Small Business, Enterprise and Employment Bill

Written evidence submitted by the Institute of Chartered Accountants for England and Wales (ICAEW) (SB 44)

This ICAEW submission concerns the access to finance (part 1), company law provisions of the Bill (parts 7-8) and insolvency provisions (part 10).

About us

ICAEW is a world leading professional membership organisation that promotes, develops and supports over 142,000 chartered accountants worldwide. Our members provide financial knowledge and guidance based on the highest profession, technical and ethical standards.

ICAEW is the largest single insolvency regulator in the UK licensing some 750 of the UK’s 1,700 insolvency practitioners as a Recognised Professional Body (RPB).

Overview

1. We are focusing on areas of the Bill which we consider to be particularly problematic but, we note that there are positive aspects of the Bill too. For instance, it addresses issues that have long been of concern in relation to registered office disputes and statements of capital. We support the abolition of bearer shares. We also welcome the deregulatory aspects of the Bill, measures to reduce red tape and barriers to business. But we are concerned that a number of the clauses outlined in the Bill will place further regulatory burdens on business, particularly SMEs.

2. The UK is rated 7 out of 189 countries by the World Bank and International Finance Corporation’s ‘Doing Business’ survey at resolving insolvency. It’s important that these measures don’t affect the UK’s reputation as being a good place to do business. We are concerned about some of the new powers being introduced, but support the measures to improve the efficiency of insolvency processes.

Access to Finance, Clause 4 - Provision of credit information on small and medium sized businesses

3. The chosen route for delivering finance rejected SMEs to alternative lenders is via competing internet platforms. These platforms would be expected to ensure SMEs understand the landscape of finance available. Our concerns with this proposed method of accessing finance are

· If the platform has commercial objectives they may find it difficult to provide a balanced, objective assessment of all the competing finance options and which is best for a particular SME.

· SMEs may get false re-assurance that this is a government scheme and therefore assume that any approach from a finance provider will be legitimate and appropriate.

ICAEW recommendation

4. We recommend that ‘finance rejected’ SMEs require advice before finance from independent advisors before being channelled to alternative lenders. As a result of appropriate financial advice, SMEs who have been rejected for finance can become ‘finance ready’. This will also allow banks and new investors to more easily find ‘finance ready’ SMEs, avoiding the need for multiple credit checks as well as SMEs responding to multiple enquiries.

Clauses 70-72, sch 3 – registration and disclosure of persons with significant control

Proposals to make registered information public

5. We do not believe the proposed public disclosure regime will meet its objective of reducing crime in the UK and the suggestion that it will increase trust is unsubstantiated. However, it could increase the risk of identity theft of individuals and companies, and decrease investment in UK companies.

6. The public registers may not be accurate. It is not proposed that Companies House (CH) will verify the information and given the complexities, even where companies conscientiously seek to comply with the law, there may be errors. The AML regulated sector will not be able to rely upon the information given.

7. The new laws leave a significant loophole. Unless the rest of the world adopts the same approach, criminals, who control companies but still want to keep their name and details hidden, will be able to use a foreign company and still operate in the UK through a branch because the new powers do not extend to foreign companies doing business in the UK. This adds a significant layer of red tape for SMEs and individuals that are law abiding, but does not eliminate the problem.

8. The disclosure regime could deter law abiding citizens from investing in the UK if they want to keep their investments private. This could have a negative impact on the UK’s economy as this requirement is not expected of investors anywhere else in the world, including other G7 nations.

9. Information on significant controllers on the company registers kept by the company and CH should be kept confidential and only accessed by law enforcement agencies and the AML regulated sector where appropriate. Making it public will not stop criminal activity and could even make identity theft easier.

10. Closing gaps in the existing anti-money laundering (AML) regime by requiring AML check on those establishing companies at Companies House could prohibit criminal activity more effectively than making registered information public.

Clauses 70-72 will produce complex regulation, will be costly to apply and risk criminalising simple mistakes. Why?

11. It is not always easy or straightforward for directors to know who meets the definitions of ‘significant controller’. For complex cases, the cost of seeking advice could be substantial, especially when a company has many connected shareholders or layers of holdings. Breaching these requirements could criminalise business owners who are not involved in any unlawful activity for inadvertent error.

12. The significant controller provisions mainly affect small and medium-sized private companies (e.g. family companies) because companies with existing disclosure requirements, such as public companies listed on the London Stock Exchange, are excluded. This therefore places a burden on the very sector that Government is looking to for growth.

13. Unless the 4th Money Laundering Directive imposes equivalent public disclosure requirements and penalties for non-compliance across the EU, the UK requirements will constitute ‘gold plating’ of EU regulation.

ICAEW recommendations

14. Information on significant controllers on the company registers kept by the company and CH should be kept confidential and only accessed by law enforcement agencies and the AML regulated sector where appropriate. Making it public will not stop criminal activity and could even make identity theft easier

15. Closing gaps in the existing anti-money laundering (AML) regime by requiring AML check on those establishing companies at Companies House could prohibit criminal activity more effectively than making registered information public.

16. Amend the commencement clause (148) to postpone implementation of these proposals until after the 4th Money Laundering Directive has been finalised and it is clear if the proposals in this Bill are in line with international requirements or represent ‘gold plating’.

17. We recommend the requirements of companies be explained more simply so it can be understood easily. Many SMEs are often operated by families who may need to seek professional advice to understand the complex provisions, so adding to the costs of enterprise in this sector.

18. We recommend that an offence is only committed when a person dishonestly or knowingly breaches the law and the breach is connected to a crime.

Clauses 82, sch 5 – Option for companies to keep information on central register

The proposals give companies the choice to keep their registers at Companies House

19. The provisions which will give companies a new option to maintain their registers at CH may not, increase transparency or reduce red tape and we have concerns over the role CH will play in this process. Why?

20. If a person is looking for information about a company over a period of time they may need to look at both CH and the company registers, depending on when and how often the company exercises the option.

21. The new laws do not make it clear whether CH will verify and reorganise information filed to create the traditional type of ‘value added’ registers that are currently provided by private sector registrars. If so, this would constitute unfair competition with the private sector which currently provides services of this kind. If not, the central register would be less useful for persons seeking information as the traditional register would no longer be kept.

ICAEW recommendation

22. The government should provide clarification over what role CH will play and if it will be expected to reorganise the information filed into a ‘value added’ register Government should publish details of the extra resource to be provided to CH to do so and publish legal advice it has obtained that the regime would not result in unfair competition.

Clauses 110 and 111 – Abolition of requirements to hold meetings

This proposal removes the ability for Insolvency Practitioners (IPs) to convene creditors’ meetings

23. We believe this is an extreme, cost saving measure that contradicts the government’s aim to engage creditors with the insolvency process. Why?

24. IPs should maintain the professional judgement and discretion to convene physical meetings where they feel it’s appropriate. Creditor engagement is essential to maintain a transparent, fair and trusted insolvency regime. Creditors make significant decisions at these meetings, which can involve substantial sums of money. Holding this kind of meeting virtually, as the bill sets out, is likely to be inappropriate in a complex insolvency case.

ICAEW recommendation

25. Amend clauses 110 and 111 – physical meetings should not be the default approach but IPs must have the power and ability to call meetings of creditors where they consider it in creditors’ best interests. IPs should be able to justify why they considered it necessary – this should be reviewed by their RPB on monitoring visits.

Clause 127 - Oversight of recognised professional bodies (RPBs)

This proposal gives the Secretary of State the power issue directions to an RPB; this could be a direction to investigate individual Insolvency Practitioners or to compel an RPB to change its rules

26. We believe this power is too far reaching, undermines the independence of the regulatory procedure and risks politicising regulation. Why?

27. This clause allows the SoS not only to require investigations, but direct IPs to take action – whether it is a public interest case or not. There is no systemic failure in the insolvency regime that justifies these measures. This proposal could undermine the independence of the procedure and enable the SoS to pursue a political agenda. In our view, the system of regulation works best when the oversight regulator and the RPBs work together, as demonstrated through the introduction of the complaints gateway.

28. A change to an RPB’s rules directed by the Insolvency Service could be contrary to the regulatory objectives of another regulator, creating confusion. All but one RPB are subject to oversight of other bodies such as FRC, LSB, FCA, and IAASA, so this could undermine the fairness of the system.

ICAEW recommendation

29. Remove clause 127 - it will not improve the regulatory system. If this clause is implemented, the government must provide more detail and clarification to RPBs and insolvency practitioners on what circumstances it would issue a direction to RPB. Also, being able to identify which regulator has priority is important.

Clause 129 - Court sanction of insolvency practitioners in public interest cases

We believe this clause causes regulatory confusion, has substantial cost implications and does not explain what constitutes a public interest case.

30. We have concerns about the Insolvency Service potentially taking on complaints which affect the public interest. The proposals would see the Insolvency Service being investigator, prosecutor and judge. There seems to be no provision for a fair trial by independent tribunal.

31. The lack of definition on what a public interest case is could create conflict and confusion with another oversight regulator that might want to get involved and use their investigatory powers in a public interest context. For instance, the Financial Reporting Council has the power to get involved in public interest cases if the IP is an ICAEW member.

32. Who will bear the costs of the court case? Any cost incurred will ultimately be passed onto the consumer, increasing the cost of insolvency cases. Court fees are likely to be charged to the RPBs, who would pass it to their IPs, who in turn would need to increase their fees to run a commercial viable business.

ICAEW recommendation

33. Clarify clause 129: the government must explain what constitutes a public interest case and if RPBs will be expected to shoulder the costs of court cases.

Clause 132 - Power to establish single regulator of insolvency practitioners

34. We believe that the power to introduce of a single regulator could undermine confidence in the current regime. The UK is ranked 7 out of 189 countries by the World Bank and International Finance Corporation’s ‘Doing Business’ survey at resolving insolvency. This means the UK’s insolvency system provides some of highest rates of returns to creditors, is one of the quickest, and cheapest regimes. There is no systematic failure that justifies the government taking this power upon itself.

35. Multiple regulators are a key driver that encourage a competitive market and raise best practice – a single regulator would be contrary to the ‘competition goal’ which is set out elsewhere in this legislation. It goes against the government's commitment for independent regulation in other sectors such as legal services, audit, and non-mainstream financial services.

ICAEW recommendation

36. Remove clause 132multiple regulators are key to encourage a competitive market and don’t necessarily lead to inconsistency. Ensuring there is effective oversight of those bodies is a better solution.

October 2014

Prepared 24th October 2014