Chris Leslie (Nottingham East) (Lab/Co-op)
I think that, on this fine morning, I too should declare an interest, although there is no requirement for me to do so. I am a Labour and Co-operative Member, and have received support from the Co-operative party. More generally, the House is aware of my historical support for the mutual sector. Unlike other Members, I come to the Bill at a late stage in its progress, and I commend, in particular, the hon. Member for Cardiff North (Jonathan Evans) and Lord Naseby for their diligence.
As the hon. Member for Cardiff North explained, after the global banking crisis had swept across the world like a tsunami and the tide had eventually ebbed, one of the critical risks that were revealed was the issue of the ability of organisations—in this instance, mutual insurers and friendly societies—to withstand, and have the capacity to absorb, difficult circumstances that might make a call on their capital. So the need to resolve this has been a priority for these institutions, although I feel that regulators and others have perhaps not put this as high up the agenda as it should have been, hence the point made by the hon. Member for Cardiff North about the building society sector getting its house in order in terms of the core capital deferred shares, but now we also require a similar set of instruments for the insurance sector.
It is important to put on the record the work done not just by the Building Societies Association but the Association of Financial Mutuals and many others who have helped create a potential solution here. It is not absolutely necessary for the sector, which is able to cope with the new regulatory requirements, but it would certainly make it easier and provide much more of a level playing field, given the ability of the PLC shareholder sector to obtain capital in a far simpler way.
I also want to commend the right hon. Member for Banbury (Sir Tony Baldry) for at least taking the opportunity to put the spotlight on clause 2 and the question about the number of votes. Having listened to his comments, however, I would not want to see that part of the Bill taken out. The hon. Member for Cardiff North was very persuasive in pointing out that the particular character of mutual insurers and friendly societies is that their members together have control and ownership of the organisation, and history shows, through demutualisation efforts in the past, that we need to safeguard the ownership and the integrity of those organisations in this way. Therefore, I am persuaded that the single vote, regardless of the amount of the investment, through the deferred shares is the right way to proceed.
This is a sensible set of measures. It is important that we have them on the statute book. However, we are at a late stage in this Parliament and I ask the Minister to clarify the Government’s intentions for bringing forward the regulations and making sure we can get these changes through, because this is a piece of primary legislation that then enables regulations to be made by affirmative order, hopefully in quick succession. I therefore ask the Minister to give us a sense of the time scale for when that may happen, because, with the level of scrutiny we have had on this, there is quite a lot of consensus on the matter and we need to ensure that the financial services and insurance sectors have this diversity. The gradual disappearance of mutuals in this area will be to the detriment not just of the sector and competition, but consumers as well. Therefore, we have to modernise and sustain the mutual sector. The Bill provides worthwhile provisions for doing that and has the support of the Opposition.
The Economic Secretary to the Treasury (Andrea Leadsom)
I would like to put on record my great pleasure at the extent of cross-party consensus on the importance of this Bill to support the mutuals sector. I thank my right hon. Friend and constituency neighbour the Member for Banbury (Sir Tony Baldry), who raised some important points. I hope he will be persuaded to withdraw his amendments, as there are clear reasons for doing so.
One of the Government objectives for the Bill is to preserve the mutual status of firms in the sector. Government amendments give firms the option to provide membership rights to deferred shareholders, if they so wish. However, if deferred shareholders do become members of the firm, they will not be entitled to additional voting rights, regardless of the value of their deferred shareholding. This clause serves to protect the principle of mutuality. My hon. Friend the Member for Cardiff North (Jonathan Evans) set out very clearly why that is vital to ensure the success of this sector, which the Government have been so keen to support.
The proposals in the Bill have been carefully drafted to provide mutual organisations with a means to raise external capital in a way that preserves the mutual status of firms. This is no easy task, and the merits of attracting external capital into the mutual sector have been debated at length by mutuals, and some mutual organisations have taken steps to reform and issue mutual capital instruments. For example, in recent years building societies have commonly issued permanent interest-bearing shares that pay the holder a fixed rate of interest. The shares cannot be sold back to the society, although they can be bought and sold on the stock exchange, which means that the price can vary. Changes in banking regulation mean that those instruments will no longer be classed as core tier 1 capital, so the building society sector has designed a replacement mutual capital instrument, known as core capital deferred shares, which will enjoy the same tax treatment as ordinary shares.
Andrea Leadsom
I congratulate my hon. Friend the Member for Cardiff North (Jonathan Evans) on his speech, and on all his work in this area. I have certainly enjoyed working with him during his last few months in the House. He is well known as a strong supporter of the mutual movement, and has spent many years as the chairman of the all-party parliamentary group for mutuals, promoting the sector.
I thank my hon. Friend for piloting this Bill on an important and valuable issue, and for securing a prompt date for Third Reading. The Bill started in the other House, where it also had cross-party support. I congratulate my noble Friend Lord Naseby on his work to promote the merits of the Bill. The Government support the key aim of the Bill, which is to provide friendly societies and mutual insurers with the means of raising external capital in a way that does not impinge on their mutual status. I am grateful to my right hon. Friend the Member for Banbury (Sir Tony Baldry) for withdrawing his amendments, and would like to record my personal gratitude to him, as my constituency neighbour, and wish him a happy retirement from this place.
Access to capital and credit is the lifeblood of any company. It poses a specific issue for mutuals, as they are designed to serve their members, and were not designed with capital investors in mind. Unlike other firms, mutuals cannot issue shares, which deprives them of access to the equity markets. This means that, in broad terms, mutuals access their regulatory capital from retained earnings and by issuing subordinated debt. This long-term approach is often seen as a strength of the sector, but mutuals have long made the case that the restrictions on accessing external capital can act as a brake on their ability to adapt and respond to new market conditions. The sector has also argued that it limits firms’ ability to secure maximum investment, to develop new and innovative products, and to grow through acquisition.
The Bill has been carefully drafted to enable friendly societies and mutual insurers to access external capital in a way that does not impact on their mutual status. This enabling Bill would allow friendly societies and mutual insurers to issue a new class of deferred share. The Bill has two substantive clauses. Clause 1 allows Her Majesty’s Treasury to make regulations that would permit friendly societies and mutual insurers to issue new deferred shares. The Treasury will work with the regulators and all interested parties to determine the details and the process for issuing the deferred shares, and to ensure that these instruments are marketed to the appropriate investors.
My answer to the hon. Member for Nottingham East (Chris Leslie)—I apologise for not having an answer for him earlier—is that we will consult the Prudential Regulation Authority and regulators as soon as possible after Royal Assent to ensure that the procedures are right. We will progress with this as soon as the legislative timetable permits.
Clause 1 also sets out the key features of deferred shares, and explains that prior consent of the appropriate authority—either the Prudential Regulation Authority or the Financial Conduct Authority—must be obtained before a friendly society or mutual insurer can issue deferred shares. Clause 2 sets out the conditions that will preserve the mutual status of firms that wish to issue deferred shares. Mutuals will be able to provide membership rights to deferred shareholders, but no friendly society or mutual insurer will grant more than one vote per deferred shareholder, and no deferred shareholder will receive more votes than an ordinary member by virtue of being a deferred shareholder. That will respect and preserve the “one member, one vote” principle of mutual organisations. In addition, the regulations enabled by the Bill will restrict the voting rights of certain members who hold deferred shares, so that they cannot vote in any decisions to transfer, merge or dissolve the mutual. That serves further to protect mutuality. Clause 3 sets out the definitions of terms used in the Bill, and clause 4 contains the title of the Bill, and confirms that the Bill extends to the whole United Kingdom and will come into force when the Treasury makes the regulations provided for in clause 1. The Government can confirm that the Bill raises no human rights issues.
The Government fully support the Bill, which is of course consistent with the commitment in the coalition’s programme to promoting mutuals and fostering diversity in financial services. This short Bill could provide a huge opportunity for the mutual sector. I hope that all Members will be able to support it.
Question put and agreed to.
Bill accordingly read the Third time and passed, without amendment.