Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016

Baroness Neville-Rolfe Excerpts

Wednesday 2nd March 2016 Grand Committee

Moved by

[Baroness Neville-Rolfe]

That the Grand Committee do consider the Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016.

[The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills and Department for Culture, Media and Sport (Baroness Neville-Rolfe) (Con)]

My Lords, for the convenience of noble Lords, it will be helpful to consider the Register of People with Significant Control Regulations 2016 together with the Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016. These regulations set out how the register of people with significant control will work and apply the register to limited liability partnerships.

In 2013, the Prime Minister set out the ambition for the UK to improve corporate transparency and tackle criminal abuse of UK corporate entities. I am therefore pleased that we are today debating regulations underpinning the detail of the register of people with significant control, which bring that ambition one step closer to reality. The register of people with significant control is the foundation of the UK’s ambition to increase the transparency of UK corporate entities.

The benefits of the increased transparency provided by the register have the potential to be far reaching. For law enforcement, the Metropolitan police force estimates that, in cases where hidden beneficial ownership is an issue, 30% to 50% of an investigation can be spent in identifying the beneficial owners through a chain of ownership layers. For business, increased transparency will ensure that companies know who owns and controls their suppliers and customers. Investors will also know who controls companies they are investing in. For civil society, increased transparency will allow people to hold businesses to account, and citizens will know who controls companies when they purchase goods or services.

The register of people with significant control—the PSC register—will record the details of people who own or control UK companies. There are five separate conditions for being a PSC, which are set out in Part 1 of Schedule 1A to the Companies Act 2006: first, that an individual holds, directly or indirectly, more than 25% of the shares in a company; secondly, that an individual holds, directly or indirectly, more than 25% of the voting rights in a company; thirdly, that an individual holds the right, directly or indirectly, to appoint the majority of the board of directors; fourthly, that an individual has the right to exercise, or actually exercises, significant influence or control over a company, the definition of which is set out in statutory guidance, and would include individuals with significant veto rights over the operation of the company. I shall paraphrase what the fifth condition is for the benefit of noble Lords. The fifth condition is where a trust or a firm controls a company through one of the other conditions and there is a person who has the right to exercise, or actually exercises, significant influence or control over that trust or firm. Again, the definition of significant influence or control in these circumstances is set out in the statutory guidance.

Where a PSC meets one of the first three conditions, the company does not need to identify on its PSC register whether that person also meets the fourth condition—I remember discussing that during the passage of the Bill. In summary, the company regulations set out the detailed requirements for the PSC register. They are: the scope of the register; the fees a company can charge for providing copies of its own register; the information to be included on the register; the contents of warning and restriction notices; and how the protection regime will work for PSCs at risk of harm by their information being made public. The limited liability partnership regulations—the LLP regulations—apply the provisions of both the primary and secondary legislation on the PSC register to LLPs, with appropriate modifications.

The full costs of the register of people with significant control are set out in the three impact assessments. First, the enactment impact assessment sets out the broad policy costs, including the costs of the provisions in the Act and many of the provisions in the regulations, which are calculated to have a net cost to business of £85.9 million per year. Secondly, the protection regime impact assessment sets out the costs and benefits of companies applying to the protection regime. This is calculated to have a net cost to business of £4.7 million per year. Thirdly, the impact assessment on the costs and benefits of making a company’s own PSC register publicly available calculates the net cost to business of companies giving access on request to the company’s own register. This is calculated to have a net cost to business of £10.9 million per year. A very important point, given the scale of these costs, is that they are spread over a very substantial population of some 3.4 million companies, including 59,000 LLPs. The average cost per company is estimated to be £25 per annum. As I explained earlier, this is an important policy and the benefits of the register have the potential to far outweigh the costs.

The PSC regime contains robust penalties to promote compliance with the requirements. These measures support law enforcement and the tax authorities’ existing powers and investigations. The most serious offences, when a company fails to investigate its ownership or when a person or body fails to respond to a request for information from the investigating company, carry a maximum sentence of two years’ imprisonment on indictment or a fine, or both. We will take strong action where companies and individuals break the rules.

Noble Lords will recall from the debates on the Small Business, Enterprise and Employment Bill last year that we put in place a protection regime because this Government believe it is important, where an individual is at serious risk of violence or intimidation, to protect a PSC’s identity from the public register. The PSC’s information will of course still be available to law enforcement, and the individual will still have to fulfil their PSC obligations. Through these regulations, we have set a high bar for the protection regime, so it cannot be abused or damage the utility of the public register. We have tightly drawn the grounds for protection where the risk of violence or intimidation is a result of the company’s activities or where the risk comes from the association of the PSC with that company.

Parts 6 and 7 set out who can apply for protection, what types of PSC information can be protected and how they can apply. Noble Lords will see that Part 6 follows the successful existing company law for directors, whereby a PSC’s usual residential address can be protected. I know I have benefited from that company provision in the past. Part 7 is novel and allows the protection of all of an individual’s PSC information from the public register. This is because we recognise that the nature of a PSC differs from that of a company director. As part of the broader package of changes to company filing requirements made by the Small Business, Enterprise and Employment Act, the date of birth—2 January in my case—will be suppressed on the public register at Companies House in the details of both PSCs and directors, so that dates of birth are not so freely available.

I will also set out the key differences in how the limited liability partnership regulations apply compared to the company provisions. The LLP regulations adapt two of the conditions mentioned earlier, so that they apply more appropriately to LLPs. The first condition is adapted to take account of the fact that LLPs do not have share capital. The revised condition is that an individual has the right to more than 25% of the surplus assets of an LLP on winding up. The third condition, which is adapted to reflect the fact that LLPs do not have directors, is that an individual holds the right to appoint or remove the majority of persons entitled to take part in the management of the LLP.

I will bring the other parts of the PSC register provisions to your Lordships’ attention. An important part of the PSC register conditions is the term, “significant influence and control” in the fourth and fifth conditions. During the passage of the Bill I explained that the meaning of this term would be set out in statutory guidance. The draft statutory guidance for companies was laid in the House Library alongside these regulations. I am very grateful to the company law experts and civil society organisations that helped develop this guidance throughout last year. I am also grateful to the businesses and individuals who commented on the guidance when it was published for final comments in December.

The draft statutory guidance for LLPs has also been prepared and is currently published on GOV.UK. This statutory guidance can be laid in Parliament only once the LLP regulations we are debating today have been made. My department has also developed, with the help of a working group of legal experts, business representatives and civil society organisations, non-statutory guidance for companies and LLPs to guide them through the requirements step by step. The guidance was published at the beginning of February and has been well received by businesses so far.

Before I conclude, I will give the Committee an update on international progress, and highlight how the Government are building on the foundation of the PSC register and leading by example on the global stage by putting the register in place. In the EU, the fourth anti-money laundering directive was adopted in May 2015, which means that by early 2017 all member states must hold beneficial ownership information through a central register. I welcome the close working with my honourable friend Harriett Baldwin, the Economic Secretary to the Treasury in the other House, to transpose this directive.

The UK is taking the lead on extractives transparency. We were the first member state to implement reporting requirements for all large and listed companies, and we expect the first reports for UK companies detailing the payments they have made to Governments across the world to be made available later this year. In a similar vein, in October 2014 the UK was successfully admitted as a candidate country for the extractives industry transparency initiative. This in effect puts more information into the public domain and allows the Government to be held to account for our policies on the extractive industries in the UK. We continue to work with other countries, through the G7 and G20 fora, to implement international corporate transparency standards, which are of course very important. I commend these regulations to the Committee.

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, I want to intervene briefly. My noble friend makes a powerful case for the regulations and I appreciate the changes which have been made, particularly as regards the protection regime to allow confidentiality where people may be vulnerable to intimidation or attack. However, I want to sound a cautionary word about how we can pile further regulation in with the best of intentions but which may have consequences that we do not really appreciate and do not want. It is the balance to be struck between transparency on the one hand and privacy on the other; that is to say, my right to confidentiality about my personal and private affairs and the right of the wider public to know about situations where my actions may affect them.

The regulatory balance that we are trying to strike must be to have a regulatory structure that is sufficiently robust and imposes sufficiently strong standards to attract people, because they have confidence in the way the markets are being policed, but not such high standards that the bureaucratic burden of doing business becomes too heavy and people therefore seek alternative ways of carrying out their businesses in markets in other parts of the world. We also need a structure that is risk-focused so that it looks at the points of vulnerability and worry. My noble friend was unwise enough to mention the money laundering directive in her remarks, which gives me a chance to say that this is a classic example of blanket regulation which achieves very little indeed. It makes wonderful work for compliance officers filling in forms. The accountants love it because they have to verify that it has all been done, and the thousands of our fellow citizens who are wandering around the country with certified copies of their passports and a utility bill under their arm beggars belief.

The Government have resisted and resisted a de minimis number, which would mean that when you wish to open a bank account for your godson that you can put £10 into on his birthday, you would not go through the ridiculous performance that we are going through now. I think that the situation has reached a level of fear among the regulated community that is hard to believe. Last week I happened to have a money laundering inquiry. When I left Oxford, I went to work in the United States. I had an inquiry saying, “We see that you worked in the United States in the 1960s. What were you paid?”. That was 50 years ago and I cannot remember. That sort of thing brings the regulatory system into disrepute.

--- Later in debate ---

[Lord Stevenson of Balmacara (Lab)]

My Lords, it is a pleasure to hear the bilious rants from the other side, with which we on this side have some sympathy. I liked the point about the number of times one has to scan one’s passport into an email in order to prove some point or other. Whatever happened to identity cards?

However, there are serious points relating to these regulations which I welcome and will support as they go through. I take the point made by the noble Lord, Lord Hodgson, about the weight or pressure being placed on companies in relation to transparency and the money laundering system more generally. However, that is not the only area where this process came from; as the Minister mentioned, it came from the desire of civil society to have a better handle on how some companies are being operated, as well as from those who wish to invest and from other stakeholders. There is a feeling that the Companies Acts cumulatively perhaps have not kept pace with how people regard the operations of the commercial sectors in the country. Obviously now with LLPs as well, which are not strictly commercial in the business sense but still operate commercially, the ability to have scrutiny is being reduced. It is interesting that the extractives directive and other things have been quoted in support of the need to have this transparency. That better contextualises the situation and I was grateful to the Minister for sketching that out.

That having been said, the point was made that at the end of the day, people will have to operate this in a way that will not be destructive to jobs, the creation of new companies, investment and trade, and these things sometimes do not see it right. Certainly when I began going through these Explanatory Memorandums, piles of which still wait to be destroyed, trees having been cut down all over Europe to create them, it seemed a bit otiose to say the least. On the other hand, these are some of the better Explanatory Memorandums I have seen and I congratulate the department on its work. However, this was difficult to get right. The issues here are complicated and are not factual; with these things we often see that a figure is mechanically put in at one end and comes out at the other, while this is judgment all the way through. I read them with interest and recommend them to those who might have an interest in how this process goes through.

The Minister mentioned this but perhaps it was not brought out as much as it could have been. The Government could have taken a position on this, which is articulated in the EMs, that the regulatory process might not achieve the best result. In the past we on this side have often been critical of the sense of a “voluntarism approach” to many of the problems which we perceive in the commercial world. On this occasion the Government have decided to go with a regulatory structure. It has not been an easy decision but I commend them for the rigour with which they have approached it.

Nevertheless—the noble Lord, Lord Hodgson, picked this up—the judgments about what is a significant interest and control in an operation are heavily dependent on interpretations in the fourth and fifth legs of the process. While I listened with interest to what the Minister said about that, I was not entirely convinced that that was picked up either in the documentation we have had or in the wording she used to describe it. I do not think that that is sufficient to hold this back because, as I say, it is a good attempt to try to get it to balance out in a fair way. However, I wondered about the review process because I suspect that this is such a major change in some ways, not in monetary terms and not necessarily in its impact but in the whole way companies relate to the Government and to the wider parts of civil society, that it would be useful to have a pretty firm statement about how this will be seen in practice and whether there will be a formal process. Of course there will be a review, but it would be helpful to have that articulated now. Perhaps the Minister will be able to address that when she comes to respond.

The weakest part of this is the relationship to LLPs. In a sense that sounds very critical but I am not trying to be. LLPs are relatively new in the way we do business and therefore are not perhaps as well exposed as conventional companies. Their instance is largely in the business services and professional area, and it is harder to see quite where the analogues with a board of directors and control for profit is concerned. However, the sense is that the most appropriate way of biting a person with control of an LLP is in the way in which the proceeds of any dissolution would fall, with 25% going to the person deemed to be a person of significant control. That was not perhaps as strong as some of the other measures that apply in the commercial sector, and maybe that could be reflected on before the guidance finally gets published. I suspect that there might be a bit of an issue around that as we go forward, but it would be appropriate for a review provided that it is picked up and it is made clear to people that it will be coming forward.

In summary, I was present during the time the primary legislation went through last year. I was not directly involved in some of the debates around it but I followed them with interest. This is a big change; those who care about some of the actions and activities of companies and have been frustrated in the past because there was a veil behind which it was very difficult to see will feel that this is a step in the right direction. It is not overly bureaucratic but the noble Lord, Lord Hodgson, is right to say, “Hang about—is this really worth all the hassle?”. I personally think that it is, but the questions that need to be asked are: how will you review this, how quickly will that happen and how effective will it be as regards how we might take this forward?

[Baroness Neville-Rolfe]

My Lords, I thank the noble Lord, Lord Stevenson, for his support for these regulations and for his kind words about the Explanatory Memorandum. I will make sure they are passed on to those who worked on it. It always helps to thank people when things are good because that leads to yet further good performance. Let us hope that the regulatory structure works. As the noble Lord said, it is a big change, but this is an important new regime for companies and it is critical that the detailed requirements are correct and fit for purpose. Increased transparency about who owns and controls UK companies is important in maintaining the UK’s higher standards of corporate trust. As we have discussed in relation to many different issues recently, having the sunlight of transparency can be an extremely powerful policy weapon, and we as a Government seek to use it in a number of areas.

We have committed to a review: I think that both sets of regulations require the Government to review the costs to business within five years. I note the points that the noble Lord made, in particular in relation to the LLP regulations, and will make sure that we keep an eye on that. I also repeat the hope that other countries will move ahead as we have done with the PSC, because this only works, as in so many areas, if other countries do this as well.

It was a delight to see my noble friend Lord Hodgson returning to the debate. I am grateful for his cautionary warning about perverse effects, which one could write into many areas of regulatory life. As he says, we need the right balance between transparency and privacy. We focus on risk, and the National Crime Agency is fully on board to be involved in the protection assessment process. As an expert in risk assessment, the NCA is well placed to ensure that assessments are consistently applied and protection applications robustly interrogated.

I share my noble friend’s concerns about the operation of the money laundering directive, which I used to speak about when I was on the Back Benches. I am glad to say that the business department and the Treasury are doing work on its application as part of a deregulation review. I very much welcome the chance to have a discussion with him so that his examples can be fed into that work.

[Lord Hodgson of Astley Abbotts]

I have sent something in.

[Baroness Neville-Rolfe]

I thank my noble friend for that and will make sure that it is seen by the relevant reviewers. My husband has already provided some examples. He has to look after an elderly aunt—not an obvious money launderer—and has run into the same sorts of difficulties that I am hearing from my noble friend. We need to try to improve things in these areas, which is partly why the work we are doing on the deregulation initiative continues to be very important. The Treasury is in the lead of course on the transposition of the directive, but BIS has responsibility for article 30. The important thing is that the two departments are working together to try to make sure that this is done in a proportionate and sensible way.

My noble friend Lord Hodgson asked a very good question about the accuracy of data at Companies House and whether we receive complaints about that. Companies House will follow up on all complaints about company information being incorrect or incomplete. My noble friend may be right that there are not that many complaints but it will follow them up. In 80% of cases where there appears to be a breach of the Companies Act, companies correct the information straightaway. Most companies are trustworthy and want to provide the correct data, although there are occasionally errors. Where appropriate, investigations are passed to other enforcement agencies, and the changes we are making here will improve our chances of catching the bad guys.

Finally, the noble Lord, Lord Stevenson, asked about capital. My officials considered whether using rights over profit and capital should be part of the approach to identifying the PSCs of the LLPs but, in consultation, business and others told us that this could be difficult conceptually and operationally. As I explained in my opening remarks, the regulations therefore operate on the basis of the closest analogy to owning a share of the company’s capital for LLPs, which would be the right to a share in the LLP’s capital if it were wound up. We will have to see how that goes, as we discussed, and we have the review provision, as I have already explained.

[Lord Hodgson of Astley Abbotts]

I am not asking my noble friend to reply now but can she give us the Government’s considered view as to whether 10 quid gives you the right of access to a limited liability company? Will she also comment on the citizens’ registration service that apparently—I may be completely wrong—enables you to go online and get a company registered with no money-laundering checks at all? It must be a hole in the dam if you set up this elaborate structure but people say, “If you do it this way, you can have no money-laundering checks at all”. I am not asking for a response now but it would be helpful if she could comment on that at some length.

[Baroness Neville-Rolfe]

My Lords, I should like to reflect and write to my noble friend. Obviously, we want to make it easy for people to set up companies. We have had a record level of company creation in this country, and that has been part of the Government’s success over the past few years. I will certainly write to my noble friend and look forward to engaging further with him on this important topic.

Motion agreed.