Mutuals’ Redeemable and Deferred Shares Bill [HL]
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Lord Newby (LD)
My Lords, I begin by congratulating my noble friend on his work in this area over a number of years and on securing a Second Reading for this Bill, on which he has done an awful lot of work and which addresses a very important issue.
As the House knows, access to capital and credit is the lifeblood of any company, and the financial crisis and its ongoing impact have served to highlight this point in very stark terms. Mutuals are no different from other companies in that they need capital to extend into new areas, develop new products and services for their members, write new business or increase their financial resilience. However, the inherent design of mutuals can mean that they face difficulties when it comes to access to external capital, as noble Lords have pointed out. Mutuals are designed to serve their members, who will be customers, employees or defined communities, but they were not designed with capital investors in mind.
In broad terms, mutuals access their regulatory capital from retained earnings and by issuing subordinated debt. However, unlike other businesses, they cannot issue shares, which deprives them of access to the equity markets. They therefore tend to be restricted in how they can raise capital. Any capital for growth must be generated internally and that takes time to be built up. This patient and long-term approach is one of the hallmarks of the mutual sector and indeed one of its strengths. However, it can also limit the sector’s flexibility in adapting to new market conditions, as well as limiting a firm’s abilities to secure maximum investment in the business and to grow through acquisition.
Friendly societies and mutual insurers compete in a highly competitive UK insurance market, and the restrictions on raising external capital can place a limit on their ability to compete on equal terms with their public limited company counterparts. In the recent past, a number of friendly societies and mutual insurers have decided to demutualise, and in some cases the lack of capital was cited as a contributing factor to a mutual contemplating demutualisation. As both the noble Lords, Lord Naseby and Lord Kennedy, pointed out, this has led to a significant contraction of the mutual insurance sector in the UK.
The sector has made the case that current capital constraints are preventing friendly societies and mutual insurers acquiring other businesses that would strengthen the overall offer to members and policyholders. It may also be restricting these organisations in developing new or innovative products, especially if those products require material amounts of regulatory capital to be held. Growth in these areas would potentially be to the benefit of both with-profits policyholders and other members of the mutual.
The proposals put forward by the noble Lord in this Bill have been carefully drafted to provide these mutual organisations with a means to raise external capital in a way that preserves the mutual status of firms. The Bill addresses access to capital for two sectors: friendly societies and mutual insurers, and co-operative and community benefit societies. It provides that the Treasury may make regulations subject to the affirmative procedure to permit friendly societies and mutual insurers to issue deferred shares and to permit co-operative and community benefit societies to issue redeemable shares. The Government agree that the deferred share capital instrument for mutual insurers and friendly societies is a good way forward, and the mutuals have demonstrated a clear need and demand for this instrument. We therefore support these proposals in the Bill.
In respect of the proposed redeemable share instrument for co-operative and community benefit societies, the Government are unpersuaded about the merit of a redeemable share instrument as these societies already have a means of issuing redeemable shares. The Government do not see a clear need and demand for such an instrument, and as we have heard, in discussion with and the agreement of the noble Lord, Lord Naseby, we propose to bring forward amendments in Committee to delete these elements. But with that caveat, I hope that noble Lords will support the Bill today.
Finally, I should like to comment on the two very specific suggestions made by the noble Lord, Lord Kennedy, in his speech. He said that we should look at a mutuals expansion project to mirror that of the Credit Union Expansion Project. It is an interesting proposal and I will be happy to take it back to my colleagues in the Treasury. One of the challenges is how to recreate the conditions under which individuals feel that they want to invest their money in mutuals, take out policies of various sorts and engage in lending from them. I am a strong supporter of doing that.
As far as the way we deal with Private Members’ Bills is concerned, I have a considerable degree of sympathy with what the noble Lord said. I do not believe that the way they are being dealt with is as efficient as the way we deal with government Bills. Although it is far beyond my pay grade to suggest a way forward, I am more than happy to take his comments away. Apart from anything else, there is a real problem at the moment in that many noble Lords can secure a First Reading for their Bills, and then very often they—and more importantly, their supporters—think that those Bills are actually going to make progress. A huge amount of work goes into such legislation. Recently I was involved with a Bill that stood at number 25 or 30 in the list. A poor lawyer had spent months slaving over it. The promoter did not have the heart to tell that lawyer that, as I already knew, it stood zero chance of even getting a Second Reading. That is not sensible, and nor, frankly, are some of the subsequent ways of dealing with these Bills. This is not a matter for the Government but one for the whole House, and I am very willing to take it back, along with his other proposal.
With those comments, and with the caveat I gave earlier, I hope that noble Lords will support the Bill today.