Companies House Changes – 3 Consultations, and Banning Short Selling

The Government has issued three public consultations covering these subjects:

  1. Improving the quality and value of financial information on the UK companies register.
  2. Enhancing the powers of the registrar.
  3. Implementing the ban on corporate directors.

These follow on from a previous consultation entitled “Corporate Transparency and Register Reform” which contained proposals to reduce fraud and improve transparency, and which I reported on here: https://roliscon.blog/2019/05/11/changes-proposed-at-companies-house/ and you can see my response to that consultation here: https://www.roliscon.com/Corporate-Transparency-and-Register-Reform.pdf

The latest consultations can be found here: https://www.gov.uk/government/news/government-launches-consultations-to-crack-down-on-company-fraud-and-improve-corporate-transparency

These proposed changes will certainly improve the quality of information on the Companies House Register and in general should be welcomed, but they will impose more obligations on smaller companies. The consultations may be of particular interest to company directors and those who file information with Companies House such as accountants and company secretaries. But they ask a lot of questions, so perhaps best to review and respond to these consultations over Xmas. There are easy on-line questionnaires to which you can respond.  

Banning Short Selling

There was an interesting article in the Financial Times on short selling yesterday. It reported that South Korea is to attack those who bet against companies by short selling and is threatening jail and hefty fines. They are particularly concerned about “naked” short selling where stock is sold when not owned (e.g. rather than by borrowing it first), but they have also extended a ban on all short selling. Similar bans are in place in Malaysia and Indonesia.

The intention appears to be to halt speculative trading. Is it wise to do so? My view is that short selling as such can assist markets to identify a realistic price on stocks, but the problem is that it can also be associated with abusive practices where those doing so do not just keep their opinions to themselves but broadcast negative comments on a stock. Those comments can be sometimes fair and accurate but at other times they are not. It is very difficult for companies to respond to such comments and get them corrected or removed.

Of course one can argue that this sometimes happens in reverse, i.e. stocks are promoted by puffs or ramping to drive the price higher. Company directors themselves can be the source of such activity. The real issue is about media regulation where in the modern world both positive and negative commentary can be widely promoted on the internet without any regulation whatsoever.

That is the problem that needs tackling in essence, and banning short selling is at best a temporary measure that does not attack the underlying issue and in particular the excessive speculation that can take place in stock markets.  

Naked short selling might reasonably be banned though on the principle that nobody should be trading shares in which they do not have a financial interest. At least if they have a long holding, they may take the interest of the company into account. But if they have a short holding, their interest may be solely in damaging the company.

It is a long-standing principle of insurance that you cannot insure something in which you do not have an interest – for example someone else’s life unless you might suffer financial loss as a result of their death. Why? Because it is widely acknowledged it could lead to abuse, or in the case of life insurance that death might be hastened! You have to have an insurable interest to obtain insurance. That I suggest is a good principle to follow on share trading.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Regulating Consumer Investments and Company Register Reform

 The Financial Conduct Authority (FCA) have launched a consultation on the Consumer Investment Market. They consider it a priority to reduce the harm that many consumers suffer from fraud in this sector. The FCA has this to say:

“We have made significant improvements to this market to protect consumers. But there are over 5,000 financial adviser firms and more than 27,000 individual advisers acting as intermediaries between the consumer and their investment. Dominated by small firms, these complex chains of interdependent products and services – some of which are beyond our regulatory remit – make it easy for bad actors to ‘hide’ and challenging for us to oversee. The consumer investment market is not working as well as it should. Too often consumers receive lower returns than they should because of unsuitable products with high fees. Too often there have been scams and scandals in this market leading to consumer loss. Too often consumers leave their savings in cash because they don’t have confidence in the alternatives. That’s why we have made Consumer Investments a priority in our current Business Plan”. They also say:

“Some of the most serious harms we see relate to investments outside our regulatory perimeter and online scams, many based overseas. We have limited powers and capabilities in this space, in particular in our ability to deal with online promotions”. This is now a major problem that the FCA has been particularly poor at dealing with as Mark Taber regularly points out.

The “Call for Input” document only has 38 complex questions so I suspect they are unlikely to get many responses from real consumers, but those interested in financial markets may care to read it. See here:  https://www.fca.org.uk/publications/calls-input/consumer-investments

The Government BEIS Department consulted previously on modernising Companies House who maintain the register of companies. The Government’s response to the consultation has now been published. You can read it here: https://www.gov.uk/government/consultations/corporate-transparency-and-register-reform

Company registration, and the identification of company directors is clearly a very essential element in preventing frauds of all kinds, but has been woefully inadequate in the past. The identify of directors is not checked and Companies House even has very limited abilities to query new applications. So you could probably set up a company called Mickey Mouse Ltd with the sole director named as Mickey Mouse. Indeed I did check to see if there was such a company registration. Yes there is a company of that name, although the sole director’s name is different.  

The report even says: “There are benefits to the UK’s fight against crime: these reforms will increase the accountability of those few that transgress. As noted, the volume of economic crime in the UK is immense and growing. It accounts for almost one third of all crime experienced by individuals. The Home Office estimates that the social and economic cost of fraud to individuals in England and Wales is £4.7 billion per year and the social and economic cost of organised fraud against businesses and the public sector in the UK is £5.9 billion.

We will be able to trace and challenge those who misuse companies through the improved information on those who set up, own, manage and control companies. In partnership with others, our improved analytical capacity will use this information to detect suspicious activity earlier and hold those responsible to account”.

The recommendation to tighten up on the identities of directors has been generally supported so that is likely to be progressed. The ability to suppress some personal information will also be enhanced to improve security over that.

In general I suggest company directors and shareholders should welcome the proposals as a step forward in modernising Companies House, but you may care to review the details.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Changes Proposed at Companies House

The Government BEIS Department have recently proposed a number of important changes to the way Companies House operates in a public consultation entitled “Corporate Transparency and Register Reform” (see https://tinyurl.com/yysf9gdn ). Here’s a brief summary of the main points:

This consultation will be of interest to anyone who is a director of a private or a public company, or a major shareholder in such a company (i.e. those People with Significant Control). Even directors of the smallest companies could be affected.

A major proposal is to verify the identity of directors and to collect more information on them (although not their email address apparently, which I have suggested be added). This can now be done very quickly and at minimal cost electronically using various verification services (e.g. listed GB Group in which I hold shares). This will help to prevent fraud and they even hope to be able to link all directorships in various companies together. For example, this might make it easier to track the past activities and record of directors which even in small listed companies can be very informative as to their competence and reliability.

They propose to continue to retain the records of dissolved companies for 20 years which many investors consider important and is useful for investigators of all kinds.

They also plan some changes to improve the protection of personal information held at Companies House. Bearing in mind that there are well over 6 million records of directorships, with significant personal information, this is clearly important.

For public company investors there are two significant proposals:

1 – Improved digital tagging standards for accounts, which might make it simply to provide information services based on them.

2 – A possible cap on the number of directorships any one person can hold. There are common complaints about “overboarding” where directors take on too many roles. I have suggested a maximum of 5 in public companies, with some possible exemptions, should be imposed.

In general the proposals seem eminently sensible and I suggest they be supported on the whole. You can see my detailed comments in a response submitted to the consultation here: https://tinyurl.com/y6j9u4do 

But you should of course submit your own comments on those points of interest to you.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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