Mutuals’ Redeemable and Deferred Shares Bill [HL]

Lord Naseby Excerpts

Friday 24th October 2014 Lords Chamber

Moved by

[Lord Naseby]

That the Bill be read a second time.

[Lord Naseby (Con)]

My Lords, noble Lords may wonder why I have become involved in the mutual world. I have to thank Peter Gray, one-time chief executive and chairman of the Tunbridge Wells Equitable and Friendly Society, who revitalised that society in the 1970s and 1980s, and the Association of Friendly Societies. It was he who inspired me to take a real interest and, as a result, I chaired that organisation from 1992 to 2005.

The other inspiration that has caused this Bill to see the light of day comes from the Chancellor of the Exchequer, the right honourable George Osborne, who somehow persuaded the powers-to-be to make in the Conservative manifesto a commitment to mutuality both in the workplace and in the structure of the mutual financial sector. There are broadly five sectors of the mutual financial world. Building societies, credit unions and co-operatives have all been helped by the Chancellor already. However, two of the five have yet to be helped—namely, mutual insurance companies and friendly societies. Why do they need help? It is simply because, unless they can raise additional capital, they will never be able to expand or develop to their true potential. Indeed, unless they are helped, I suspect that they will either wither on the vine or demutualise. So we have today’s Bill, which has been in gestation now for close on two years, helped by the Treasury—and I pay particular thanks to the right honourable Sajid Javid MP and his successor in looking after this Bill, Andrea Leadsom MP, who have also helped it on its way. I have had consistent help from my noble friend on the Front Bench this afternoon.

The Bill refers to two classes of shares—deferred shares and redeemable shares. One of the key hurdles that I and my team have had to jump was to persuade the regulator that both those vehicles meet the requirements of Solvency II and would therefore be eligible for tier 1 capital, which is absolutely vital for development capital. We have been successful with the deferred shares element, but have not yet persuaded all parties that it is possible for redeemable shares as well. I therefore had to make a decision on whether to go ahead now with just the deferred element of the Bill, which goes a long way to help mutual insurers and friendly societies, or whether to persevere to try to persuade the authorities about redeemable shares. I decided, in the face of having only five months left of this Parliament, to drop the redeemable element. I suspect that my noble friend on the Front Bench will do just that in Committee, in moving certain government amendments.

I want to look at the effect of the Bill. Clause 1 gives powers to the Secretary of State to permit the use of a new class of deferred shares. That is on the assumption that the redeemable element was removed. This will affect industrial and provident societies, friendly societies and mutual insurers. Furthermore, holders of shares must be or will become a member of the Society of Mutual Insurers. To maintain the mutual characteristics of the organisation, they will be entitled to only one vote as a member, regardless of the value or number of shares they hold. They will be entitled to only the level of remuneration payable under the rules of the mutual. Deferred shares may entitle the holder only to repayment of their nominal value on the solvent liquidation of the mutual. This removes any risk of carpet-bagging by those interested solely in demutualisation. The power to make regulations under the Act is exercisable by statutory instrument and must not be made unless a draft of it has been laid before, and approved by, resolution of each House of Parliament—that is, the affirmative procedure.

I will not talk about Clauses 2 and 3 because they relate exclusively to redeemables. Clause 4 sets out how regulations may provide for a mutual to issue deferred shares,

“being shares that incorporate a term which prohibits the repayment of any principal to the shareholders save in either or each of the following events … the winding up or dissolution of the … mutual … in circumstances where all sums due from the society or mutual insurer to creditors claiming in the winding up or dissolution are paid in full … the granting of relevant consent by the appropriate authority … The memorandum or rules of any society or constitution of any mutual insurer may exclude or restrict the issue of deferred shares … A society may only issue deferred shares if it is authorised to do so by its memorandum or rules and a mutual insurer may only issue deferred shares if it is authorised to do so by its constitution”.

This means that no shares will be issued until the current members have approved it. However, the key benefit—this is absolutely crucial—is that these shares would, when issued, be classed as tier 1 capital and meet the requirements of Solvency II.

Clause 5 restricts the voting rights of holders of a deferred share and obviously will need amendment to remove “redeemable”. It means that if their only membership is via holding such a share, they may not participate in any decisions concerning amalgamation, transfer of engagements or conversion into a company or, in any case, a proposed transfer or sale of business or property under Section 110 of the Insolvency Act 1986. This is a further safeguard against the motivations for demutualisation.

Clause 6 sets out the proper legal definitions for the various types of mutuals affected by this legislation. Clause 7 is the usual Short Title, commencement and extent.

I would like to spend a few moments explaining why this Bill is so important. It is important because it gives access to new capital, particularly for friendly societies and mutual insurers. First, all mutuals need to be able to play a full part in our economy with diverse corporate ownership. Friendly societies and mutual insurers do not have the ability to raise capital that some co-operatives and building societies do, or indeed public limited companies.

Secondly, without new capital, many mutuals could be driven into inappropriate corporate forms through demutualisation. If more mutuals convert to other corporate forms, consumer choice would be reduced and large numbers of consumers would no longer have non-listed, member-owned options in the financial services marketplace. This both reduces competitive pressure from the operation of different business models in the same market and adds to systemic risk to the economy.

Thirdly, a lack of capital limits mutuals’ growth and the ability to develop new services. The growth rate of a mutual is constrained by its relative inability to add capital through retained earnings.

Fourthly, like all businesses, mutuals need to be able to benefit from the economies of scale available only by growing their business. Mutuals need to gather sufficient capital to serve their members well, extend services to new members, expand their menu of services and achieve economies of scale.

Fifthly, it is important to learn the lessons from the recent financial crisis. If financial services businesses are to build up stronger capital bases, they require the legislative and regulatory agility with which to do so.

Sixthly, there are direct benefits of being able to issue these new shares. Debt, the alternative, is of a lower quality than equity for firms wishing to build their capital base. There is inevitably a limit to the amount of debt that can or should be raised. Mutual shares would therefore present an opportunity for small mutuals to raise funds that they may not be able to do otherwise, and for larger mutuals to raise tier 1 funds that subordinated debt does not provide.

These shares are alternatives to private equity buyout, which shows signs of growing. They are also alternatives to demutualisation, and this is crucial. When one looks back 20 years, the UK mutual insurance sector was the largest in Europe but now accounts for just 2% of mutual insurance premiums in the EU. Mutual insurers in 1994 accounted for 50% of the UK insurance market, and lack of access to capital was largely seen as the key reason for demutualisation. The small size of the market today means that any further demutualisation in the sector could hasten the entire sector’s early demise.

If the Bill goes ahead, mutuals will be able to source external capital without losing their mutual status, and some very specific benefits will follow. They could take part in tactical acquisitions, which will enhance their competitiveness. They could also look at local infrastructure potential. I shall give one example. In 2004, Family Investments friendly society and Brighton Council explored the concept of a city mutual. The idea was that Family Investments would raise a fund from its own capital and via a bond offering to local residents, which in turn would be used by the local council for a range of social housing and employment projects. Your Lordships may remember that on Monday I suggested something very similar for cottage hospitals. In the end, as far as the parties in 2004 were concerned, it was unclear whether the legislative arrangements were in place. This Bill will meet that requirement.

Finally in this area, there are a number of examples in overseas countries of similar mutual shares offerings. Examples from Canada and the Netherlands and across the whole European Union show how mutuals can enlist their members in raising capital through the issuance of new deferred shares. In summary, the benefits offered provide evidence that government support for the Bill would create a viable new opportunity for mutuals to attract new capital and deliver positive outcomes for mutuals and consumers.

The Bill has all-party support. Many colleagues have spoken to me in support of the Bill, and some have been good enough to write, particularly my noble friends Lord Hodgson and Lady Maddock. In the mutual world I have had wonderful support from organisations such as Liverpool Victoria, Royal London, Engage, Family Investments—steered so ably by John Reeve—and particularly Wesleyan Assurance, which is held in such high regard. Add to those the Association of Financial Mutuals, the Association of Friendly Societies and the All-Party Parliamentary Group for Mutuals—chaired by my friend Jonathan Evans MP, who will steer the Bill through the Commons, given the chance—and, above all, Mutuo, with its energetic and knowledgeable director Peter Hunt. I thank them all. I beg to move.

--- Later in debate ---

[Lord Naseby]

My Lords, I thank all noble Lords who have listened to the debate and I want to pay particular tribute to Her Majesty’s Opposition for the support that they gave me during the early stages of the Bill and then right through until today. I will refer to the noble Lord, Lord Kennedy, as my noble friend because he has worked very closely with me on this, and I wish to give him my thanks and appreciation for all the trouble he has taken. Finally, I have to say to my noble friend to whom I have already referred that he is an extremely patient and persistent man. Without that attribute, this Bill would not be before the House today. It remains for me to hope that it will get a fair wind, that people will be conscious of the time limit of five months, and that the processes in both this House and another place—which I know only too well—ensure that this really worthwhile piece of legislation can see the light of day and be put on to the statute book. Without further ado, I hope that the Bill will be given a Second Reading.

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