Introduction
The United Kingdom’s corporate landscape is undergoing a significant transformation with the enactment of the Economic Crime and Corporate Transparency Act 2023 (ECCTA 2023). A central pillar of this legislation is the introduction of mandatory identity verification for company directors, Persons with Significant Control (PSCs), and those who file information at Companies House. For Small and Medium-sized Enterprises (SMEs), which often operate with limited administrative resources, these new requirements present a considerable compliance challenge. This essay will explain how solicitors should advise their SME clients on navigating the new Companies House identity verification regime. A solicitor’s advice should be proactive, practical, and risk-focused. The primary role is to demystify the new obligations, guide clients through the practical steps for compliance, and clearly explain the serious consequences of non-compliance, thereby helping SMEs to operate effectively within a new, more transparent corporate environment.
The Legislative Context: The Economic Crime and Corporate Transparency Act 2023
To provide effective advice, a solicitor must first explain the rationale behind the new rules. The ECCTA 2023 is not simply an administrative change; it is a key component of the government’s broader strategy to combat economic crime, including money laundering, fraud, and terrorist financing (HM Government, 2023). For years, the public register at Companies House has been criticised for its vulnerability to misuse. The ease with which companies could be incorporated with false or anonymous details allowed illicit actors to create corporate structures to hide their identities and launder the proceeds of crime (Transparency International UK, 2019). The new verification requirements are designed to address this by ensuring that the individuals behind UK companies are real and can be traced.
A solicitor should explain to an SME client that the Act grants Companies House significant new powers, transforming it from a passive recipient of information into a more active gatekeeper. These powers include the ability to query, reject, and remove information from the register, as well as to share data more effectively with law enforcement agencies. The identity verification measures are the foundation of this new-found authority. By advising on this context, solicitors can help SME clients understand that compliance is not just a matter of ‘box-ticking’ but is part of a national effort to enhance corporate integrity, which ultimately benefits legitimate businesses by increasing trust in the UK as a place to do business. This wider understanding can help secure client cooperation with the new, and potentially burdensome, administrative processes.
Key Elements of the Identity Verification Requirement for SMEs
A solicitor’s primary duty is to provide clear and accurate information about what the law requires. The advice on identity verification should be broken down into clear, manageable components.
Who Must Be Verified?
Solicitors must advise SMEs that the verification requirements apply to a broad range of individuals associated with the company. The key groups are:
- Directors: All new and existing directors of a UK-registered company must have their identity verified. This includes directors of newly formed companies and individuals appointed as directors of existing companies (ECCTA 2023, s. 4). For new companies, at least one director must be verified before the company can be incorporated.
- Persons with Significant Control (PSCs): All new and existing PSCs are also subject to mandatory identity verification. This ensures that the ultimate beneficial owners of a company are known and identifiable.
- Filing Agents: Individuals who file information at Companies House on behalf of a company, such as solicitors, accountants, or formation agents, will also need to be verified. This applies if they are registered as an Authorised Corporate Service Provider (ACSP).
Solicitors should stress that this applies to all directors and PSCs, regardless of nationality or residency. An SME with an overseas director must ensure that individual complies with the verification process.
How is Verification Performed?
The advice needs to be practical regarding the methods of verification. The government has confirmed two primary routes (Companies House, 2024):
- Direct Verification with Companies House: This is the default method and involves a digital process. The individual will need to use a smartphone or computer to take a photograph of an approved form of photo identification (such as a passport or driving licence) and complete a ‘liveness’ check, which typically involves facial scanning to confirm they are a real person and match the photo ID. This process is designed to be quick and is expected to be the most common route for digitally literate individuals.
- Indirect Verification via an Authorised Corporate Service Provider (ACSP): For individuals who cannot or do not wish to use the digital service, an alternative is to have their identity verified by an ACSP. These will be organisations, such as law firms or accountancy practices, that are registered with Companies House and meet certain anti-money laundering standards. The ACSP will conduct the identity checks on the individual and then confirm to Companies House that verification has been completed. Solicitors’ firms can register to become ACSPs, presenting a new service opportunity.
For an SME, the choice will depend on the circumstances of its directors and PSCs. A solicitor should discuss the pros and cons: the direct route is likely cheaper and faster if it works, while the ACSP route provides a non-digital alternative and a professional service, albeit at a cost.
Timing and Implementation
The implementation of ECCTA 2023 is being phased in through secondary legislation, and solicitors must advise their clients that the rules are not all effective immediately. While the Act is now law, the specific dates for when verification becomes mandatory for existing directors are still to be confirmed. Solicitors should monitor announcements from Companies House and provide timely updates to clients. It should be made clear, however, that for new company incorporations and new director appointments, the verification requirements will apply as soon as the relevant systems are launched. This means SMEs planning to set up new companies or appoint new directors must be prepared for these new steps.
Practical Advice for SME Clients
Armed with the legal requirements, the solicitor must translate this into a practical action plan for the SME client.
1. Conduct an Internal Audit
The first step for any SME should be to conduct an audit of its corporate structure. The solicitor should advise the client to:
- Create a definitive list of all current directors and PSCs.
- Cross-reference this list with the company’s statutory registers (the Register of Directors and the Register of PSCs) and the information publicly available on Companies House.
- Correct any inaccuracies immediately. The new powers of Companies House mean that inconsistencies are more likely to be identified and queried, leading to delays and potential penalties.
2. Communicate with Relevant Individuals
Once the list is finalised, the company must communicate with each individual who requires verification. The solicitor should advise the SME to explain what is required of them, the methods available, and the company’s intended timeline for achieving compliance. This is particularly important for non-executive directors or PSCs who may not be involved in the day-to-day running of the business and may be unaware of these new duties. Clear communication will prevent delays and ensure a smooth process.
3. Develop an Action Plan and Integrate into Processes
Solicitors should recommend that the SME create a simple action plan. This plan should assign responsibility for overseeing the verification process, set internal deadlines for directors and PSCs to complete their verification, and track progress. Crucially, the advice should extend to future-proofing. Verification is not a one-time exercise. The solicitor must advise the client to integrate the identity verification step into their standard procedures for appointing a new director or registering a new PSC. It should become a mandatory part of the onboarding checklist for any new appointee.
4. Understand the Consequences of Non-Compliance
A solicitor’s advice would be incomplete without a clear warning of the risks of non-compliance. The ECCTA 2023 introduces significant sanctions. A solicitor must explain that:
- It will be a criminal offence for an individual to act as a director if their identity has not been verified (ECCTA 2023, s. 9). This could result in a fine. The company itself may also commit an offence if it fails to ensure its directors are verified.
- Companies House will have the power to impose civil penalties for non-compliance.
- There are practical business consequences. For example, a company cannot be incorporated without having at least one verified director. Furthermore, the acts of an unverified director could potentially be challenged, creating legal uncertainty for the company and those it deals with.
The Solicitor’s Broader Role and Professional Responsibilities
The solicitor’s role extends beyond simply relaying information. Under the SRA Principles, solicitors have a duty to provide a competent service and act in the best interests of their client (Solicitors Regulation Authority, 2019). In the context of the ECCTA 2023, this means being proactive. Solicitors with corporate clients should not wait to be asked about these changes. They should be issuing client briefings, updating their retainer agreements, and discussing the issue during regular client meetings.
Furthermore, law firms themselves have a decision to make about whether to register as an ACSP. This offers a commercial opportunity to provide verification services to clients, generating a new revenue stream. However, it also comes with its own compliance and liability burdens. Solicitors must consider their firm’s capacity and risk appetite before pursuing this route. If a firm does become an ACSP, it must have robust procedures in place that are compliant with both the ACSP regime and existing anti-money laundering regulations. The advice given to clients will then also include an offer of a practical solution through the solicitor’s own firm.
Conclusion
The introduction of mandatory identity verification at Companies House is one of the most significant reforms to UK company law in a generation. For solicitors advising SMEs, the key is to provide advice that is clear, practical, and forward-looking. They must begin by explaining the purpose of the ECCTA 2023 to secure client buy-in before detailing the specific requirements of who, how, and when individuals must be verified. The most valuable advice will be in the form of a tangible action plan, encouraging clients to audit their current records, communicate with relevant parties, and embed the new verification steps into their corporate governance procedures for the long term. By clearly setting out the legal requirements and the serious consequences of failure to comply, solicitors can help their SME clients navigate this new regulatory environment, mitigate risk, and contribute to the broader goal of a more transparent and secure UK corporate framework.
References
Companies House. (2024) Changes to UK company law. Available at: https://changestoukcompanylaw.campaign.gov.uk/ (Accessed: 15 May 2024).
Economic Crime and Corporate Transparency Act 2023. c. 56.
HM Government. (2023) Factsheet: Economic Crime and Corporate Transparency Bill – Companies House reform. Available at: https://www.gov.uk/government/publications/economic-crime-and-corporate-transparency-bill-2022-factsheets/factsheet-companies-house-reform (Accessed: 15 May 2024).
Solicitors Regulation Authority. (2019) SRA Principles. Available at: https://www.sra.org.uk/solicitors/standards-regulations/principles/ (Accessed: 15 May 2024).
Transparency International UK. (2019) At Your Service: The role of UK professional services in corruption. Available at: https://www.transparency.org.uk/publications/at-your-service (Accessed: 15 May 2024).
