Companies House reform: R3’s response to the further Government consultations

15 February 2021

One of the areas of focus for R3 this month has been the insolvency and restructuring profession’s role in the fight against fraud. While our events team hosted R3’s first-ever joint fraud conference, in partnership with the Fraud Advisory Panel and INSOL Europe, we also published our response to three Government consultations on Companies House reform.

These three consultations followed the Government’s response to its 2019 ‘Corporate Transparency and Register Reform’ consultation. Each of the new consultations looked at specific areas for further development of policies to strengthen the powers and role of Companies House and the integrity of the companies register: the ‘powers of the Registrar’; ‘implementing the ban on corporate directors’; and ‘improving the quality and value of financial information on the UK companies register’.

In our response, we set out our views on the Government’s response, as well as our feedback on the three subsequent consultations. Our full response can be read here, while a summary is included below.

Background

In May 2019, the Government published the Corporate Transparency and Register Reform consultation, exploring “options to enhance the role of Companies House and increase the transparency of UK corporate entities.” A summary of our feedback at the time can be found here.

The Government released its response to this consultation in September 2020, before publishing the three further consultations in December.

These consultations were all of great interest to R3 and our members, due to the important role the insolvency and restructuring profession plays in tackling fraud. When appointed over corporate entities, insolvency practitioners (‘IPs’) are required to investigate the company’s affairs and director conduct, in part by referring to the books and records of Companies House. Being able to access corporate records and information about directors, or quickly identify where this information is missing or inaccurate, is therefore an important component of our members’ ability to carry out their statutory duties.

Overview and key recommendations

Overall, the approach the Government is proposing should help to improve the integrity of the corporate governance framework and make a significant difference in the fight against fraud and increase confidence in UK plc. The Government’s decision to consult on three further issues in more detail indicates its commitment to ensuring that the reforms to Companies House are effective.

However, the main concern we raised in our response to the 2019 consultation was that it lacked any reference to, or acknowledgement of, the unique role IPs have as users of Companies House. Disappointingly, neither the Government’s response to the consultation, nor the three subsequent consultations made any reference to this important consideration.

In our most recent response, we have highlighted two key recommendations that we had made in our response to the 2019 consultation. These are that the Government:

• recognises the role of the insolvency profession as an extensive user of Companies House and a key component in the UK’s anti-fraud toolkit, and reflects this fact in the further development of this important policy area.

• ensures that IPs are included in the category of those bodies able to access the proposed new range of additional ‘back office’ information collected by Companies House. This will allow the profession to more effectively carry out investigations into companies’ corporate affairs and director conduct, and identify and disrupt more frauds.

R3's feedback to the Government's response

In our original consultation submission, we had highlighted the need for Companies House to require ID verification of company directors and People with Significant Control (‘PSCs’). We were very pleased to see the Government confirm in its response that it will press ahead with this change, although we have reiterated our caution against the Government’s decision to use third party agents to carry out the verification.

Another win for the profession was the confirmation that the Government will retain dissolved company records for 20 years, something which had been cast in to doubt in recent years.

However, as mentioned above, it was disappointing that the Government's response did not refer to our suggestion that IPs should be allowed access to the 'back end' of Companies House data. The Government’s original consultation set out how the register will effectively comprise two parts: a ‘front-end’ that is accessible publicly, and a larger ‘back-end’ holding more ‘behind-the-scenes’ information, including the additional information the Government intends Companies House to capture. This ‘back-end’ information would “only be accessible internally to Companies House and to public authorities.”

Our most recent response has once again stressed the importance of IPs being included in the category of those able to access the ‘back end’ of Companies House, to facilitate investigations into potential financial wrongdoing and misfeasance.

We also reiterated some of the other recommendations from our original submission, including making the restoration of a company an administrative process, to tackle the significant asymmetry between the cost to a director of avoiding scrutiny and the cost to the insolvency profession and creditors of putting things right.

Powers of the Registrar consultation

The Government is proposing to give the Registrar new discretionary powers to query information and widen its existing powers of querying information. Rather than having the Registrar query every piece of information that they receive, the Government is proposing for the Registrar to focus on querying issues that have been highlighted to them by third parties and other Government agencies.

We broadly agree with the proposals. The profession has long called for a more proactive approach from Companies House and this power will be an important component in enabling the organisation to carry out this role.

However, in the list of sources from where the Government expects to receive information, intelligence or evidence to inform the querying decisions, no reference is made to IPs. Given the important role played by IPs in tackling corporate fraud issues, we have urged the Government to ensure that matters highlighted, and information provided, by IPs are given sufficient weight, and reviewed promptly, by the Registrar. In our response, we have stated that we would welcome express reference to IPs in this list.

Consultation on implementing the ban on corporate directors

The Government is proposing that a company can only be appointed as a director if all of its directors are natural persons, and those natural person directors are – prior to the corporate director appointment – subject to the Companies House identity verification process.

We broadly support this approach, provided that the exemptions to the ban on corporate directors, as described above, are included in this reform.

We are also encouraging the Government to consider reviewing the issue of corporate PSCs. In our response to the Government’s original consultation, we noted that the effectiveness of the policy to extend ID verification to PSCs may be limited where “…the PSC is a corporate (or other non-individual registrable person), knowing the identity of the corporate will only reveal one ‘layer’ of information if it is unknown who owns this corporate, or if the corporate is based overseas.”

Consultation on improving the quality and value of financial information

In this consultation, the Government has suggested a move towards an all-digital approach for Companies House filing and a “file once across Government” approach (for example, enabling companies to file their accounts in one central place and for all government bodies to extract the information they need from that central source).

There are likely to be significant potential benefits from a “file once with government” approach, with simplified processes for filing information across Companies House, HMRC and Government more generally.

However, should the Government move towards an all-digital approach for filing, it will be important to ensure that the digital systems work effectively. Several IPs who started to use Companies House’s electronic filing process in the summer of 2020 subsequently returned to filing by paper due to a range of problems using the system. It is essential that Companies House quickly establishes a workable process for electronic filing, especially so that new statutory insolvency processes can be registered as soon as possible.

Next steps

We will be reaching out to discuss our key recommendations with Government officials, with the aim of ensuring that the profession's role in the fight against fraud is considered fully in the Government's reforms plans. This will help to secure the success of the reforms and allow the profession to identify and tackle more fraud cases – to the benefit of stakeholders, creditors and UK plc.