Co-operatives, Mutuals and Friendly Societies Bill

Andy Carter Excerpts

Friday 28th October 2022 Commons Chamber

[Sir Mark Hendrick]

I agree and commend the hon. Gentleman for his comments. Co-operatives spring up from local communities; they are bottom-up, grassroots organisations—certainly not top-down.

As I said, alongside investor-owned firms, co-operatives, mutual insurers and friendly societies have an important part to play in the biodiversity of our economy. They need a business environment that facilitates this: Government policy that understands and supports the mutual business difference; and legislation that is up to date, flexible and permits co-operatives, mutuals and friendly societies to undertake their purpose of serving their members’ needs in the best way possible. Only by working in a modern and supportive business environment will co-operatives, mutuals and friendly societies be able to make a full contribution to the prosperity of our country by serving the interests of customers and citizens. Yet demutualisation remains a real and present threat to the mutual sector, which is, unfortunately, incentivised by the system.

My Bill is about giving mutuals the option to maintain mutual capital for the purpose it was intended. There is a fundamental distinction between the rights of members of a mutual society and members of an investor-owned company. Members of a company—shareholders—have the right both to a pro rata share of distributed profits, or dividends, based on their shareholding, and also to a pro rata share of the underlying value of the company. The more capital they own, the greater their share of the profits and of the value of the company. Members of a mutual society, by contrast, generally have neither of these rights, because in mutuals profits are generally not used as a mechanism for rewarding capital, and members of a mutual do not have any expectation of any entitlement to a share in the increased value of their society.

Since members of a mutual are not entitled to any share of its increased value, the amount by which the net asset value of a society exceeds the capital provided by members—commonly referred to as the “capital surplus on a solvent winding up”—has no specific owner. It is effectively a legacy asset, held by the society for future generations, and enables it to provide for, and invest in, its future. It is a core part of its mutual identity. It represents the trading surplus accumulated by previous generations of members participating in their society’s business, in which they were always content to have no personal share. By implication, it is held for the benefit of future generations. Societies were originally set up not to make a capital surplus to reward members, but to provide goods and services for those who need them; that was the purpose, and this was the basis upon which previous generations have taken part in the trade.

Seen through the lens of investor-ownership, a capital surplus is a tempting asset—a windfall or unearned profit —which, if mutual members were to be replaced by investor-shareholders, could be shared out among those shareholders. Capturing this asset is the usual incentive for a “demutualisation”, which is when a capital surplus or legacy asset is divided up between shareholders—when the mutual agreement between the former members, whereby they engaged in their society on the basis that they would not personally profit from its trade, is broken up. In short, it is when a mutual purpose for the common good is replaced by a profit-driven purpose for private benefit.

In UK law there is no generic or principled recognition of the value to wider society of mutuality or of the legacy asset of a mutual society. As a result, the ability to access legacy assets actively incentivises demutualisation.

[Andy Carter (Warrington South) (Con)]

I am grateful to the hon. Gentleman for his speech and very supportive of his Bill. He talked about how the Bill would protect mutuals and co-operatives. Will he give us some examples of when things have gone as he suggests they could and some assets have been used for other purposes? I think that is at the heart of it, and any examples would be welcome.

[Sir Mark Hendrick]

I thank the hon. Member for his intervention. Actually, I will come to that later in my speech.

Provided that the relevant formal procedures are completed, including securing consent from a statutory minimum threshold of members, a demutualisation cannot be stopped. That threshold has been changed from time to time for different types of mutual societies to make demutualisation less likely, but those measures provide only partial protection. There is currently no statutory mechanism for ensuring that surpluses, which previous generations never intended to be a private reward for anybody, remain committed to that wider public purpose.

At the moment, legislation governing mutuals can incentivise demutualisation by permitting those legacy assets to be distributed. Legacy assets have often been built up over many generations of membership and can constitute a significant part of the working capital of the business. Current members typically have not contributed to that capital base but have enjoyed the benefits of previous years of successful trading. Most demutualisation attempts succeed, assisted by a significant power imbalance between the boards of mutuals and members.

The example of Liverpool Victoria last year shows that demutualisation attempts can, however, be defeated, even when proposed by a mutual’s board. We should be wary of the interests that private equity is showing in mutuals across the world, attracted by the prospect of acquiring significant assets built up by generations of members. At present, it is not possible for an existing society, or those setting up a new society, to proscribe demutualisation. That leaves mutuals vulnerable to those simply aiming to liberate those legacy assets, sharing them out among people as they choose, and converting the business into an investor-owned company. That has resulted in much of the UK building society sector being lost and their businesses either failing or transferring to non-UK ownership. That has been bad for mutuality and bad for the economy, given the damage that it has caused to corporate diversity.

Demutualised former building societies were mostly absorbed into banks that failed during the financial crisis. None of the demutualised former building societies continued for long as an independent bank. They became part of larger listed banking groups or, in the cases of Northern Rock and Bradford & Bingley, failed in the financial crisis and were later nationalised. Moreover, those demutualisations converted some of the largest building societies at the time. The argument for demutualisation has proved to be bogus. It has not delivered the strong independent businesses that it was supposed to do, and the need for more capital is soon forgotten as the newly proprietary entities are generally merged into larger firms.

Diversity of ownership types and business models creates a corresponding diversity in forms of corporate governance, risk appetite and management, incentive structures, policies and practices, and corporate behaviours and outcomes. It also offers a wider choice for consumers and enhances competition that derives in part from the juxtaposition of different business models.

Legislation is needed to help UK mutuals to preserve their legacy for the purposes for which they were intended, to maintain and encourage greater corporate diversity, and to build a more resilient economy. Mutuals need to be able to incorporate appropriate measures into their constitutions which have a statutory basis, either at the point of establishment or thereafter, with an appropriate level of member approval. This will be even more important if the legislative reforms for co-operative and community benefit societies explained above are taken forward. To optimise the successful implementation of new legislation, properly recognising legacy assets for the benefits they bring will be an important ingredient for building confidence.

Many jurisdictions have acted to preserve mutual ownership by ensuring that assets are used only for the purpose for which they were intended. That ensures they cannot be distributed to members or third parties, and thus disincentivises demutualisation. Mergers, dissolutions and transfers of business are still permitted, so this arrangement does not hamper the evolution of business in any way. Ideally, such measures will be universal, but in some legal traditions that is considered problematic as it arguably alters members’ ownership right retrospectively. It is not desirable to cut and paste legislation between different traditions, so solutions are required that respect the culture of different legal frameworks. To deal with that, simple legislation can be introduced in common law jurisdictions that would give every mutual the right to choose a constitution that preserves legacy assets for the purpose they were intended.

My Bill does that. My Bill disincentivises the raiding of legacy assets. Voluntary legislation will ensure that legacy assets are preserved for the purpose for which they were intended. It empowers mutual members to decide what should happen to assets on a solvent dissolution. It would match the best legislation that exists in many other countries. My Bill also: introduces a voluntary power to enable a mutual to choose a constitutional change, so that its legacy assets would be non-distributable; details precisely the destination of any capital surplus on a solvent winding up; outlines the procedures necessary to include such provisions in a mutual’s rules; and inserts a statutory provision for the relevant rules to be unalterable. My Bill will define the capital surplus as the amount remaining after deducting a mutual’s total liabilities from its assets, including repayment of members’ capital.

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[Andy Carter (Warrington South) (Con)]

I congratulate the hon. Member for Preston (Sir Mark Hendrick) on introducing this private Member’s Bill, and it is a great pleasure to take part in the Second Reading debate. I am very supportive of the measures in the Bill, and I know that the Government have also indicated their support. To that end, I do not intend to speak for too long, but I want to reflect some of the views that my constituents have shared with me. Before I do that, I want to speak about the importance of the co-operative movement on our high streets. As somebody who grew up in the 1970s, I remember my mum shopping in the Co-op because she got her dividend stamp. She got rewarded for supporting a local supermarket on our high street. I have to say that I am a member of the Co-operative. I have my little card, and when I go into the Co-op in my village to do my shopping today, I will get rewards for doing that. I am proud as a Conservative to be supporting the Co-op in Cheshire.

It is not just the Co-operative superstores, there are many insurance mutuals on our high streets. I suspect that many of our constituents do not realise—I certainly did not until I started looking into this—how important mutuals and co-operatives still are to the high street today. It demonstrates the longevity and importance of this business model, so I am pleased that we are supporting the Bill.

The Co-operative in Warrington is among the strongest supporters of community activity. It regularly contacts me to ask if we will support community initiatives. It recently contributed to one of my local playgroups, helping to provide new equipment for the children. Incredibly, that money is raised by people shopping and then given back out into the community. Co-operatives provide real value.

In some respects, it is surprising that the co-operative sector in the UK remains relatively small compared with similar economies. Like many colleagues in this House, I have received a significant amount of correspondence on this Bill from constituents. When talking to a dairy farmer in Lymm, I was struck by the importance of co-operatives for that sector. He gets up very early in the morning to look after and milk the cows, and then waits for the milk tanker to arrive. The business model he follows means that he works with a co-operative to negotiate with the major supermarkets and major dairy companies. He told me, “I simply wouldn’t be in a position to negotiate with supermarkets and head offices all around the country if I didn’t work with a co-operative that generates support and profits.” Co-operatives are experts in negotiation, and they are incredibly supportive when working with farms.

What is the overall impact of co-operatives on the economy? A 2021 report by Co-operatives UK identified that about 7,200 co-ops operate across the UK. Their turnover in 2021 was £39.7 billion, which was an increase from £38.6 billion in 2020. The co-ops employed about a quarter of a million people in 2021, with membership totalling 14 million. Between 2020 and 2021, the number of co-ops grew by 1.2%.

I will turn briefly to important elements in the Bill. It provides His Majesty’s Treasury with the powers to make regulations that would allow all co-operatives, mutual insurers and friendly societies to opt to restrict the use or dealing of their assets. I made that point in an earlier intervention on the hon. Member for Preston. There have been recent examples of co-operatives and mutual societies finding themselves under attack. That is why I support the Bill, which also brings friendly society laws up to date and establishes tax neutrality for mutuals’ deferred shares.

The impact of co-operatives on our economy and their members is broadly good. The Bill’s measures are, broadly speaking, updates to enhance the operating environment so that they can continue to serve their members and improve choice in the markets in which they operate. I know that the sectors face significant challenges. They are limited by issues with access to external finance, so it is important that we take that into consideration. The intention is that, where members of the society choose to adopt legal restrictions, the use of the assets will be limited to specific purposes in line with the objectives of the mutual society. The use of any other assets for those purposes would then carry legal recourse. That optionality in the regulations will be important in mitigating any potential negative impact. I know that the Government will continue to work with the sector, and I am very pleased that the Minister is in his place and that he will respond shortly. I encourage the Government to continue to work with the sector, to ensure that the regulations are appropriate and adapted to the needs of different mutual models.

Finally, I am pleased that Co-operatives UK fully supports of the Bill. It has carried out consultations with its members, which indicate that the measures enjoy widespread support. It has also said that the measures would bring

“significant new investment, innovation and development in a wide range of co-operatives, for greater economic, environmental and social impact.”

Likewise, mutuals have praised the proposals for offering more choice and competition in their markets, and for allowing them to serve their members with an enhanced operating environment.

In short, I support the hon. Gentleman’s Bill, which is clearly welcomed by the sector, and I look forward to continuing to use my Co-op membership card when I buy my tea this evening.

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[Dr Evans]

It is absolutely fantastic, and even better when it is just down the road if you are in your pyjamas. The main thing is not to forget the card so you can support the economy.

It goes a little further than that. I began to think about the other things that could be tied up with mutuals. I was a doctor before I came to Parliament, and had a lot of dealings—I still do, and declare an interest—with them. I have investments with the Wesleyan Assurance Society, which began in Birmingham in 1841, supporting doctors with investments and financial products. Both professionally and in the local community, we can see the effect that mutuals have. It goes further than that. In my constituency, the Hinckley & Rugby Building Society was formed in 1983 when two societies joined, but there has been a society in place since 1961. It is in the top 20 building societies, with assets of £830 million, and more than 50,000 users and customers, many of whom are based in my local area. It emerged from the need to support our local industries, particularly lacemakers and shoemakers. It is still there today, providing products for people who might not be able to secure them on the open market.

[Andy Carter]

My hon. Friend is generous in accepting interventions. As he knows, I grew up in his constituency. One of the first things my mum and dad did was open an account at the Earl Shilton Building Society, and I still have that account today. I think that they put in £2—today, having not put any money in, it is worth about £4,000. That is certainly a demonstration of the value of local building societies and the role they play in local communities.

[Dr Evans]

My hon. Friend is absolutely right. When I was young, I was given a small account with the Nationwide Building Society. It was common for previous generations to do that. We seem to have lost the sense of what building societies and mutuals can provide in our community. That is why it is good that the Bill has been introduced, so that it can provide a forward-thinking ability not only to defend them but to set them up for the future.

We can see the tangible difference that these societies can make. The Hinckley & Rugby Building Society supported a cricket match in Earl Shilton, as well as Leicestershire Cares, giving money back and investing it to make our communities better.

I will not dwell on the impact of the Bill, because what it is trying to do has already been highlighted. The provisions that would be put in place would not interfere with the ability of co-operatives to give profit to members or pay interest on share capital. I am keen to see, as I hinted in my intervention—and as has been followed up by my hon. Friend the Member for North East Bedfordshire (Richard Fuller)—how we can turn this into an industry that is fit for the future and drives innovation in the sector. The measure is a starting framework that can provide for that. If the Law Commission review is correct and forward thinking, we can restore the impact of mutuals on society that I had the pleasure of seeing as I grew up, and now have the pleasure of representing in my area. Long may they live.