Are SMEs Victims of the Broad Brush Approach?

First published on SME web.

Entrepreneurs and small business owners may be forgiven for thinking that the Government's Discussion Paper: 'Transparency and Trust' is not relevant to them, for it appears to be concerned with criminal activity and matters more usually the concern of larger companies such as bearer shares. But the "ambitious set of reforms", if implemented, will have significant implications for businesses of all sizes.

Launched by Vince Cable on 15 July 2013, the Paper proposes a number of reforms: from disclosure of beneficial company ownership to a review of the use of prepack administrations. Anyone involved in the administration of small companies already be anticipating the regulatory burden that is likely to be imposed.
Although Cable says the Government recognises that the "overwhelming majority of UK companies contribute productively to the UK economy, abide by the law and make an enormous contribution to society", the proposals have not been drafted to apply to specific companies or to the perpetrators of criminal activities, such as tax evasion and money laundering.

Instead, the proposals will be enacted under a broadbrush
approach that will apply to all companies. As a result, the standard private limited company will be forced to comply with additional timeconsuming and costly regulation which is unlikely to lead to any change in their already compliant ownership, constitution, or operations. They are therefore likely to feel that the reforms are excessive.

To achieve increased transparency, the Paper suggests among other things the establishment of a beneficial ownership register, elimination of bearer shares and removal of corporate and nominee. Private limited companies are already required to detail their shareholders and officers, and public limited companies have had
disclosure rights for a number of years. The proposals appear to be directed at those companies that ignore the rules already in place. As with all areas of criminal activity and compliance, the introduction of more regulation alone is not usually a sufficient deterrent, and must be combined with improved investigation and punishment to prevent offending.

Unfortunately, these issues are not tackled in the reforms. Would the reforms be better placed if they focused on identifying companies being used as vehicles for criminal activities or failing to comply with the current provisions of the Companies Act 2006? Would investment in the monitoring and enforcement powers of Companies House see more positive results?

The reforms are likely to have little impact on the Paper's stated objectives, but the inevitable unintended consequences will be suffered by honest companies already under pressure in a difficult and competitive market.

The proposed widening of the powers of the courts and relevant regulators together with the increased relevant factors to be considered in relation to director disqualification are likely to cause directors, even lawabiding ones, significant concern. For example, the proposals include a power to order disqualified directors to personally compensate creditors. There is of course a risk that increasing the already significant responsibility on company directors to comply with their wideranging commonlaw and statutory duties might dissuade entrepreneurs from entering the market or, worse, encourage them to ignore compliance altogether.

The sweeping approach also means the Government is missing an opportunity to really improve the business sector. Cable suggests, for example, that disqualified directors be offered training and education to ensure their future ventures do not fail, whereas no suggestion is made to offer such education and training as a matter of course to all new directors, to ensure compliance from day one.

Unfortunately, the far reaching reforms tar all companies with the same brush and it is the small to medium law abiding companies that will be the victims of increased regulatory compliance and costs. The ultimate victim will be the consumer. Increased costs, more noncompliant companies, and a lack of competition in the market when companies fail or avoid incorporation are the foreseeable results of overregulation.