Economic Crime and Corporate Transparency Bill (Eighth sitting)

Seema Malhotra Excerpts

Committee stage
Thursday 3rd November 2022 Public Bill Committees

[The Chair]

I remind the Committee that with this we are discussing the following:

Clauses 37 to 43 stand part.

New clause 35—Person convicted under National Minimum Wage Act not to be appointed as director—

“(1) The Company Directors Disqualification Act 1986 is amended as follows.

(2) After Clause 5A (Disqualification for certain convictions abroad) insert—

‘5B Person convicted under National Minimum Wage Act not to be appointed as director

(1) A person may not be appointed a director of a company if the person is convicted of a criminal offence under section 31 of the National Minimum Wage Act 1998 on or after the day on which section 32(2) of the Economic Crime and Corporate Transparency Act 2022 comes fully into force.

(2) It is an offence for such a person to act as director of a company or directly or indirectly to take part in or be concerned in the promotion, formation or management of a company, without the leave of the High Court.

(3) An appointment made in contravention of this section is void.’”

This new clause would disqualify any individual convicted of an offence for a serious breach of the National Minimum Wage Act 1998, such as a deliberate refusal to pay National Minimum Wage, from serving as a company director.

[Seema Malhotra (Feltham and Heston) (Lab/Co-op)]

It is a pleasure to serve under your chairship, Mr Robertson. I will continue to speak to this group, finishing with a few remarks about clause 43 and our new clause 35.

We welcome clause 43 and recognise that it reflects new circumstances that arise from the Bill’s abolition of local registers of directors, set out in clause 50. We have further questions on that, which we will deal with when we come to later clauses.

On new clause 35, let me put our argument on the record. I thank the Minister for his comments, which I hope suggest that we will move on in some form, perhaps with the data he comes back with. Will he update us on when he expects to come back to us, so that we can come to a conclusion, and perhaps on an alternative way to make progress on the matter, during the passage of the Bill?

The reason my hon. Friend the Member for Aberavon and I tabled new clause 35 is to include provision such that persons convicted under the National Minimum Wage Act 1998 cannot be appointed as company directors. There are real questions about whether we would want an employer who wilfully neglected or refused to pay the national minimum wage to a worker who qualified for it to be the director of a company after the Bill comes fully into force. The new clause would strengthen a lot of the measures in the Bill, because we are talking about people we hope to trust to undertake their responsibilities as a director.

The Bill introduces a substantial amount of regulation about who can and cannot serve as a company director as a result of criminal or potentially criminal practices, so this feels like the right place for consideration of such a measure. I will welcome the Minister’s comments and I look forward to continuing to work with him as we make progress.

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Kevin Hollinrake)]

It is a pleasure to speak with you in the Chair, Mr Robertson.

I am not quite clear when I will be able to get the information that we should have before we look at the matter in new clause 35. I think it is right to identify the scale and nature of the problem before we legislate, but I am certainly keen to do so, not least in my role as the person responsible for labour frameworks and markets.

I will respond to one or two of the comments of the hon. Member for Feltham and Heston. We already have power to ban directors disqualified overseas, under section 5A of the Company Directors Disqualification Act 1986. We can and have taken steps to disqualify directors who have been convicted of relevant foreign offences. On exemptions, I think we dealt with exemption from identity verification in a previous sitting. This will be set out in regulation, but that will probably include people who have already had their ID verified, for example.

The hon. Lady also asked about the defence of “reasonably believed” in clause 40. That would cover a situation where somebody had broken the rules but perhaps did not know that the rules had been broken. That would of course be subject to some kind of investigation, and the person could say, “It wasn’t me who submitted the return. I am not guilty of an offence.” It is a defence that somebody believed the information had been submitted correctly when actually it had not. I think that is a reasonable provision, which investigators would be able to take into account before taking forward a prosecution.

Question put and agreed to.

Clause 36 accordingly ordered to stand part of the Bill.

Clauses 37 to 42 ordered to stand part of the Bill.

Clause 43

Registrar’s power to change a director’s service address

Amendment made: 7, in clause 43, page 31, line 10, at end insert

“(but see subsection (4A)).

(4A) Subsection (4)—

(a) does not limit the service address that may be registered for the director under regulations under section 1097B (rectification of register), and

(b) ceases to apply in relation to the director if a new service address is registered for the director under those regulations.’”—(Kevin Hollinrake.)

Where a director’s service address is moved to their residential address under section 246 of the Companies Act 2006, subsection (4) imposes restrictions on further changes. This amendment ensures those restrictions do not bite on further changes under new section 1097B (inserted by NC5).

Clause 43, as amended, ordered to stand part of the Bill.

Clause 44

Register of members: name to be included

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[Seema Malhotra]

I thank the Minister for his comprehensive walk through these clauses, which I am sure he wrote overnight. It was very helpful. I have a few questions, but I will start by speaking to clause 44, which amends the Companies Act 2006 so that for individuals entered in a register of members, commonly denoting shareholders, “name” refers to a forename and surname. I have made the point before that it is quite staggering that we have not had such specification of the information that should be required. We absolutely welcome this measure and the encouraging of greater transparency of company shareholders.

We support the clause, but it seems to be countered by moves that arguably encourage less transparency of shareholders. In particular, the withdrawal of the central register, with information held only by the company rather than centrally, will make it harder to have public access and knowledge of who shareholders are.

It is important for us to emphasise why transparency continues to be so important. Transparency International has noted that, until now, shareholder information has been extremely limited and difficult to access. That has been a core factor in the UK’s unwanted reputation as a hub for dirty money and economic crime. The lack of any substantial rules and regulations around shareholder information reduces the reliability of the information published by Companies House and, in turn, of the totality of information about a company held by Companies House. We have tabled amendments to later clauses, but I wanted to make that broader point. While we talk separately about directors, officers and shareholders, in the end we are talking about entities working together as a whole, and wanting transparency about activity, and who is involved in it, as a whole.

Clause 45 concerns the power to amend required information. As the Minister outlined, the clause allows the Secretary of State to make regulations to specify changes to the information that must be entered in a company’s register of members. This is an important clause, and I have a couple of questions for the Minister. First, is there any consideration of what information may be required? I think there was some suggestion about the addresses of company members. In the Minister’s opinion, would the clause provide for a potential future decision by the Secretary of State to bring forward proposals to request identity verification and perhaps directors’ IDs from shareholders with shares of less than 5%?

I wonder whether this should be among the requirements for transparency of shareholder information in the Bill, which specifies changes to information that must be entered. If there are measures that could be brought forward, should they not be in the Bill rather than in future regulations? Is it a case of simply saying, “We will go as far as we think is relevant now and leave the option open for additions later”? Where the Minister thinks there could be further measures later, it would be interesting to debate whether some of them could be brought forward.

The Minister clearly set out the arguments for clause 46, and we support the expansion of the court’s powers.

Clause 47 relates to the register of members and the protection of information. As the Minister outlined, the clause would allow the Secretary of State to make regulations requiring a company to refrain from using or disclosing individual membership information except in specified circumstances. I was not fully clear who may make applications to the registrar not to use or disclose information. There may well be good reasons for such a request, but what individuals do the Government have in mind and in what circumstances could such a direction be made? Procedures in the future may result in less transparency, and for good reason, but it is important that we understand the reasons for that and that they are on public record as we consider the Bill.

It is possible that transparency is countered by the implementation of the Bill and the subsequent legislation for which it makes provision. That may reduce transparency by backdoor means, as it were, and reduce its scope to apply to those very individuals whom we may want to subject to such transparency. I am sure that the Minister understands why we want to probe that issue.

Clause 48 concerns the removal of the option to use the central register. Given all the measures relating to transparency and shareholder information, I am concerned about their total effect. The important principle running through the Bill is increased transparency in terms of publication and searchability, but the Bill also provides for private companies to exercise the option not to be on the central register. Perhaps I have not followed all the detail relating to the disclosure of shareholder information, but after the Bill’s implementation, I think there will be less publicly available shareholder information and not more. I look forward to the Minister’s response to those concerns.

[Kevin Hollinrake]

I think I have noted all the points raised by the hon. Lady. She is absolutely right that, in future, the Secretary of State could, through regulations, elect for the collection of more information from shareholders or any other relevant parties. We must all acknowledge that we do not want to put undue burdens on people who are trying to go about their normal, legitimate, bona fide commercial business. We are trying to strike a balance to ensure that we get the information from those we need it from, who may be acting for nefarious purposes.

On the hon. Lady’s point about the circumstances in which someone may want to remove details from the public register, that individual could be a celebrity, who would not want their address held publicly, or someone who fears domestic abuse. Those are the types of cases and circumstances that may arise. The information would still be held, just not in public. The law enforcement agencies would still have access to it, but the general public would not. When making such an application for removal, an individual would have to demonstrate evidence of risk, and could not simply say, “I want that information removing.” The registrar can refer cases to law enforcement agencies if she is in any doubt about whether the application has been made for bona fide reasons. She can also revoke a removal, if she feels that she has been given false information. I think they are reasonable provisions, and that judgment will be exercised.

On updating the register, the hon. Lady has tabled amendment 104, which we will consider in the next group. Perhaps we will have a good debate about that then.

Question put and agreed to.

Clause 44 accordingly ordered to stand part of the Bill.

Clauses 45 to 48 ordered to stand part of the Bill.

Schedule 1 agreed to.

Clause 49

Membership information: one-off statement

[Seema Malhotra]

I beg to move amendment 104, in clause 49, page 34, line 32, after “time” insert “and annually thereafter”.

This amendment would require a confirmation statement with company membership information as set out in clause 49 subsection 2 to be submitted annually.

The clause requires a company to provide a full list of shareholders when the first confirmation statement is filed after clause 44(3) comes into force. As I said, the clause is a welcome step in increasing the transparency of shareholder ownership and information, which we support strongly. Nevertheless, as has been said, the provisions in the Bill on shareholder information could and should go further. That is the context in which we tabled the amendment.

The amendment would provide that the confirmation statement about the company membership under this clause is submitted not only on a one-off basis but annually. The principle of shareholder information being submitted is one we support fully. If the Government believe that should be a one-off, I would be grateful if the Minister could explain why it need not be annual.

As I have mentioned, opaque shareholder ownership is a significant barrier to ensuring transparency and tackling economic crime. An example that has been cited already is Savaro Ltd. In August 2020, tonnes of ammonium nitrate exploded in Beirut port, killing more than 200 and wounding thousands more. The reported owner of the chemicals was a UK-registered private limited company called Savaro Ltd. The data provided by Savaro Ltd gives an insight into the poor quality of shareholder information held at Companies House and how that hinders investigation. Transparency International highlighted how, to identify the shareholders, it had to go back to 2015 for documents that named Status Grand as the sole owner.

Instead of identifying shareholders annually, companies only have to say that no shareholders have changed. The information is hidden in PDF documents, so it is unnecessarily time-consuming to establish who held shares in an entity at a particular point in time. Savaro is a clear example of how annual shareholder data, which the amendment would provide for, could assist considerably in investigating even criminal activity in UK companies.

Let me pre-empt the Minister’s pushing back on the amendment. One common argument against companies providing shareholder names annually is that it would prove too onerous a task for UK companies, but in answer to a written parliamentary question that I tabled his predecessor outlined that the average number of shareholders in UK companies in 2021-22 was only 2.15. The average number of directors was 1.59, so the number of shareholders was not that much higher. To argue that it would be onerous for the majority of companies to provide shareholder information does not seem so credible when set against the low average number of shareholders by comparison with company directors, as set out in the Government’s own data.

I urge the Government to consider this important amendment and hope the Minister will respond positively on how we might move forward with the sentiments and arguments behind it.

[Kevin Hollinrake]

I am grateful to the hon. Lady for her amendment. Clause 49 requires companies to provide to the registrar a one-off snapshot of relevant membership information when the first confirmation statement is due following the clause’s commencement. The amendment would require companies to provide that relevant membership information annually thereafter. The hon. Lady—or is she right honourable?

[Seema Malhotra]

Honourable—for the moment.

[Kevin Hollinrake]

It is only a matter of time. The hon. Lady cited the disturbing case, which I too read about, of Savaro Ltd in Beirut. It may be helpful for me to clarify how the clause as drafted works with existing company law. Companies are already required to provide a confirmation statement at least annually, which records changes in membership information in the previous period. One of the principles behind the confirmation statement is that companies should not be required to resubmit information that has already been filed on the register. Through the process, companies are required to either confirm the information submitted previously or provide Companies House with any updates to a variety of information, including the information contained in their register of members.

For example, if information submitted previously about a company’s members needed to be updated, or there were new members to disclose information about, the existing confirmation statement process already requires the disclosure of that information. Clause 49 introduces a requirement for companies to file a one-off snapshot of relevant information. That will be the means for companies to provide full names for all their members, as required by clause 44. That will give Companies House the starting point to display the information in a more user-friendly way. That information will then be maintained through existing confirmation statement requirements—annual updates, in effect.

The hon. Lady makes a good point about the usability of the information and the different PDFs being held. Companies House is looking at that. The Government would welcome suggestions on how best to display the information—a simple table would be preferable, in my view—which is to be determined as part of the implementation. That will involve user testing in the usual way to ensure that the information is displayed in a user-friendly way, as the hon. Lady seeks. Although I appreciate the intent behind the amendment, it would serve only to duplicate existing requirements, and would introduce the requirement to deliver potentially the same information on a yearly basis in cases where there had been no change in membership. I would therefore be grateful if she could withdraw it.

[Seema Malhotra]

I thank the Minister for his comments and his recognition of the important sentiments behind the amendment, which I will withdraw. I think some of the measures he outlined regarding the format of the information on Companies House and searchability will go a long way to addressing the point. I hope that we will be able to continue a dialogue on that, perhaps under his guidance about how we can best engage, to ensure that what is published is searchable and meets the important sentiments of transparency, so that frankly we never have another Savaro Ltd. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

[Kevin Hollinrake]

Clause 49 is linked to clause 44, to which I spoke a few seconds ago and which introduces new requirements in respect of the names information to be provided to the company in relation to its members, for inclusion by the company in its register of members. Currently, information on shareholders can be contained across multiple filings. The clause requires certain companies to provide the registrar with a one-off list of all shareholders, including their names and how many shares they hold. The first confirmation statement will be due after the new names requirement in clause 44 comes fully into force.

Collecting that information via a one-off snapshot will improve the usefulness of the information on the register by enabling Companies House to display the information in a more user-friendly way. Companies will then confirm the information submitted previously, or provide any updates to Companies House—via the existing confirmation statement process—on the information contained in its register of members.

[Seema Malhotra]

I have no further points to add.

Question put and agreed to.

Clause 49 accordingly ordered to stand part of the Bill.

Clause 50

Abolition of local registers etc

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to discuss the following:

Amendment 69, in schedule 2, page 148, line 40, at end insert—

“167GA Unique identification number for directors

(1) On receipt of notification of a person becoming a director, the registrar must allocate that director a unique identification number, unless such a number has already been allocated to that person.

(2) Any information supplied to the registrar under or by virtue of this Act about a person who has been allocated a unique identification number under subsection (1) must include that number.”

Amendment 68, in schedule 2, page 150, line 36, at end insert—

“167KA Limit on number of directorships held

(1) Where notice has been given to the registrar that a person (P) has become a director, the registrar may determine that P may not hold that directorship.

(2) The registrar may make a determination under subsection (1) if the registrar considers that P holds an excessive number of directorships.

(3) The factors that the registrar may take into account in making a determination under subsection (1) are the experience, expertise and circumstances of P.

(4) If the registrar makes a determination under subsection (1), P may not hold office as a director of the company.”

Amendment 70, in schedule 2, page 150, line 39, after “167G,”, insert “167GA”.

This amendment would provide for penalties to apply to anyone failing to provide their unique identification number (see Amendment 69) to the registrar.

That schedule 2 be the Second schedule to the Bill.

[Kevin Hollinrake]

In last year’s consultation on the powers of the registrar, the Government asked stakeholders for their views about the requirements for companies to hold their own registers and to deliver the information contained in them to Companies House. Stakeholders were also asked whether the election regime, by which companies can choose to keep their registers only at Companies House, should be retained. They were clear that centralising certain registers with Companies House could reduce burdens on businesses. In response, the Government said that we would continue to consider updating the registers regime accordingly.

The Government have decided that, where possible, a single source of information about companies is preferable, and that that source should be Companies House. In future, the definitive registers of directors, secretaries and persons of significant control will, in all cases, be held by the registrar rather by companies themselves. Clause 50 introduces schedule 2, which contains the amendments to the Companies Act to implement that policy by setting out the requirements and processes that will apply upon the abolition of local registers and the existing election regime. The changes will apply to registers of directors, of secretaries and of persons of significant control.

Schedule 2 sets out the detailed requirements necessary to give effect to the new regime for companies’ registers. The schedule is necessarily long and detailed because of the complexity of re-engineering the existing system to repeal obligations to maintain local registers and replace them with a regime that will result in the population of central registers. What have largely been a range of duties for companies to maintain records are broadly being transposed into an analogous set of obligations to report that information to the registrar. In many instances, companies are currently obliged not only to maintain registers but to notify the registrar of changes to them. The eradication of local registers will therefore serve to ease burdens on business.

However, it is worth drawing attention to a number of areas in which the new registers regime will involve new reporting obligations for companies. Proposed new section 167G will replace section 167 of the Companies Act 2006 and introduce additional requirements on companies. When notifying the registrar of a new director, companies will be required to make statements to verify the director’s identity and that the individual is not disqualified or otherwise ineligible to be a director.

Proposed new section 790LB will permit that the notification of a new person with significant control, which is required under proposed new section 790LA, is accompanied by a statement confirming that the individual’s identity is verified. If a statement is provided in relation to a registrable relevant legal entity—a legal entity that itself has significant control in a company—it must specify the name of one of its relevant officers and must confirm that their identity is verified. The notice must be accompanied by a statement from the relevant officer confirming that they are the relevant officer of the registrable relevant legal entity.

On amendment 68, which was tabled by the hon. Member for Glasgow Central, given that in our consultation on potential reforms for inclusion in the Bill the Government considered the possibility of including a cap on directorships, I am sympathetic to the underlying intention of the amendment. Approximately three out of four respondents to the consultation opposed a cap. The Government chose not to proceed with one, believing it preferable to verify identities and provide more accurate linkage of records, thereby providing a more accurate picture of involvement with companies. That reasoning stands today.

Analysis of the companies register, together with comparison against other data sets and the reporting of anomalies from obliged entities, will assist in identifying circumstances in which we believe the number of directorships poses a risk of criminal activity. That information will be shared with the relevant enforcement and supervisory bodies.

The amendment proposes a form of fitness test rather than a cap. I acknowledge that this removes some concerns about the bluntness of such a cap and addresses some of the concerns raised by respondents in our original consultation. However, in return the amendment undermines the agency of company owners to act independently and in their own interests when appointing people to run the business they own. It places the registrar in the position of being a higher authority for such appointments. Would they ever have at their disposal the evidence to make a negative determination? What would be the implications of a negative determination on the actions taken by a validly appointed director up to the point of such a determination?

The possibilities in this policy area were given careful consideration as part of the Government consultation. We have not identified a legislative proposal along the lines of 68 amendment that is workable or appropriate. It would undermine business confidence in the UK if companies could not be sure whether their director appointments would take effect. We believe that the new and existing powers to analyse and query information and on identity verification, along with the enhancement that will be brought to linking people across multiple roles and the wider data-sharing possibilities for the registrar, all serve to strengthen our capacity to identify possible grounds for concern. Such concerns can be reported to the relevant agencies, investigated and acted upon, including by pursuing the disqualification of directors, if appropriate. I hope I have clarified why we do not believe the amendment should be taken forward.

Amendments 69 and 70 will be redundant once the expanded power under section 1082 is exercised, as amended under clause 66. The effect will be that all individuals who are under a duty to verify their identity will be assigned a unique identifier when they successfully complete identity verification. This will include all directors, who will commit an offence if they act as a director without having their identity verified.

[Seema Malhotra]

Will the Minister clarify what he said? Will all directors be given a unique identifier?

[Kevin Hollinrake]

Yes, that is in clause 66. Further detail about the use and allocation of unique identifiers will be set out in regulations made via the affirmative procedure, so Parliament will have sufficient opportunity to scrutinise them. There is no need, therefore, for the inclusion of a penalty for directors who fail to provide the registrar with their unique identifier. It will be the registrar who issues a director with a unique identifier, not the company or the director. I hope my explanation has provided further clarity on why the amendments are not needed. I urge the hon. Member not to press the amendments to a vote.

[Seema Malhotra]

May I ask your advice on procedure, Mr Robertson? Should I speak now on clause 50, the amendments and schedule 2, or should the SNP amendments be moved first?

[The Chair]

You should speak now.

[Seema Malhotra]

Thank you, Mr Robertson.

The importance of clause 50, which relates to schedule 2, is obvious and requires no further comment. The Minister’s description of schedule 2 as long and detailed was on the button. Its length is understandable given the changes it is making by abolishing the requirement for companies to maintain their own registers of directors, registers of directors’ residential addresses, registers of secretaries and registers of people with significant control. Instead, that information will be held centrally by the registrar, with the important provision that companies have a duty to update the registrar of any change to the information.

We welcome the proposed changes in clause 50, but I want to comment on amendments on 68, 69 and 70 tabled by my SNP colleagues, to which I am sure they will speak. Amendment 68 would limit the number of directorships that one individual may hold. Where notice has been given to the registrar that a person has become a director, the registrar may determine that they should not hold that position, if the registrar considers that they hold an excessive number of directorships. That may be achieved by setting a cap on the number of directorships held and it might be possible to override that limit if there were good reason, and a simple means introduced by which that application and argument could be made to the registrar. Such a proposal could be implemented sensibly to bring about the benefits that it offers, especially in the light of some of the abuses committed.

From our evidence sessions and debates in Committee, we have learned that individuals with multiple directorships are a massive red flag in terms of potential criminal activity. In evidence to us on 27 October, Bill Browder said:

“Why is it okay to have a person be a director of 400 companies? That does not make any sense to me. Why should there not be some limitation—maybe 10? Ten companies is a lot of companies—but 400 companies, or a thousand companies?”

––[Official Report, Economic Crime and Corporate Transparency Public Bill Committee, 25 October 2022; c. 74, Q151.]

A limit on the number of directorships could easily be set in legislation and that would not stop people conducting their lawful business, but it would make it harder for criminals to use the system and our company structures to launder money and act as drivers of economic crime. It is worth reflecting on the fact that the evidence for that change came from a range of professional bodies. They also said that if they were directors of four, five, six or seven companies, how would they have the time to undertake their responsibilities with the required due care? The Minister referred to the consultation on this issue and said that three out of four of those consulted opposed a cap. Can he give us clarification on the year of that consultation? There are some questions about how we might interpret some of the responses, given the number of respondents and how many responded to all the questions.

In the light of that, I will make a few other remarks. The Association of Accounting Technicians, a registered charity based in London that acts as a professional body for accounting technicians worldwide, echoes Mr Browder’s assessment. In September 2020, it published an article recommending a cap of 15 directorships for one person, but it recognised, I think as we all do, that it is a difficult balancing act. We do not want to stop legitimate, lawful and productive activity, but we want to have a way of putting a stop to mechanisms that are easy to abuse. The AAT noted that there was a cap of 15 in Ireland, a general cap of 20 in India, and a cap of five in France that applies to public companies only.

Bodies that responded to the Government’s consultation made other interesting comments. There was a wide range of views on the cap, from two to 100 I think, with many suggesting between 15 and 25. This is an important conversation in the light of the scale and nature of economic crime, how it is changing, and the scale of abuse of our company structures. Some action has been undertaken in slightly different contexts, with less clarity about what has been happening with Russian money, Russian oligarchs and the connection to our international security. This year has really helped to challenge and expose much of that, albeit six years after legislation on economic crime was first promised. The point is that we have reached a place where our eyes are wide open now—or definitely wider, if not open completely.

Some of the wider comments and contributions to the Government’s consultation may well be worth going back to, in the light of what other countries do seemingly without impeding their economy or their companies’ activities. India is a good example of a nation whose trade is growing and that has a real focus on both domestic growth and international trade. I worry that we are closing down some of these debates, when this is a time to review them, perhaps with a slightly more open mind.

[Kevin Hollinrake]

What limit would the hon. Lady put on it?

[Seema Malhotra]

The Minister asks a fair question. He is not necessarily stating a cap. Given what has come out in the consultation, and what has been in the articles about whether there should be a cap and what would be right for British companies, it is certainly open to further conversation. It is interesting that in the Government’s consultation many were suggesting between 15 and 25, which is in the ballpark of what has been happening in other countries. The make-up of our economy could be slightly different. We have to understand it in the round, and in the context of our economy, but it is a question of a scale of 400 to 1,000.

If the Minister is saying that there might be a level at which there starts to be a red flag, and implicitly that Companies House may implement the legislation, perhaps Companies House and the registrar will say, “Maybe we’ll just do a procedural check if we have 25-plus directorships.” I do not know. That is where data and analytics help, rather than a ballpark figure. It must be within a considered understanding of how our economy works, and how and where legitimate business is carried out, with a view from directors as well. We might find that it is an easier answer to reach, because it does not have to be one that only we, as Members of Parliament, comment on; it has to be informed.

We are not arguing for a hard cap. We are saying that, as the logic of the SNP amendment outlines, rather than managing on a case-by-case basis, having a way to manage risk structurally and procedurally is an important response to the evidence, the nature of use that we have seen and the situation we find ourselves in today. There is room to learn from the experience of other countries.

Amendment 69 would insert a provision into schedule 2, requiring that:

“On receipt of notification of a person becoming a director, the registrar must allocate that director a unique identification number, unless such a number has already been allocated to that person.”

Amendment 70 follows from that, and would provide penalties for anyone failing to provide their unique identification number to the registrar. We support the spirit of the amendments, but I refer the Committee to our amendments 102 and 103, which we will be speaking to in later debates. Our amendments take a slightly different approach and place a duty on the registrar to give every director a unique identification number, which is published on the registrar’s website. I think that approach is tighter.

I hope in his response that the Minister will be clear about what the registrar is required to do versus what they can do, and what will be and will not be published on the unique identifiers for directors.

[Alison Thewliss (Glasgow Central) (SNP)]

I rise to speak to amendments 69, 68 and 70. These are connected amendments to schedule 2. I appreciate the point about clause 66, but we will get to that when we get to it, and we are here now.

The evidence from various witnesses last week, which I have heard over many years, is that the Companies House register is a mess. The amendments seek to tidy it up to some extent. A unique identifier that follows a person all the way through, from becoming a director of a company to perhaps resigning as a director of that company and going on to be a director of a different company at a later stage, would help to trace that person through the Companies House system.

I have mentioned in previous debates that there are three Alison Thewlisses on the Companies House register. They are all me, but they appear three times, and nobody would necessarily know that they are the same person. It would make sense to have a unique identifier attached to me as a person so that people can easily find and trace my history as a company director.

I looked up the Minister on the Companies House register. He is there five times. There are five Kevin Paul Hollinrakes out there in the world. It would be useful for companies doing due diligence or for people seeking to look at somebody’s directorship history if there was only one Kevin Paul Hollinrake on the register and we could see a complete picture of all those registrations over the course of his life and career.

That is the main purpose of the amendments—to make registrations traceable and to make the system easier for users and for me, if I want to be a company director, to provide the correct information. I could say, “I am already a director—here’s my number; just add it on to the previous things I have.”

Amendment 70 seeks to prevent people getting around that system and trying to register themselves perhaps by using their middle name or a different name, as if they were a different person. The unique identifier, once allocated to a person, should always follow that person through the system. If I try to register with my middle name or a married name rather than my maiden name, the system should pick it up. That is often an issue for women in the system. They might look very much like two separate people, with a married name and a maiden name, but they are in fact the same person. That unique identifier within the system would help trace people through, simplifying it for everyone.

--- Later in debate ---

[Alison Thewliss]

Broadly, I support clause 66. The amendments are not to that clause, but to schedule 2, to tighten it up and to improve it in any way we can. I accept what the Minister says. Labour, too, has an amendment to tighten the provisions, and I dare say I will support that as well, when we get to that stage, because all such amendments are to press the Government to tighten things up and to improve the Bill.

On amendment 68 and the number of directorships held, in evidence we heard Bill Browder suggesting the scenario of a drunk Latvian having their passport taken and being registered as a director in hundreds and hundreds of companies. Bill Browder said rightly:

“Why is it okay to have a person be a director of 400 companies?” ––[Official Report, Economic Crime and Corporate Transparency Public Bill Committee, 25 October 2022; c. 74, Q151.]

Clearly, that is ridiculous. There is no way that someone could fulfil their obligations as a director if they were the director of 400 companies at once. It would be impractical to suggest that anyone could.

Also, Thomas Mayne said:

“On the point about directors, there certainly should be”

a limit—

“it is crazy that you have these people with 1,000 companies.”––[Official Report, Economic Crime and Corporate Transparency Public Bill Committee, 25 October; c. 79, Q162.]

It really is.

I do not want to put a specific number in the Bill—that would be something for Companies House and regulations to decide—but we clearly all understand what an excessive number of companies is. Four hundred is excessive and 1,000 is ludicrous. Perhaps the cut-off could be at 20 or 30, although even at that I would struggle to say that someone could make a good job as a company director keeping an eye on all those companies. It is worthwhile looking at the issue, because it is a red flag in the system: if one person is registered to multiple companies, that is a red flag, and it should be something that triggers Companies House to look into them in more detail.

[Seema Malhotra]

The hon. Lady is making a powerful argument. The Minister asked her what she thought was not sufficient about clause 66. Does she agree that arguing for a unique identifier is about ensuring that it actually happens? The wording of proposed new paragraph (d) in clause 66(2)(c) is to

“confer power on the registrar…to give a person a new unique identifier”.

It is a power, rather than a duty. That seems to be at the heart of the disagreement—is it a power or is it a duty?

[Alison Thewliss]

I agree. I do not want to go too far on clause 66, as we have not reached it, but this is about ensuring that something is in the Bill, that it is hard and fast that it happens, rather than having a suggestion, something that the registrar might like to consider, or some kind of “have regard to”. It needs to be there and specified. That is what we are trying to achieve.

Proposed new subsection (3) in amendment 68, on what Companies House should take into account in making its determination under the clause, specifies the “experience, expertise and circumstances” of a director. If someone has long-term experience of running companies that actually existed and have filed accounts, there is something tangible there and then Companies House can say: “Oh yes, that person has 30 directorships, but they are active in all those directorships, and we know what they are.” However, if someone has no active activity that Companies House can fill in, that becomes a red flag under amendment 68. It would give Companies House a degree of discretion. Wherever it might want to put the number is also a factor.

The Minister is trying to suggest that having such a check would be an inhibition to business. I do not believe that, and I am interested to hear what evidence the Minister has to suggest that such a limit on directorships would inhibit businesses in any way. As the Labour spokesperson, the hon. Member for Feltham and Heston, mentioned, other countries have such a rule. Those restrictions are in place elsewhere around the world, so the comparison would be interesting: do they feel that businesses, directorships and the involvement of people in companies are inhibited by having such a rule? We are proposing a change to the Bill to help Companies House do its job, to help it with the red flags and to give it an action to take once it has seen the red flags and identified them through something such as holding multiple directorships.

--- Later in debate ---

[Seema Malhotra]

As the Minister mentioned, the clause amends the Companies Act in relation to individuals’ dates of birth and when they can be restricted from disclosure. The measures are important for occasions when the disclosure of someone’s date of birth would be inappropriate or unnecessary, so we support the clause.

Question put and agreed to.

Clause 51 accordingly ordered to stand part of the Bill.

Clause 52

Filing obligations of micro-entities

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to consider clauses 53 to 56 stand part.

[Kevin Hollinrake]

This group of clauses will improve the quality and value of financial information on the companies register.

Clause 52 will require a micro-entity company to file both its balance sheet and profit and loss account with the registrar. It removes the current option available for a micro-entity to omit—or fillet out—its profit and loss account when filing its accounts with Companies House. Clause 53 will require small companies to file a profit and loss account, and a directors’ report, when filing their accounts with the registrar. Clause 54 ensures that clauses 52 and 53 operate as intended by amending references to the existing small company and micro-entity filing obligations in the Companies Act 2006.

Clause 55 requires any companies seeking an audit exemption to provide an additional statement from their directors. That will help to deter fraudulent under-reporting by companies and, where a company director has provided a false statement, provide additional enforcement evidence that can make it easier to successfully prosecute directors. Finally, clause 56 removes the option for small companies, including micro-entities, to prepare and file a set of abridged accounts.

Collectively, the clauses will ensure that more financial information for micro-entities is publicly available on the register, helping to inform better business and lending decisions. They will ensure that the company’s turnover—one of the three eligibility criteria that determine the size of the company and what it must file with the registrar—is publicly available. The clauses will also provide greater transparency of micro-entity accounts, which will help to deter fraudulent or criminal activity and make such activity more easily identifiable.

It is crucial that we strike the right balance between transparency and burdens on business. As micro-entities already file a copy of their annual accounts for other purposes—tax returns with His Majesty’s Revenue and Customs, for example—the changes will not be overly burdensome for them.

[Seema Malhotra]

I thank the Minister for his comments. We welcome the measures in these clauses.

As the Minister said, clause 52 updates the filing requirements for micro-entities. A company is a micro-entity if it has any two of the following criteria: a turnover of £632,000 or less, a balance sheet of £316,000 or less, or 10 or fewer employees. The technical definition of a small company is any company that has any two of the following criteria: a turnover of £10.2 million or less, a turnover of £5.1 million or less, and 50 employees or less. Although we use the terms micro and small entities—in terms of the scale and size of other companies, that is significant—they can be larger than the terms indicate. That increased transparency from clause 52 is important.

We welcome clause 52 as a reflection of the fact that insufficient information is filed from those micro-entities to give a true and fair view of their financial position. The minimal disclosure requirements at present have also made them attractive to fraudsters who want to present a false picture.

There were 1.3 million micro-entity accounts filed in 2019-20. It is the most common choice for account filings. The Government’s December 2020 consultation on improving the quality and value of financial information on the register noted:

“Fraud investigation bodies have reported that micro-entity accounts are often used by companies that are investigated in money laundering cases.”

It is therefore absolutely right to tighten things up and seek greater transparency in the accounts and financial positions of companies’ activities. However, that raises the important question of whether any further work might be needed on micro-entities, although that question is for another debate.

On roll-out time, the Bill’s impact assessment suggests on page 76 that familiarisation time will be needed to get micro-entities up to speed with the changes, but there should not be significant additional costs, as companies already collect and submit additional information to HMRC in tax filings. In the light of what we and the Minister have said, we want moves that stop the criminal behaviour, but do not impede ordinary, good, productive and lawful business, so the measures are welcome. We want to see them come into force as soon as is practicable. The Secretary of State may make a determination later about when to bring the requirements into force, but perhaps the Minister will indicate today when he expects the Government will want the new requirements on micro-entities to become operational.

We welcome clause 52 as a necessary means to ensure that small businesses that are not micro-entities file full accounts to the registrar—which, again, will increase transparency and the availability of information. Clause 54’s consequential amendments seek to ensure that clauses 52 and 53 function as intended.

I want to make a few comments on clause 55. Perhaps the Minister can clarify the exemptions from audit requirements under this clause. When a company seeks an exemption from the requirement to have its accounts audited—for example, because it is a small company with £10 million or less in turnover—the clause would require directors to make a statement confirming that the company qualifies for an exemption.

I would appreciate it if, in the interest of the robustness of legislation, the Minister would expand on the clause and clarify what qualifies a company to have an exemption in that regard. The Government brought in an increase in audit exemption levels, effectively making more companies eligible for exemptions, and that goes back to the 2013 EU accounting directive, which sought to simplify requirements on companies submitting accounts and gave member states the flexibility to increase the small company accounting and audit exemption thresholds. Is there likely to be any review of those thresholds? Perhaps the Minister can enlighten me as to whether there is clear demand for that.

In the light of current circumstances—the clamping down on, and growth in, economic crime, as well as the transformations we will have seen in the last six, eight or 10 years—will the Minister tell us whether the high thresholds brought in by the Government have reduced audits and the transparency of information on the register? Have they affected the extent to which information filed by companies is trusted? Is the Minister interested in considering whether the levels for audit exemption are acceptable and right in the context of current economic crime, or does he think, in the light of the opportunities presented by the Bill, that there is reason to look at any of that again?

We welcome clause 56 as a necessary provision for improving the accuracy of information in relation to small companies.

[Kevin Hollinrake]

I will check the implementation date of the new rules around filing full accounts and let the hon. Member know in detail.

In terms of the audit exemption, the threshold is currently £10.2 million. We will always keep that under review, because we are trying to ease the burden on business while ensuring that nothing untoward is happening. Having been through the process myself, I know that auditing a business is very extensive, exhaustive and expensive. It is absolutely right that we seek to reduce burdens on business whenever we can, while also putting appropriate checks and balances in place.

Question put and agreed to.

Clause 52 accordingly ordered to stand part of the Bill.

Clauses 53 to 56 ordered to stand part of the Bill.

Clause 57

Confirmation statements

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[Kevin Hollinrake]

I am very disappointed that the right hon. Lady regards me as anti-regulatory. I want a system that allows good, bona fide businesses to go about their daily business without unnecessary checks and balances. We cannot control everything that goes on in our society but, in the main, businesses are lawful, and undertake lawful and legitimate commercial activity.

If the right hon. Lady expects a world in which we check every single filing, nobody will be doing any commercial work in our society. The only people we will have will then be box-checkers, and where would the tax revenue come from to pay for all the things that both she and I want in our society?

We must have a proportionate balance between regulation, the cost of resourcing regulators and the needs of law enforcement agencies. That is why our belief, which I know is not entirely hers, is that we need to take an intelligence-based approach to regulation. That is the most effective way to do it.

[Seema Malhotra]

I think we all agree that we do not want to do things that impede lawful activity—that is not a matter for debate, really. The question is whether the systems will be strong enough. They do not have to be burdensome; there are ways in which systems can have automatic checks, and be underpinned by clear roles and responsibilities. The question of who would know whether there are errors in a confirmation statement, and how that would be checked, is quite an important one for ensuring that we are not—

[The Chair]

Order. This is an intervention. I call the Minister.

[Kevin Hollinrake]

I do not disagree. I agree with the hon. Lady about automation, but checking every single document and every single file would be ludicrously burdensome, because 99% of those filings would be legitimate documents. I speak as somebody who has been an authorised person under the FCA, so I know how many checks, and double-checks, someone in such a position has to make. The vast majority of people who the FCA regulates do a bona fide, legitimate job.

We are trying to find the people who are not doing so, and what we are trying to do through the Bill is to allow the sharing of information and the cross-referencing of information to identify all the red flags—the hon. Lady talks about automation—and then trigger alerts that can be investigated. I think that we all agree about that, and that is the approach that we are taking.

As I was saying, these measures will all ensure that companies, once formed, will reassert to the registrar via their annual confirmation statement that the company’s intended future activities are lawful.

Clause 59 will oblige a company to notify the registrar via its first annual confirmation statement of a change in its principal business activity if such a change takes place between the company’s application to be incorporated and the incorporation taking place. That addresses the fact that there is currently no duty to notify the registrar during the incorporation process. This new obligation builds on the existing obligation in section 853C of the Companies Act 2006, whereby companies have to notify the registrar of a change in principal business activities via their annual confirmation statement.

Clause 60 amends section 853J(4) of the Companies Act so that the framing of criminal offences is consistent with similar provisions in this Bill. It also makes the same amendment to section 853L(1), which concerns the offence of failing to submit a confirmation statement on time. It will clarify that every officer of the company who is in default can commit the offence, as well as every director of the company. It also corrects an irregularity with the framing of the offence, which currently imposes strict liability on all the company’s directors and secretaries, regardless of whether they are in default—in other words, regardless of whether they authorised, permitted, participated in, or failed to take all reasonable steps to prevent, the contravention. I hope right hon. and hon. Members agree that it is important that these measures reach the statute book.

[Seema Malhotra]

We welcome clause 57 which, as the Minister said, prescribes the company’s duty to notify the registrar about certain events and provide certain information in advance of and at the same time as the delivery of the annual confirmation statement. That is obviously very important.

We have already debated some of the issues that clause 58 addresses. It is obviously an important clause, and the Minister has outlined that the approach is to hope for accuracy, based on risk assessments and red flags. We understand that, but it still does not feel as strong as we need it to be. It does not feel clear and strong on detecting issues, and it does not give the registrar a clear expectation of what the Minister intends. It felt a little like the Minister was just hoping that everything would work out. We should be clearer about what steps should be taken on detection, prevention and enforcement, and ensure that that is as strong as possible through the passage of the Bill. That is incredibly important, because we know that those are weak areas.

My right hon. Friend the Member for Birmingham, Hodge Hill made the very important point that we need to clarify what is expected of the registrar. They will be subject to many different demands, and in some ways it will make their life easier if they see in Hansard that there is a clear expectation from the Government, the Minister and the House about what is to be done. That would aid the call for greater resources, as it is frankly a way of making savings from enforcement later, and increasing the speed of detection will considerably lower the cost of economic crime. I hope that the Minister recognises that I am putting these comments and questions to him in the hope of detecting ways of tightening up the message about what we expect, in order to better implement the Bill and its stated goals.

We welcome clause 59, which I think we referred to earlier. Clause 60 will align terminology around existing offences relating to confirmation statements. The Minister outlined the detail of that. I raise a similar question as previously, because I seek clarity from him on what it will mean in practice for companies that breach the new provisions around confirmation statements. What is the result of failure to comply with the provisions, and who will be held to account? Clarifying that would be quite helpful. It would also be helpful to understand whether the Bill will allow for retrospective penalties, should information on the confirmation statements turn out to be misleading, and perhaps purposefully misleading.

[Kevin Hollinrake]

The hon. Lady raises some good points on retrospective penalties. I will find out that information and come back to her.

Question put and agreed to.

Clause 57 accordingly ordered to stand part of the Bill.

Clauses 58 to 60 ordered to stand part of the Bill.

Clause 61

Identity verification of persons with significant control

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[Kevin Hollinrake]

Under the cross-Government identity proving framework in “Good Practice Guide 45”—GPG 45—a combination of non-photographic documents, including Government, financial and social history documents, can be accepted to achieve a medium-level assurance of identity. That includes birth certificates, marriage certificates and recent utility bills. The framework, which also recognises ID documentation from authoritative sources, such as the financial sector or local authorities, is routinely used to build a picture of identity. Restricting that process by defining a recognised authority as a Department or agency could therefore inadvertently disenfranchise individuals from meeting ID verification requirements. I take the hon. Member’s point that the amendment seeks to include certain forms of ID, but it might not serve the purpose that he thinks it would.

[Seema Malhotra]

I understand what the Minister says in relation to GPG 45. I wonder whether he has considered that, in circumstances where an identity document with a photograph of the individual’s face may not be available, for whatever reason, in some way having a photograph of the person’s face is the most important thing. Is that something he has considered as part of verification checks?

[Kevin Hollinrake]

All these matters need to be considered in the round when we come to the further details of ID verification. I was simply pointing out some of the shortcomings of the amendment.

In certain circumstances, non-photographic verification should also be available, to ensure that the Companies House service meets digital inclusion drivers and accessibility requirements, as set out in the Department for Digital, Culture, Media and Sport digital identity and attributes trust framework. The Companies House service must also adhere to the public sector equality duty.

The ability to verify using a range of documentation will maximise the number of service users able to verify digitally or at all. Not having that route would prospectively drive users toward assisted digital or non-digital routes, resulting in additional burden, an impact on ease of doing business, and increased cost and resource. It would also lead to far higher rejection rates, impacting company incorporations and appointments. As I said, the vast majority of companies are law-abiding, and it is disproportionate to put this burden on them.

I turn to the amendments that seek to remove parts of clause 62. Again, I have sympathy with my colleagues who are concerned about the effectiveness of the AML regime. Indeed, the measures in the Bill requiring corporate service providers to register with Companies House are intended to support the AML regime—a point raised earlier by the right hon. Member for Barking. There is a requirement for corporate service providers to register with Companies House as well as an AML supervisor. We will know who corporate service providers are registered with, and we will be able to provide their supervisors with information that will enable them to do their job more effectively. Where corporate service providers fail to act effectively, the registrar will be able to suspend or de-authorise them.

The practical effect of the amendments would be to limit verification pathways to the registrar only, preventing verification by the AML regulated sector from being acceptable for the purposes of ID verification under the Companies Act. That is unnecessary, and it would come at the expense of people and businesses conducting their activities entirely legitimately.

About half of company formations are currently submitted by third parties, very many of which take their responsibilities seriously and are highly diligent in conducting ID verification checks. They include high street accountants, regional legal firms servicing small businesses, and so on. I am concerned that preventing third parties from being able to register with Companies House and verify identities would have disproportionate consequences for those entities, possibly driving business away from them. That effect would be particularly acute where ID verification is taken as a package with company formation and other services. It is not clear how the amendments would affect the ability of corporate service providers to deliver documents on behalf of their clients if they are not required to be authorised, for example if they represent limited partnerships.

Many company directors and people with significant control currently registered at Companies House, all of whom will need to verify their ID under the transitional provisions post enactment, would prefer to do so by using their professional adviser. They would suddenly find that their long-established legal adviser was deemed fit by the Government to verify their ID for money laundering purposes under the money laundering regulations but unfit to do so under the Companies Act. The amendments would therefore create considerable disruption for individuals as well as corporate service providers. I hope that my explanation has provided reassurance and that hon. Members will consider withdrawing their amendments.

I have already described the new powers provided by clause 62. Beyond that, it is important to note that the regulations provided for by the clause can also specify the records that authorised corporate service providers will be required to keep in connection with the verification or reverification of identity. Those record-keeping obligations on authorised corporate service providers can be enforced through offences for non-compliance. Additionally, the Secretary of State can confer, by regulation, discretion on the registrar about when an individual’s identity ceases to be verified. The individual will then be required to re-verify their identity. Finally, regulations under the new sections introduced by the clause will be subject to the affirmative resolution procedure.