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The Queen's speech 2022 - an ambitious agenda with a focus on economic growth and legislative flexibility in a post-Brexit UK

  • United Kingdom
  • Financial services and markets regulation

20-05-2022

On 10 May 2022, the Government announced its much anticipated legislative agenda which comprises a hefty 38 Bills (an increase from 30 last year), providing ministers with a substantial workload for the year ahead. The speech focused predominantly on boosting economic growth in the aftermath of the COVID pandemic, addressing the challenges faced due to the increasing cost of living, and highlighting the opportunities for legislative overhaul and trade deals in a post-Brexit UK.

Looking in further detail at the reforms relating to the UK financial services sector, Ruth Paley, Kari McCormick, Sarah Turner and Adele Seclier consider the impact that these Bills aim to have on combatting economic crime and creating greater transparency, legislative flexibility and accountability.

1. Economic Crime and Corporate Transparency Bill

In the wake of Russia’s invasion of Ukraine and the recent criticism directed at the Government’s ‘lamentable’ attempts to tackle economic crime, the UK took new steps to combat economic crime by accelerating the introduction of the Economic Crime (Transparency and Enforcement) Bill. The Act, which received Royal Assent on 15 March 2022, creates a number of criminal offences and introduces a Register for beneficial owners of Overseas Entities, operated by Companies House, in order ‘to crack down on foreign criminals using UK property to launder money’.

It is therefore encouraging to see the inclusion of a second Economic Crime Bill (the Economic Crime and Corporate Transparency Bill) in the most recent legislative agenda for the next 12 months. This Bill concentrates on measures such as long-overdue reforms to Companies House and the extension of the civil forfeiture power to crypto assets.

(i) Increased powers for Companies House

Companies House is often referred to as integral in upholding the UK’s reputation as a strong, transparent and attractive business environment. Company incorporation in the UK is amongst the fastest and cheapest in the world, with 99 per cent of applications processed within 24 hours, as stated in the Corporate Transparency and Register Reform White Paper.

The UK was the first G20 country to create a public central register of beneficial ownership information for all companies incorporated in the UK. Publicly available since 2016, the People with Significant Control (PSC) register requires companies to provide information about the individuals who own or control them (including name, month and year of birth, nationality, and details of their interest in the company).

However, whilst the register itself is often cited as evidence of the UK’s intention to tackle dirty money, one significant limitation on the reliability of the information contained in the register is the fact that the information provided is accepted by Companies House on trust, with no current powers to check or scrutinise the information provided. This leaves the registration system open to abuse for financial crime purposes.

There’s been a particular recent focus on the lack of power to verify information during the pandemic, which has seemingly allowed criminals to exploit the system by registering fake companies for the sole purpose of claiming for Covid-19 relief, only to dissolve them shortly after. Money laundering and other forms of financial crime are also said to have been facilitated by what is seen as a relatively lax approach to checking companies, after changes in 2011 made it quicker to register a company online.

The Bill aims to address these concerns by strengthening the accuracy and reliability of the companies register, which informs many business and lending decisions, and is worth an estimated £1-3 billion a year to the UK economy. By broadening the Registrar of Companies’ powers, the intention is to transform Companies House from a mere passive recipient of information to an active gatekeeper over company creation, with new powers to check, remove or decline information submitted to, or already on, the Company Register.

More specifically, the reforms contained in the Bill will introduce identity verification requirements for those who manage, own and control companies and other UK registered entities, which will improve the accuracy and transparency of Companies House data, supporting better business decisions and law enforcement investigations.

Companies House will also be accorded more effective investigation and enforcement powers, which include powers to query suspicious appointments or filings and, in some cases, request further evidence or reject the filing. Companies House will also have more extensive legal gateways for data sharing with law enforcement, other government bodies and the private sector, which, it is hoped, will result in a more efficient sharing of suspicious activity with law enforcement.

To deliver on this ambition, Companies House will transform every aspect of its skills, culture, operating model, and services. The Government has invested £20 million in this transformation programme in 2021-22 and has committed a further £63 million at the 2021 Spending Review. It is hoped that the legislative and operational reform of Companies House, which includes increased powers combined with identity verification requirement will ensure that companies on the UK register are run responsibly, transparently and with accountability and will deter criminals from attempting to exploit the system.

(ii) Extension of the civil forfeiture power to crypto-assets

The speech refers to the creation of powers to ‘more quickly and easily seize and recover crypto assets, which are the principal medium used for ransomware’. The Government hopes that in creating the civil forfeiture power, this will mitigate the risk posed by those who cannot be criminally prosecuted but use their funds to further criminality.

UK enforcement authorities can currently seize crypto assets using powers derived from criminal law. However, the extension of the civil forfeiture power to the civil regime will be attractive to enforcement authorities in view of the application of the civil standard of proof, ‘on the balance of probabilities’.

This reform suggests that the UK is starting to wake up to the economic crime risks that are inextricably linked to crypto assets, and comes just a few months after the criminal directorate of HMRC seized three non-fungible tokens (NFT’s) in a first of its kind seizure for a UK law enforcement agency, as part of an investigation into a suspected tax fraud scheme worth £1.4M.

2. Financial Services and Markets Bill

A Financial Services and Markets Bill has been included in the legislative agenda, with the aim of strengthening the United Kingdom’s financial services industry in the wake of Brexit. The reduction in red tape is hoped to be achieved by replacing EU law with UK specific legislation, and capitalising on the benefits of Brexit – a theme which extends to several other Bills. The Bill, which builds on the Financial Services Act 2021, (the first step in amending the UK’s regulatory regime outside of the EU), will make the most of the opportunities of Brexit, by establishing a coherent, agile and internationally-respected approach to financial services regulation ‘that is right for the UK’.

Economic Secretary to the Treasury, John Glen said ‘We are reforming our financial services sector now we have left the EU to ensure it acts in the interests of communities and citizens, creating jobs, supporting businesses, and powering growth across all of the UK.’

  • In addition to the creation of UK-specific legislation, the Financial Services and Markets Bill also contains the following elements:
  • Updating the objectives of the financial services regulators to ensure a greater focus on growth and international competitiveness;
  • Reforming the rules that regulate the UK’s capital markets to promote investment;
  • Ensuring sustainability of the UK’s cash infrastructure, so that people continue to be able to access their own cash via withdrawal and deposit facilities (as cash remains an important payment method for millions of people across the UK, particularly those in vulnerable groups); and
  • Introducing additional protections for those investing or using financial products, to make it safer and support the victims of scams, including APP scams which cause losses totalling hundreds of millions of pounds each year. Additional protection introduced by the Bill includes enabling the Payment Systems Regulator to use its existing regulatory powers to require reimbursement in cases of authorised push payment APP scams in designated payment systems, including Faster Payments.

3. Draft Audit Reform Bill

Calls for reform in relation to corporate reporting and audit have been ongoing for a number of years. Following three independent reviews undertaken by Sir John Kingman, Sir Donald Brydon and the Competition and Markets Authority (collectively ‘the Reviews’) and the Government white paper published in March 2021 – Restoring trust in audit and corporate governance ‘White Paper’), there was an expectation that reform was imminent. Against that backdrop, recent suggestions that the legislation required to implement many of the recommendations made in the Reviews would be put on the back burner were met with dismay by both businesses and auditors alike.

While short on detail, the inclusion of the Audit Reform Bill in the Queen’s speech was therefore welcomed as was the Government’s indication that the Bill would take forward many of the recommendations of the Reviews. The Government’s response to its consultation on the White Paper (due for publication shortly) will give a clearer picture and more detail on what recommendations are likely to be included.

The main elements of the draft Bill are:

  • Establishing a new statutory regulator, the Audit, Reporting and Governance Authority (‘ARGA’), to protect and promote the interests of investors, other users of corporate reporting and the wider public interest.
  • Providing new measures to open up the audit market to competition, including managed shared audits in which challenger firms undertake a share of the work on large-scale audits. It is intended this will improve the quality and usefulness of audit; and boost resilience, competition, and choice in the audit market.
  • Bringing the largest private companies in scope of regulation by the new ARGA by amending the definition of ‘public interest entities’ (‘PIEs’), recognising the public interest in companies of this size. This will likely require additional corporate governance measures, additional disclosures in annual reports and enhanced requirements relating to audit.
  • Giving the new regulator effective powers to enforce directors’ financial reporting duties, to supervise corporate reporting, and to oversee and regulate the accountancy and actuarial professions.
    • Proposals regarding corporate reporting set out in the White Paper included a possible directors statement on internal control (similar to the Sarbanes-Oxley requirements in the USA); the requirement for both a new annual Resilience Statement (setting out how directors are assessing the company’s prospects and addressing challenges to its business model over the short, medium and long-term) and an Audit and Assurance Policy; giving ARGA greater powers to require changes to company reports and accounts without a court order; and increased transparency for corporate reporting reviews, and extending review to the whole of the annual report and accounts. We have commented on these matters in further detail in our recent briefing which looks at financial reporting reforms. However, the direction of travel appears to be that the proposals as set out in the White Paper will be rowed back so as not to overburden business with excessive regulation.
  • Reforming the regulation of Insolvency Practitioners with the stated aim of giving greater confidence to creditors and strengthening corporate governance of firms in or approaching insolvency so that ‘asset stripping’ can be more effectively tackled.

There is a lack of detail at the moment as to exactly which of the measures set out in the White Paper will be brought forward in the draft Bill, and how some of the stated objectives of the Bill as outlined above will be implemented. It is clear that the establishment of ARGA to replace the Financial Reporting Council will go ahead, and that the Government intends to enhance directors’ financial reporting duties in some form and proceed with the proposals for managed shared audits. Press coverage had speculated that the draft Audit Reform Bill had been dropped from the legislative agenda in its entirety. In fact, it has been put forward as draft legislation, meaning it will be issued for consultation before being formally introduced to Parliament. This is likely to delay implementation until 2024. We can expect the Government to publish its response to the original White Paper ‘shortly’. This should provide more detail of exactly what the Government intends and what the impact of these measures will be.