Select Committee on Business and Enterprise Minutes of Evidence

Examination of Witnesses (Questions 40-59)


26 MARCH 2008

  Q40  Mr Weir: So what you are proposing to do is to basically put this on-line, presumably through your website, so they can do it that way as well as the paper route. Would this service offer a standard form of—I do not know what they are called now but they used to be Private(?) Articles of Association, things like that—that go in to the company, or is that going to have to be drawn up by the person who is submitting it?

  Mr Jones: No. You have hit the nail on the head really. We will offer a very basic incorporation service electronically, similar to the one which is currently offered on paper. If companies or individuals want advice on their company constitution, the old Memorandum and Articles of Association, then they will need to go to a private adviser to get that information.

  Q41  Mr Weir: But on the on-line one will there be a standard forum of company constitution that they can simply adopt to meet the legal guidelines? Many years ago when I used to be involved in this sort of thing you bought an off-the-shelf company, filled in the blanks and sent it off and that is all you really had to do. Is that the sort of service that is going to be offered electronically for someone who wants to perhaps set up a single person or husband and wife type company? Is that the idea behind this?

  Mr Jones: There is already a default format for a simple form of Memorandum and Articles. We have not taken any decisions on precisely how we are going to offer this service. I really do not want us to get into the business of competing with incorporation agents who actually are doing a very good job. So I will continue to talk to the incorporation agents about that. I have regular meetings with them already and we will decide appropriately.

  Q42  Mr Weir: But if you have a company that comes in, formed through an incorporation agent, which presumably deals with all the constitution, all the paperwork, and you have somebody going on-line and doing it themselves in the standard form, is there any difference in the way that you check these forms coming in, check their veracity, their accuracy? I know you said earlier you did not check their veracity as such, but will they be treated any differently when they come in, given that someone anywhere in the world presumably can go on your website and form a company and register it in Companies House?

  Mr Jones: No, they will not be treated any differently at all. Our interest is, as it always has been, in making the process of incorporation as simple (within the bounds of the requirements of the Act) and as cheap as we can make it.

  Q43  Mr Weir: Without again treading on the fraud issue too much, is there not a security danger here that on the Internet anywhere in the world anyone can come on to find how to form a company in the UK, put in information, file it off to you electronically, your electronic system checks it, the parameters are met, in it goes and it is registered, and no one ever checks that they are real people, that they are real names and addresses or anything, and it will come up on your register as a company? Do you not see there is a danger there?

  Mr Jones: There will be checks that the addresses—

  Q44  Mr Weir: But what are the checks? That is what I am trying to get at.

  Mr Jones: There are checks that the address we have been given is a real address, so we have access to the address information.

  Mr Weir: But I could set up a company using Brian's address and that would come up as a real address. It does not mean to say that Brian knows anything about it.

  Chairman: I think we are getting on to the fraud issues here and we can come back to this in detail, that section, again.

  Q45  Mr Wright: Turning now to the Companies Act and CHIPS, the Companies House Information Processing System, work on CHIPS began in 2001. Companies House brought developments in-house in 2004 because of "increasing costs and changing requirements". What were the changes in requirements and who instigated those changes, and how much of the change was due to the requirements of the Companies Act?

  Mr Jones: I think it is fair to say my understanding is that the work that was originally done by a third party supplier on developing the early stages of the CHIPS system started to creep in terms of the scale and scope, started to overrun in terms of costs and that as a result of that there was a breakdown in the good working relationship between Companies House staff at the time and the third party supplier. To answer your question precisely, I think the differences in scope were perhaps partly a misunderstanding between Companies House and the third party supplier at the outset, so one party was saying, "Well, this isn't a change in scope or scale", the other was saying, "Yes, it is", and that that was leading to additional costs, and all of those discussions led to a breakdown in that working relationship, which led to the work being brought in-house.

  Q46  Mr Wright: So would you say it was certainly unexpected as far as the change in requirements at that time, and if so were there discussions between yourselves and what was then the Department of Trade & Industry?

  Mr Jones: I do not think there were changes in scope or scale that were brought about by anything of a legislative nature. It seemed to me that at the time the CHIPS system was, quite rightly, being used simply to replace the existing STEM system, which was the old system which had been there for 20 years. So the provisions of, for example, the new Companies Act, which was imminent, were in a sense completely irrelevant to that discussion which happened between Companies House and the supplier. It was more a disagreement between the two parties as to whether or not the original specification was being adhered to, on the one hand, and whether or not the supplier was allowing the scope of the project to escalate for other reasons.

  Q47  Mr Wright: Do you have any information about the cost of private sector IT schemes of similar scope, and how would they compare with you?

  Mr Jones: I do not have estimates of private sector IT schemes. I have worked on a number of public sector IT schemes. I have been responsible for putting in major IT systems in other government organisations. It is very difficult to compare two IT systems developments because the complexity of systems is something which is very difficult to quantify. It is easy to believe that the costs associated with any particular piece of work seem high, but until you understand the complexity associated with the design, with the development, with the testing and with the implementation of that system it is very difficult to benchmark one system against another.

  Q48  Mr Wright: But you say you would compare favourably?

  Mr Jones: As I say, it is very difficult to compare at all because other IT systems I have been responsible for in government have been bigger but less complex, have had certainly fewer customers, so therefore fewer data refreshers within the system. It is just impossible, I think, to compare one with another.

  Q49  Mr Wright: Okay. Thank you. According to your last annual report, a total of £12.1 million expenditure on CHIPS has been written off since the work was taken in-house, representing the entire value of the contracted work prior to February 2005. Was all this work wasted, and why did this expenditure generate "little appreciable benefit"?

  Mr Jones: At the time it would have appeared, I am sure, to staff who were managing and running the system that that work was not wasted and that it was preparatory work leading up to what was then the development of the system in-house. We took a view last year, my board and I, that with hindsight, if one is able to look back now at how much of the work that was done prior to February 2005 is now adding value to the system as we see it successfully running today, then the answer is very little, if any, of it. As a result of that, I was very firmly of the view that we should write that off because it should not be forming part of the carrying value of the new system.

  Q50  Mr Wright: Are you now confident then that the work being carried out in-house will result in better value for money?

  Mr Jones: We have now completed the implementation of CHIPS. With the caveat relating to a number of teething problems which I alluded to earlier, it is working well. The web services at the registration process were working on day one, which in my experience is unique in the context of a public sector IT programme of this size and nature. What we therefore have, I believe, is a very firm basis on which we can both run our operation for the future and, crucially, implement the imminent changes to the Companies Act that we have on our agenda for the next few years.

  Q51  Mr Wright: With regard to the Companies Act, last November the Department delayed aspects of the implementation of that Act. Who instigated that? Did you go to them and say, "Look, we're not going to be ready in time, so can you just delay this piece coming in?"

  Mr Jones: The programme to implement the Companies Act is very much a joint project between BERR, Geoff's staff and Companies House, so we have worked together on the implementation of Companies Act changes throughout the early stages of understanding what the legislation meant, interpreting what the legislation would mean for our systems, designing changes to the systems to meet those requirements. So throughout the whole process of implementing the Act we have worked together. It was a joint decision between ourselves and BERR that risks were escalating, and I would not put it any stronger than that. Risks were escalating to the point where—I think you have the statement in front of you—I could not be absolutely confident that I would be able to implement all of the changes by October 2008. That is not to say that the plans did not suggest we were going to hit 2008, because they did, but I have had a good deal of experience of implementing these projects. We had a CHIPS system that still was not in at that point and we needed it in before we could start development of the Companies Act, so we took the joint view between ourselves that we should discuss with ministers the possibility of a delay, and that is precisely what we did. We went to the ministers, we talked to them about it, and we told them about the risks. I have to say that I think while it is regrettable that we had to delay certain elements of the Act, the process of assessing the risks throughout the project and then taking some tough decisions in terms of advice—and it was a tough decision to have to go to the Minister and tell him that we were not going to be able to, or that there was a risk that we were not going to be able to implement this flagship piece of legislation on time—going through that process, for my money, has been an example of good practice in terms of how to manage risks in a project.

  Q52  Mr Wright: So really at the end of the day it was a joint decision based on your fears of the high risk that you would not be ready to implement it?

  Mr Jones: Absolutely right.

  Q53  Mr Wright: There was no debate or trying to put pressure on you to come to the conclusion that this October should be the date for implementation?

  Mr Jones: No. I think the robustness of our argument was based on a very clear assessment of risks and a very clear detailed analysis of the work which had to be done and the steps which had to be put in place before we could do that work, and they were largely around getting CHIPS in. So ministers readily accepted that that was a robust analysis and came to a pretty quick decision, based on the fact that autumn 2007 was the right time to take the decision to delay, if we were going to take it, so that we did not put companies to any unnecessary work and so that we did not put companies to any unnecessary expenditure.

  Q54  Mr Wright: CHIPS is live. Are you now confident that there will be no further delays to the implementation of the Companies Act?

  Mr Jones: It would be a very foolish man who would give a 100% guarantee that anything to do with an IT project was going to work, but my experience tells me that we now have sufficient contingency time in the programme to enable us to implement all of the remaining provisions of the Act on time. Indeed, we will be implementing certain provisions next week and I am confident that they will be in in time. We will be implementing certain other provisions in October 2008 and the work on that is planned and well-advanced, and for the work which has to be implemented in 2009 we expect to finish the development stages towards the end of 2008. So I think you can see that we have built now a good deal of contingency into the programme, contingency that will be used to improve companies' understanding of what the Companies Act means for them. So our communications effort will be ramped up very significantly during 2008-09, so that companies (I have to say not all of whom still understand what the 2006 Act is all about) will have time to prepare themselves.

  Q55  Mr Wright: So what percentage would you put on the risk element? Obviously you were talking about a high risk before and having to go to the Minister. Do you see it as a low risk of, what, 10%, 15 or 20%?

  Mr Jones: I would rather put it in terms of the RAG status that we use, and at the moment the programme is on green.

  Q56  Chairman: Mr Jones, I want to give you a few minutes off because you have taken our questions for an hour and Mr Dart wants to get through this session without answering any questions at all, I think, but just while we have got the Director of Corporate Law and Governance in front of us I would just like an update on implementation of the Companies Act. Not in detail, because I think it is a life's work, companies law and understanding it, but a general picture of where you are on implementation because on 13 December we had the statement about a number of issues which were coming up for implementation. So in general terms, where are we on the implementation of the Act?

  Mr Dart: Thank you, Chairman, for the opportunity to cover this area because I think it is very important, as I am sure Members of your Committee fully understand, that in talking about the delays to the final implementation of the Companies Act we are only talking actually about a part of the Companies Act. We are talking about the part of the Companies Act which introduces changes which mean that there will need to be changes in the systems and processes at Companies House. Much of the rest of the Act is in fact about the way companies run themselves or freedoms of operation, some bits of that are implemented, particularly EU directives. So quite large amounts of the Companies Act have not been delayed because of the delay to CHIPS, which delays the final implementation. They delay an important part of the Act and that is clearly a matter of regret, but quite a lot of the Act has already been implemented and I think it is worth noting, for example, that most of the key de-regulatory benefits, the benefits which show up in the bottom line for companies, that save them money in their administrative costs, have already been delivered or will be delivered by October 2008. We estimate that companies will save about £300 million per annum as a result of changes to regulatory requirements in the Companies Act—these figures are, of course estimates and approximates—and around £250 million of the £300 million total benefits will be delivered by October 2008. So we have always been very conscious of the need to bring in, where we can, things which benefit companies. The very first part of the Act to be implemented, for instance, in January 2007, was the single biggest saving for companies, which was to enable e-communications with shareholders. That did not really involve Companies House, so it was possible to do that. So the answer to your question is that we are fully on track to implement the phases of the Companies Act which do not depend on CHIPS and Companies House, so the phases as set out in various parliamentary statements, which you have clearly got before you, are all on track, and indeed a number of not only parts of the Act are brought into effect but also a number of regulations under the Act have already been made, for instance revisions to the accounting and audit regulations, updating those. That is something which has been recently approved. So I would say that a very good proportion of the Act has already been implemented.

  Chairman: I think that is a helpful context in which to set the issues of Companies House and I appreciate the answers to that very much indeed. Now we will turn to the subject which has been dancing around quite a lot in our earlier questions, fraud.

  Q57  Mr Binley: I am getting the distinct impression that you see your data in two different ways. When you are in your registration mode you see it as raw data. When you are in your marketing mode you see it as valuable information, and I think that highlights in another way the stress that you are under, quite frankly, the tensions you are under in providing the level of service that you are providing. I am privileged to be a member of the All Party Group on Identity Fraud and you will know that we produced a report only recently. We met with the Minister, I think about eight weeks ago, and the Minister accepted it is a valuable contribution. The truth of the matter is that that report highlighted a number of areas where the register can be misused and false information provided under the guise of valuable information, and of course it was just the opposite. You will have read about bogus filing, information filed by an incorrect source as one of the causes, the filing of false information, companies or directors filing false information about themselves, et cetera, and the wrongful use of information held on the register. All of those contributed sizeably to identity fraud. It is difficult to quantify, but certainly of a quantifiable amount, which is of import to the nation. Yet I hear there is real concern that you have about inability to check information and there seems to be a real clash of interest there, not only for the general public but for you in your job, quite frankly. Could you comment on how you might improve that position, thinking a bit outside the box?

  Mr Jones: Just to say at the outset that I see what we have on the register as raw data which is valuable information, rather than one or the other. The basic premise of the register is that business and Government want a system that is easy to establish companies and to conduct business relatively free from the burdens of regulation, so there is always going to be a balance here to be struck. So we want to get information in and on the register quickly so that it is quickly available for people to search. Nevertheless, fraud is very much on our minds and, as you will imagine, I get quite a few letters across my desk every month which relate to cases where there have been examples of identity theft or a company hijack or where people have attempted to falsely file certain information about directors. There is a number of things that we are doing already and a number of things we will be able to do in the future which I think will help. To put the whole thing in perspective, and without sounding complacent because I am most certainly not, I think this is an incredibly important issue, particularly for those who have been subject to fraudulent activity, as I said earlier, we get about 50 notifications every month out of the 600,000 documents we receive that may relate to some sort of fraudulent activity and we work very closely with the Metropolitan Police, have worked very closely with the Metropolitan Police, and indeed we had a Metropolitan Police Officer situated in our offices up until last year who helped us form liaisons and points of contact with the police forces around the country. We have also worked very closely with the City of London Police, who now of course (as of next week) will be the lead force for combating fraud, and we have held meetings with them and with the National Fraud Strategic Authority to ensure that the information we have got is being used by the law enforcement agencies (as well as, unfortunately, by the fraudsters) to try and assess situations which may potentially lead to fraudulent activity. Quite separately, we have been encouraging people to take part in what we call our three point plan, which is that if they file their documents electronically with the use of an authentication code they sign up for what we call PROtected Online Filing (PROOF) that means that any piece of paper which is sent to us purporting to relate to updating information on that company we will not accept it, because we will only accept information electronically and with the authentication code. If they also sign up to Monitor, which is the system you described earlier whereby they can keep an eye not just on their competitors or their suppliers but they can keep an eye on their own company, so if somebody attempts to file a form or a change of details for their own company they are notified immediately. We are doing what we can to get people to sign up to this three point plan. Regrettably, only about 160,000 companies out of the 2.6 million have hitherto signed up to PROOF. PROOF is free. We do not ask for any money to sign up to it. We are providing a service here which we believe will improve the integrity of the register and will protect our customers to a much greater degree, but sadly until somebody is the subject of an attempted fraud I fear that they often do not take it seriously enough or believe that it will actually happen to them. So we are spending a little bit of money trying to encourage people to sign up to our three point plan and we will in the next year be developing an electronic PROOF system whereby people can sign up to PROOF electronically. Currently, they have to do it on paper and with the signatures of all the directors of the company.

  Q58  Mr Binley: So you are reassuring me that you are moving more into the world of checking information? That is what you are telling me?

  Mr Jones: It is really a self-check system.

  Q59  Mr Binley: I understand that, but it is moving into the world of checking information?

  Mr Jones: Yes, absolutely, and in fact the whole concept of checking and amending one's own information on the register is something I would like to move into. You talked about thinking outside the box. At the moment, our system is based very much on people sending forms to us with their information on it and our putting that information on the register. I would very much like to move in the longer term to a system whereby you, as a director of a company, look after your own data on the register. So you check it regularly, you amend it if you want to amend it and you keep it up to date, and we then simply require of you certain statutory returns such as on-line accounts and an annual return.

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