Committee (4th Day)
Relevant documents: 11th and 13th Reports from the Delegated Powers Committee
My Lords, I remind the Committee that, if there is a Division in the Chamber, the Committee will adjourn for 10 minutes from the sound of the Division Bell.
Clause 78: Register of people with significant control
36A: Clause 78, page 56, line 22, at end insert—
“( ) This section and Schedule 3 do not apply to small companies as defined in the Companies Act 2006.”
My Lords, I declare my interests as set out in the register.
At Second Reading, I expressed some unhappiness and concern about the compulsory public register provisions. One of my main objections is to the inclusion of, and the impact on, small companies. Generally, I think that it is a wonderful thing that this country has had an explosion in entrepreneurship over the past five years, the likes of which I have not seen in my lifetime, with lots of young people happily getting on with setting up their own businesses—and, as I have said before, that is not just confined to London and the south-east. One of several reasons for that is that, compared to other countries, the Government have made it relatively easy to set up your own business: forming a company is extremely easy; the nature of the financial accounting returns has been made simpler for small businesses; and, whereas there are major hurdles in setting up a new SME in, for example, Italy, in this country it is pretty straightforward. That has been a huge success.
Prima facie, I am not happy with additional regulatory burdens, particularly on small businesses, unless they add some clear advantage. Here I cannot see that a small business, as defined in the Companies Act 2006, will have the resources to be engaged in terrorist funding, nor do I see much prospect for at least material avoidance or for a security risk. Therefore, my Amendment 37A calls for the exclusion of small companies as defined in the Companies Act from the application of compulsory public registers. One of my concerns is that there are huge numbers of new small companies—1 million last year, I think, and nearly 2 million over the past two and a half years—and they are almost invariably run and controlled by the entrepreneur who set them up, so he will almost certainly fall into the category of having control through owning 25% or more of the company. I think it extremely unlikely that small businesses will know about this legislation, as it is pretty unlikely that they will be employing lawyers who could warn them about it, so I also see the danger that large numbers of entrepreneurs will quite innocently not keep this register and thereby commit a criminal office. I do not think that any Members of this Committee would want to see entrepreneurs prosecuted for the criminal offence of not keeping their public register.
I believe that this is an unnecessary piece of additional bureaucracy on small businesses. I believe that it will be substantially ignored out of ignorance of the requirements. I really do not see that there is any need to include small businesses within the public registers legislation.
Can the noble Lord assure the Committee that taking small businesses out, as he requires under this amendment, will not take out shell companies, which are the major tool by which major international and, indeed, national frauds are effected?
It depends on whether a shell company falls within the Companies Act definition, so it will depend on what funds there are—what the shell company is capitalised at—and the other issues in the Companies Act that determine what is a small business. There is not necessarily a black-and-white answer, but I would have thought that if the Government graciously accepted my amendment they could add to it significantly by carving out that shell companies are not excluded.
My Lords, I am rather puzzled by one of the arguments that the noble Lord, Lord Flight, has advanced in favour of his amendment. As the noble Lord, Lord Phillips, has just said, it appears that the noble Lord, Lord Flight, has not read the impact assessment on this Bill. It was highlighted in the impact assessment that the majority of shell companies, which are often the vehicles of choice for money laundering and other criminality, would be classified as small businesses. To exclude them would, as the noble Lord, Lord Phillips, said, leave the door wide open and not solve one of the major problems that this legislation is looking to solve.
The noble Lord, Lord Flight, mentioned burdens on small companies. Of course I do not want to create burdens on any kind of company, but I believe that when a law is justified and has been implemented, small companies have a duty to keep on top of that legislation and make sure that they are not caught out by having failed to identify their person of significant control. As the noble Lord, Lord Flight, said, the vast majority of the companies are small companies owned by the people that run them, so they will have nothing to declare; they will have simply to say that the managing director or the chief executive is the person of significant control and that will be the end of it. The burdens on small companies, I suggest, are actually very slight and for that reason I would argue against this amendment and hope it will not be proceeded with.
My Lords, I am in sympathy with my noble friend Lord Flight’s amendment, but maybe not with the details, for the reason that the noble Lord, Lord Phillips, indicated. I declare an interest in that I am the director of a small company. This is the company that manages the house in which I live, which is divided into four flats. We have four shareholders, who are those who live in the four flats, and it is convenient for us to organise the cleaning of the common parts and that sort of thing through a company. It is controlled by the four of us. It has very small sums of money, but we would still have to have a register saying that nobody else controlled the company —at least I suppose we would. There are numerous companies, both trading companies and those like the one that I refer to, which would be caught by this legislation and in my view should not be. It may be that my noble friend’s amendment requires refinement and elaboration, but he has a good point in principle.
My Lords, as a champion of small companies half of me has a lot of sympathy with this amendment but the other half is worried. We define a small company as one that has a turnover of less than £6.5 million, a balance sheet of less than £3.26 million and fewer than 50 employees. The questions that have been raised today are: what is to prevent such companies from getting up to the activities we are seeking to prevent, and is size really the sole determinant of illegal activities? Maybe we should have a definition of a micro-company—a small, start-up company that has criteria much below the numbers I have given. We need to keep bureaucracy and red tape out of it, but it is quite clear that in the right hands a coach and horses can be driven through this and we need to have some degree of protection.
My Lords, I reiterate what the noble Lord, Lord Mitchell, has said. I spent the best part of my very long legal career acting for small businesses and start-ups, and nobody could be more in favour of them from virtually every point of view. However, we absolutely cannot leave a gap through which coaches and horses will ride with impunity. I am sure that the noble Lord, Lord Flight, does not need reminding of the fact that shell companies are a vehicle of choice for huge fraud. It is reckoned now internationally that fraud amounts to £27 trillion to £35 trillion, while our own fraud figures are rising at a startling rate. The amount of tax evasion—I shall not use the word “avoidance”, because it is discredited—is staggering and rising exponentially. The principal vehicle by which fraud, evasion, irresponsibility and immorality are effected in our country is the shell company. I am sure that I do not need to tell your Lordships that Barclays, I think it was the year before last, paid some derisory proportion of tax on its profits by using over 100 shell companies, in a huge chain, switching through virtually every tax haven on the globe.
If there is one thing that we really must do, and which I believe everybody in this House is determined to try to do, it is to prevent the evasion of the intention of us as legislators over a whole raft of measures—particularly tax but not by any means confined to tax. At present, because of such companies largely using the considerable wits of thousands of lawyers and accountants in the City, with the aid of the tax havens throughout the globe that sit with open mouths looking for funds to pass through them, we are in a parlous state. The highly beneficent intention of this legislation is to do something about that, and I hope that we will not be engaged in yet another legislative self-delusion, of which I have sat through so many. I hope that the noble Lord, Lord Flight, does not misunderstand me—I totally go with his basic proposition—but we cannot leave this Bill in a state that facilitates the very thing that all of us are determined to try to deal with.
Even if we got the legislation right, for us to rely on the proper implementation of the law that leaves this place would be another self-delusion. Our implementation agencies are so terribly underresourced that it is not David and Goliath in this country—it is so often David without his sling and Goliath. To my mind that means that, when we are in doubt, we should screw the template tighter to the intention that we have for this legislation. I am afraid that that leads me to be unhappy with the amendment.
My Lords, I draw your Lordships’ attention to my entry in the register of interests, which includes directorship and ownership of a number of small companies within the thresholds.
I agree with the noble Lord, Lord Phillips, that the measure’s intention is clear and its purpose very noble and needed. However, like the noble Lord, Lord Mitchell, I am keen to ensure that bureaucracy on small companies and SMEs is minimised. The case of a national bank, which I shall not append by name because I am sure that there are many others, using lots of subsidiary companies to avoid tax, is not caught here, because a subsidiary company would not be a small company.
My concern is the small family company where, perhaps by the second or third generation, there are multifarious ownerships, possibly through a trust or directly. Indeed, the Institute of Chartered Accountants in England and Wales, of which I am a fellow, helped clarify my thinking by giving the example of a number of family members who own a company but one of them habitually votes in accordance with the directions of his or her spouse. In such a case, would the spouse be a significant controller and what lengths would the company need to go to so as to establish that? This is just an extra layer of complication and administration that our SME companies should not have to face.
Is the noble Lord sure of what he just said? He said that a subsidiary company in a chain of subsidiaries would not be a small company. I would want to be absolutely certain of that. My impression is rather the reverse: if it has minimal paid-up capital, as indeed it could, how would it be caught?
My Lords, I also declare my interests in the register and take issue with the suggestions of the noble Lord, Lord Phillips. When it is said that HM Revenue & Customs does not have the resources to pursue these matters, is the suggestion that it does not have the powers to ask the question of a taxpayer or company, “Who controls the company?”. I am very nervous about requiring all the millions of honest small companies to do some extra work which is unnecessary because HMRC already has the powers to ask that question.
My Lords, I do not know whether it is for me to answer that question, but it is very germane. I fear that the truth is that the implementation of so many of our laws is just grotesquely inadequate. Large parts of many of the statutes we pass in this place are never implemented. Prosecutions under a plethora of criminal provisions have never been made. That is under implementation. Frankly, I do not know how to answer the noble Lord because it is an entirely fair question. All I know is that one without the other leaves us in a mess. I accept what he says: one does not want, because one has no implementation, to create such a barbaric forest of bureaucracy that it becomes counterproductive in another way.
My Lords, this is Committee and it is perfectly in order for noble Lords to speak as many times as they wish. I also remind noble Lords that it is customarily the case that they address the whole Committee and not merely the noble Lord who asked the question.
My Lords, on the specific point, I just add the following. First, it would be perfectly possible to operate a non-UK shell company as the Bill stands so the Bill is completely avoidable for those intent on doing evil. Secondly, with regard to UK companies, it might be possible to include a definition. The point of a shell company is that it does not have a business. I am very clearly talking here about small companies that have an active business. Finally, anyone with evil intent will not register a small company, even if it is a UK company, for the reasons the noble Lord just pointed out: the chances of being discovered are very small.
Therefore, I beg to suggest that the Bill is ineffective in this area as it stands. What would be effective is a significant burden on the innocent—the runners of small family businesses. As my noble friend Lord Leigh pointed out, the issue of who has control is sometimes quite debateable because there may be more than one person holding 25% and the way family affairs are organised may be complicated.
For some reason, my Amendments 48 and 49 are also included within this group. I did not really want to combine them with Amendment 36A, which is very different in nature, but nor did I want them not to be aired by default. These two amendments, together with Amendment 51, are practical proposals which emanated essentially from the BVCA, which I believe has had some practical discussions with government about possible ways of handling the points raised.
Amendments 48 and 49 extend the provision in the Bill applying to English limited partnerships to include other limited partnerships without a legal personality which are comparable to an English limited partnership. Many overseas limited partnerships invest in UK companies and, unless there are arrangements along the lines of Amendments 48 and 49, the effect would be to require information on all limited partnership investors to be put into the register. This would create confusion about who was the controller of the English company the partnership was investing in as well as creating unnecessary and costly administration. The main relevant overseas companies to which this applies are Channel Islands limited partnerships which are frequently used by private equity firms to invest in UK companies. This is a practical issue which it is necessary to deal with, or where there are non-UK limited partnerships investing in UK companies we could end up with a wealth of unnecessary and quite confusing information.
I, too, shall speak to Amendments 48 and 49, as they are grouped together, and express the same reservations as my noble friend Lord Flight about not wishing to have the two connected. The reason for my amendment is principally to ensure that the policy objectives of the Bill are met. I seek to manage and mitigate unintended consequences as much as possible, in this case by making sure that only individuals who meet the criteria set out are disclosed and not many others by dint of legislative accident.
It is worth noting here that the Bill has already been improved in this regard. The original draft would have missed out partnerships entirely, because they have no legal personality, and forced the disclosure of hundreds of investors, none of whom owned 25% of the business, but all of whom would have been deemed to have owned that amount through their investment vehicle.
A particular concern is private equity, as my noble friend Lord Flight said. Funds raise money from many investors of different types and different geographies, but normally none of their investments as individuals would be anywhere near 25% of the fund. The private equity fund, typically known as the general partner, takes responsibility for investing that fund in a portfolio of businesses and managing those businesses. It is the fund run by the general partner and not any individual investor who exercises significant control. It is right that the public and, indeed, Governments know who that is. It is not necessary for them to know who the individual investors are behind it.
The merits of this point were accepted in the other place and there is an exemption for English limited partnerships. This amendment seeks to apply that to other limited partnerships that are similar to English limited partnerships in structure but are governed by other laws. I am thinking in particular of partnerships structured in the Crown dependencies. It is very important that we offer a level playing field in this context. Funds structured particularly in the Channel Islands and elsewhere are direct drivers of inward investment into the UK. To be clear, we are not talking about tax avoidance or tax evasion. It is simply a mechanism for investment. It is typically used by pension funds, which would not pay tax in any circumstances. My amendment would allow any partnership deemed similar in structure to an English limited partnership to be treated the same as one and not have to disclose the hundreds of investors underneath it.
In his excellent Budget in 2013, the Chancellor commendably launched a new initiative to make our asset management industry as competitive as possible. It was about encouraging our financial services industry to be drivers and attractors of inward investment in the real economy. These partnerships are great channels for such investment and must be encouraged. That is why they should be treated the same as English limited partnerships. If the amendment in my name and that of my noble friend Lord Flight is accepted, investors in partnerships, which are of huge benefit to the UK economy, will be treated as if they had invested in an English limited partnership or one that is similar in spirit.
My Lords, I shall speak to Amendments 37ZA, 37B, 37C, 47B and 50A.
I congratulate the Government on coming forward with these provisions that provide for a register of beneficial interests in companies that are not listed on the Stock Exchange. Transparency in the governance of companies is essential, as is fair taxation. They are essential for providing a level playing field on which all businesses are able to compete. Anything else undermines the kind of entrepreneurship and creativity that we want to see driving growth throughout our economy. However, transparency goes beyond the issue of business competition. It also matters from the point of view of knowing who owns a company. Who owns whom is vital to know and we will return to this issue as today’s discussions continue.
The Lough Erne declaration was signed in 2013 and reflects a good understanding of the importance of the above and I am glad to see some of the thoughts reaching fruition in the Bill. The third point from that declaration is perhaps the most relevant to our proceedings and I think it came from the Prime Minister. It reads:
“Companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily”.
That is a sound principle with which I am sure the whole Committee will agree. Parts 7 and 8 of, and Schedule 3 to, the Bill reflect this. Today we will be testing the provisions within the Bill to try to ensure that its provisions match these principles and that they are drawn tightly enough to deliver them. I hope the Minister appreciates that our intention is to support the proposals and to contribute to their effective working.
The main mechanism through which the principles are to be put in place is the PSC register—that is, “people with significant control”—which has our backing. The briefing that Christian Aid has provided—I wish to place on record my thanks to it for having done so—points out that only 9% of the British public believe that company ownership should be allowed to remain a secret. Given the reputation this country has for respecting the value of fair play, I can readily believe that.
The Government have also helpfully published and concluded a consultation on the regulations which will be issued governing the PSC register, which will aid us as we scrutinise the provisions in Committee. As the preamble to that document makes clear, PSCs—individuals with more than 25% of the company’s shares or voting rights—will have to be on the register and there will be a statutory obligation to update that. I struggled to find a proper definition of PSC. I think I found it in the wording but it should be clearly defined and positioned in the Bill so that there is no ambiguity on this.
Turning to Amendment 37ZA, I am sure noble Lords will appreciate that what we are doing here is to test the boundaries of Schedule 3, specifically the exclusions. It is right that the Secretary of State should be able to leave out certain companies that may already have more comprehensive disclosure requirements like those that are publicly listed. However, that is the underlying principle. Only companies that already disclose the information that this part of the Bill requires should be subject to exclusion. Otherwise a Secretary of State could, by order, essentially produce a definition that excludes companies that should in the spirit of the legislation be covered. I welcome the fact that doing so would require the affirmative procedure, but the fact that it would still have to be limited in that way would be a useful instruction to put into primary legislation. It would also create the kind of certainty that the playing field will remain level, as it were, and that would be helpful to businesses.
On the subject of delegated legislation, noble Lords will see that I have two recommendations from the Delegated Powers Committee in this group. The first concerns guidance about the meaning of “significant influence or control”, which is obviously a core part of the provisions. The committee stated:
“There is no provision however for Parliamentary scrutiny of the guidance. The reasons given in paragraph 285 of the memorandum for not making the guidance subject to scrutiny are the fact that it will be worked up in consultation with stakeholders and the fact that it will not conflict with the statutory provisions in Part 21A. We do not find these reasons convincing. Section 790F of the Companies Act 2006 will make it an offence if a company fails to comply with the duty to gather information about persons who exercise significant control. It seems to us that the existence of the offence will give greater importance to the guidance, since those involved are likely to see compliance with the guidance as necessary in order to avoid the risk of committing an offence. Accordingly, the guidance is liable to play a significant role in determining the meaning of ‘significant influence or control’ and therefore the range of persons who fall within the scope of the new Part 21A of the 2006 Act. In the light of this, we consider that guidance under paragraph 24(2) of Schedule 1A should be subject to Parliamentary scrutiny”.
We agree, and hence we have tabled this amendment.
The other recommendation from the Delegated Powers Committee that we have adopted is the suggestion that the powers within Clause 84 are in the realm—I am thinking of “Wolf Hall” being on our televisions—of Henry VIII powers because they allow for the modification of the rule contained with Section 156A requiring that directors are natural people. Hence I have tabled the committee’s suggestions that these regulations be subject to the affirmative procedure. I hope that the Minister will either be able to accept this or to place on the record why the Government do not think it appropriate to do so.
I have two remaining amendments in this group. Amendment 37B is an amendment to new Section 790C, which sets out the circumstances in which a legal entity rather than an individual—called “relevant legal entities” —may be noted in the PSC register. Our amendment here would make sure that, when deciding whether to specify a description of legal entity, the Secretary of State must have regard to the extent to which entities of that description are bound by disclosure and transparency rules broadly similar to the rules applying with the disclosure requirements which would otherwise meet the objectives of this part.
Finally, Amendment 37C, like Amendment 37A, is intended to make sure that any exemptions from this part of the Bill are for reasons that are clearly in accordance with the aims and principles of the Bill. Individuals and legal entities can be excluded from the requirements of Part 21A only in exceptional circumstances.
My Lords, Clause 78 and Schedule 3, which it introduces, will fulfil the UK’s 2013 G8—now G7—commitment to implement a central register of the people who have significant control over UK companies. I am grateful to all those who have spoken on this vital reform. I concur with everything that my noble friend Lord Flight said about the amazing growth of small businesses in this country and the ease of company formation compared with elsewhere. I think that everyone in the Committee shares his wish to try to keep things that way.
Perhaps I may start by outlining what this reform seeks to achieve. The register of people with significant control will ensure that we know who ultimately owns and controls our companies. This will help us to tackle the criminal misuse of UK companies, and that includes shell companies. Perhaps I may also quote the Prime Minister:
“For too long a small minority have hidden their business dealings behind a complicated web of shell companies, and this cloak of secrecy has fuelled all manners of questionable practice and downright illegality”.
Therefore, my noble friend Lord Leigh rightly called this change one which has a noble purpose.
The Metropolitan Police force and other enforcers have highlighted this problem, providing numerous examples to us of fraud, corruption and tax evasion facilitated, I am afraid, by UK companies. The register will also ensure that we meet international standards that aim to prevent terrorist financing and money laundering. It will allow us to implement the soon-to-be-adopted EU fourth money laundering directive.
My noble friend Lord Flight asked whether non-UK shell companies would be caught. The Bill does not apply to non-UK companies, but UK companies owned by non-UK companies will be required to disclose PSCs.
I know some noble Lords will be keen to understand why the register has to be made public. There are a number of reasons for this. Allowing public access is entirely consistent with the way that other company data—such as that on shareholders and company directors—are made available. Public access also helps ensure the accuracy of the data not only because people can flag up inaccuracies and omissions but because the public nature of the data should in itself encourage people to ensure they file correct information first time round. Finally, a lack of corporate transparency does not just affect the UK and UK citizens. As the noble Lord, Lord Watson of Invergowrie, said at Second Reading, the cost to developing countries of companies’ illegal behaviour is “quite staggering”. A public register will support citizens in these countries easily and quickly to access information that will help them hold their own companies and Governments to account.
My noble friend Lord Flight expressed a concern that these new rules were coming in and small companies would not know about them. I understand that point. We are, therefore, setting up a working group to develop guidance on the PSC register. We will ensure—and I can promise this—that a representative of small business sits on that group. One of the group’s tasks will be to work out how best to communicate these reforms before they are implemented in 2016.
The noble Lord, Lord Mitchell, asked why there was not a clear definition of PSC. I think PSC is clearly defined in Schedule 1A and this will be supported by statutory guidance on the meaning of “significant influence or control” and wider guidance on the meaning of PSC more generally, which the working group will help us to develop.
I turn briefly to the amendments—which actually pull in both directions because of the way in which the grouping has been done. Amendment 36A would exempt small companies from maintaining a PSC register or filing the information at Companies House. Clearly, we must minimise burdens on business, and small business in particular, wherever we can. However, I have looked into this and it is not possible to exempt small businesses in this case. It has been widely identified, including by UK law enforcement agencies, that small companies, including shell companies and micro-companies, are frequently used for criminal purposes, as my noble friend Lord Phillips of Sudbury explained.
As the noble Lord, Lord Watson, helpfully pointed out, the burden of applying the rules in any individual case will not be great. It is the cumulative effect of the compliance costs of lots of different companies that leads to a big figure, but the amount of extra information that individual companies will have to supply is, in most cases, very small and we will see the benefits in terms, we hope, of reduced crime and wrongdoing generally. Exempting small companies or micro-companies would significantly risk undermining our intention to tackle the misuse of UK companies and would be contrary to our intention to ensure enhanced transparency, as set out in our G7 commitments.
My noble friend Lord Flight will doubtless also be aware that small companies will be in the scope of the fourth money laundering directive, once that is adopted. Even if we were to find a way of exempting them now, or wished to do so, we would need to re-include them when that directive was transposed.
My noble friend Lord Leigh asked about spouses. I can confirm that a spouse could be a PSC, so if one or more individuals meets the specified condition they will be a PSC whether or not they are married to another shareholder.
I turn now to Amendments 37ZA and 37B. As I have said, we are committed to reducing duplicative reporting and burdens on business. That is why companies listed on UK markets already subject to stringent disclosure and transparency requirements are not required to maintain a PSC register. We have also taken a power that would allow us to exempt other types of company, provided they are bound by similar requirements. For example, we might want to exempt UK companies listed on EU-regulated markets. The same principle applies in relation to those specified circumstances where a company may be listed on a PSC register in place of an individual—that company must also be subject to adequate disclosure and transparency requirements. In deciding to exempt a company, the Secretary of State must have regard to these disclosure requirements. Failure to take them into account would expose him to the risk of judicial review and run counter to our commitment to ensure transparency. The amendments tabled by the noble Lord, Lord Mitchell, are therefore unnecessary to ensure that the powers are used as we would wish.
Amendment 37C would prevent the Secretary of State from exempting a legal entity from needing to be noted in the PSC register except in exceptional circumstances. I confirm that this provision would only be used in exceptional circumstances. However, that fact is implicit in the current drafting of Section 790J(3).
Amendments 48 and 49 would extend provisions in Schedule 3 dealing with limited partnerships to foreign limited partnerships. I cannot add a lot to the very clear explanation given by my noble friend Lord Leigh. I agree that the PSC register should only contain information on individuals who exercise significant control over our companies. I am keen to ensure that we do not inhibit or hinder investment into UK companies or the good partnerships that have been developed. We could extend the limited partnership provision in a way that does not damage the efficacy of the register or, as my noble friend Lord Leigh said, open up risks, for example, in relation to loss of tax. I am therefore grateful to my noble friends Lord Leigh and Lord Flight for tabling these amendments and intend to consider their proposals further before Report.
Finally, on Amendments 47B and 50A and the PSC register, the noble Lord, Lord Mitchell, was right to probe us in this area. Having listened to the arguments, I see merit in requiring the statutory guidance on “significant influence or control” to be subject to the negative resolution procedure. I similarly see the benefit of requiring increased parliamentary scrutiny over regulations setting out exceptions to the ban on corporate directors. I therefore intend to consider both amendments and return to them on Report. In relation to the other amendments, I hope my explanations have provided reassurance and that noble Lords will feel content not to move them.
Amendment 36A withdrawn.
Clause 78 agreed.
37: After Clause 78, insert the following new Clause—
“Duty to keep register updated
(1) The Secretary of State may by regulations make provision prescribing the steps to be taken by the registrar of companies to ensure that the information on PSC registers or as the case may be the central register is as accurate, reliable and up to date as possible.
(2) Regulations under this section are subject to the affirmative resolution procedure.”
I start by echoing the comments of my noble friend Lord Mitchell that the Government are to be commended on making the UK the first country to introduce a register of people with significant control. I said that at Second Reading and am pleased that, although it is happening slower than I would like, developments are taking place in other countries. Significant work needs to be undertaken to make sure that that progress continues and speeds up.
I welcome the fact that the Minister recognised that much of the effect of shell companies and their activities impacts on developing countries. In fact, a staggering amount does so. It has been estimated that more than a quarter of the financial assets held in tax havens are in some way taken from developing countries—which lose far more in this way than the total global aid budget. That is a very worrying statistic.
The role of the British Overseas Territories and Crown dependencies is in some ways complicit in this. I use the example of the British Virgin Islands and the purchase of mining concessions in the Democratic Republic of Congo, which cost the DRC $1.36 billion—around twice that country’s annual education and health budget combined. That is an example of the extent of the problem. It is disappointing that, since the Prime Minister made his announcement at the summit in 2013, the Government have not yet followed through decisively enough. I was pleased to see that the shadow Chancellor gave a commitment that a Labour Government would require Overseas Territories and Crown dependencies to publish the names of beneficial owners of companies. That is very much to be welcomed.
Of the amendments that stand in my name on the Marshalled List in this group, Amendment 37 tackles two concerns about how the register would function. First, I am concerned that the Bill does not put forward a plan to ensure that information on the register is properly verified and that the impact assessment assumes an unlikely 100% rate of compliance. Secondly, under the Bill, the public register will only be updated annually. This amendment creates an obligation on the Secretary of State to ensure that Companies House regulations provide for the information to be sufficiently verified and, indeed, updated, which is crucial. By including this in primary legislation, I believe it will provide a mechanism to ensure that Parliament affirms the regulations brought forward and holds the Secretary of State responsible for the quality of information in the register.
When a similar amendment was discussed in another place at an earlier stage of the Bill, the Minister there argued against it, claiming that the Government would be able to,
“amend the frequency with which”
the register was “updated at Companies House” and that the Bill demands that information provided for the register is,
“accurate, which is enforced by the criminal offences”.—[Official Report, Commons, Small Business, Enterprise and Employment Bill Committee, 30/10/14; cols. 412-13]
I have to say that I find these arguments unconvincing. Without a proper verification regime—perhaps even with one—100% compliance simply will not happen. I am sure that the Minister knows that.
My amendment contains, I believe, a fundamental principle in that the responsibility for the information in the register being properly verified and kept up to date would rest with the Secretary of State rather than with Companies House. In addition, to make it more likely that companies will comply with the law in that circumstance, it would allow Parliament greater scrutiny over those important areas. If the Minister is not minded to accept this amendment, I would ask whether she could set out how the Government believe that they could ensure that the public register is kept up to date and how they would work with Companies House to ensure an adequate verification regime for the information that enters the register.
Amendments 39, 41 and 43, which use identical wording, seek to address a technical issue in the legislation relating to foreign companies. Under the provisions of the Bill, when a UK company has a chain of ownership that includes offshore elements, the register will not show that full chain of ownership. To some extent we are at a disadvantage here, as the Government are involved in a consultation on the use of corporate directors, which has concluded its public phase, but we do not have any indication of what it has produced. Could the Minister offer any illumination at this point to indicate what conclusions are likely and, indeed, when the conclusions will be published? Will the result be published before the Bill completes its passage in this House?
It is particularly important that the complete picture is reported for companies whose control chain extends outside the UK, because these are precisely the kind of high-risk companies that are more likely to be involved, directly or indirectly, in money laundering, organised crime, dealing with stolen assets, cross-border fraud and other criminal activity. As an example of the problem, I mentioned at Second Reading that the palace of Victor Yanukovych, then President of Ukraine, was owned by an anonymous UK shell company. Blythe (Europe) Ltd is a shell company, based in the UK, that part owns the company that owns the palace and which itself is owned by a Liechtenstein trust. Without the full chain of control, although we could get the name of the person or persons who have significant control of Blythe (Europe), we would not get details of how that control was exercised and whether it was directly by the Liechtenstein trust or through any other vehicles, making it impossible to get the evidence required to bring any prosecutions. Surely the Minister cannot regard that situation as acceptable. Without details of the vehicles through which control is exercised, it will be impossible for the authorities to seek information to assist investigations, as they will not know about which companies and in which jurisdictions questions need to be asked.
This is a serious problem, which needs to be addressed. I am seeking to achieve that the legislation ensures that the register captures information on the full chain of ownership, even if sections of the chain, as we have heard in relation to the previous set of amendments, are not based in the UK. That is the spirit in which Amendments 39, 41, and 43 add to the list of required particulars that would be published in the register, so that it will list any intermediaries used by the person exercising significant control.
I believe that it is important that these matters are dealt with in primary, not secondary, legislation, as that would help in ensuring that the full chains of ownership are recorded in the register. If the Minister has other ideas as to how this might work effectively, I would be interested to hear them, but I urge the Minister to prioritise tacking this issue before this important piece of legislation completes it progress in this House. I beg to move.
My Lords, my name is on the amendments in this group, but I shall speak, if I may, to Amendment 37A in particular.
Amendment 37A defines “intermediaries”, which is the term used in Amendments 39, 41 and 43. As defined in Amendment 37A, “intermediaries” would catch, I think and hope, all the links in the chain of shell companies—as they usually are—that enable a fraudulent scheme to be effected. It may well be that the drafting of Amendment 37A is defective because, as I think we all know only too well, the combination of the details of the amendments in relation to this Bill and in relation to the Acts of Parliament that the Bill amends is pretty hair-raising even for a lawyer. Therefore, I apologise in advance if the Minister guns me down on the wording of Amendment 37A, but the purport of it is clear enough and I am convinced that it should be there.
It is no good allowing the many devices utilised by the people and corporations that use the very lax system of international control now prevailing, so we are trying here to do something really effective. I pay tribute to my noble friend the Minister and the Government for grappling with these issues at all, because, as the noble Lord, Lord Watson of Invergowrie, said, we are the first to try to get a grip on this. We all realise that we cannot effectively get a grip of the problem on our own, but at least we are in the field and showing our mettle. As the noble Lord, Lord Watson, mentioned, initiatives are being taken in consultation with some of these tax havens, but it is not a very happy tale: only one decision has been taken so far, by the Cayman Islands, which is to have nothing to do with all of this. I have a terrible suspicion that the others may come back with a similar response, because it is their bread and butter to be the handmaids of the world’s great fraudsters and shysters. But we are doing our best, and I hope that Amendment 37A will commend itself.
I will make just one more short point, on Amendment 37. As the noble Lord, Lord Watson, said, when a similar amendment was discussed in the other place, the Minister there said that the Bill includes a new power, amending the Companies Act, that will allow amendment of the frequency of the provision of the information, which is currently annual. Amendment 37 would allow ad-hoc inspections, so it would allow the person having the authority to make a lightning swoop, if you like, on the company or person concerned in order to extract up-to-date, current information on what they are up to. As I understand what the Minister in the other place said, it is not enough simply to have a general power to amend the timing of all this; we need an ad-hoc power to move against particular individual companies at any time. That would be one of the effects of Amendment 37.
My Lords, I rise to speak to Amendment 37, to which I have put my name. I pay tribute to my noble friend Lord Watson of Invergowrie for the work he has done in this area and for that very clear exposition of the relevant issues. He has made the important points, so I shall try not to repeat what he said.
Amendment 37 would give the Secretary of State power to make regulations ensuring that the PSC register is current and accurate. My noble friend Lord Watson explained the importance of that, but I shall echo his arguments. It is vital that the register be up to date if it is to do the job we expect of it and shine a light on some of the murkier examples of using anonymous shell companies to obscure the true ownership of an asset. I believe the Government see the register as providing something of a snapshot of the beneficial owners of a company, but in this day and age where technology has made instant communication the norm, rather than the exception, there is no reason why the PSC should not be kept up to date.
In this context, it is worth considering the evidence put before the Committee in the other place by the Institute of Directors, which said that the PSC,
“will be updated once a year and a fair number of people said in our consultations, ‘It’s going to be out of date within minutes of being published.’”—[Official Report, Commons, Small Business, Enterprise and Employment Bill Committee, 14/10/14; col. 19]
In your Lordships’ House there is an obligation on each of us to maintain our register of interests, which is not allowed to be more than one month out of date. Why should companies have an annual requirement? It simply does not make sense in this electronic age. In their response to the consultation, the Government said that they will continue to work through the principle that information will be provided to the central registry to ensure that there are no loopholes or unintended consequences. My concern is that this could be a loophole, so I would like the Minister to address it.
My second point is about accountability. As my noble friend Lord Watson said, this amendment requires the Secretary of State to ensure that the right regulations are in place so that what is on the PSC register is accurate and complete. Parliament will be able to scrutinise these regulations to check that they are capable of delivering an accurate register.
I shall pick up a remaining point from the debate about this group, and I hope the Minister will be able to put our minds at rest. Too little progress has been made in encouraging Overseas Territories and Crown dependencies to have public registers. If we return to the original Lough Erne agreement, it is clear that making progress on this issue is an integral part of fulfilling its spirit. I hope the Minister can update us on whether the Government will consider making such registers obligatory.
My Lords, I share the sentiment expressed by the noble Lord, Lord Mitchell, about the contribution that the noble Lord, Lord Watson, has made to this debate. I thank other noble Lords for this group of amendments which are in the spirit of ensuring that the register is effective and informative, which is what we all want. I hope I have understood noble Lords’ various concerns correctly.
I fully support the objectives expressed. We must have a single source of easily accessible information on the individuals who exercise significant control over our companies. However, reform has to be proportionate. It should not come at the cost of imposing unnecessary burdens on business. We have heard very persuasively, particularly from the Government Benches, how important this is. As I will explain with concrete figures, some of these amendments would impose additional costs which I am not sure we could justify because I am not convinced that there would be corresponding additional benefits. I shall explain that.
The noble Lord, Lord Watson, asked about when the outcome of our consultation on corporate directors will be known. We will try to write to the noble Lord before Report with the key findings.
On Amendment 37, the Government agree that information in the PSC register must be accurate, but I do not think we need an extra regulation-making power to ensure that that is the case. I am confident that the existing measures we have in place, and those we will introduce through the Bill, can already deliver noble Lords’ intentions. These measures include: criminal penalties for the provision of false information; public scrutiny of the information; and multiple checks pre and post registration at Companies House. To give just one example, in 2013-14, 9 million submissions underwent multiple checks by Companies House, resulting in nearly 400,000 being rejected. If we were to go further—for example, by requiring companies to use third parties to verify data before their annual filings at Companies House—our provisional estimates for the first year would be in the region of £400 million to over £1 billion, with a further cost of £300 million to £900 million per year thereafter. It is potentially a big bill.
Surely my noble friend understands that one is not looking for every company to have to make intermediate or particular requirements on its register. We need a power for the registrar—although it could be someone else—to say to a company, “Show us your books”. That would have a huge deterrent effect. However, we are not suggesting the whole kaboosh should be responsible in that way.
My Lords, I am grateful for that clarification. I was hypothecating the use of third parties to verify data before the data went to Companies House. It seems there is agreement that this would not be desirable for the reasons I have stated.
I have listened carefully to the arguments on the benefits of requiring up-to-date information to be filed at Companies House and the Government have listened to similar arguments during the negotiations we have been having on the fourth money laundering directive. Noble Lords may, however, not be aware that we already have the power we need in the Bill to allow us to increase the frequency with which information is filed at Companies House. This was inserted in the event that the statutory review mandated by Clause 79 demonstrated a need for more up-to-date information. I will, however, in the light of the conversations we have had today, reflect further on whether there is a case to use that power once the register goes live and the new system has bedded in.
Turning to Amendments 37A, 39, 41 and 43, I understand the desire for more information on every layer of the ownership chain. However, we must keep in mind our fundamental objective, which is to know who ultimately owns and controls our companies. Requiring additional information risks confusing companies and users of the register. There will also be cost implications in asking a company to hold and keep up-to-date information on every company or individual in its ownership chain. We believe we will have the information we need for investigation and prosecution.
More importantly, this is not a requirement of international standards or the soon-to-be-adopted fourth money laundering directive, which I am glad will bring the major benefits of these reforms to other member states. Noble Lords will, I am sure, share my concern to avoid gold-plating.
The noble Lords, Lord Watson, Lord Mitchell and others, asked why we are not including the overseas territories and Crown dependencies in this legislation. The Prime Minister made clear that he would like a publicly accessible central registry of company beneficial ownership information to be the new international standard. We would therefore like the overseas territories and Crown dependencies to match our policy. We respect, however, the fact that the overseas territories and Crown dependencies are separate jurisdictions with their own elected Governments, under which they are responsible for fiscal matters. We are working closely with the overseas territories and Crown dependencies and keeping them informed of our policy as it develops so that our decisions can feed into their policy thinking. At the Joint Ministerial Council in December last year, the UK and territory leaders agreed to work together on raising international standards and to meet ahead of the G20 meeting of finance Ministers and central bank governors this February to agree a way forward on implementation of the G20 principles.
I hope my noble friend and other noble Lords have found some reassurance from my response and that the noble Lord will agree to withdraw the amendment.
I thank the noble Baroness for her response. I think it is fair to say that we are not a million miles apart on most of the issues covered by the amendments. However, in her response, the Minister mentioned Clause 79, inasmuch as the Government would have the power to increase the frequency of the updating of the register—I cannot quickly find the wording that refers to that—and it would be helpful if she could give me something in writing on that.
The amendment states that,
“the central register is as accurate, reliable and up to date as possible”.
I think that everybody would like that to be the case. As the noble Lord, Lord Phillips of Sudbury, said, we are not suggesting that every company should constantly be involved in that and it should not be updated more than once a year. I liked the analogy with our own register given by my noble friend Lord Mitchell. It is important that information is as current as we can possibly make it. However, I noted the Minister’s response and I think we will return to this matter on Report.
I mentioned earlier that the shadow Chancellor said that a Labour Government would require the Overseas Territories and Crown dependencies to produce a register. I do not know what the legal requirements are. I know the difference between the Crown dependencies and the Overseas Territories, but there must be a means of doing that and I hope that the Government will at least bring to bear whatever pressure they can behind the scenes on these dependencies and territories to move in this very important area.
We have covered some important issues in this debate and we may well return to some of them on Report. I welcome what the Minister has said on most of the points and I beg leave to withdraw the amendment.
Amendment 37 withdrawn.
Schedule 3: Register of people with significant control
Amendments 37ZA to 37C not moved.
37D: Schedule 3, page 159, line 15, at end insert—
“(4) For the purposes of subsection (3) “special reasons” includes reasons related to the national security of the United Kingdom or reasons to the personal safety of an individual.
(5) Where the Secretary of State grants an exemption under this section the fact of the exemption must be included in the information contained in the PSC register of the relevant company or the central register.
(6) The decision of the Secretary of State to grant an exemption is subject to judicial review.”
My Lords, in moving Amendment 37D, I shall speak also to Amendments 44HA, 47A and 44 and will be returning to the central themes that I marked out when speaking to the amendments in the previous two groups: the need to ensure that the boundaries and scope of the provisions that we are talking about are adequately drawn so as to ensure that no loopholes remain and the need for appropriate transparency to make sure that the register serves the purpose that it was intended to serve. As before, I will often be probing rather than criticising the measures, which have our support.
Our Amendment 37D, the first in this group, would provide for the explicit circumstances when it will be necessary to exclude otherwise necessary information from the register. Clearly, it is understandable that, where there is a danger either to an individual or to national security, companies can be exempted from providing information. However, it is important that those circumstances are explicitly in the Bill, otherwise there may be exemptions for less important reasons in the future. The amendment also provides for any such decision to be challengeable through judicial review. Despite the fact that this Government have recently set about attempting to damage and degrade judicial review, it remains an important mechanism for holding the Government to account—hence its provision here.
I have also added my name to Amendment 44. My noble friend Lord Watson will no doubt be able to give a more complete explanation of it in a moment, but the essential point is that the Bill as drafted appears to preclude the possibility of a journalist using the register to investigate a potential impropriety. New Section 790O(4)(d) says that any request for information should include whether or not the information is going to be passed on to another person. In an age where open data are providing insight in a variety of fields, appearing to want to prevent them being passed from one person to another seems—to me, at least—to be a rather odd decision. I am keen to hear the Minister’s explanation for that subsection.
Amendment 44A is a probing amendment. New Section 790P sets out the process through which a company, upon receiving a request for information, can either provide it or go to court. However, subsection (4), which sets out when a company does not have to comply with a request, appears to have no time limit attached. Our amendment requires it to be reviewed annually.
Amendment 47A follows on from Amendment 37D in marking out the extent of the exclusions. Circumstances where a person’s details could be suppressed from a register are to be laid out in regulations by the Secretary of State. Amendment 47A would make it possible to challenge any such decisions. Taken together, these amendments would improve the clarity of these provisions and improve their ability to increase transparency about ownership of companies. I beg to move.
My Lords, I declare my interests as in the register. My various amendments in this group are all part of the same process and seek to change the proposed arrangements so that, although there would still be a register and companies would still need to know their shareholders, there would be no requirement to send details to Companies House. If the company in question did not wish to give access to the register, access would be by way of an application to the court, which would then be limited to security, taxation and law enforcement reasons—implicitly by those three categories of bodies. The Bill thus amended would comply with the G8 commitment, which I was pleased that the noble Lord, Lord Mitchell, read out. It specifically did not commit to a public register but committed to making the information on share ownership able to be accessed by security, taxation and law enforcement authorities.
As I argued at Second Reading, the Bill’s proposals for a public register as they stand are, in my view, flawed on several counts. I think we all agree on the need to address the issue of anonymously owned companies having connections with terrorist groups or evading tax—I might add that the same goes for charities, where the record of involvement is under some question. My amendment addresses this by allowing security, tax and criminal law enforcement bodies access. Indeed, the provisions in my amendments could be adapted to simply obliging companies to provide the information on controlling interests to those three bodies.
My point is that there is really no need for public access, which is potentially open to abuse. The Bill as it stands overturns 200 years of the right to privacy under UK company law without really debating it. Transparency of ownership relates to whether a company is public or private under British law. As has been pointed out, publicly listed companies have to make an announcement that goes right down to a 3% shareholder, but for a private, family business, privacy has generally been accepted.
The categories of privacy that are protected are contemplated in the BIS October 2014 consultation, and the Government have since responded further to that. Those categories relate to people who are at risk of intimidation or violence, but there are many other areas in which protection of ownership should be justly considered. The measures, as they are likely to evolve, would be expensive to operate and, at the end of the day, decisions about where people need protection are relatively subjective. The Government’s recent advice on secondary legislation suggested that they would confine protection to situations risking violence or intimidation. I suggest that that would be far too narrow to be just. There are a number of situations where families would be open to press vendetta, for example, should they be thus exposed.
I believe that there are five key issues at stake in this territory: the first, self-evidently, is fighting crime; the second is the right to privacy; the third is the cost of regulation and the never ending increase in regulation, notwithstanding the Government’s commitment to the contrary; the fourth is encouraging investment in the UK; and the fifth is the legal problems posed—and, indeed, the expenditure required—by the Bill’s provisions.
On fighting crime, I suggest that the Bill is virtually ineffective; in practice, it is really window-dressing for the NGO lobby. As I have already said, the guilty can use non-UK companies or not bother to register, as there is no verification process. Indeed, an important related issue is that, without a verification process, the arrangements do not meet the required FATF standards. Ironically, although the FATF does not call for public registers, it does require that there should be appropriate third-party verification of the information. I spoke a few minutes ago on the issue of casually overriding privacy. The key point there is that companies themselves need to know who their shareholders are.
On the regulatory costs, a major issue of concern has been rightly raised by small business. The cost estimates seem to be all over the place—I have seen estimates of as much as £2 billion or potentially even more—which is related to the issue of the very large number of small companies, about which I have already spoken. Can the Minister say whether any assessment has been made of the number of companies that will be affected? I have seen a figure of some 5 million, which is why the aggregate costs of this legislation are likely to be larger than the Government have estimated.
On the impact on British investment, it is extremely unlikely that any other jurisdictions will adopt public registers; indeed, that is what other jurisdictions have so far intimated. If they do anything, they are clearly going to move towards granting access to the three authorities that would justly need it. The major investors in this country—from China, from south-east Asia and from the oil states—feel very strongly about the privacy of their investments and would have absolutely no intention of their ownership of businesses operating in this country being made available to every Tom, Dick and Harry through a private register. As a result, I think that we will see the rather silly business of investors from those parts of the world investing in this country through non-UK companies. Again, that would potentially lose the sale of legal services in this country and could potentially lose tax. The key point is that because the arrangements do not apply to non-UK companies, the provisions of the Bill are essentially avoidable.
There are also potential practical legal nightmares, because the Bill’s provisions apply not just to those who have 25% ownership but to those with “control”. The definition of “control” is legally problematic. If the legislation goes ahead, lots of court cases will come up on whether someone actually has or does not have control. Even with 25% ownership, in some cases control may be exercisable by another party—for example, when an individual delegates the management of their investments to a fund manger.
Significant causes of concern have been raised by the financial services industry in these areas, specifically by the Association of Pension Lawyers, the BBA and the British Private Equity & Venture Capital Association. The BIS impact assessment contains no justification for the measures in the Bill. It makes it clear that there are few or no data or academic studies on quantifying a reduction in crime as a result of a public PSC register. Indeed, the assessment failed to consider anything other than the two options of doing nothing or the provisions of the Bill.
To conclude—the 14 amendments to which I referred essentially cover the territory—the proposals are ineffective and avoidable as they stand because they apply only to UK companies. They will not work and are likely to be a source of confusion about who or what is a shareholder with significant control. No verification enables the guilty, especially non-residents, to avoid or evade participation. The protection arrangements as formulated are too narrow but, as would be required in justice, would be quite complicated and expensive to administer. I regret that I see what is in the Bill as essentially window-dressing to please the NGO lobby and as a diversion from the real mechanism for beating crime, which lies with the money-laundering regulations.
We all believe it is right that companies should know their shareholders but not that competitors, spammers or journalists should all have access to precisely who owns what. The BIS impact assessment does not support the Government’s contention that this reform will be good for business and the UK business environment. That impact assessment actually states:
“There is a risk that we have not accurately accounted for this potential impact on overseas investment in the UK and UK competitiveness … particularly since the UK will likely be a ‘first mover’”.
I am deeply disappointed that a Conservative-led coalition Government should have put forward such ineffective and often wasteful legislation. The objective is clearly to please a particular lobby and to give the impression that the Government are doing something bold and imaginative here. I regret not just that many members of the public from the NGO lobby have been given that wrong impression but that it seems that many Members of your Lordships’ House have as well. If this legislation goes ahead, it will be avoided very easily and will not meet its objectives. It will just be another regulatory burden on the innocent.
My Lords, I rise to give a rather more upbeat reason for supporting Amendments 44 and 47. We have just heard the noble Lord, Lord Flight, in respect of his amendments. I open by saying that I am quite astonished to hear him say that public access is open to abuse. The whole thrust of this legislation is to deal with abuse of a very serious nature by companies in all sorts of activities. The number of such companies is small, certainly; none the less, it is a very important number and some of them are very influential.
Although I shall have something to say later specifically on the amendments tabled by the noble Lord, Lord Flight, I want to speak particularly to Amendments 44 and 47 because, the noble Lord, Lord Flight, notwithstanding, most people would agree that members of the public should be able to view and share information from a company’s PSC register. As the Minister said in another place, a principle of this legislation is that information should be publicly available so that businesses can identify who really owns the companies with which they do business. It is right that businesses should know whom they are dealing with and that civil society and the wider public can hold our companies to account. If the central register is to be updated only annually—or perhaps more frequently; we will see—it becomes important that people can access and share information from businesses’ registers as well.
The part of the legislation which concerns me—and which Amendment 44 would remove—requires people or organisations who intend sharing information from a company’s PSC register to say whom they would share it with, to give their names and addresses, and to state the purpose of sharing it. How can those questions, which appear in subsection (4)(d), be answered in advance? I do not believe it is possible. How would the person requesting the information know the individual or organisation to whom they might at some indeterminate point in the future wish to divulge any of the information that they receive? You would need to be a clairvoyant to know these answers.
The effect will be that the person requesting and subsequently receiving the information will be prevented from ever passing it on to anyone else. That will have a significant effect on the abilities of journalists and well respected organisations—such as Christian Aid and Global Witness, which have been assiduous in campaigning in this important area—to carry out the work that they do, including investigations, checking on company activities and publishing information about it. I do not quite sign up to the idea that if you have nothing to hide you have nothing to fear, because there can be cases where information can certainly be misappropriated, not least online. However, it is important that companies should be willing to defend what they do, and to do so as publicly as they reasonably can. However, I defend the concept of commercial confidentiality, although it should not be used as a cloak to enable companies to hide some of their activities, presumably those that they genuinely do not want aired publicly.
When I raised the issue at Second Reading, I was pleased that the Minister gave me an assurance that legitimate access to company registers would not be prevented. However, she did not say anything about publishing details from the companies register. I have been through the comments of her ministerial colleague in Committee in another place and, in my view, she justified paragraphs (a), (b) and (c) of new Clause 790O(4) on page 162 perfectly well. However, at no stage did she justify paragraph (d), and nor did our Minister at Second Reading. As my noble friend Lord Mitchell said, it requires to be justified because, unless lines 32 to 40 are removed from the Bill, reputable organisations will be prevented from exposing and potentially rooting out corruption through carrying out and sharing investigations properly. Without doubt the measure would be used by companies to prevent publication of parts of their registers, which surely goes against the spirit of the legislation. Therefore, in addition to the question that my noble friend Lord Mitchell asked of the Minister, I simply ask her whether she can reveal what she believes subsection (4)(d) adds to the Bill.
Amendment 47 tackles the issue of exemptions. As with the point I made in my remarks on Amendments 39, 41 and 43 in relation to corporate directors, we await the outcome of a government consultation on the question of exemptions. As the Minister said to me that she hoped to write to me before Report in respect of the other consultation, and given that the one on exemptions concluded a month ago, I hope she will be able to do the same with that. It is important that we should be aware of the outcome of the consultation before the Bill completes its passage in this House.
At Second Reading I was pleased to receive from the Minister an assurance that exemptions to publishing information in the register would be given only in exceptional circumstances, which is as it should be. I should like to probe a little with this amendment because exemptions should be open to challenge. The amendment would ensure that it was possible for a decision to grant or refuse a protection provision to be challenged and that it was clear on the register that a protection provision had been granted.
A similar amendment was tabled by the honourable Member for Hartlepool in Committee in another place, and the Minister’s argument there was that the court was not the best authority to determine the applications in the first instance. She argued that the registrar was best placed to do so. Therefore, Amendment 47 provides for the registrar to make that decision. I believe that a fundamental principle is at stake here. The public interest test must always enable an exemption to be challenged when new evidence comes to light. The decision to exempt an individual may be determined in a different way by the registrar on the presentation of new evidence specific to the company on why the public interest demands disclosure.
I hope that the Minister will accept this amendment, given that it appears that it complies with what her colleague said in another place. If not, I ask her to outline how she will ensure that exemptions can be challenged in the public interest when new information comes to light. It would also be useful if the Minister could outline the broad categories under which exemptions must be given.
I want to make some comments in relation to the amendments of the noble Lord, Lord Flight—specifically Amendments 44A to 44G and 44J—because I believe that they are completely contrary to the spirit of the Bill. Indeed, his concluding remarks suggest that he himself accepts that. I am particularly concerned about Amendment 44H, which it seems to me would almost certainly be in breach of the forthcoming fourth EU anti-money laundering directive. I am sure that it would be a significant step backwards for scrutiny and transparency and would uphold company secrecy. The noble Lord, Lord Flight, has given us his rationale for it but I do not think it would be widely shared.
The noble Lord was also pessimistic about what he called “other jurisdictions” creating a public register, if I have quoted him correctly. I think that that is unduly pessimistic. In the EU the Parliament has taken a position in favour of public registers in the negotiations on the anti-money laundering directive. A number of EU member countries are supportive of creating public registers for beneficial ownership throughout the whole of Europe, not just in their own countries. The G20 has also announced new high-level principles on beneficial ownership. All G20 countries, including Russia, China and even Saudi Arabia, are now committed to, and accountable for, improving the provisional access of beneficial ownership information. I accept that that is not common for the establishment of registers but it represents progress. How far that progress will run remains to be seen but we need to counter the doom-and-gloom idea.
I remember debating with the noble Lord, Lord Flight, a year ago on the banking reform Bill when he said that if some of the proposals in respect of company directors and anti-money laundering went through, we would see people disappearing from the City of London and working in places such as Geneva. I wonder what the people working in Geneva are thinking this week. I suspect it is about coming back to Britain, if indeed they ever left, because it has turned out to be not quite the haven they might have regarded it as being. My view is that the City of London and British business are extremely strong. It is a place where people want to work. We should be setting the highest standards within it to make it better, stronger and more widely regarded. To those who say that if we bring in legislation that is stronger than currently exists we will scare people away, I repeat the words that I think I said during the banking reform Bill—if those sorts of people are scared off that easily then, frankly, let them go.
My Lords, I speak in support of Amendment 44. It seems to me that this is an example of the Government getting slightly cold feet about their own proposals. If this Bill is supposed to create a public document—a public register—there is no going back. Surely it is public and saying “but only in certain circumstances” seems to display a lack of coherence. I am not merely worried about potentially trying to curtail the rights of journalists to expose just the sort of malfeasance that we might wish to expose. Once things are made public, surely they should be public documents that can be used for whatever purpose people wish. If there is a fear that, for instance, animal rights activists might put such a register to use, the answer is obviously that certain companies and individuals can claim exemption in the first place and will not appear on the register. However, once the register is there, a public document has, surely, to be accessible to the public.
I support my noble friend Lord Flight’s amendments. I declare my interest as before. I understand why my noble friend the Minister is proposing this, although I am not sure that I agree with it. The task is surely to design these rules so that they have the least impact on honest taxpayers. The tax legislation that we have is so enormous, and growing at such a vast rate every year, that I would be amazed if anybody knows of any human being who has actually said they have read all of it. There are not only enormous complexities in our tax legislation but vast powers for HMRC to enforce it. With this legislation, we are in danger of producing a group of citizen tax collectors who believe that it is possible—that it is their right—to go through the register and come out with an opportunity to accuse a company of paying insufficient tax. The effect of that would be that a newspaper or other media outlet, or an NGO, will pursue the case, and I am afraid that, as a result, the duties on HMRC to look into it will be rather greater than they are at present. Rather than reducing the burden on HMRC, as was mentioned earlier, I have a feeling that this legislation will increase it rather dramatically. This whole area of legislation is rife with unintended consequences.
My noble friend mentioned activists. An animal rights activist, for example, was convicted and sentenced to six years in prison last year, I think, for attacking people connected with Huntingdon Life Sciences—sending incendiary devices, hoax bombs and other such stuff. The anti-fracking demonstrators in Balcombe threatened similar activities. All of this legislation is open to abuse in a most remarkably comprehensive fashion, which is why I believe that this information should only be available to those people listed in my noble friend Lord Flight’s Amendment 44H.
My Lords, my name is on two of these amendments, Amendments 44 and 47. My noble friend Lord Watson has introduced them very fully, but I would like to add a few further points. As a first general point, some have commented—the noble Lord who has just spoken made the point that this is imposing a huge liability on limited companies—and asked why any member of the public should have access to the information on this register. The answer is simple but has not been referred to. Too often we overlook the fact that limited liability is an entirely state-provided privilege—and what a privilege it is. It protects those who own companies from the normal results of one’s own lack of success and, in some respects, even worse. Major conditions must surely be attached to the enjoyment of such a privilege. I believe that the Government are correct in the general purport of the provisions that we are now talking about. However, the way in which they have been constructed and, indeed, some of the drafting, leave a lot to be desired. I support some of the proposals made by my noble friend Lord Flight and the noble Lord, Lord Leigh of Hurley.
I want to concentrate on new Section 790O, from which Amendment 44 would remove the last lines. That removal is justified on the grounds that what is required by this subsection is unrealistic and, I would say, impractical. How does one provide information about the future which may not be in one’s control? I refer to new Section 790O(4)(d), which says that where a member of the public requests access to the company’s PSC register to see what is in it, they must say with that application,
“whether the information will be disclosed to any other person”.
How on earth can one do that? One could say, “I want it for this and that reason”, but one cannot tell whether in future it will be disclosed by someone else, or if one would want to disclose it for a purpose as yet unknown to a person as yet unknown.
It then it goes on to say that in making the application for access to the PSC register, one must give,
“the purpose for which the information is to be used by”,
any person to whom it is disclosed. Again, that is not realistic. For those reasons alone, it is entirely right that this part of the section be removed, as the amendment requests. There may be some residual need for something that is currently within that subsection and my noble friend the Minister may want to highlight that. Indeed, a lot of what we say today needs reflection and it may be that she will come back on Report and say, “Okay, we will remove sub-paragraphs (i) and (iii) but we need sub-paragraph (ii) and something else”.
Then, new Section 790P(3) says:
“If on an application under this section the court is satisfied that the inspection or copy is not sought for a proper purpose”—
without defining “proper purpose”, which is not good enough. These are important provisions. There are remedies and consequences for not complying with the law. Not to have a definition of a “proper purpose” must be wrong. Having said that, I am not entirely happy with the definition provided by my noble friends Lord Flight and Lord Leigh of Hurley, but I will not detain the Committee any longer. I just confine myself to those points. However, the drafting of this whole area of the Bill is extraordinarily opaque in places and lacking in proper clarity. I am concerned at the bureaucratic effects of some provisions while strongly in favour of the general purport of the Government in producing this part of the Bill.
My Lords, I just make the point that this amendment is not in my name, as was previously suggested, although I rather wish it was. I thank my noble friend Lord Flight for that back-handed compliment.
It is worth recalling that the PSC register in the UK in fact relies on self-reporting information that is not subject to independent verification. My noble friend the Minister indicated that it will be accurate because it is public but I struggle to rationalise that. The important point is that it is not subject to independent verification and, as my noble friend Lord Flight mentioned, that does not comply with Financial Action Task Force recommendations 24 and 25. None the less, that is the chosen route of Her Majesty’s Government and one has to consider the ramifications of allowing full public access to this unverified data. It means that people will take as read information supplied by companies, which of course could be completely incorrect, and they will assume that, as it is on an official register, it has validation when it is not the case. While recognising that tax and law authorities must and should—
That is an important point. We are here worried about rogue companies. We are not worried about companies that are abiding by the law or those that inadvertently make mistakes. Here, we are trying to pursue rogue companies that attempt to mislead. That was my point.
Indeed, that is my point. If we are going to do it, we should follow the recommendations of the Financial Action Task Force and have that information verified. However, it does not mean that the register needs to be public. The tax and law authorities not just must but should have all this necessary information to deter misuse. I am not clear why it should necessarily be public. The noble Lord, Lord Watson of Invergowrie, referred to the G7, I think, but the document containing the G20 high-level principles of beneficial ownership transparency, which was published after the meeting in Sydney last year, makes no requirement for any public transparency. It makes a requirement for beneficial ownership to be on a register but, in its carefully worded 10 points, it does not suggest that it should be made public. We are in danger of becoming the only country in the whole of the G20 to insist on public disclosure—and one has to ask why on earth we would do that.
Would not it therefore be advisable to defer the requirement to make the information public until after the report required from the Secretary of State in the Bill? That might permit a better assessment of the quality of data being submitted through the self-reporting mechanism and an assessment of the competitive implications for UK businesses once other countries have had an opportunity to decide how they are going to address their compliance with the G20 report.
It is clear, thanks to the long-term economic plan and the success of the coalition Government’s policies, that the UK is an extremely attractive country to invest in. I declare an interest in my professional capacity. I talk to overseas investors all the time who seek to acquire and invest in UK companies. There is unparalleled interest in seeking to invest in the UK. Likewise, I declare that I went on the UKTI trade trip with the Prime Minister to China, where there is an enormous amount of interest from Chinese companies that wish to invest in the UK. We seem to be obsessing over disclosure of their potential investment in UK companies when, should they choose to invest in a limited partnership or directly into real estate, there will not be any disclosure. These investors will simply be deterred from investing in the UK because this transparency of ownership is an alien culture to them. I wonder whether the concerns over privacy will leave them not just dissuaded but unhappy with the actual cost and regulation that it will require, which is not the case for Delaware companies, for example. I fail to understand why a company should have to bear the onus of a request that might be flippant or irrelevant or just unnecessarily nosy.
I thank my noble friends for their amendments and for the wide-ranging debate. It is good that the noble Baroness, Lady Wheatcroft, and the noble Lord, Lord Borwick, added their voices to the Committee’s discussions, which I found very interesting and illuminating. Of course, the common thread in this group is that of access to information in the PSC register, albeit from very different perspectives.
I start by responding on a couple of general points. The noble Lord, Lord Watson, asked about the response to our discussion paper on PSC rights. Last week, I laid a Statement before the House setting out how we will take the policies and discussion paper forward. We intend to publish draft regulations this summer. This sort of consultation, which we have applied throughout the Bill, helps to limit unintended consequences. The noble Lord also asked why a person needs to tell the company how they are using the information. This is essential to ensure that data are used for a proper purpose. It is important to remember that the full date of birth will be publicly available from the company, even though this will not usually be on the public register at Companies House, and we do not want people passing these data on to fraudsters or identity thieves, for example.
There was also a question about the inspection provisions. Concern was expressed that the PSC register would not necessarily be available for use by journalists and NGOs. Any person may inspect the PSC register for a proper purpose. The purpose of the PSC register is to provide transparency of company ownership and control, so a person may inspect the register in the interests of finding out that information, including in the context of journalism, for example. Someone working with a journalist could pass on the information, provided that they had stated the purpose. I agree with my noble friend Lady Wheatcroft that, once things are made public, they are public, but I think that we will reflect on the debate that we have had this afternoon on this point.
My noble friend Lord Flight said that he felt that the protection regime needed extending and that the current proposals were too limited. We are building on the existing directors’ protection regime, which we believe works well—that is, the current one for companies, to which there have been a number of references and of which I have had experience in my company life. It has improved over the years and generally works well. However, as I set out last week, we are considering whether we need to extend it further. The ultimate objective is transparency, so purely commercial reasons, for example, would not be valid.
I now turn to the amendments, starting with Amendment 37D. The noble Lord clearly appreciates the need for the Secretary of State to be able to grant exemptions from the PSC register in genuinely exceptional circumstances. The amendment provides some examples of such circumstances, such as in relation to national security, with which I agree. In these rare cases it would be damaging to require the fact of that exemption to be publicly stated. This could cause people to try to obtain the information in question by other means, which is not what we would want.
Turning to Amendment 44, I know that the noble Lord will want to ensure that civil society is able to obtain PSC information. As my honourable friend Jo Swinson made clear during Committee in the other place, these provisions will not prevent them doing so. The Bill already allows companies to apply to the court to refuse inspection when information is not sought for a proper purpose. This provision will help to prevent misuse of information in the register by fraudsters and those who simply wish to send people junk mail—whoever they are. If the company’s application were upheld by the court, access to the information would be denied.
In Amendments 44A to 44H and 44J, my noble friend Lord Flight obviously comes to the group from a different perspective, seeking to severely restrict the ability of people to inspect a company’s PSC register. I recognise the concerns raised around allowing public access to this information, including the points that my noble friend mentioned—notably the impact on UK competitiveness and personal privacy. However, I remind him that the Government consulted on the question of public access to PSC information and acted on the basis of the responses that we received. I do not think we will be able to agree to an entirely different approach today. It is not our policy to respond to any lobby but to make real and important changes to tackle the criminal use of UK companies, which is a significant problem, made worse in the international digital world. We want to lead in this area, as the Prime Minister has made clear. I hope that the sketch made by my noble friend Lord Leigh proves to be wrong.
Again on privacy, we have carefully considered the impact that this policy has on the privacy of individuals through the conduct of a full privacy impact assessment. That document has been published and is on the GOV.UK website. The assessments indicated that the proposed measures are necessary and proportionate. In reflecting further, it is important that we also revisit that assessment. We firmly believe that a central, public register is the most appropriate option for the UK, and allowing people to access the company’s own PSC register is an important part of that. I will not repeat what I said in opening today, but increased trust is good for business. Making sure that the UK maintains its reputation as a clean and reliable place to do business and invest is very important. We have taken clear steps to protect personal information wherever appropriate.
On effectiveness, which my noble friend Lord Flight raised, we are looking closely at how Companies House and law enforcement agencies can work together to enforce the regime. The criminal sanctions and public nature of the register will also help to deter criminal activity.
On the issue of compliance costs, a final stage impact assessment estimates a net cost to business per year of £97.5 million, which over 10 years is around £1 billion. Those costs are spread over a population of 3 million companies. Of course, some small businesses are not companies and are not covered by this particular provision. In addition, for companies with simple ownership structures that already know their PSCs—that is, the vast majority of companies—the costs will be minimal. For example, the final impact assessment found that there would be a cost of £10 to small, simple companies in updating beneficial ownership information annually, and a cost of £10 in providing information to a central register annually.
On Amendments 47 and 47A, I would have serious concerns about allowing third parties to ask the registrar of companies to review a person’s right to protection. It is important to remember that applications will only be granted in very limited circumstances, for example when someone is placed at serious risk of violence or intimidation as a result of a company’s activities. On that basis, I do not think it would ever be in the public interest to override that decision.
I hope that I have responded to the key questions raised. I have said that we are happy to reflect on the detail of the debate on Amendment 44. I am not sure what the conclusion of that will be, but I listened to what was said today. I hope my noble friend and noble Lords are reassured by this discussion and will agree to withdraw or not move their amendments.
I thank the Minister for her reply. In general, we are reassured. Many things have been discussed today and we will all go away and reflect before Report. There was one moment when the noble Lord opposite mentioned Huntingdon Life Sciences, which made my spine run cold. There was an occasion when a private company in which I was involved, of which I guess I was the PSC, was dealing with Huntingdon. We were leasing computers to it and the animal rights brigade suddenly parked outside my house. That lasted for only a day or two, but it was quite unnerving. However, that is by the by. I thank the Minister for what she said and I beg leave to withdraw the amendment.
Amendment 37D withdrawn.
38: Schedule 3, page 159, line 29, leave out “the specified conditions in”
My Lords, the amendments in this group are minor and technical ones to the measures in the Bill concerning director disqualification and the register of people with significant control, or the PSC register.
Amendments 61 and 102 would ensure that there was reciprocal recognition of certain bankruptcy restrictions between Great Britain and Northern Ireland. The amendments provide consistency to put it beyond doubt that a person made bankrupt by a court in Northern Ireland will be committing an offence if they act as a director of a company in Great Britain.
Amendments 38, 40 and 42 in respect of the PSC register will ensure that we have sufficient flexibility to amend the regulations setting out the nature of a person’s control over a company. They will allow us to describe the nature of control by reference to any interest held in the company and not just to the specified conditions.
Amendment 50 amends paragraph 26(2) of new Schedule 1A to ensure that, if changes are made by way of regulations to Part 1 of Schedule 1A, consequential changes can also be made to Part 2. This will ensure that the legislation, if amended, can remain coherent and consistent. I hope that noble Lords will support these amendments. I beg to move.
Amendment 38 agreed.
Amendment 39 not moved.
40: Schedule 3, page 159, line 40, leave out “the specified conditions in”
Amendment 40 agreed.
Amendment 41 not moved.
42: Schedule 3, page 160, line 6, leave out “the specified conditions in”
Amendment 42 agreed.
Amendments 43 to 44J not moved.
Amendments 45 and 46
45: Schedule 3, page 166, leave out lines 40 to 46 and insert “to a fine not exceeding level 3 on the standard scale and, for continued contravention, a daily default fine not exceeding one-tenth of level 3 on the standard scale.”
46: Schedule 3, page 168, leave out lines 17 to 23 and insert “to a fine not exceeding level 3 on the standard scale and, for continued contravention, a daily default fine not exceeding one-tenth of level 3 on the standard scale.”
Amendments 45 and 46 agreed.
Amendments 47 to 49 not moved.
50: Schedule 3, page 177, line 36, at end insert—
“( ) in consequence of any provision made by virtue of paragraph (b), to change or supplement Part 2 of this Schedule so that circumstances specified in that Part in which a person is to be regarded as holding an interest in a company correspond to any of the specified conditions, or would do so but for the extent of the interest.”
Amendment 50 agreed.
Schedule 3, as amended, agreed.
Clauses 79 to 81 agreed.
Schedule 4 agreed.
Clauses 82 and 83 agreed.
Clause 84: Requirement for all company directors to be natural persons
Amendment 50A not moved.
Clause 84 agreed.
Clause 85 agreed.
Clause 86: Application of directors’ general duties to shadow directors
51: Clause 86, page 60, line 29, leave out from “company” to end of line 30 and insert “to the extent it is reasonable, just and equitable for any such general duty to apply.”
My Lords, Amendment 51 seeks to address the issue of the duties of shadow directors and to limit the extension of their duties to what is fair, reasonable and appropriate. The current wording in the Bill goes too far in making the condition that the duties apply,
“where … they are capable of so applying”,
whatever that actually means. The territory relates to the doctrine of avoiding conflicts of interest and, in particular, the situation for full directors, but unfortunately the ground rules there do not apply to shadow directors who sometimes may not even be aware, subjectively, that they are shadow directors. This amendment seeks to tie the conditionality of the duties of shadow directors to what is reasonable, just and equitable. I understand that the Government are sympathetic to these issues but may prefer to address the territory via regulations. As the Bill stands, I suggest that the position of shadow directors is not reasonable. I beg to move.
My Lords, Amendment 51, which is tabled in my name and that of my noble friend Lord Flight, is to Clause 86 and concerns shadow directors. Shadow directors are individuals who influence a company without actually being a director. I do not think I have to declare an interest as being a shadow director of any company, as far as I am aware, but—
That is the point. Shadow directors can be significant shareholders who have chosen not to sit on the board—in particular, a lender who has become active in the affairs of a business—or simply someone in whose interests and according to whose instructions the directors act, without the person actually being a director. The Bill seeks to clarify the rules governing shadow directors so that people do not deliberately assume that status in order to avoid a lighter touch corporate governance regime. Indeed, the definition of shadow director is not changed by the Bill, only the extent to which they should enjoy the same duties as directors.
At present, the duties of directors apply to shadow directors to the extent permitted by common law rules and equitable principles. These are set out in Section 170 to 177 of the Companies Act and offer up a code of conduct. Clause 86(3) would enable the Secretary of State to make regulations to apply any duties of directors to such shadow directors. The Bill makes provision for the duties of directors to apply to shadow directors,
“where … they are capable of so applying”,
as my noble friend said. This wording, quite apart from adding certainty, will do the opposite and leave the courts little discretion to allow them to apply said duties in a proportionate manner. This wording, “capable of so applying”, amounts to some sort of blanket application of duties from one to the other since it is difficult to conceive of a situation where the duty would be incapable of applying.
Of particular interest is the duty to avoid conflicts of interest. It is not often possible to prevent a conflict from arising, and therefore the prima facie duty to avoid conflicts is typically addressed by having some mechanics: for example, one frequently sees a director excusing himself from any meetings considering such matters which might present a conflict and thus being prevented from voting. The Companies Act specifically considers these mechanisms but, of course, it will not be possible to apply them to shadow directors, who may not seek to be shadow directors and may not even be aware that they are. This could result in an automatic breach of the duty by entirely innocent shadow directors, so I would argue that more flexibility is required.
This is why the amendment offers up an alternative wording, which says that duties will apply,
“to the extent it is reasonable, just and equitable for any such general duty to apply”—
it certainly sounds reasonable to me—and caters for examples such as conflicts of interest. It still allows for the Secretary of State to make an intervention, as well as giving the courts the requisite discretion, but it will prevent the inherent unfairness in the situation that I have just described.
My Lords, in responding to Amendment 51, I thank my noble friends Lord Flight and Lord Leigh. Like my noble friend Lord Leigh, I have been a director in the past, but never a shadow director. It may be helpful if I set out how directors’ general duties currently apply to shadow directors and how Clause 86 will improve this position.
The current provision in Section 170(5) of the Companies Act 2006 states that the directors’ general duties apply to shadow directors to the extent that the,
“common law rules or equitable principles so apply”.
This makes it confusing for anyone who may be acting as a shadow director to know whether any duties apply to them and the extent to which those duties apply. Clause 86 clarifies that the same standards of behaviour are expected of shadow directors as of appointed directors, wherever possible.
I am sympathetic to the intention behind this amendment that shadow directors should not be put in a disadvantaged position compared to appointed directors. The Government recognise that there may be circumstances where the directors’ general duties may not be capable of applying to shadow directors in the same way as appointed directors. One example could arise in the context of the duty to avoid conflicts of interest, as set out in Section 175 of the Companies Act 2006. In principle, we would expect any director to avoid a conflict of interest wherever possible. However, Section 175 of the Companies Act also recognises that there are cases in which a director should be able to act in cases of conflict. It therefore allows for authorisation by the company for a director to continue acting on a matter where they have a known conflict in certain circumstances. A shadow director may not be able to seek authorisation in this way.
Clause 86 does not introduce a blanket application of the duties to shadow directors. A shadow director will be able to rely on Clause 86 to demonstrate that, in their circumstances, a duty or part of a duty is incapable of applying to them. Officials have discussed this with the British Private Equity & Venture Capital Association, and in light of the points that have been made, I now wish to consider the issue more fully and reflect on whether there is a need to adapt the way the general duties of directors apply to shadow directors so that they do not find themselves in a worse position than directors. This would be achieved by using the power already included in Clause 86(3). I will write to noble Lords before Report to give an update on my conclusions. I hope that my noble friends are reassured by this explanation and that, on this basis, my noble friend Lord Flight will withdraw his amendment.
Amendment 51 withdrawn.
Clause 86 agreed.
Clauses 87 and 88 agreed.
Clause 89: Duty to deliver confirmation statement instead of annual return
51A: Clause 89, page 62, line 40, leave out “853I” and insert “853H”
My Lords, the amendments here in my name—as I made clear when I was speaking to Amendments 44A to 44F—go together. They are all really part of the same argument that the register should not be public but should be available to the police, and the taxation and security authorities. Therefore, it would be redundant to repeat the points that I have already made. I beg to move.
I draw attention to my interests recorded in the register and my connection to small businesses. This section of the Bill has our broad support. We welcome any attempt to reduce the burdens of reporting while maintaining the integrity and transparency required to make such registration effective. Clause 89 provides for a new filing requirement instead of the annual return. The new confirmation statement is outlined in some detail in the Bill. I am bound to say that I did not find the old annual return such a hardship, and I hope that I will feel the same with the new statement.
Amendment 54B is a probing amendment. It ensures that sanctions would be the same for companies that do not have and maintain a record of their PSCs and those that did not provide information to the public register. The intention of the amendment is to help to probe and to ensure that the information makes it to the register and can be used meaningfully. We would be grateful if the Minister will set out the thinking behind the difference between these two and why the enforcement is slightly different and provide us with an understanding of how the Government see the mechanisms for enforcement and how they will work over time.
My Lords, I am grateful to my noble friend for so graciously moving his amendment and to the noble Lord, Lord Mendelsohn, for his remarks. The confirmation statement in Clause 89 is a replacement for our friend the annual return to Companies House. It will contain important information about the company, in particular about the register of people with significant control, which we have just been debating.
Amendment 54B would increase the criminal penalties we provide for not filing a confirmation statement at Companies House. It is important that penalties should be sufficient to deter and sanction those who do not provide Companies House with a confirmation statement. However, I do not believe that increasing the penalty is necessary in this case, which I think is what the noble Lord may be seeking. Enforcement activity by Companies House is focused on ensuring that information is delivered to it and put on the public register in a timely way. Companies House sends reminders to the company in good time before the company is due to file the current annual return. If a company fails to deliver information, the first aim of Companies House is to seek compliance. In the event of continued non-compliance, Companies House prosecutes the company and its directors. Last year, Companies House prosecuted almost 2,000 companies for failing to file the annual return. This approach to enforcement works. Compliance rates for the annual return are currently running at 98%.
The penalties in Parts 7 and 8 are designed to be consistent with the level and approach of existing Companies Act penalties. The penalty for failing to deliver a confirmation statement to Companies House is equivalent to the existing penalty for failing to deliver an annual return. The Government do not consider that there is a case to increase these penalties. Of course, we take the failure to file information at Companies House extremely seriously. It is important that people should be able to obtain up-to-date information about companies with which they may wish to do business. A continuing failure to deliver a confirmation statement could incur a daily default fine of £500. This would quickly add up to a significant amount. I understand concern that there should be sufficient incentives to ensure that information about people with significant control is put onto the public register. In practice, however, we judge a prison sentence to be highly unlikely to be proportionate to failing to deliver a confirmation statement, even were the law to permit the judiciary to impose such a penalty. It is, of course, important that people should have confidence in the public register. When necessary, enforcement includes the prosecution of criminal activity. Consequently, we consider that the sanctions set out Clause 89 are sufficient. I hope that explanation helps to clarify issues and that my noble friend feels able to withdraw his amendment.
Amendment 51A withdrawn.
Amendments 51B to 51D not moved.
Amendments 52 to 54
52: Clause 89, page 67, line 34, after “exceeding” insert “the greater of £500 and”
53: Clause 89, page 68, line 1, after “exceeding” insert “the greater of £500 and”
54: Clause 89, page 68, line 7, at end insert—
“( ) Until section 85(2) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 comes into force, in subsection (4)(b)(i), “a fine” is to be read as “a fine not exceeding level 5 on the standard scale”.”
Amendments 52 to 54 agreed.
Amendments 54A and 54B not moved.
Amendments 55 and 56
55: Clause 89, page 68, line 41, after “exceeding” insert “the greater of £500 and”
56: Clause 89, page 69, line 14, after “exceeding” insert “the greater of £500 and”
Amendments 55 and 56 agreed.
Clause 89, as amended, agreed.
56A: After Clause 89, insert the following new Clause—
(1) This section applies where the company is a charitable company.
(2) The Registrar must agree with the Charity Commission a common form of annual return for both organisations.”
My Lords, I am sorry that I am on the wrong side of the Moses Room this afternoon, but all the chairs were full when I arrived earlier, but never mind.
The amendment inserts a new clause after Clause 89 and is born of long frustration at the Government’s failure to force through a simple deregulatory change. If someone sets up a charity, it will normally be the case that it will be set up as a charitable trust; trustees will be appointed who will operate in a normal way under the supervision of the Charity Commission. The drawback of this is that the trustees have unlimited liability, which is not always particularly attractive. Therefore, to avoid that you can change from being a charitable trust to being a charitable company, which gives you the advantage of limited liability. However, that has a drawback because you then come under two regulators: the Charity Commission for your charitable activities and Companies House for your limited company activities. Both regulators require annual returns to be made to them and require largely overlapping information. If one was to draw a Venn diagram, one would find that there was relatively little space not covered by both regulators’ requirements.
In 2012, a report that I did for the Government recommended that the two forms could and should easily be merged. The Government accepted that recommendation, but I have to say that since that date progress has been glacial. In fact, that would be altogether too rapid a description of the progress that is being made. There has been lots of stuff about overlapping jurisdictions and incompatible IT systems, all of which to my mind smells of the long grass, if the long grass does smell. So I tabled this amendment to suggest that the Minister should be required to ensure that a common form is agreed between the two regulators, the Charity Commission and Companies House. I do not suppose for a moment that the Minister will accept it, but it is an attempt to draw attention to very slow progress in one part of her department.
How many companies the measure would cover is not exactly known, but the estimate is between 20,000 and 30,000 companies, which means about the same number of forms, if we could make this change. Deregulation requires a scalpel, not a meat axe, and this is a scalpel which I am offering to my noble friend on the Front Bench, as it would make a significant difference to 20,000 to 30,000 charitable companies, a difference to which the Government have been committed for some little time but which so far seems to be entirely stillborn as an idea. I beg to move.
My Lords, I support this amendment but must declare an interest. I happen to be a trustee and director of just such a charitable company and charity as my noble friend suggests. I cannot pretend that it is a huge burden to fill in both separate forms but this is exactly the sort of deregulation that we should be looking for—and so do the Government, or at least I thought they did. How are we getting on with the glacial process, as my noble friend described it, of trying to harmonise these two forms?
I declare the same kind of interest as my noble friend who last spoke. There is sometimes confusion in Government about regulation. Many regulations are extremely good and opposition to regulation as a kind of mantra is peculiarly boring. Unfortunately, we have just gone through a Bill in which some of the bits of deregulation were of no importance whatever, yet we still have bits of regulation like this, which could make a difference and could easily be improved. The sort of regulation that people most dislike is when they have to do the same thing at least twice. This is one example of that. My noble friend is to be congratulated on raising it on this occasion. I hope that my noble friend the Minister will be prepared to go a little further than he suggested that she might, because this is what annoys people. I know it does not matter very much, but it is one of a whole lot of things that annoys people that add up to something that does matter. If we could just get rid of this, it would also suggest that the Government and authorities were competent, whereas this glacial movement possibly suggests the opposite.
My Lords, I welcome the input of my noble friends Lord Cope, Lord Deben and Lord Hodgson, on this deregulation issue. Clause 89 replaces the current annual return for companies with a new requirement for companies to confirm that the information held on the register of companies is up to date. Companies will no longer have to restate information if there has been no change. They will have more flexibility about when they confirm that their company information is up to date.
Charitable companies are currently required to file a separate annual return with the Charity Commission. Clause 89 does not change that position. The information required by the Charity Commission in its role as a charity regulator is not the same as that required by the Registrar of Companies. Therefore, the information required in the two returns differs. For example, a charity’s annual return to the Charity Commission contains financial information taken from the charity’s accounts and narrative information on the charity’s aims and activities. Charities with an income of more than £25,000 also need to enclose copies of their accounts with the annual return. That is not to say, of course, that nothing can be done to reduce the reporting burden on charities.
In December 2012, the Charity Commission began registering charities under a new legal form—the charitable incorporated organisation, or CIO. The aim of the CIO structure is to give charities the advantages of incorporation without all the administrative burdens associated with being a company. For example, CIOs do not need to register with Companies House but need send only an annual return to the Charity Commission. In 2013-14, the Charity Commission registered 1,331 CIOs. We expect the number of charities choosing this structure to increase in future. As the Government said in our response to the noble Lord’s review of the Charities Act, the Charity Commission has accepted his recommendation that we should continue work on creating a single reporting system for charitable companies.
The noble Lord, Lord Cope, talked about deregulation. I understand that Companies House will meet the Charity Commission in March to explore this further and will give further detailed consideration to ways in which the implementation of the confirmation statement can be aligned with the Charity Commission’s requirements—for example, with a joint filing approach similar to that used by Companies House and HM Revenue & Customs. This would allow charitable companies to enter data once to satisfy the requirements of both Companies House and the Charity Commission, and it would reduce the administrative burdens on these companies. In addition, information provided by charities in their accounts could be made available to Companies House and the Charity Commission without the need for the charitable company to provide this information separately. I will ask the organisations to write jointly to the noble Lord after their meeting setting out how they will take this forward.
I am pleased to say that work is in progress on this matter. I hope that the noble Lord has found my explanation reassuring and, on that basis, will withdraw his amendment.
I am extremely grateful to my noble friend and I congratulate his officials on drafting a speaking note of brilliant obfuscation, which manages to avoid most of the issues. The one point that he did make, which was about the public benefit, obviously occurs only in charities’ accounts; it does not occur in an ordinary company’s accounts. That is the one difference, and that surely can be accommodated in a common form and does not represent an insuperable difficulty.
The second red herring concerned the charitable incorporated organisation—the CIO—which has now been in existence for just over 12 months. There is, of course, a problem for companies. At present the Charity Commission will not accept conversion because of the volume of work; it simply cannot take on more than a certain number of CIO applications at a time. Indeed, there is no reason why we should force people who have set up charitable companies to become CIOs. It is looking at the problem through the wrong end of the telescope to say that they have to change their arrangements when, quite simply, a regulatory action by my noble friend would solve the problem.
Finally, my noble friend said that he was going to invite the two regulators to write to me setting out how they would take this forward. However, it is now 18 months since the Government accepted the recommendation that I made a year before that. Do we not yet have a plan from Companies House, after 18 months? Surely, we could find a way of acting with a little more urgency. I urge my noble friend to act as the Dyno-Rod man on this matter to ensure that we move the whole issue forward; otherwise, in two or three years’ time, we will still be discussing how difficult it is, and we will be talking about all the problems that he has been informed about by his officials.
I would like my noble friend to take a personal interest rather than merely ask the organisations to write to me, which means that the issue will certainly be put in the long grass. However, I am grateful for his reply and I beg leave to withdraw the amendment.
Amendment 56A withdrawn.
Clauses 90 and 91 agreed.
Schedule 5: Option to keep information on central register
Amendments 57 to 60
57: Schedule 5, page 199, leave out lines 41 to 47 and insert “to a fine not exceeding level 3 on the standard scale and, for continued contravention, a daily default fine not exceeding one-tenth of level 3 on the standard scale.”
58: Schedule 5, page 201, leave out lines 40 to 46 and insert “to a fine not exceeding level 3 on the standard scale and, for continued contravention, a daily default fine not exceeding one-tenth of level 3 on the standard scale.”
59: Schedule 5, page 205, line 42, after “exceeding” insert “the greater of £500 and”
60: Schedule 5, page 208, line 8, after “exceeding” insert “the greater of £500 and”
Amendments 57 to 60 agreed.
Schedule 5, as amended, agreed.
Clauses 92 to 94 agreed.
Schedule 6 agreed.
Clauses 95 to 100 agreed.
60A: After Clause 100, insert the following new Clause—
“Director’s duties: factors to be considered in takeovers and mergers
In applying the City Code on Takeovers and Mergers, the offeree board circular must set out the opinion of the board on the offer (including any alternative offers) and the board’s reasons for forming its opinion which must include its views on—(a) the likely consequences of any decision in the long term,(b) the interests of the company’s employees,(c) the need to foster the company’s business relationships with suppliers, customers and others,(d) the impact of the company’s operations on the community and the environment,(e) the desirability of the company maintaining a reputation for high standards of business conduct, and(f) the need to act fairly as between members of the company.”
I shall speak also to Amendment 60B. The Bill offers us a tremendous opportunity to look at directors’ duties. It is a useful time to examine some of the areas which have been a matter of public debate and which have a bearing on our deliberations. We have tabled two probing amendments for consideration.
At Second Reading in the other place, the Secretary of State raised concerns about whether in mergers and takeovers there are the correct provisions in the code under which companies act. Indeed, public concern over the takeover of Cadburys by Kraft and the AstraZeneca/Pfizer situation led the Secretary of State at that time to say that this Bill would address those matters.
Since that time, the Takeover Panel has been hard at work bringing forward a tightening of directors’ duties in respect of takeovers and of undertakings made during takeovers. The Takeover Panel has long said that a target company’s directors may take factors other than price into account. We are all aware that very often the commentary has been that there is always pressure to focus on price alone. The Takeover Panel has now amended the code to make that point explicit and to allow boards not to consider the offer price as the determining factor. This is progress, but we retain concerns that are not assuaged. This offers boards partial protection when the price alone does not meet all the considerations for the long-term interests of the company or its shareholders.
In relation to binding undertakings, the Takeover Panel’s suggestions are to be welcomed. We agree with a distinction being drawn between post-offer undertakings, which are binding, and intention statements, which are not. Intention statements are required to be accurate statements of the parties’ intentions at the time they are made and to be based on reasonable grounds. The panel will require clarity by companies making an offer, which should help boards to consider their duties properly when evaluating bids made by those companies.
It would be useful if the Minister could provide us with her assessment of whether the changes made by the Takeover Panel are suitable and adequate and whether they meet all the action planned within the context of the ambition set out by the Secretary of State in his comments at Second Reading. It would be interesting to have the Minister’s assessment of the extent to which the Government consider that if such additions were in place at the time they would have dealt with AstraZeneca/Pfizer and Kraft/Cadbury situations and what impact they would have had on them.
Amendment 60A probes these matters further. The current position is governed by note 1 to Rule 25(2) of the takeover code. Our amendments suggest an alternative framework on which we seek the Government’s views. As it is currently defined in negative terms, the code does not limit the factors or provide a framework under which the board may consider these matters. While not limiting them, we propose factors that should be positively taken into account. We are keen to hear the Government’s views on such a formulation.
Amendment 60B takes forward an existing arrangement that incentive payments should be identified. As the shadow Secretary of State said in another place, there are clear cases and concerns that the lucrative nature of advising on such arrangements creates incentives which may not be desirable and lead to poor outcomes. Our change would amend the current situation, which is that they are identified in the offer document. That is in the code under Rule 24(16). We make clear the need to disclose in full payments which are contingent on the outcome. This will provide for an accurate reflection of what is paid, as opposed to the current arrangements, which relate only to fees and expenses.
I would be grateful to know whether the Government would be minded to change the current rules to ensure proper transparency. In addition, although this is not in the amendment we have proposed, we would be interested in whether the Government would be sympathetic to finding the right place for the reporting of such payments—the actual payments made, that is the fees, expenses and incentive payments—to be made in the context of a transaction. I beg to move.
I am not sure that it is in the register of interests but I further disclose that I used to sit on the Takeover Panel appeal committee some eight years ago, as the alternate to the president of the Institute of Chartered Accountants and in my capacity as the chairman of the Corporate Finance Faculty—finally, I stand up in your Lordships’ House to speak on my one area of expertise. Having said that, the vast majority of my time is spent working with private companies rather than public companies, but I thank the noble Lord, Lord Mendelsohn, most sincerely for raising a matter on which I can speak.
I take this moment to commend the Takeover Panel on the role it undertakes in City life and in the UK economy. It is an extraordinary organisation, which works extremely effectively and well, and which is genuinely the envy of the world. When overseas—in particular, American—potential purchasers of UK companies come to these shores, and the nature and working of the Takeover Panel is explained to them, they are absolutely amazed. They cannot understand how it is we can have such a system, where an organisation exists without any real power and without any real teeth but simply survives through the ability to cold-shoulder an adviser. It is a phenomenon which defies real explanation. Many people would be extremely reluctant to see the good workings of the Takeover Panel interrupted by legislation in any way.
In particular, Rule 24.16(a) provides that an offer document must contain an estimate of, first,
“the aggregate fees and expenses expected to be incurred”—
as has been suggested—and then, separately, a breakdown of those fees and expenses by category, including,
“financial and corporate broking advice”.
Rule 24.16(b) provides that:
“Where any fee is variable between defined limits, a range must be given in respect of the aggregate fees and expenses … setting out the expected maximum and minimum amounts”.
The takeover code already requires the matters specified in Amendment 60B and covers all situations where the payment of such fees would be contingent on the outcome of the offer. It specifies the conditions under which they are payable and the estimated value or range of those payments. We have taken the trouble to look at the last 10 documents that were live in respect of such takeovers, and they all included the fees, costs and expenses—some of those seem high, but contingent fees will be high. They are all there, in the documentation. It may be that Amendment 60P is not required as envisaged.
My Lords, I thank the noble Lord for his amendments, the clarity of his introduction and the opportunity to briefly debate the matter of company takeovers. First, in view of his wider points, I will reflect on the changes that the Takeover Panel has made, both recently in response to AstraZeneca/Pfizer, and in response to Cadbury/Kraft earlier in the Parliament, a deal which, as a businesswoman at the time, rather shocked me. I share my noble friend Lord Leigh’s warm words about the strength of the Takeover Panel—we are lucky to have it in this country.
Noble Lords will recall that the Cadbury/Kraft takeover raised widespread concerns about our takeover regime. It was to tackle those concerns that the panel then consulted and made four key changes. The first was to increase the protection for target companies. Potential bidders now have only 28 days to put up or shut up. The second change was to strengthen target companies’ positions. The code is now explicit. The target boards can consider another longer-term consideration, and not only price. In addition, most inducement fees were banned, and I will come back to that. The third change was to improve transparency by requiring greater disclosure of the bidder’s plans, disclosure of offer-related fees and greater detail on the financing of the offer. The final change was to give greater recognition to employees’ interests. Employer representatives were also given an improved ability to make their views known.
More recently, AstraZeneca/Pfizer raised other concerns about whether companies could really be trusted to honour the commitments they made during a takeover bid. In response, the panel has moved quickly, consulting on and adopting changes to the code which will allow companies to voluntarily make a new form of commitment—called a post-offer undertaking—with which they will be required to comply, subject to expressly stated qualifications or conditions, and which will strengthen the panel’s ability to monitor compliance with such undertakings by enabling the appointment of an independent supervisor and requiring written reports.
All of these changes mark a significant strengthening of our takeover regime. This will continue to make the UK an attractive location for foreign investors while giving shareholders and the wider public the confidence they need that the UK’s takeover framework operates in society’s wider interests. It also underlines the importance of our acting with care to ensure that we do not inadvertently undermine the internationally acclaimed takeover regime, as the noble Lord, Lord Leigh, described it.
To respond to the noble Lord’s question, these changes also meet the ambitions set out at Second Reading by the Secretary of State, which is why we are not proposing legislation in this Bill.
The noble Lord, Lord Mendelsohn, asked what difference these changes would have made, I think in relation to Pfizer. The changes that have been made to the code would have meant that a formal mechanism for giving post-offer undertakings would have existed. Stakeholders would have been clear what undertakings had been given, how they would be monitored and in what circumstances they could be set aside. For instance, Pfizer would not have been able to say that its commitments would be subject to a “material change of circumstances” condition or “subject to its fiduciary duties”. There would have been much greater clarity about what Pfizer’s commitments meant and much greater certainty that they would be honoured.
Turning to the specific amendments, Amendment 60A deals with directors’ duties. The Government agree with the noble Lord’s intention behind the amendment. As we all know, directors should at all times comply with their duties as directors. This includes during takeovers, as directors of both a target company and an acquiring company. Most people who have served as directors are aware of this. I am pleased to reassure the noble Lord that the takeover code already allows for this in practice and that there is therefore no need for further legislation. Section 172 of the Companies Act already makes it clear that directors have a general duty to promote the success of the company. This includes, among other things, having regard to the six matters listed in the amendment. This duty applies at all times, including, obviously, during takeovers. Moreover, Rule 25.2 of the code already requires board circulars of offeree companies to explicitly set out the board’s opinion on the offer’s effect on all the company’s interests, including specifically employment.
I accept that this is not the same as requiring a board to set out its views on how its opinion meets every factor listed in Section 172 of the Companies Act but, in forming its opinion, the board will need to consider those factors among other matters and, where appropriate, will be likely to set out its view of how it is affected by the others.
As I alluded to earlier, it is also important to note that the code was amended in 2011 to make explicit that the board of an offeree company is not required to consider the offer price as the determining factor in a bid and can take into account any other factors it thinks relevant. This was to make sure that target companies can take account of factors other than short-term interests in bid situations—in other words, that they act in the best interests of the company. There is an inherent difficulty in making statements that relate to the effect of another party’s—the bidder’s—future conduct. There has to be a real risk that this would simply result in boilerplate disclosures and those of us who have been directors know the risk of that. It is therefore questionable whether, in practical terms, the proposed amendment would result in meaningful disclosures being made by target boards in the majority of cases.
Amendment 60B requires disclosure of success fees by the offeror company. I agree that it is essential that takeover bids should proceed on the basis of their economic fundamentals. For this reason, we welcome the changes made to the takeover code by the Takeover Panel in 2011 to ban inducement fees and other means of encouraging the target board to do a deal with the bidding company. Alongside these changes, a new requirement was introduced for much greater transparency in the fees that the bidding company would be paying to its professional advisers. A subsequent review in 2012 carried out by the code committee indicated that these changes are generally working well. Success fees may encourage advisers to prioritise deals that they believe will succeed. I accept that, in theory, they may create incentives for advisers to promote deals that may not be in the long-term interests of their clients. The Government are not, however, aware of any evidence that skewed incentives on the part of advisers have recently led to poor bids. Noble Lords will know that we try to be evidence-based in legislating. If the noble Lord has any evidence we would, of course, be interested to receive it. I hope the noble Lord has taken some reassurance from that rather long and comprehensive answer and will agree to withdraw his amendment.
My Lords, I thank the noble Lord, Lord Leigh of Hurley, for his very useful intervention. As someone who is a doyen of the corporate finance industry and whose business office is just round the corner from my own, I am aware that his reputation is very distinguished in these matters.
Indeed, I thank the noble Lord for what he had to say in relation to incentive payments and their provision in the code as overseen by the Takeover Panel. As I said, this takes forward an existing arrangement that incentive payments be identified and I hope there was some genius in our crafting that allowed it to extend slightly further than just the situation, if there was to be a situation, with an offer where payments were to be considered during the course of a transaction, as is sometimes the case, that they would also have to be disclosed in some format. It is also why I referred to whether there should be some reason to report after the fact as well.
I am very grateful to the Minister for her responses to this, which were very helpful. I want to make a couple of things very clear. We will consider her comments much more carefully. It is certainly true that one wants to make sure that any disclosure is meaningful and that there is very limited boilerplating—as we have both been in business we know an awful lot of boilerplating takes place. Currently, I would say from this side we see that the argument could be applied to both situations equally but we will take that back and consider it further.
In relation to the incentive payments, that is an invitation that will be very hard to resist and over time I am sure that we will come forward with that. In general, the advisory market is probably one—even though this may well be a case of poacher-cum-gamekeeper too much—where the whole market requires some broader assessment and elements of competition and transparency in that would be not unopportune. However, this is not the time for that and these are matters that we may return to in due course. In the current circumstances I beg leave to withdraw the amendment.
Amendment 60A withdrawn.
Amendment 60B not moved.
Clauses 101 and 102 agreed.
Clause 103: Determining unfitness and disqualifications: matters to be taken into account
60C: Clause 103, page 84, line 5, leave out from “to” to end of line 6 and insert “the affirmative procedure”
My Lords, I will speak also to Amendment 60D. First, I want to set out our support for the introduction of this clause. I will then briefly set out our amendments and raise some of the recommendations of the Delegated Powers and Regulatory Reform Committee that we support.
The Government are to be congratulated on bringing these matters forward. They address a number of weaknesses that have been identified as individuals have used ever more sophisticated ways either to continue to operate while in breach of the intent of the current law or to operate in ways that avoid it. There are some very difficult drafting challenges in these clauses and we may wish to return to these matters later with some more considered amendments. Today, we would like to raise a number of issues and get the Government’s view and a temperature check.
During our examination of the clauses for this Committee and in our discussions with small businesses, we were struck by the concern expressed by some about the problems of rogue traders. While this affects some sectors more than others, there was a much stronger feeling than we expected that this matter required strong legislative action. This does not mean that there is any appreciation of the scale of the problem or much evidence that the situation is acute or even getting progressively worse. Yet small businesses expressed the view, based on the risks that consumers take, that consumer confidence would be higher if the regime against rogue traders was seen and understood to be stronger than it currently is. In other words, small businesses sometimes feel the impact of rogue traders to be far greater than the actual consequences of them; they cast a shadow over some small businesses. If there was much greater and stronger consumer confidence that the regime available would deal with rogue traders, small businesses would be better off.
It was only when my attention was drawn to the Mail on Sunday this Sunday that this matter became very live. It is interesting from this side to say the “Mail on Sunday”, but anyway. There is a piece in the financial part of the paper written by Tony Hetherington, who is,
“Financial Mail on Sunday’s ace investigator”.
He covers a number of important matters. This Sunday, he identified a number of issues relating to rogue traders. I draw noble Lords’ attention to two stories. In one particular case, an individual ran a company,
“whose proper title was Palm Oil Investments Limited, but in June last year he changed its name to Quick Payroll Solutions. It still appears to be in business, but for how long is anyone’s guess”.
“failed to file accounts that were legally due in 2013, let alone accounts due more recently for 2014. These are offences and it will be no surprise if Companies House strikes off his business”.
Tony Hetherington writes:
“I do not suppose this will bother”,
“He was a director of a rip-off diamond investment company, Elite Gems Limited, which went bust in 2013. And he was also a director of scam carbon credit company Charles Stratton Limited, which has not filed any accounts since it was set up in 2011. It is about to be struck off”.
“It would be nice to think that at some point the authorities will catch up with,
“and either disrupt his activities or ban him from running future businesses, however I am not holding my breath”.
In relation to another series of companies—this is an important point—he identifies:
“Four companies involved in selling investment land with false claims about its development prospects”.
“wound up in the High Court after they cheated investors out of £3.3 million. Complete Building Systems Limited, Rawtenstall CBS Limited, Evesham CBS Limited, and Hounslow West London Limited were linked to an earlier business, The Property Partnership”.
Hetherington had previously warned that this was,
“part of a network scam land firms that included Nationwide Land Developments, Burnhill Land, Portfolio Land Acquisitions, and Elite Land Developments. All have ceased trading and five bosses have been disqualified from acting as company directors.”
The four companies were able to cheat investors out of £3.3 million, but a lot of that money went into commission payments to sales staff, including a number of central figures behind a scam carbon credits investment company, Carbon Green Capital. These individuals were also behind a wine investment business, DS Vintners. The registered director of all four of the latest scam companies is another individual, who also pocketed a large sum. He was the named director when the others were unable to be, based on their previous conduct. Current measures do not seem to be effective or to deal with some of the ways in which people get round them.
In relation to the Bill, we are very keen to know about a number of clauses and how they would operate. We are particularly interested in how the Government see Clauses 104 and 107 relating to reporting on the officeholders of insolvent companies and the operation of compensation orders, and in particular to what extent they see the use of these provisions, at least in the short term. We warmly welcome the review from the Delegated Powers and Regulatory Reform Committee of the matters to be taken into account when determining fitness to be a director. Clause 103 replaces the provisions of the Company Directors Disqualification Act 1986 and allows for the Secretary of State to modify the schedule which would identify the factors taken into consideration in disqualification. The Government chose the negative procedure to lower parliamentary scrutiny on the basis that the power would be used only to highlight certain factors and behaviours that the court would in any event have discretion to take into account. Interestingly, the affirmative procedure is kept, without any explanation, for Northern Ireland.
At the heart of the Government’s argument is that courts have discretion over many things. However, we believe, as did the committee, that it is important to establish that they are required to take these matters into account. Amendment 60D broadens the matters to which the court must have regard when determining whether a person should be disqualified as a director. It asks that the court makes a judgment if the person holds the position of non-executive director. This suggestion looks at a situation where an individual may have multiple directorships with very different characters. There is a difference between the role and function of directors of small private companies and that of directors of large listed and other entities. Indeed, the role of non-executive director has a very particular character.
I make it clear that we are not trying to make being a non-executive director less attractive. In general we make the observation that non-execs play an essential role. They should be properly supported by companies and their remuneration should be commensurate with the duties that they hold, but we believe that there need to be appropriate tools to ensure that the responsibilities are undertaken appropriately. However, there is a difference between being an executive director and a non-executive director. As the Bill currently stands, there may be grounds and circumstances where it is appropriate for a disqualification to be considered in relation to the role of individuals as non-executives, and this should be treated and considered separately from other roles. Many noble Lords have seen many examples in the past but there is a powerful one in relation to the banking sector, where a number of people took on non-executive responsibilities, different from the executive responsibilities that they had in other businesses, and they did not perform their duties with a great deal of honour or credit.
There is some crossover with other provisions—none of which is a reason not to do this but all of which should be considered, as each has its own distinctive approach. For example, non-execs in the financial sector are also looked at under the FCA regulatory regime. As we saw from the criticism levelled against the FCA for the way it handled the banks, there is a strong issue of public confidence in these matters that should be taken into account in relation to directors’ disqualifications and the processes around that.
There were some drafting challenges with bringing forward a statutory regime that prevented directors being non-exec directors of a public company but left them free to be directors of a private company. It may be the case now that they would be and should be—certainly where it is appropriate and in most cases —disqualified from both, but there should be a more flexible option where a particular set of circumstances can be appreciated; for example, where a hugely capable and successful business leader by dint of the characteristics and business approach and possibly style that has made them successful is not able to act effectively within the role of governance. We would hope that this approach would also have a chilling impact on the selection of such individuals as non-executives.
There could be a case to add the facility to this legislation to ban a director specifically from taking public appointments where the view is that, because of their incompetence as a non-executive, they are not fit to take on such a role for a particular period. We would be very interested to hear from the Minister her impressions of the principles and potential practice of such amendments. I beg to move.
I thank the noble Lord for the amendments in this group. He will perhaps be interested to know that we had a sweepstake to try to work out what he was getting at with these amendments. I am afraid we were not particularly successful, so I will make two or three comments on the amendments, which we looked at objectively in terms of the way that they had been drafted, and may take the opportunity to write to him afterwards to pick up some of the points, including the good points he made about rogue trading, which is a concern. The examples he drew our attention to were new to me. He asked what the Government are doing about repeat offenders in this area. The short answer is lots, including taking account of previous failures. The effect of Clause 103 will be to require the court to take misconduct and previous failures into account when deciding whether a director is unfit, especially where it demonstrates a pattern of unfit conduct through a number of companies.
Amendment 60C is in line with the recommendations made by the Delegated Powers and Regulatory Reform Committee, to which I would like to express my gratitude for the consideration it has given this long and complex Bill in a timely manner. We must thank it for the great work it does in aiding scrutiny in this House. I will consider this amendment and will return to it on Report.
Amendment 60D would restrict the consideration a court must give to the loss or harm that a person’s conduct has caused to a company solely to non-executive directors when deciding whether to disqualify a director. The concept of non-executive director is not recognised within the Companies Act 2006 or the Company Directors Disqualification Act. The noble Lord, Lord Mendelsohn, will know only too well that for the purposes of companies legislation, all de jure directors are considered equally, whatever their role on the board may be. Any individual who acts as a director of a company, in whatever capacity, owes duties in respect of the running of the company to, for example, shareholders, employees and creditors. Accordingly, if the actions of any director, executive or not, have caused demonstrable loss for which they are culpable, it is right that they should be liable to be disqualified and that the period for which they are disqualified should take account of the resulting loss to creditors.
To try to change the law on directors fundamentally and to bring in a new definition of non-executive director without extensive consultation would be quite a big ask. I am not sure whether that is being sought in this probing amendment, but perhaps we can discuss the matter further. In the mean time, I commit to study the points that have been raised and to write to the noble Lord, and I ask him to withdraw his amendment.
I thank the Minister for her helpful reply. We, too, had a sweepstake on what her responses were likely to be. I have not done badly on some and lost quite badly on others. We also had a sweepstake on what the further replies might be, although I shall not reveal them for fear of putting anyone in a difficult position. In view of the current circumstances and the very helpful replies, we look forward to discussing these matters further. I beg leave to withdraw the amendment.
Amendment 60C withdrawn.
Amendment 60D not moved.
Clause 103 agreed.
Clauses 104 to 108 agreed.
Schedule 7 agreed.
Clause 109 agreed.
Schedule 8 agreed.
Clause 110: Disqualification as director: bankruptcy, etc in Scotland and Northern Ireland
61: Clause 110, page 90, line 21, at end insert—
“(2) In section 24 of that Act (extent), for subsection (2) substitute—
“(2) Subsections (1) to (2A) of section 11 also extend to Northern Ireland.””
Amendment 61 agreed.
Clause 110, as amended, agreed.
Clauses 111 to 113 agreed.
Committee adjourned at 6.40 pm.