Co-operatives, Mutuals and Friendly Societies Bill

Lord Kennedy of Southwark Excerpts

2nd reading
Friday 24th March 2023 Lords Chamber

Moved by

[Lord Kennedy of Southwark]

That the Bill be now read a second time.

[Lord Kennedy of Southwark (Lab Co-op)]

My Lords, I am delighted to present this Bill to your Lordships’ House today for its Second Reading. I thank all noble Lords who have signed up to speak and look forward to each of the contributions that will follow shortly.

I have been a supporter of co-operatives in all their forms for more than 40 years. I am one of a small group of Labour and Co-operative MPs and Peers sitting in Parliament. The Co-operative Party, of which I am a member, has since 1918 had an agreement with the Labour Party that it seeks representation on public bodies only jointly with it. The Co-operative Party today is proud to have 28 MPs, 16 Peers, 11 Members of the Scottish Parliament, 16 Members of the Senedd in Wales, five metro mayors and nearly 1,000 councillors elected in England, Scotland and Wales. I am a member of the Co-operative Group and, as detailed in my entry on the register, a director of the London Mutual Credit Union, one of the biggest credit unions in the United Kingdom. I first joined the old Royal Arsenal Co-operative Society 43 years ago—I know I do not look old enough—following a meeting with my noble friend Lady Thornton, who at that time was working for it; we have been friends ever since.

This is a small, two-clause Bill. It is another step along the road of reforming and developing the legislative framework to support the sector. I place on record my special thanks to the Member for Preston in the other place, Sir Mark Hendrick MP, for steering this Bill through the other place so skilfully, and also to Peter Hunt and Mark Willetts, the team at Mutuo, for the work they undertook in devising the Bill. I also thank officials at the Treasury for their work in getting us to the place today where the Government are happy to support the Bill. I am still struggling to get such a positive response to my other Private Member’s Bill on residential leasehold, but we struggle on with that one.

The Bill is all about protection. It is about creating the mechanism to enable mutual organisations to opt in to a restriction on the use of their assets. This is permissive, not mandatory. If a mutual organisation does not want to use the powers in the Bill, it does not have to. It allows the Treasury to make regulations that in turn will allow various mutuals, if they so wish, to opt in to a restriction on the use of their assets. Equally, those that do not elect to opt in are free to carry on as they do now. That is a very important point for the House to note, and one of the reasons why the Bill is structured the way it is. The Bill is necessary, as it enables a pathway to protect and preserve members’ accumulated assets from those who would like to mount a raid on them for profit and gain for themselves. In many cases, these assets are considerable and have been accumulated over many years and generations.

As part of our mixed economy, co-operatives, mutuals and friendly societies have their role to play, and the environment they operate in should be as supportive as possible, allowing them to remain true to their founding principles and flourish. This Bill will help them do that with the knowledge that there is a mechanism that they can take up to provide a layer of protection to maintain mutual capital for the purpose intended, if they themselves decide they need this protection.

There are important differences between companies and mutuals, which the Bill is trying to protect. Noble Lords will be aware that members of a company have the right to a share of the distributed profits, based on their shareholding, and to a share of the underlying value of the company. The more capital you own, the greater your share of the profits and the value of the company. Members of a mutual society, by contrast, generally have neither of those 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 or entitlement to a share in the increased value of the society.

As 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 has no specific owner. It is in effect a legacy asset, held by the society for future generations, that enables it to provide for and invest in the future. It is a core part of a mutual’s 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.

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

The measures in place today provide only partial protection against demutualisation. There is currently no statutory mechanism for ensuring that surpluses, which previous generations never intended to be for private reward for anybody, remain committed to that wider public purpose. At present, it is not possible for an existing society, or those setting up a new society, to proscribe demutualisation. This leaves mutuals vulnerable to those aiming simply to liberate the legacy asset, share it out among those they choose and convert the business into an investor-owned company.

This has resulted in much of the UK’s building society sector being lost, and the businesses then either failing or being transferred into non-UK ownership. We all remember the names of those building societies that have long since disappeared, such as the Abbey National and the Bradford & Bingley. This has been bad for mutuality and bad for the economy, with damage being done to corporate diversity. Demutualised former building societies were mostly absorbed into the banks that failed in the banking crisis. Legislation is needed to help UK mutuals to preserve their legacy assets for the purpose 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 with a statutory basis, either at the point of establishment or thereafter, with an appropriate level of member approval.

What does the Bill do? It disincentivises the raiding of legacy assets through legislation. 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 the assets on a solvent dissolution. It would match the best legislation existing in many other countries around the world. The Bill introduces a voluntary power to enable a mutual to choose a constitutional change so that its legacy assets, the capital surplus, will be non-distributable, details precisely the destination of any capital surpluses on a solvent winding up, outlines the procedure necessary to include such provisions in a mutual’s rules and inserts a statutory provision for the relevant rules to be unalterable. It defines the capital surplus as the amount remaining after deducting a mutual’s total liabilities from its total assets, including repayment of members’ capital. It introduces new provisions to maintain the destination of the capital surplus and ensures that where mutual rules make the capital surplus non-distributable, any resolution to convert into, amalgamate with or transfer engagements to a company should also include a provision to transfer the capital surplus as provided by the rules in the event of a solvent winding up. That is quite a lot in a two-clause Bill.

In conclusion, I will address the issue of why corporate diversity matters. Diversity of ownership or types of business creates models of corresponding diversity in the forms of corporate governance, risk appetite and management incentive, structures, policies and practices, and corporate behaviours and outcomes. It also offers wider choice for consumers through enhanced competition that derives in part from the juxtaposition of different business models. For the wider market to benefit, each of the corporate models needs to enjoy the necessary critical mass defined as the degree of market share necessary to enable each model to operate successfully and thus provide real competitive pressure on the other players within the market.

Finally, I thank the Delegated Powers and Regulatory Reform Committee for its report, which specifically refers to this Bill. Responding to the points raised, I emphasise that this is a short, skeleton Bill. It is specific in nature and seeks to deal with a real, identifiable problem. The expertise to draw up the regulations lies in the Treasury. It is a Bill which is permissive. A mutual entity is not compelled to do anything on the Bill becoming law, and any mutual entity that does not wish to adopt or use the powers does not have to. Furthermore, the regulations must be brought back to this House and the other place for consideration and affirmative resolutions must be passed. There are proper procedures in place for proper consideration, and the regulations will be considered by the Secondary Legislation Scrutiny Committee before any such debate takes place in this House. I look forward to the contributions from other noble Lords in the debate and I beg to move.

--- Later in debate ---

[Lord Kennedy of Southwark (Lab Co-op)]

My Lords, I very much thank all noble Lords who have spoken. I agree with every comment that has been made, which is very unusual in this House, so that is wonderful.

I thank the noble Lord, Lord Bourne of Aberystwyth, for the reference that he made to the campaign against the demutualisation of Liverpool Victoria. That is a recent example of the threat that mutuals face when people see their large assets. It was a great campaign that will be an eye-opener and a wake-up call for everyone, showing that something needs to be done to protect those assets. I thank him for his support, and I generally agree with all the comments that he made.

My noble friend Lord Mann spoke about sports facilities, the benefits they bring to the community and how the assets of those facilities could benefit from a change in their ownership structures. That was a really important point. He highlighted that, with legislation, lots of playing fields and sports centres and grounds could be protected for future generations. Small ones in particular are often under threat.

As my friend the noble Lord, Lord Naseby, said, we have worked together many times on these sorts of issues, and I thank him again for his support, which is really good to hear. His many years of support for the mutual sector are welcome and needed, and we thank him very much for them.

My noble friend Lady Taylor of Bolton also made reference to the Liverpool Victoria situation and highlighted the need for further protection. I agree with what she said about the special place that the Co-op has, in our memories and even today; I am a regular shopper down the Co-op, and it is a wonderful organisation, as are all the mutual organisations in our country, so it is always worth supporting that.

It was great to see the support from the Opposition for the Bill. My noble friend Lady Anderson of Stoke-on-Trent and I have been friends for many years, from long before either of us was in either House of Parliament. She used to serve in the other place. I was so pleased when she joined this House at the end of last year, and I am even more pleased and proud that she is speaking from the Opposition Front Bench. It is great to see her here.

I thank the Minister for her support for the Bill today, and I thank the officials from the Treasury for all the work that they have done. It is good to hear that there is further work going on behind the scenes in the department to look at other legislation. I was pleased that she mentioned the London Mutual Credit Union. I am proud to be a director there. It is a wonderful institution, the biggest credit union in London, and we are actually in the mortgage market now. It is a fantastic organisation. If she ever wants to visit, I would be delighted to show her around and show her all the work that we do there.

Bill read a second time and committed to a Committee of the Whole House.