The UK’s corporate register is set to shrink significantly over the next year as new identity verification rules for company directors and beneficial owners come into force on Tuesday, according to corporate transparency and financial crime specialists.
From November 18, all new directors and persons with significant control (PSCs) will need to verify their identity with Companies House before they can set up or run a company. Existing directors and PSCs will be gradually integrated into the system over the next 12 months and will complete the review when they next file a confirmation statement. Acting as a director without proof will be punishable.
The reforms aim to tackle fraud, money laundering and the abuse of shell companies by ensuring “the people who set up, run and control companies are who they say they are”, according to Companies House. More than a million people have already confirmed their identities, and up to seven million more are expected to complete the process over the next year.
But experts say the immediate impact will be visible in the number of new businesses being created – and the size of the UK business register in general.
Graham Barrow, an expert in business registrations and financial crime, predicts the number of new businesses starting up will “fall off a cliff” from Tuesday as those unwilling to reveal their identities drop out of the system.
“There will be a whole lot of people who have no intention of going through the process,” he said. “We will likely see a significant streamlining of the registry over the next year.”
Barrow stressed that a reduction should not be taken as a sign of a slowdown in economic activity. “Most of these companies are associated with people who don’t have the best intentions and are forced to change their minds. There is no evidence that the size of the registry correlates with legitimate economic impact.”
In September, the UK Business Register recorded 5.5 million companies, of which more than 500,000 were already in the process of being wound up or liquidated. Registered representatives – including attorneys, accountants and formation agents – can verify the identity of clients on their behalf.
But Barrow warned that the reforms could lead to a rise in attempts to circumvent the rules, including the use of “ghost directors” – individuals paid to reveal their identities to hide the true operators of a company. “There has already been a significant increase in the salaries of UK proxy directors for running companies that are actually controlled overseas,” he said. Payments of around £500 per identity are “not uncommon”.
A Times investigation last year found that directors are paid to act as fronts for failing companies, allowing true owners to escape scrutiny. Three people involved in the scheme have since been banned from running companies.
Legal experts believe that in addition to identity verification, a second major change will reshape corporate governance: a new investigative obligation imposed on companies themselves.
Hamish Perry, partner at Charles Russell Speechlys, said companies now needed to proactively investigate who their PSCs were.
“From November 18, companies will need to take additional steps to find out who their PSCs are, including serving formal notices to anyone they believe has this information,” he said. “There is also a duty to notify Companies House if a company suspects that someone has become a PSC or relevant legal person, even if the person has not confirmed this.”
Perry said the changes represented a “significant raising of the bar” for corporate transparency: “Companies with complex ownership structures or incomplete shareholder information will be particularly affected. They will need to implement clear internal processes to investigate and report their PSCs.”
The reforms involve the abolition of statutory registers and stricter registration requirements, exposing companies to far greater scrutiny.
“This is not just a legal change,” Perry added. “It’s a shift toward much greater regulatory accountability.”
