UK: key points for financial institutions on Government response to BIS transparency and trust paper

On 21 April 2014, the Government published its response to the Department for Business, Innovation and Skills (BIS)'s July 2013 discussion paper "Transparency and Trust discussion paper".  The response proposes a number of key changes (summarised below), many of which will require primary legislation, and are thus dependent on the availability of parliamentary time.  Meanwhile, the Government invites views on the policy direction set out in this response as it moves towards its implementation in legislation.

Banks and other financial institutions will be interested in two of the matters not being taken forward. 

The Government has concluded that there should be:

• no amendment of directors’ general statutory duties to introduce a primary duty for bank directors to promote financial stability over the interests of their shareholders, and
• no extension of powers to sectoral regulators' powers to enable them to bring directors' disqualification proceedings.

Nevertheless, the proposals foreshadow joint investigations and enhanced information-sharing between sectoral regulators (such as the FCA and the PRA) and the Insolvency Service, and envisage amendments to Schedule 1 of the Company Directors Disqualification Act 1986 (CDDA) to require the courts to consider breaches of sectoral regulation in disqualifying a company director.

Key proposals:

1. A central registry of company beneficial ownership information

• • The central registry of company beneficial ownership information will - as announced in October 2013 - be publicly accessible.
  • The regime will apply to UK bodies corporate that currently register information on their members at Companies House, including companies limited by guarantee and Limited Liability Partnerships
    • companies who comply with the relevant FCA Disclosure and Transparency Rules, or who have securities listed on a regulated market subject to equivalent disclosure requirements. will be exempt
  • The statutory definition of ‘beneficial ownership’ will be based on the existing definition of beneficial ownership applied in the anti-money laundering context (effectively individuals who ultimately own or control more than 25% of a company’s shares or voting rights, or who otherwise exercise control over the company or its management).
  • Where a qualifying beneficial interest in a company is held through a trust arrangement, generally the trustee(s), but in some cases other natural person(s) exercising effective control over the activities of the trust (e.g. the beneficiary, settlor or protector of the trust)  will be required to be disclosed as the beneficial owner of the company.
  • The requirement to identify significant beneficial owners will apply to UK bodies corporate who will be required to maintain a register (to be kept available for public inspection) of beneficial owners, containing information on the beneficial owners’:
    • full name;
    • date of birth;
    • nationality;
    • country or state of usual residence;
    • residential address (note that this information will not be required to be publicly available);
    • a service address; and
  • date on which they acquired the beneficial interest in the company and details of that interest and how it is held.
• Individuals with a qualifying beneficial interest in the company will be required to make disclosure to the company, and update the information.
• The public register at Companies House will contain information on the beneficial owners’:
  • full name;
  • month and year of birth
  • nationality;
  • country or state of usual residence;
  • a service address; and
  • date on which they acquired the beneficial interest in the company and details of that interest and how it is held.
• Companies House will also hold a residential address and a full date of birth for the beneficial owner, but accessible only to specified UK and overseas enforcement authorities (details subject to further consideration).
• Enforcing the rules:
  • Extension or replication of existing company law criminal offences to tackle situations where companies or individuals break the rules
  • No extension of the Secretary of State’s investigative powers under the Companies Act 1985 to law enforcement and tax authorities.

2. Bearer shares and the opacity of company ownership

• Prohibition on the creation of new bearer shares
• Existing bearer shareholders to surrender their bearer share warrants for conversion to the registered shares specified in the warrant within a set period of time
• Thereafter, companies with bearer shares remaining would be required to make applications to court for the cancellation of those shares.

3. Opaque corporate control through corporate directors

• Prohibit on the use of one company as the director of another company - corporate directors - with limited and specific exemptions where the use of corporate directors is of higher value and lower risk.

4. Opaque corporate control through irresponsible ‘front’ directors

• Improve the general standard of information available with respect to directors’ general statutory duties, to increase awareness of the potential for breaching them by acting as an irresponsible front.
• Legislate as necessary to underpin new and specific means of contacting individual directors to ensure they have understood their duties.
• The court will be required to take account of breaches of any legislation, which will include breach of directors’ duties, when considering the disqualification of a director.
• Consideration to be given to increasing the accountability of individuals controlling a single director (or several directors) by bringing them into scope of legal liability, and to the potential application of the directors' general statutory duties to those who control directors.

5. Directors’ accountability: Tackling misconduct

• Schedule 1 of the CDDA (which sets out matters determining unfitness) to be replaced with a new, broader and more generic, provision requiring the court or Insolvency Service to consider in making disqualification determinations:
  • factors to be set out
  • the materiality of a director’s conduct, culpability and track record, and the impact of their behaviour

6. Directors’ accountability for misconduct overseas

• Amend the law to
  • require courts to take any overseas misconduct into account when deciding whether or not to disqualify a director in the UK and
  • to provide the Secretary of State with the power to disqualify an individual from acting as a director in the UK when convicted of a criminal offence in connection with the promotion, formation or management of a company overseas
• Commission research into director disqualification and sanction regimes in certain other jurisdictions to inform the decision as to whether to make regulations under Part 40 of the Companies Act, to prevent directors restricted overseas from acting as directors in the UK.

7. Increasing the reach of the director disqualification regime

• Require the courts to consider breaches of sectoral regulation in disqualifying a company director
• Remove the legislative barriers to the types of investigative material that can be provided by sectoral regulators or others for use by the Insolvency Service to pursue the disqualification of a director.
• Enhance the ability for the Insolvency Service to share investigative information with other regulatory or enforcement bodies.
• Improve effective working between sectoral regulators, including those in key sectors such as the FCA and PRA, and the Insolvency Service, building on current best practice to develop a programme of ongoing collaboration and co-operation to ensure sector specific regulatory enforcement and economy-wide company law enforcement are fully integrated.
• Not amend the directors’ general statutory duties to introduce a primary duty for bank directors to promote financial stability over the interests of their shareholders.

8. Better compensating creditors for director misconduct

• Allow causes of action that arise on an insolvency and which may only be pursued by an insolvency office-holder (e.g. for fraudulent or wrongful trading)to be sold or assigned to another party to pursue, to increase the chances of action being taken against miscreant directors for the benefit of creditors.
• Empower the Secretary of State to apply to the court for a compensation order against a director who has been disqualified (and to empower the Insolvency Service to accept a compensation undertaking offered by such a director) where creditors have suffered identifiable losses from their misconduct.

9. Increasing the time period for disqualification proceedings following an insolvency

• Increase the time limit for instituting disqualification proceedings under section 6 of the CDDA from 2 to 3 years of the earliest insolvency event.