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UK: Creation of PSC Register introduces new disclosure requirements for insurers
Purpose of new legislation
The Government hopes to combat tax evasion, money laundering and terrorist financing by enabling the full legal and beneficial ownership of a company to be made public. Similar measures were introduced as part of the EU Fourth Money Laundering Directive, which must be implemented by 26 June 2017.
The new Regulation
The new legislative changes are contained in Part 21A of the Companies Act 2006. Broadly, it requires people with significant control ("PSC") to be identified and disclosed by the company. The rules apply to UK-incorporated companies whose shares are not traded on any of certain specified markets (including but not limited to the LSE main market, AIM and regulated markets in EEA states). These companies are already subject to DTR5 (or an equivalent regime) which contains disclosure obligations relating to major shareholders.
A PSC is identified as an individual (excluding corporate bodies) who, in relation to a company:
- holds, directly or indirectly, more than 25% of its shares;
- holds, directly or indirectly, more than 25% of its voting rights;
- holds, directly or indirectly, the right to appoint or remove directors holding a majority of the votes that can be cast at a meeting of its board of directors;
- has the right to exercise, or actually exercises, significant influence or control over it; or
- has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or firm which is not a legal entity and whose trustees or members meet any of the above conditions or would do so if they were individuals.
Although corporate bodies are excluded from being PSCs, companies must still identify relevant legal entities which are subject to DTR5 and which would be PSCs if they were individuals, and may need to register such entities on their PSC register.
For example, if Mrs Smith owns 50% of the shares in Company A (a registrable relevant entity), which owns 50% of the shares in Company B, Company B's PSC register will need to show Company A, but not Mrs Smith. This is intended to avoid a duplication of disclosure obligations, since Company A, already subject to DTR5 or an equivalent regime, will disclose the relevant details. If Company A were not a registrable relevant entity then Company B's PSC register would show Mrs Smith only.
Companies have an obligation to update the PSC register, and to seek the necessary information from potential PSCs (or relevant legal entities) by sending out requests for information. PSCs, and relevant legal entities then have an obligation to respond to these requests.
The sanctions for non-compliance will give rise to a criminal offence on the part of the company and its officers.
The PSC registers must be made available to the public on request and, from 30 June 2016 onwards, the information must be included in the company's annual confirmation statement (the replacement for the Annual Return), which will be included on the Companies House register.
Overseas effect of new regulation
Although the PSC regime is applicable to UK-incorporated companies, a situation could arise where a UK resident, Mrs Smith, owned 50% of a Cayman Islands-incorporated Company A, which in turn owned 50% of a UK-incorporated Company B. In this instance, only Company B would have an obligation to maintain a PSC register.
Company A, not subject to DTR5, would not constitute a registrable relevant legal entity, and thus not be recorded on the PSC register. Company B would have a duty to take reasonable steps to identify its PSCs (in this case – Mrs Smith). Assuming Company B has no knowledge of Mrs Smith, and Company A does not disclose the details of Mrs Smith's ownership to Company B, Company B will not be in breach of its obligations so long as it makes reasonable efforts to obtain such information.
If Mrs Smith knows that she is a PSC of Company B, that her required particulars are not on Company B's PSC register, and that Company B has not contacted her for a period of at least one month, she will be under an obligation to contact Company B and notify it of her status. However, it does not appear that Mrs Smith would commit any offense by not complying with this obligation.
Current Regulation for Insurance Companies
Currently, controllers and potential controllers of FCA or PRA authorised firms must make appropriate disclosures to the relevant regulatory body. Subject to specific exemptions under the Financial Services and Markets Act 2000 (Controllers) (Exemption) Order 2009 (SI 2009/774), Part 12 of the Financial Services and Markets Act 2000 contains the regime for changes in control of authorised firms.
Under the Solvency II Delegated Regulation, insurers must also disclose, as part of their solvency and financial condition report, "a description of the holders of qualifying holdings in the undertakings." This is defined as either directly or indirectly holding at least 10% of the shares or voting rights, or a holding which "makes it possible to exercise a significant influence" over the company.
Although some aspects are common to both regimes, the new PSC regime may impose additional burdens on insurance companies:
- The PSC regime is only applicable to "smaller" companies not listed on AIM / LSE Main Market. However, subsidiaries of insurance companies listed on the AIM / LSE Main Market which are themselves not listed will still have to comply;
- If a company fails to send out a notice requesting information to potential PSCs within a month of them becoming PSCs, individuals who know themselves to be PSCs of the company incur an obligation to notify the company of their status;
- The solvency and financial condition report must be published annually, whereas the PSC register must be updated as an ongoing obligation;
- Although the obligation to update the PSC register is incumbent on the company, a failure to respond to a notice or notify the company under 5(b) above might result in the PSC or the relevant registrable legal entity being unable to:
(i) Transfer those shares;
(ii) Exercise rights in relation to those shares (such as voting); or
(iii) Receive sums due on those shares (dividends), except in a liquidation.
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