Examination of Witnesses (Questions 40-59)
COMPANIES HOUSE,
BERR
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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