses to the Consultation
The detailed response of the British Venture Capital Association (BVCA) broadly welcomes the consultation proposals, but cautions against any changes that increase the burden upon companies to such an extent that the UK becomes a less attractive place to incorporate investment vehicles or invest in a corporate entity.
For example, whilst the BVCA agrees with the proposals for director verification, it has stressed the importance of changes to directorships or shareholding continuing to be instantaneous (rather than effectively requiring Companies House approval). There is a strong objection to the introduction on any 'cap' on the number of directorships that an individual can hold, on the basis that there is no specific number of directorships at which it can be said that that individual can no longer effectively perform their duties.
The BVCA response also expresses concern about the merits of a '1 click' function allowing members of the public to see a full summary of an individual's directorships and appointments, with the argument that this information would effectively challenge the privacy of an individual and could put them in difficult positions personally and commercially.
A response from the Chartered Institute of Taxation (CIOT) welcomes the proposed changes to identify verification (for both directors and shareholders) from the perspective of combatting money laundering and is supportive of the use of digital technology as the preferred way to implement verification.
Both the BVCA and CIOT responses upheld the view that companies should be able to register changes at Companies House instantaneously, without requiring prior verification of identify for directors, shareholders or beneficial owners, but agreed that a 'flagging' system that showed non-compliance would be an effective way to warn third-parties of potential issues when reviewing a company's entry at Companies House.
The Bank of England's response focussed on the potential role these proposals play as part of the Bank's wider work with the G20 and others to deliver greater corporate transparency, efficiency, competition and productivity in the context of global financial markets. The Bank also identified the possibility of smaller companies gaining easier access to finance by maintaining a 'portable credit file'.
What should companies be doing now?
There are significant commercial, moral, financial and reputational reasons why all UK companies should be taking steps now to make sure that the information held about them at Companies House is true and accurate.
This could involve some or all of the following:
- ensuring that all Companies House filings for your company are up to date and accurate – avoiding the risk of future sanctions or fines, doing your bit to combat economic crime and reassuring third parties doing business with you (many of whom will be checking your Companies House entries) that you are a well-organised and diligent organisation;
- reviewing your corporate governance practices generally (including with regard to combatting money laundering and modern slavery) and getting professional input if necessary;
- for companies with large numbers of shareholders, taking steps to confirm that the information that you hold about those shareholders is up-to-date, and that steps are taken to track down any untraceable shareholders;
- making full use of Companies House data to protect your interests when dealing with other companies or individuals, particularly where there is a suspicion that criminal or illicit activity is being covered up. This would apply to your trading and commercial arrangements, but is also relevant when looking for outside investment or considering selling your business; and
- where appropriate, being prepared to verify the identity of people doing business with you (much like regulated organisations like banks, lawyers and accountants do) – in the knowledge that this is a reasonable and increasingly straightforward process to implement.
If you would like further advice or assistance with any of the above, including regularising information stored at Companies House or answering any corporate governance queries about the role of the board in setting policies in relation to risks and operations (including verification of identity of any new directors or shareholders) please feel free to contact Dan Partridge or Caroline Lavis.