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Comments from the Association of Chartered Certified Accountants
October 2002

If, as the accompanying Regulatory Impact Assessment (RIA) suggests, law enforcement authorities have reason to believe that serious crime is currently facilitated by the absence of extensive rules regarding the disclosure of share ownership, then new statutory rules to make more relevant information available may, in principle, be justified.

But any changes of this kind must be properly targeted and in proportion to the benefits likely to accrue from them. Our members' own experience of advising private companies is that manipulating companies for the purposes of money laundering is not a significant concern in this sector. Those companies that are involved in such activity and/or those which wish to conceal their true ownership structures will, in any case, take steps to evade new controls by escaping UK jurisdiction. The Government's own guiding principles on regulation, i.e. that the way regulation is conducted should be proportionate to its objectives, should be observed. The assumption made in the RIA that those not suspected of wrong-doing will comply with the new requirements (while those involved in it will not) should be reflected in the scale of any new legislation: 'innocent' companies should not be made to pay too high a price for the control of others.

Our comments on the numbered consultation questions are set out on the following pages.

Q1 Should a material distinction be drawn in the treatment of different types of company?

Yes. By definition, the nominal (and beneficial) ownership of shares in private companies can be expected to change far less frequently than is the case in public and listed companies. The required level of recording and notification of changes should reflect this.

Q2 Should listed and unlisted companies be required to report to the same authority?

No. The listing authority should not be expected to process information in respect of unlisted companies.

Q3 For maximum effectiveness, should any system of disclosure place an obligation on the beneficial owner or the legal, registered owner or both?

For maximum effectiveness, both parties should be required to disclose their beneficial interest.

Q4 Alternative definitions of ownership and control

Those holding shadow directorships are already covered by a number of provisions of the Companies Act 1985, including s288, which requires companies to record directors' details and to notify Companies House of new appointments. It is widely considered that companies which have shadow directors do not comply with s288; one reason for this might be that directors are aware of the difficulty for third parties of proving the existence of a shadow directorship. Some strengthening of the requirements to record and notify would be in order. In place of the current rule, which says that the company and every officer who is in default - this is likely to be the company secretary - are liable to fines in respect of any instance of non-compliance, it could be provided that each director is to be responsible for ensuring that these functions are complied with. Failure to comply should be added to the list of matters which the courts may take into account for the purposes of making disqualification orders. Further, it should be an express requirement that the list of directors to be set out in the company's Directors' Report - and any successor statements introduced following the conclusion of the current law reform exercise - encompass shadow directors as well as de jure directors. We envisage that the proposed obligation, contained in Modernising Company Law, for directors to volunteer to the auditor information which is material to the audit, would reinforce such a provision.

Q9-15 (Options 1-4)

We agree in principle that individuals should be required to inform a company if they have a beneficial interest in its shares (Option1(a)). A pro-forma notice would be appropriate for this purpose.

We do not consider, however, that the 3% threshold for basic disclosure (Option 1(b)) or the subsequent 1% increase threshold (Option 1(c)) are material in the context of the private company. Both thresholds need to be higher.

We query whether it would be proportionate in the private company scenario for companies to have to notify Companies House of all changes in beneficial interests as and when they occur. Law enforcement authorities would still be able to access information held on relevant changes by the companies themselves.

Given that the focus of the proposed reform is on assisting the work of enforcement authorities, we query whether there is a need for information on beneficial ownership to be made available on a public register (Options 2, 3 and 4). Relevant information should be held by the company and be made available to the authorities directly on their request.

Q16 (Option 5)

Information on directorships held by named individuals is already available via Companies House. If the arrangements for recording and notifying details of shadow directorships were strengthened (see our response to Q4 above), then the current database would be capable of providing the required information on shadow directorships.

Q17 Arrestable offences

In the light of the aim of keeping regulation to the minimum necessary to achieve the objects of the exercise, responsibility for failure to disclose or for misleading disclosure should rest with the individual shareholders. Companies should be responsible for recording the information and for making it available on request to a recognised authority.

Lastly, we consider it to be incongruent that potentially extensive requirements regarding the recording and disclosure of information regarding share ownership are being contemplated for private companies at a time when the DTI is proposing to abolish the office of company secretary in those companies. It appears that the post of secretary is being recommended for abolition on the grounds that the functions connected with the post are not sufficiently distinctive to justify the mandatory appointment of a separate officer.

The present proposals weaken the case for the abolition of the secretary. The proposed functions would clearly fall within the scope of the company secretary where one is in post. Where there was no company secretary, the work involved, as with all other secretarial functions, would invariably fall to be contracted out to an external adviser, at a cost to the company. The main difference would be that the person contracted to perform the work would not be an officer of the company, with on-going responsibilities to it. We reiterate the comment made by the Fraud Advisory Panel to the effect that the post of company secretary provides an important safeguard against fraud. If the DTI is suggesting that fraud and money laundering are as serious an issue in private companies as they are in public companies then it should consider anew whether the abolition of the secretary achieves any net deregulatory benefit.

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