Co-operatives, Mutuals and Friendly Societies Bill (First sitting)

Mark Hendrick Excerpts

Committee stage
Wednesday 30th November 2022 Public Bill Committees

[The Chair]

Before we begin, I have a few preliminary reminders for the Committee. Please switch electronic devices to silent. No food or drinks are permitted during sittings of the Committee, except for the water provided. Hansard colleagues would be grateful if Members could email their speaking notes to [e-mail].

My selection and groupings for the sitting are available online and in the room. I have selected the three amendments in the name of the sponsor of the Bill, Sir Mark Hendrick. Amendments will be considered alongside the existing content of the Bill in a single debate.

Clause 1

Power to restrict use of assets of relevant mutual entities

[Sir Mark Hendrick (Preston) (Lab/Co-op)]

I beg to move amendment 1, in clause 1, page 2, line 2, at end insert—

“(ba) provide for the case mentioned in subsection (2)(a) to be subject to such exceptions as may be prescribed;”.

This Amendment would enable the Treasury to make provision in the regulations about exceptions to the case allowing for a mutual entity to use or deal with assets for a purpose for which the activities of the entity are carried on.

[The Chair]

With this it will be convenient to discuss the following:

Clause stand part.

Clause 2 stand part.

Amendment 2, in title, line 1, leave out from “Make provision” to “to permit” in line 3.

This Amendment and Amendment 3 would amend the long title of the Bill to reflect that the purpose of the Bill is to permit the capital surplus of mutual entities to be non-distributable.

Amendment 3, in title, line 4, leave out—

“; to amend the Friendly Societies Act 1992”

See the explanatory statement for Amendment 2.

[Sir Mark Hendrick]

Good morning, Mr Mundell. It is a pleasure to serve under your chairmanship. I am grateful to you and to Committee members for joining me to look at the detail of the Bill.

Co-operatives, mutual insurers and friendly societies have an important part to play in the biodiversity of our economy. These businesses share their origins in self-help movements that are relevant to the economic and social challenges faced by people today, and they need a business environment that facilitates their activity. I have therefore introduced a Bill to make long overdue changes to the legislation that governs co-operatives and mutuals and to create a more modern and supportive business environment for them to operate in.

Members on both sides of the House agreed on Second Reading that a strong network of co-operative and mutual businesses can play an important role in a diverse and modern economy. Co-operatives and mutuals represent a serious contribution to the UK economy, accounting for more than £133.5 billion of income annually.

The Bill will ensure that Government policy understands and supports the difference of mutual businesses. It will also create legislation that permits co-operatives, mutuals and friendly societies to undertake their business purpose of serving their members’ needs in the best way possible. Crucially, it will give co-operatives and mutuals the opportunity to opt into a framework providing greater safeguards for their assets and more protection against demutualisation.

The Bill does that by proposing simple voluntary legislation that would give every mutual the right to choose a constitution—either at the point of establishment or thereafter, with an appropriate level of member approval—that preserves legacy assets for the purpose for which they were intended. As witnessed in 2021 with Liverpool Victoria, or LV=, mutuals remain a target for asset-stripping demutualisers attracted by legacy assets built up over generations. That is unfortunately incentivised by the legislation governing mutuals and remains a real and present threat to the mutual sector.

The Bill is about giving mutuals the option to maintain mutual capital for the purpose for which it is intended. Legacy assets have been built up over generations of membership and often 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. The Bill 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.

The Bill empowers mutual members to decide what should happen to assets on a solvent dissolution. It would match the best legislation that exists in many countries. The Bill achieves that by introducing a voluntary power to enable a mutual to choose a constitutional change so that its legacy assets would be non-distributable; to detail precisely the destination of any capital surplus on a solvent winding-up; to outline the procedures necessary to include such provisions in a mutual’s rules; and to insert a statutory provision for the relevant rules to be unalterable.

The Bill defines the capital surplus as the amount remaining after deducting a mutual’s total liabilities from its total assets, including repayment of members’ capital. The Bill introduces new provisions to maintain the destination of the capital surplus. It ensures that, where a mutual’s rules make the capital surplus non-distributable, any resolution to convert into, amalgamate with or transfer engagements to a company shall also include a provision to transfer the capital surplus, as provided by the rules, in the event of a solvent winding-up.

[Danny Kruger (Devizes) (Con)]

May I say how much I appreciate the Bill? I am pleased that the Government are supporting it. Does the hon. Member agree that the value of the asset lock he proposes for mutual funds will enable places that have suffered from deindustrialisation and globalisation to have a base of capital with which to build the local economy, and that what he is doing very much supports the wider levelling-up agenda?

[Sir Mark Hendrick]

Yes, I totally agree. The Bill is consistent with the levelling-up agenda. It is meant to ensure that the assets remain in place for the purposes for which the asset base was originally intended.

Let me set out the detail of the clauses and the amendments. Amendment 1 addresses an inconsistency in the legal text in clause 1(2)(a), which results from trying to capture the varied range of entities that make up the mutuals sector. As I said, there are co-operatives, mutuals and friendly societies—different types of organisation and company. In its current form, the Bill proposes an asset lock for a purpose that is for the objects of a mutual entity. The purpose of a co-operative is often seen as one that is for the benefit of its members. It could be argued that demutualisation, which involves distributing surplus funds to members, is for the benefit of members. However, given that the Bill aims to reduce incentives for demutualisation, the amendment is needed to close that loophole; otherwise, the ultimate purpose of the Bill risks being defeated. The amendment also ensures that the Bill is sufficiently broad that it is future-proofed and works for the wider mutuals sector.

The other two amendments are technical changes to ensure that the long title reflects the current contents of the Bill—namely, that the purpose of the Bill is to permit the capital surplus of mutual entities to be non-distributable. They leave out the words from “Make provision” to “to permit” and the words “; to amend the Friendly Societies Act 1992”.

I would like to express some disappointment that the overall ambition of my original Bill is not included in this version. In addition to allowing co-operatives, mutuals and friendly societies to safeguard their legacy assets to disincentivise demutualisers, the Bill’s initial proposals addressed some other issues: co-operatives needing the ability to issue perpetual capital to fund investment and growth—that would have meant a new type of share—and mutual insurers and friendly societies needing to be able to issue mutuals’ deferred shares to fund investment and growth without suffering disproportionate tax penalties. I discussed that issue in some detail with Ministers—both the current Minister and the former Minister, the hon. Member for North East Bedfordshire, who is on this Committee. The initial proposals also dealt with friendly societies needing an updated legal framework to facilitate their contribution as modern businesses working to help level up and promote economic prosperity. Friendly societies have not seen their legislation updated for quite some time; that is long overdue.

The Bill does not cover the whole scope of what I wanted it to achieve, but I am extremely pleased that the Government are backing a key aspect of my proposals concerning mutual assets. They have also given assurances that they plan to conduct a wider review of key legislation underpinning the co-operatives, mutuals and friendly societies sector with some firm proposals, instructing the Law Commission to conduct a review as part of that process. That is major progress and a step forward for the sector.

[Richard Fuller (North East Bedfordshire) (Con)]

Would the hon. Member be interested, as I would, to hear an update on the progress the Minister has made on that front? It is a key part of what the Bill is trying to achieve, and we want to ensure that we do not lose this opportunity.

[Sir Mark Hendrick]

I thank the hon. Member for his contribution and for the part he played in my getting this far with the Bill. I hope the Minister will indicate what moves are afoot and what progress will be made in that direction.

[Richard Graham (Gloucester) (Con)]

The Bill is hugely supported by everyone present, but will the hon. Member clarify his proposed amendment to line 3 of the title to reflect the fact that the Bill aims

“to permit the capital surplus of mutual entities to be non-distributable”?

I understand exactly what he means about potential creditors moving those assets into a different structure—he mentioned the LV= situation—but what happens when a mutual, for whatever reason, sadly fails? At that stage, does the Bill allow for any remaining capital to be distributed to the members of that mutual?

[Sir Mark Hendrick]

I thank the hon. Member for his intervention. A lot depends on how it is framed at the start when the mutual or co-operative decides to register. Remember that this is an opt-in; therefore, any conditions upon the dissolution of the company will depend very much on its registration and constitution. Those would allow for this, if the organisation were so set up. I am sure that the Minister will comment on that as well.

Returning to the previous intervention, I hope the Minister will give some assurances, because there are obviously none in the Bill. I hope that moving in the direction of the Law Commission setting up a review of the sector and of the two pieces of legislation he wrote to me about that need review will bring the rules and legislation on co-operatives, mutuals, associations and friendly societies up to date with what is seen as best practice across Europe. Italy, France, Spain and Germany are far more advanced in how they help the sector, in terms of both taxation and the way in which organisations are viewed and are able to expand.

[Gareth Thomas (Harrow West) (Lab/Co-op)]

My hon. Friend has done an impressive job of getting his Bill to this stage. He will know that one problem with increasing access to capital for mutuals has been the roadblock of His Majesty’s Revenue and Customs. When the Minister reflects on the question raised by the hon. Member for Gloucester and on the contribution of my hon. Friend, will he clarify whether he has instructed HMRC to co-operate fully with the Law Commission’s work? If it does not, we will still have a roadblock in terms of increasing access to capital for mutuals.

[Sir Mark Hendrick]

I concur totally with my hon. Friend.

Let me close by thanking you, Mr Mundell, and by thanking my colleagues for their contributions and for being present to support the Bill. I also thank everyone who has worked so hard to make it a success, including Peter Hunt and Mutuo, the Co-operative party, the co-operative sector, and the Minister and his Treasury officials. 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, indeed, citizens.

[Richard Graham]

I should mention that I once worked for a mutual group and with co-ops, mutuals and friendly societies, Mr Mundell. That is, if you like, a declaration of historic interest.

Today’s Bill is indicative of the huge support for the sector from the hon. Member for Preston. He highlights the fact that co-ops, mutuals and friendly societies can still, and do, play a key role in modern finance. I congratulate him and successive Treasury Ministers on their partnership in bringing the Bill forward. In fact, everyone here is so supportive of the sector that we probably all qualify for the support of the Co-operative party—a recruitment opportunity that I hope it is alert to.

--- Later in debate ---

[Andrew Griffith]

I am always happy to engage with the hon. Member. The simple answer is that I do not know whether it is for the House to engage, but I am happy—I hope my actions to date speak as loudly as my words—to engage on what that scope should be. I certainly assure him that, before the launch of a review, the sector will be consulted. If hon. Members have particular points to make, I am keen to hear them.

The future of mutuality looks bright and prosperous. That ambition is supported by the Government. I commend the hon. Member for Preston for his work on the Bill. The Government will support it.

[Sir Mark Hendrick]

I am grateful for the co-operation that the Government have shown on the Bill through successive Ministers over the past four or five months. I am encouraged to hear about the co-operation of the Law Commission and the moves to be made to involve it in a review of the sector. I look forward to seeing what the review brings forward. In the spirit of what my hon. Friend the Member for Harrow West said, I hope that the House will get the chance to deliberate the outcome of the review and to produce future legislation that will go towards solving many of the problems that I identified in my original draft of the Bill.

This is not the Bill that I introduced, but a good chunk of it is there, and I am grateful for the asset lock that is being introduced. I hope that we can also work to deliver, in future, further aspects of my original Bill in order to reach what I think is a conducive and favourable environment for co-operatives, mutuals and friendly societies in this country. If we look at the examples of the sector in other countries, in particular in mainland Europe, we can see that we are well behind in the degree of contribution to the GDP of those countries, compared with the degree of the contribution to GDP of the sector in this country.

A lot remains to be done, but I thank the Minister for bringing forward that work to ensure that we can get there at some stage in the future. Thank you, Mr Mundell, and I thank the Minister, the Treasury team and everyone else present today to support my Bill.

Amendment 1 agreed to.

Clause 1, as amended, ordered to stand part of the Bill.

Clause 2 ordered to stand part of the Bill.

Title

Amendments made: 2, in title, line 1, leave out from “Make provision” to “to permit” in line 3.

This Amendment and Amendment 3 would amend the long title of the Bill to reflect that the purpose of the Bill is to permit the capital surplus of mutual entities to be non-distributable.

Amendment 3, in title, line 4, leave out—

“; to amend the Friendly Societies Act 1992”.—(Sir Mark Hendrick.)

See the explanatory statement for Amendment 2.

Bill, as amended, to be reported.

Co-operatives, Mutuals and Friendly Societies Bill

Mark Hendrick Excerpts

3rd reading
Friday 24th February 2023 Commons Chamber

[Sir Mark Hendrick (Preston) (Lab/Co-op)]

I beg to move, That the Bill be now read the Third time.

The object of my Bill is to help ensure the best business environment for co-operatives and mutuals, and that means three things. First, we need a good policy understanding of the importance of mutual business, and that must stretch across Government to Ministers and officials. We recognise that it is always a challenge to get attention from a busy Department such as the Treasury, but well-informed and motivated Ministers and officials will give us a fighting chance. Co-operatives and mutuals are an important feature in a mixed economy when their different business purposes are recognised and allowed to flourish. Good policy is the foundation stone for that.

Secondly, on legislative reform, the Bill is part of making legislation on co-operatives and mutuals fit for purpose for a modern economy. Co-operative law was first introduced to this House in the 1860s, and formed the basis for co-op law in many countries around the world, but it has sadly not been kept up to date. We want to draw on the best practice in the world, which is why the idea of protecting assets for their intended purpose is so important.

Countries that have adopted such provisions have much more robust co-operative and mutual business sectors. The removal of the incentive to demutualise means that they can continue to grow in line with the interests of the members they serve. There is more to do on legislative reform, as my original Bill identified. We look forward to working with the Government to ensure that legal options are no longer a poor relation but match the standard of the best in the world.

Thirdly, we need regulators to appreciate the role of co-operatives and mutuals. We can have the best policy and legislation, but in practical terms, progress can be thwarted if regulators lag behind. They should no longer see their role as facilitating demutualisation, as they unfortunately did in the LV debacle. Instead, the true champions of consumers should be driving corporate diversity and choice. If there was one lesson to take from the global financial crisis, it was that we do not want all businesses following the same mistaken strategy. In that regard, diversity is strength, and regulation should take seriously its role in ensuring that co-operatives and mutuals are not ignored, or worse, homogenised into a single idea of business driven by shareholder-owned interests.

The Bill is one of a series of such private Members’ Bills over the last 20 years. I am proud to have played my part in bringing it to the House in the way that my predecessors did. There have been five Bills to modernise co-operative and mutual law, all of which have received Royal Assent. It is welcome that our efforts and endeavours have had the support of Treasury Ministers and from both sides of the House. This is one area in which there is genuine and lasting cross-party consensus. It is no less welcome that we enjoy today the support of His Majesty’s Government for this sixth such Bill. It is perhaps less positive that we have had to take this piecemeal private Member’s Bill approach to legislation, but I sincerely hope that the promised Law Commission review puts that right, and that a modern framework for business is established once and for all.

My Bill is about giving mutuals the option to maintain mutual capital for the purpose for which it is 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 to a pro-rata share of distributed profits, or dividends, based on their shareholding, and 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.

By contrast, members of a mutual society generally have neither of those rights because a mutual’s profits are not generally 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 their 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 the society exceeds the capital provided by members—otherwise known as capital surplus on solvent winding up—has no specific owner. It is effectively a legacy asset held by the society for future generations, enabling the society to provide for and invest in its future. That is a core part of the 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. The society was originally set up not to make capital surplus to reward members, but to provide goods and services for those who need them. That was its purpose, and it was the basis upon which previous generations have taken part in its trade.

Seen through the lens of investor ownership, a capital surplus is a tempting asset—a windfall of unearned profit that, were mutual members to be replaced by investor-shareholders, could be shared out among those shareholders. Capturing that 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 the legacy asset of a mutual society. As a result, the ability to access legacy assets actively incentivises demutualisation. Provided that relevant formal procedures are completed, including securing consent from a statutory minimum threshold of members, a demutualisation cannot be stopped. The statutory minimum threshold has been changed from time to time for different types of mutual society to make demutualisation less likely, but these measures provide only partial protection. There is currently no statutory mechanism for ensuring that surpluses, which the previous generations never intended should be a private reward for anybody, remain committed to the wider public purpose.

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 the legacy asset, share it out among those they choose and convert the business into an investor-owned company. That has resulted in much of the UK building society sector being lost, and their businesses then either failing or transferring to non-UK ownership. That has been bad for mutuality, and bad for the economy with the damage it has caused to corporate diversity. Demutualised former building societies were mostly absorbed into the banks that failed in the financial 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 that have a statutory basis, either at the point of establishment or thereafter, with an appropriate level of member approval. That will be even more important if the legislative reforms for co-operative and community benefit societies I have explained 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 the assets may be used only for the purpose they were intended. That ensures they cannot be distributed to members or third parties, thus disincentivising demutualisation. Mergers, dissolutions and transfers of business are still permitted, so this arrangement does not hamper the evolution of a business in any way. Ideally, such measures would be universal, but in some legal traditions that is considered problematic, as it arguably alters the ownership rights of members retrospectively. It is not desirable to cut and paste legislation between different traditions, so solutions are required that respect the political culture of different legal frameworks. To deal with this, 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 through legislation. Voluntary legislation will ensure that legacy assets are preserved for the purposes for which they were intended. It will empower mutual members to decide what should happen to assets on a solvent dissolution, and it will match the best legislation in many countries around the world.

My Bill would introduce a voluntary power to enable a mutual to choose a constitutional change so that its legacy assets, or the capital surplus, would be non-distributable. It would detail precisely the destination of any capital surplus on a solvent winding-up and would outline the procedures necessary to include such provisions in a mutual’s rules. It would make 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 would introduce new provisions to maintain the destination of the capital surplus and ensure that where a mutual’s rules make the capital surplus non-distributable, any resolution to convert into, amalgamate with or transfer engagements to a company will also include a provision to transfer the capital surplus, as provided by the rules in the event of a solvent winding-up.

That is my Bill, Madam Deputy Speaker. I thank the Minister and his team for their co-operation and help in bringing it forward.

--- Later in debate ---

[Sir Mark Hendrick]

With the leave of the House, I wish to thank all my friends and colleagues in the House for their support of my Bill. I also thank the variety of Treasury Ministers who, due to a number of reshuffles, have been able to work with me on the Bill from last year to now, including the hon. Member for North East Bedfordshire (Richard Fuller) and the current Economic Secretary to the Treasury. My thanks go out to all the Treasury civil servants who are present in the Chamber today. I wish to thank Peter Hunt and Mark Willetts at Mutuo for their help and advice in drafting the Bill, and also the Co-operative party, which has supported me throughout the whole of my political career, stretching back to the 1980s when I was in local government, the 1990s when I was in the European Parliament, and since 2000 when I entered this House.

Finally, I wish to thank in advance my noble Friend Lord Kennedy of Southwark for agreeing to take my Bill through the other place.

Question put and agreed to.

Bill accordingly read the Third time and passed.