The Economic Secretary to the Treasury (John Glen)

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I congratulate the hon. Member for Cardiff North (Anna McMorrin) both on securing this private Member’s Bill and on highlighting the important issue to the House. I acknowledge the many significant contributions so far: from my hon. Friends the Members for Northampton South (Andrew Lewer), for Berwickshire, Roxburgh and Selkirk (John Lamont), the hon. Member for Croydon Central (Sarah Jones), my hon. Friends the Members for Clwyd South (Simon Baynes), for Grantham and Stamford (Gareth Davies), for Christchurch (Sir Christopher Chope), for Rushcliffe (Ruth Edwards), for Bolton West (Chris Green), for Sedgefield (Paul Howell), for Darlington (Peter Gibson) and for Gedling (Tom Randall). All of them have interrogated the Bill very carefully and thoughtfully with some interesting exchanges along the way.

I wish to put it on record that I fully agree with the ambitions of the hon. Lady’s Bill to support the growth and development of the co-operative and mutual sector and to tackle climate change; I have enjoyed our dialogue during the preparation of the Bill to get to this point. They are two key drivers of my tenure as Economic Secretary. I also wish to put it on record that the Government have taken significant steps to support the co-operative and mutual sector to reach its potential, and I will continue to champion mutuals of all kinds. Just last week, I was pleased to attend a roundtable on the topic of regional mutual banks chaired by my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) who has also made contributions again today. I will be taking some of those thoughts from that discussion forward.

Treasury officials who work with me also hosted an innovative mutuals workshop with representatives from across the sector last year to drive practical changes to help co-operatives. In 2014, as has been mentioned, we passed the Co-operative and Community Benefit Societies Act to reduce legal complexity and, at the same time, we increased the amount of capital a member could invest in a society from £20,000 to £100,000.

John Glen

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It does show the considerable potential, but we must be clear about the different legal traditions and frameworks that exist in those different jurisdictions. Right now, we are looking at where we can examine ways of moving forward constructively from the basis that we have in this country.

I would like to move on and examine some of the other elements where the Treasury has made contributions to assist this broad agenda. Where we have identified barriers holding mutuals back, we have acted to remove them. This year, we worked with Her Majesty’s Revenue and Customs to ensure that companies converting to co-operatives are treated on a level playing field. At the Budget, the Government announced that the tax burden on housing co-operatives would be reduced. Most recently, the Treasury has worked closely with the Department for Business, Energy and Industrial Strategy to ensure that co-operatives can benefit from the Government’s covid-19 business support offer, including through the Corporate Insolvency and Governance Act 2020.

I am conscious that the interest of the hon. Member for Cardiff North is not just about the development of the co-operative sector. In our discussions, her passion for taking action to address climate change and her considerable experience in Wales prior to coming to this place have been abundantly clear to me. The Government share that ambition. As the House will be aware, we legislated to reduce emissions to net zero by 2050, becoming the first major economy to do so. In the Budget earlier this year, the Chancellor also announced a series of real, tangible measures to support green growth and tackle climate change. They were wide-ranging and included: committing to the carbon capture and storage infrastructure fund; fulfilling the manifesto commitment to tree planting and peatland restoration through a £640 million Nature for Climate fund; delivering on our commitment to increase the proportion of green gas in the grid by consulting on introducing a Great Britain-wide green gas levy to support biomethane production, alongside other measures to decarbonise heat; doubling the size of our energy innovation programme; and, at the summer economic update in July, the Government announced a further ambitious £3.05 billion package for housing decarbonisation designed to cut carbon, save people money and create jobs.

In my own area of responsibility at the Treasury, green finance is a priority. We published our green finance strategy in July last year. It sets out very clear objectives to align private sector financial flows with clean environmentally sustainable and resilient growth, and to strengthen the competitiveness of the UK financial sector. The tone of the debate and the content of colleagues’ speeches today has shown that there has to be an almost limitless ambition in terms of the dimensions of interventions. A number of contributions focused on the issue of green bonds and mobilising green finance. That means accelerating investments to support clean growth and our environmental ambitions. I think I would want to say that the issuance of green bonds will be an important part of the pathway to delivering the transition to net zero by 2050. It is something that the Treasury keeps under active and ongoing review as we approach fiscal events in the future.

I would like to turn now to the reasons the Government cannot support this Bill, despite sharing the ambitions of the hon. Member for Cardiff North. For the benefit of the House, it may be worth restating that societies can currently issue shares to raise capital and may also issue debt in much the same way as companies, as the Opposition Front-Bench spokesman, the right hon. Member for Wolverhampton South East (Mr McFadden) correctly set out. The current arrangement allows for a considerable amount of flexibility for co-operatives seeking to raise capital, while safeguarding their status as genuinely mutual member-owned and controlled entities.

The Government believe that the UK should have a strong and robust regulatory system which provides strong protection for consumers. Investment in mutuals, like any other investment, is not risk-free—a point that has been made by several hon. Members. Although it is for investors to make their own choices about risk—as has been pointed out, investments can go up and down—it is crucial that the Government ensure that appropriate protections are in place, particularly where a new type of investment instrument or product is being created.

The recent public and regulatory attention, following the failure of London Capital and Finance, to retail investments such as those that are often referred to as mini bonds highlights that care is needed when developing investment products for retail investors. From the beginning of this year, the Financial Conduct Authority took action to limit the promotion of a certain type of mini bond to certain retail investors, citing concerns about the high risk that capital invested would not be repaid and the illiquid nature of the investment. The FCA is now consulting on making those temporary rules permanent and extending them to some similar securities.

Unfortunately, we believe that the type of share proposed in the Bill may unintentionally—I do accept that it would be unintentional—create a capital instrument with characteristics similar to those of a mini bond, without ensuring that adequate protections for consumers were in place. Some of the significant issues with mini bonds arose as a result of their illiquid nature—the fact that they cannot easily be transferred—limiting investors’ ability to access their funds. Although the share proposed in the Bill is transferable, we believe that, in practice, it is likely that it would be highly illiquid. Mutual shares can ordinarily only be transferred at par value, which in turn limits the potential for the emergence of any secondary market for the shares, because the incentive to purchase existing shares is limited. In the case of the share proposed in the Bill, the opportunities for retail investors to recover their funds before the term attached to the share has expired, should they need to do so, may be extremely limited. That limitation could pose risks to retail investors with relatively low net worth who may need to access their capital.

Investment in mutuals is not risk-free. Many investors in mini bonds were motivated by the opportunity to support a brand or product that they had some relationship with, so they may not have fully considered the risks posed to their capital. That issue should be considered carefully in this case, because it is likely that individual socially minded investors may see investment in a green co-operative as an ethical use of their funds and may underestimate the associated risk.

That issue may be compounded by two further considerations. First, although the FCA is the registering authority for co-operatives, where they are not undertaking regulated activity they are not supervised by the FCA in the manner in which financial services firms are. We believe, therefore, that there is a significant risk of mistaking registration with the FCA to suggest a level of scrutiny that does not exist, and that may cause investors to underestimate the risk. Furthermore, as the investments are unlikely to be covered by the Financial Services Compensation Scheme, there would be no compensation available to consumers if the issuing co-operative were unable to repay the original investment. That has been a particularly contentious area with mini bonds.

More broadly, the Treasury’s review of the current regulatory arrangements for the issuance and marketing of non-transferable debt securities, such as some mini bonds, is ongoing. It is right that we consider carefully the outcome of that review before consideration is given to the creation of any capital instrument with similar characteristics. We do not want to have to do another review when we have not concluded this one yet. I hope I have made it clear to the House that the Government have significant concerns about the potential consumer detriment that may unintentionally arise as a result of the type of share proposed in this Bill.

John Glen

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My hon. Friend shows his usual grasp of these matters. He is right to say that the lack of clarity about the promotions regime and the regulation of the underlying instruments poses some real challenges. Alongside Dame Elizabeth Gloster’s review, which will report in November, we are looking carefully at the right joined-up response to deal with the risks that we have seen in the recent unfortunate situation arising from these mini-bonds.

Alongside protecting consumers, it is right that the Government consider the impact of any proposed changes to the shares issued by co-operatives on the sector. We have seen clear examples in other policy areas of legal forms being used to deliver investor benefits other than for the purpose they were intended, such as tax-advantaged venture capital schemes in energy generation. The FCA noted in response to its 2015 consultation that it had taken the decision not to register a number of energy societies as co-operatives. Those decisions were taken on a case-by-case basis, when it was determined that the conditions for registration as a co-operative were not met. In those cases, the relevant condition for registration was that the society must be a bona fide co-operative society.

Key to what makes mutuals distinct from other legal forms is their purpose-driven nature—one that the hon. Member for Cardiff North set out clearly in her opening speech and to which others have referred. I am concerned that the type of share proposed in the Bill may incentivise investors to inappropriately use the co-operative legal form as a vehicle to attract investment rather than to act for the benefit of its members or community, as co-operatives are intended to. Let me be clear: we are not opposed to community energy schemes, or for that matter any other business seeking to incorporate in the mutual model. However, it is right for the Government to be cautious in proceeding without the possibility for appropriate consultation and consideration, because we have seen real examples of where the model has been used in the wrong way, to considerable consumer detriment.

Finally, I note that there does not appear to be a clear consensus from the co-operative sector in support of the Bill as it stands. I will set out the position plainly as I understand it. In a briefing to MPs, the trade body Co-operatives UK noted that the Bill would be “impractical and counterproductive” and

“would restrict rather than expand the scope for societies to take on mission-aligned investment for environmental and social purposes.”

Co-operatives UK’s preferred approach, as the hon. Lady acknowledged, is to make amendments in Committee to remove the links to environmentally sustainable investment from most of the Bill. However, I believe that would fundamentally contradict the hon. Member’s intentions in drawing the scope of the Bill and is therefore not a viable way forward.

To conclude, let me reiterate my sincere gratitude to the hon. Member for Cardiff North for bringing forward this Bill. There has been a constructive discussion today, and it is important to highlight the value of the co-operative and mutual sector, both to the House and the public. I thank her for the way that she has engaged with me and my officials in recent months. Her passion to support the sector and tackle climate change has been clear throughout. As I have indicated to her previously, I will be happy to continue to work with her and representatives from the sector, of which there are a number across the House, to understand what more can be done. I will continue to champion the work of the co-operative sector more generally and address some of the themes of today’s debate, which have been very valid and worth while.