(1) What is the background to the White Paper?

Companies House operates the UK’s corporate registration framework which enables users to create and maintain companies and other legal entities. In recent years the Government has grown concerned that this framework has been manipulated, with companies being misused by criminals to facilitate and perpetrate different kinds of fraud. They are proposing to reform the law to help tackle this. In addition to the overarching aim of moving Companies House’s role from being a passive recipient of information to a more active gatekeeper, the Government has also considered whether the “corporate” (ie other companies or legal entities) director should be abolished.

At present, the law only requires that one director on a company’s board be a real (ie a “natural”) person and any number may be corporate directors. It also allows for an unlimited number of “layers” of corporate directors within a company’s overall structure. Following its “Transparency and Trust” discussion paper in July 2013, the then Government proposed that all company directors should be individuals and for UK companies to be prohibited from appointing corporate directors to their boards. Their view was that the use of corporate directors could “muddy the water” around ownership and provide a screen behind which to conduct illicit activity. The Government did, however, acknowledge that corporate directors were considered useful in some parts of the UK economy and so provided scope in the proposals to define exceptions so that companies might, in prescribed circumstances, continue to make use of them. There have been various consultations held since to garner views on the approach that the Government proposes to take towards establishing an exception regime to accompany the general prohibition.

The Government received consultation responses from various sectors including the pensions sector, which is the focus of this analysis. The reason being is that many pension schemes have moved to sole corporate trustee structures in recent years and within these structures there has been a further move towards appointing a corporate director/s (usually a professional trustee) to sit on the board of the trustee company. The benefits of using corporate bodies to act on Trustee boards include reducing administration costs and reducing liability exposure.

Since these consultations, and in the Corporate Transparency and Register Reform White Paper (the “White Paper”), the Government has recently moved away from the exemption regime and focussed instead on a principled-based approach.

(2) What are the proposals on restricting the use of corporate directors and will they affect the use of corporate pension trustees?

As mentioned above, at present companies are able to act as directors provided there is one natural person listed on the board. The Government are proposing to reform the corporate director rules to prohibit corporate directors as a general rule, with a “principle based” exception running alongside this prohibition. Under this exception it is proposed that there are two conditions to satisfy:

(1) All directors of the company seeking such director appointment should themselves be natural persons; and

(2) Those natural person directors are, prior to the corporate director appointment, subject to an appropriate identity verification process.

Put simply, the requirement is for companies to have at least 1 fully verified person directly associated with each entity on the companies register. Companies will be allowed a maximum of one “layer” of corporate directors, which must be based in the UK and the natural persons directing that corporate director will be subject to identity verification (see more on this below). Any company (including corporate trustees) failing to satisfy these grounds of exception will not be permitted to act as corporate director.

As mentioned earlier, this would affect schemes with a corporate professional trustee who, under these proposals, would need to ensure that all of their directors are “natural” persons.

(3) Are there any other proposals in the White Paper that may be of relevance to pension schemes?

The White Paper introduces other wide-ranging changes which may indirectly affect those running a pension scheme. Many of these changes revolve around increased checks for those incorporating or filing with Companies House, in particular with the proposed introduction of mandatory identification requirements. In practice, this will create a more burdensome and bureaucratic process for those setting up or changing corporate trustees at Companies House- for instance, on appointment of new trustee directors.

(4) What are the implications for pension schemes and what happens next?

The consultation specifically considered how the principles will apply in the pensions sector given the widespread use of the corporate trustee model in that context. Given that a corporate trustee is no different from any other limited company, it will continue to be permissible for specialist trustee providers to furnish schemes with professional board members in so far as that provider, as the corporate director appointee, maintains all-natural person directors on its own board.

There is some concern amongst pension specialists that the principles might challenge established corporate trustee models involving professional trustee service providers. There is also concern that these proposals may accelerate the move away from the appointment of sole corporate trustee directors, and towards sole professional trustees.

This article was first published by LexisNexis UK. Read Rosalind and Riccardo’s article (behind paywall), here.