When HM Government pushed its small business reform legislation through Parliament just before the general election, it created a valuable source of KYC information, along with an exemption to registration that might help thousands of high-net-worth individuals, vulnerable and otherwise.

On the Government's website, one of the jobs of the new Small Business, Enterprise and Employment Act (which received Royal Assent on 26th March) is to "enhance the reputation of the UK as a trusted and fair place to do business, increasing transparency around who owns and controls UK companies and helping deter and sanction those who hide their interest in UK companies to facilitate illegal activities, including through the creation of a publicly accessible register of people with significant control over a company."

Once their laughter over the illiteracy of this statement has subsided, compliance officers might notice the implications that this part of the new Act might have for 'know your customer' controls. The legislation operates quite independently of any laws that the UK might enact in future in compliance with the forthcoming update to the European Union's Money-Laundering Directive.

The operative part of the Act is Schedule 3, which is entitled "Register of people with significant control." It serves as an addition to Part 21 Companies Act 2006. The need to keep registers applies to all 'DTR5 issuers' (i.e. issuers of shares; DTR5 is the Financial Conduct Authority's vote-holder and issuer notification rules) and any company the Secretary of State for Business, Innovation and Skills (Mr Sajid Javid) identifies in forthcoming regulations.

It is not known when the registers will be up and running. Within Schedule 3, chapter 2 imposes duties on companies to gather information, and on others to supply information, to enable companies to keep registers required by chapter 3. Chapter 3 requires each company to keep a register, referred to as a register of people with significant control over the company, and to make it available to the public. Chapter 4 gives private companies the option of using an alternative method of record-keeping, while chapter 5 makes provision for excluding certain material from the information available to the public.

Gaol for the compliance officer?

Section 790F states that if a company fails to comply with its duty to investigate and obtain information for the register and to keep it up to date or give notice, it will be held to have committed an offence, as will "every officer of the company who is in default." Presumably this means, among others, the compliance officer. On conviction on indictment, this means imprisonment for a maximum term of 2 years or a fine (or both). On summary conviction (in front of a magistrate) it can mean 12 months' imprisonment or a fine (or both).

Exemptions by ministerial appointment

As we have said, chapter 5 contains some exemptions for information from public scrutiny. Section 790ZF protects information about the usual residential address of a person with significant control over a company.

By section 790ZG, the secretary of state may issue regulations to stop the 'registrar' (presumably the Registrar of Companies for England and Wales) and the company from using or disclosing the particulars of 'people exercising significant control' of a prescribed kind (or to refrain from doing so except in prescribed circumstances) in the event of an application. The regulations can say how to apply, who can apply, what grounds the applicant must have for applying, etc. Regulations will have to be passed in Parliament using the 'affirmative resolution' process, i.e. active voting in the two chambers. (The 'negative procedure' refers to statutory instruments that automatically become law unless there is an objection from either House.)

This, however, is as nothing compared with the sweeping information-cloaking powers that the Government arrogates to itself in chapter 2. There, section 790J (entitled "power to make exemptions") says that the secretary of state may exempt an individual or firm by not requiring him/it to comply with any notice under section 790D(2) (which deals with a company’s duty to investigate and obtain information, and which it sends out to people who should be on the list) or section 790E (which exhorts companies to keep the information up-to-date). However, if someone receives a notice, he must bring the existence of the exemption to the attention of the company that sent it.

Under this exemption companies are not obliged to take reasonable steps to find out who is a 'registrable person' or to 'give notice' to anyone they think might qualify. No notices, moreover, have to go out to anyone who might know who fits the bill. The only restraint on the secretary of state's power to grant an exemption under this section - and it is a slender one - is that he must say that he is "satisfied that, having regard to any undertaking given by the person to be exempted, there are special reasons why that person should be exempted." That is all.

What this might mean

The first lesson to draw from this is "make friends with influential politicians." As we have seen from the Government's refusal to prosecute a single senior banker for any of the scandals that have been rocking the financial sector since the crash of 2008, if not before, one route to that goal is to make copious political contributions. The second lesson to draw is that the Government is probably willing as a matter of principle to grant extensive exemptions to high-net-worth people who might turn up on these company registers. After all, when the previous Labour Government was trying to commit the personal and family details of every child in England and Wales to a database known as ContactPoint, which local authorities used for a time, it announced in August 2006 that the details of children of celebrities and wealthy people were to be given special safeguards. The next Government only wound the database down because of Liberal Democrat concerns about civil liberties - concerns that no longer apply because the Liberal Democratic Party is no longer a vital force in British politics. It passes belief that the impulses of a Conservative Government with an overall majority in Parliament are less favourable towards HNWs than those of the Blair/Brown Government. Ministerial 'waivers' could therefore become common under this regime.

On top of this, banks with wealth management arms could well use their undoubted political muscle to extend ministerial exemptions under chapters 2 and 5 to shield the identities of their clients who are beneficial owners of small businesses and who might be deemed 'vulnerable'. HNWs who inherit shares and other resources but who are less than usually able to order their affairs and are therefore open to victimisation might benefit from such a phenomenon and remain anonymous. The beauty of this arrangement, under chapter 2, is that the information would not only be kept from the public; it need not be collected in the first place.

The transfer option

Section 94, to conclude, says that Schedule 5 amends the Companies Act 2006 to give private companies the option of keeping certain information on the register kept by the registrar of companies for England and Wales instead of keeping it on their own registers. It is unknown whether many small financial firms will take the government up on this offer.