The Economic Crime and Corporate Transparency Act 2023 ("ECCTA"), which started to come into force from March 2024, has introduced a swathe of reforms to Companies House which fundamentally alter the agency's character and powers.
Historically, Companies House – which may be seen as a 'quasi-regulator' - has generally uploaded filings without scrutiny. However, its statutory objectives now indicate a shift to a proactive approach – for example, an objective for Companies House is to ensure that those required to deliver documents do so, and do so properly and accurately. The agency is therefore required and empowered to adopt an investigative role.
The reforms are intended to ensure that the true nature of each company's ownership and control is disclosed to Companies House and, to a large degree, the public. Together with the other changes introduced by the Act (most notably the introduction of the 'failure to prevent fraud' offence – of which more here), ECCTA makes a clear statement of intent, namely a crackdown on the UK's most commonly experienced offence - fraud.
The changes are being incrementally phased into force over the next 12 to 18 months. Some of the key changes which are currently 'live' include the following:
- Companies House has new powers to scrutinise and challenge company filings
The Registrar's current (limited) role is being expanded in order to improve the accuracy and integrity of register information and prevent abuse. The Registrar now has powers to reject and query filings (such as inconsistent information) based on its own or, significantly, a third party's concern. It is also now easier for the Registrar to cross-check this information with other public and private sector bodies, as well as inform law enforcement agencies of potential wrongdoing or suspicious filings.
- The Registrar can also compel persons or entities to provide information and can impose sanctions if there is a failure to do so.
- The 'false statement' offences have been expanded
It is now a criminal offence to provide misleading, false or deceptive information without reasonable excuse (as opposed to doing so knowingly or recklessly) and there is a new aggravated criminal offence for knowingly providing misleading, false or deceptive information.
- Further limitations on the use of corporate directors
Only corporate entities with 'legal personality' will be appointable as corporate directors – all their directors will have to be (verified) natural persons.
- Restrictions on registered addresses
Companies are no longer able use a PO Box as their registered office address. It must be registered at an 'appropriate' address where it can be expected that documents sent to it will come to the attention of a person acting on behalf of the company and where delivery can be acknowledged. Any failure to provide a suitable address renders the company and its directors guilty of an offence. Companies House can also change the registered office of a company if it deems it necessary.
In addition, companies must supply a 'registered' email address through which they can be contacted by companies house. This will not be publicly available.
Whilst not yet in force, other upcoming significant changes under ECCTA include:
- Tighter identity verification procedures for directors and PSCs, to prevent fraudulent appointments and the illicit use of personal information. After the 'transition period', those that do not comply may face criminal sanctions or civil penalties, and the register will reflect their unverified status;
- Companies will be required to record shareholders' full names in their registers and provide a 'one-off' full shareholder list. They will also need to disclose the status of nominee shareholders, including for whom they are holding shares. A PSC register will also be held centrally by the Registrar; and
- All new companies will need to confirm they are forming the company for a "lawful purpose" when they incorporate, and each year the company will need to confirm that its future activities will be lawful on their confirmation statement.
The incremental enforcement of ECCTA's provisions recognises both that certain changes will need to be supplemented by further statutory instruments and guidance and also that these sweeping changes may have a significant impact on companies' existing practices and processes.
What does ECCTA mean for directors and officers (D&Os)?
On a day-to-day basis, D&Os are going to be under greater pressure to ensure that filings are correct. This may extend to a review of past filings, due to the risk of a penalty being imposed for inconsistency. In the event that filings are inaccurate, D&Os are exposed to investigation by Companies House and potentially civil or criminal sanctions for 'false statement' offences. It will also be more expensive to make such filings, due to an increase in Companies House fees.
As and when it becomes necessary to provide a full shareholder list to Companies House, D&Os will also need to obtain (and maintain) a clear picture on their stakeholders, in order to provide accurate information about their members and PSCs. The publication of such information may, in some cases, have PR implications which will need to be carefully managed.
Companies House is currently empowered to prosecute criminal offences under the Companies Act 2006. However, a new civil penalties regime (in place from May 2024) allows Companies House to impose civil penalties for breaches of Companies Act 2006 and thereby avoid the time and expense of criminal proceedings. Under the Economic Crime and Corporate Transparency Act 2023 (Financial Penalty) Regulations 2024, Companies House is able to impose fines up to a maximum of £10,000. Given the relative ease with which these penalties may be imposed, together with a practical need to fund the ECCTA reforms, we anticipate that Companies House may apply its new powers with enthusiasm.
What does ECCTA mean for D&O insurers?
ECCTA may be seen to be a double-edged sword for D&O insurers. Whilst greater transparency and checks by Companies House may facilitate risk assessment (and control) at the underwriting stage, the reforms open up a range of potential future claims against their insureds. D&Os are being held to a higher standard, with more onerous requirements and greater risk of sanctions. It may be that the reforms increase the number of individuals meeting the definition of 'Insured Persons' within any one organisation, if it becomes necessary to distribute managerial responsibility to meet the additional regulatory burden.
In light of the above, in the short term at least, insurers may anticipate an uptick in claims for investigation costs and defence costs as Companies House 'cuts its teeth' on the reforms. In the longer-term, it appears possible that the legislation may realise the government's aim of engendering a shift in corporate culture – which may well have a deep-seated impact on D&O claims landscape as a whole.
