Mutuals’ Redeemable and Deferred Shares Bill [HL]

Debate between Lord Deighton and Lord Naseby

Friday 21st November 2014 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Deighton) (Con)]

My Lords, I congratulate my noble friend Lord Naseby on securing a prompt date for the Committee stage of this important Bill. The Government are supportive of the key objective of the Bill, which is to provide mutual organisations with a means to raise external capital in a way that preserves the mutual status of those firms. The mutual 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, and may also be restricting these organisations from developing new or innovative products, especially if these 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 Bill therefore addresses access to capital for two mutual sectors: friendly societies and mutual insurers and industrial and provident societies, now known as co-operative and community benefit societies. The Bill provides that the Treasury may make regulations, subject to the affirmative procedure, to the friendly societies and mutual insurers to issue deferred shares and to commit co-operative and community benefit societies to issue redeemable shares. At Second Reading my noble friend Lord Newby noted that the deferred share capital instrument for mutual insurers and friendly societies provides a good way forward, and he committed the Government’s support to this instrument. My noble friend also outlined at Second Reading that the Government would not extend their support to the proposed redeemable share instrument for co-operative and community benefit societies, as these societies already have a means of issuing redeemable shares. I am pleased that my noble friend Lord Naseby has accepted the Government’s support for this more limited Bill.

Government Amendments 1 to 16 achieve three objectives. First, they give effect to the Government’s commitment to support only the deferred share capital instrument for mutual insurers and friendly societies, and therefore remove the parts of the Bill that concern co-operative and community benefit societies issuing redeemable shares. Secondly, to preserve the principle of mutuality, the Bill clarifies that no friendly society or mutual insurer will grant more than one vote per person for every deferred shareholder—and, further, that no deferred shareholder will receive more votes than an ordinary member by virtue of being a deferred shareholder. Thirdly, there are several minor and technical changes to tidy up the Bill and use more appropriate legislative terminology.

Amendment 1 to Clause 1 restricts the scope of the Bill to allow HM Treasury to make regulations providing for deferred shares for friendly societies and mutual insurers. The Bill will no longer provide a means for co-operative and community benefit societies, which were formerly known as industrial and provident societies, to issue redeemable shares. In order to provide for these deferred shares, the regulations may modify the Friendly Societies Act 1992, the Companies Act 2006 and other primary legislation relating to friendly societies or mutual insurers. The Government believe that granting the regulations the power to modify primary legislation still to be enacted is both necessary and proportionate. It is necessary because there will be a period of time before these regulations are made, and in the intervening period there may be changes to existing legislation that affects friendly societies and mutual insurers which may need to be amended. It is also proportionate because it is limited to the Friendly Societies Act 1992, the Companies Act 2006 and other primary legislation relating to friendly societies and mutual insurers.

Amendments 5, 6, 7, 9, 13, 14, 15 and 16 are related consequential amendments. Government Amendments 2 and 3 make minor technical changes. Amendment 2 uses more accurate legislative terminology to clarify that the power to make regulations under the clause is exercisable by statutory instrument. Amendment 3 specifies that the statutory instrument containing regulations under this clause may not be made unless a draft has been laid before and approved by each House of Parliament. The Delegated Powers and Regulatory Reform Committee reported that it regards this delegation or procedure as appropriate.

Amendment 4 introduces a new clause that provides that holders of deferred shares will not receive more than one vote by virtue of owning a deferred share, and will not receive more votes than they would have had if they had been a member. Friendly societies and mutual insurers already have considerable freedom regarding their rules and internal governance. This maintains that freedom, but also provides that holders of deferred shares do not gain any advantage over other members by virtue of being deferred shareholders. This amendment therefore serves to protect the principle of mutuality.

Amendment 8 introduces a provision that where HMT makes a regulation to specify a particular organisation as a mutual insurer, such regulations are subject to the negative procedure. The Delegated Powers and Regulatory Reform Committee confirmed that the negative procedure is sufficient in this regard.

Amendments 10 and 11 are minor and technical changes to provide that the Treasury has the power to commence the Bill by statutory instrument and that the Treasury may make regulations by statutory instrument to commence the Bill rather than by making an order. Amendment 12 is a minor and technical change to amend the title of the Bill more accurately to reflect that the Bill applies to friendly societies and mutual insurers, permits the issue of deferred shares and restricts the voting rights of members to hold those shares. I beg to move.

[Lord Naseby (Con)]

My Lords, these amendments arise out of the removal of the redeemable element in the original Bill. It was removed by mutual consent, but I hope in due course, on another day, to come back to that dimension of the original Bill. These amendments meet the Delegated Powers and Regulatory Reform Committee’s ninth report of the Session. The comments from the committee were important and helpful.

The key element of the amendments is that they enable the Bill to go forward and allow friendly societies and mutual insurers to move forward in relation to the challenges they meet today. Looking back over two centuries, friendly societies and mutual insurers have provided insurance for life events for millions of ordinary people. They manage funds in excess of £90 billion on behalf of their members and customers and focus on good value and service quality. In addition, many are regional businesses, which is an important element. I had a debate the other week on cottage hospitals—or community hospitals, as some would call them. They are a wonderful vehicle for involving communities, and the vehicle of a friendly society or mutual insurer is a means of establishing that.

I applaud what the Government have done in terms of helping the whole mutual movement, building on the work done by the Major Government in 1992. We have seen progress in a great many areas of social welfare and other areas of mutuality, but there was this hole and these amendments help to fill it. I shall pick out the key elements these amendments will facilitate. They will facilitate an increase in membership of the firms involved. That is extremely helpful. The key point is that they will fuel organic growth and enable the development of new product lines. They will provide funds for firms to go through acquisitions that they may see as giving them an opportunity. I do not think I need to go into any greater detail. I went into considerable detail at Second Reading and the House may return to that on Report or at Third Reading.