Commercial credit reference agencies in the UK – seven of whom comprise the membership of the Business Information Providers’ Association (BIPA) – are watching the progress of the Economic Crime and Corporate Transparency Bill (the Bill) through Parliament with interest. This draft legislation promises to be, arguably, the most fundamental change to Companies House ever, even surpassing the massive change introduced by the Companies Act of 2006.

The Bill highlights a number of areas that will change key inputs to credit reference agencies’ processes. This article, however, focuses specifically on the filing requirements for small and micro-entities, as highlighted in Sally Baker’s article Companies House reform: the current state of play.

Making filing obligations for small and micro-entities clearer

The draft legislation’s first step will be to split small and micro-entities in the definitions, with the aim of providing clear and distinct sections for each type of business. It is also worth noting that the government has discussed, although not fully released at the time of writing, proposals that would also change the thresholds for small and medium-sized businesses as part of a focus on cutting ‘red tape’ and reducing the burden on businesses.

Options for small and micro-entities

The proposed amendments mean that small companies will no longer have the option to prepare and file abridged accounts and will be required to file both their profit and loss account and directors’ report. Micro-entities will also be required to file their profit and loss account, but will retain the option to not prepare or file a directors’ report. This will ensure that key information such as turnover is available.

BIPA members provide a variety of services to a range of businesses, from big banks to smaller niche lenders, alongside trade credit providers, and utilities and telecommunications companies. The key components for many of our customers are credit reports, scores and credit limits. These core services provide information to lenders and credit providers in an easily consumable manner. Some clients like a more detailed credit report that presents the information held by credit reference agencies in a structured format, with easy-to-consume information points in a bespoke layout, often for the use of an underwriter or similar. Alternatively, clients may wish to take a credit score or credit limit – a single number distilled from the information held – alongside other information to drive a decision or further activity.

At the core of all these services will typically be data consumed from sets of filed accounts and – as is always the case – the more detail we have, the more informed a decision we can provide when we use this data to build the models that drive our credit scores and credit limits.

BIPA and its members have long been concerned that micro-entity accounts do not provide the minimum amount of financial data to enable a credit reference agency to make an informed credit decision about a company, ie, whether to recommend it for credit. Our members will, of course, do their best with the available information and may also in some cases be able to supplement the information available from other non-Companies House sources, but this is not uniformly the case.

If credit-scoring models based on available financial data are to work optimally, the financial data needs to contain, at a minimum, a breakdown of assets (tangibles, intangibles, stock, debtors, cash, etc) and liabilities, with some limited notes to the accounts detailing secured borrowings (usually bank borrowings). A breakdown of capital and reserves, which separately lists the key components such as called-up share capital and the profit and loss account reserve figure, is also essential.

In the case of micro-entity accounts, this basic level of information is simply not supplied under current filing requirements. Often, we receive accounts with as little detail as aggregate figures for assets, liabilities and ‘capital and reserves’ with the latter not even broken down into share capital and reserves.

There are potential consequences due to the lack of depth in the financial information within micro-entity accounts under the current regime, including the following:

• the smallest companies are disadvantaged in obtaining trade credit and other forms of finance by being less likely to have a positive credit recommendation or by having a lower credit recommendation than would otherwise be the case;
• other businesses have less information on which to make responsible trading decisions so may expose themselves to additional risk by putting undue weight on what are simply aggregate totals in the micro-entity accounts;
• a disparity is created with other small trading companies, who may be just above the micro-entity thresholds and are therefore required to file fuller financial data; and
• companies filing micro-entity accounts may be entirely unaware that they’re putting themselves at a disadvantage in terms of obtaining credit by availing themselves of this option.

The common counterpoint to these arguments is that micro-entities are saved from further regulatory burden through the reduced filing requirements. However, this argument does not hold water when these lower requirements are culled from a larger set of accounts that have to be supplied to HMRC. This brings the draft legislation nicely full circle as the Bill also seeks to standardise the filings between both government agencies, aligning the requirements and effectively saving work for these businesses with one set of accounts being provided to both agencies, ideally via an electronic filing method to support other areas of the legislation.

BIPA welcomes the proposals to increase the level of information available through the changes outlined in this draft legislation. BIPA has  long believed that the micro-entity exemptions are unhelpful to business by creating a barrier that might lead to unintended consequences, such as making it harder to get trade credit and other matters outlined in this article. This proposed legislation is a step in the right direction to both simplification and standardisation that will benefit these businesses in the long run, through enablement of better decisions on lending that may then help them grow more in the future.

Business Information Providers Association (BIPA) was formed in March 2011 and comprises the seven principal commercial credit reference agencies in the UK – Company Watch, Creditsafe Business Solutions, Dun & Bradstreet, Equifax, Experian, Graydon UK and Vistra. It operates in a non-competitive way to address issues pertinent to the industry as a whole. Collectively, the agencies facilitate billions of pounds of business decisions each year.

BIPA has two primary purposes. First, to promote economic growth by facilitating access to business information as used by the credit reference agencies. This information is essential because it helps to reduce the risk inherent in business transactions, deters fraud and facilitates the granting of credit. Second, to facilitate communication between the agencies and the business community to create greater awareness of the data held, how this data is used and how it benefits business decisions and responsible lending.

BIPA has a strong relationship with Companies House, which is a core supplier and a key data source for our members’ commercial credit reports and other services.

To find out more, visit bipa.uk.com or contact BIPA on LinkedIn.