Co-operatives, Mutuals and Friendly Societies Bill

Sally-Ann Hart Excerpts

Friday 28th October 2022 Commons Chamber

[Sally-Ann Hart (Hastings and Rye) (Con)]

It is a pleasure to speak on this Bill, which was introduced in this House on 15 June by the hon. Member for Preston (Sir Mark Hendrick), and I congratulate him on that.

Essentially, the Co-operatives, Mutuals and Friendly Societies Bill aims to make it easier for co-operatives to get more investment while retaining their democratic structures, ensuring that they work in the interest of, and are owned by, their members. It also brings friendly societies law up to date and establishes tax neutrality for mutuals’ deferred shares.

I am proud of the work of mutuals such as the Hastings Mutual Insurance Company and the Hastings and East Sussex Building Society. The now de-registered Hastings Pier Charity in Hastings and Rye has done some great work locally. But I am not on an expert on them, so I did a bit of research before today. I was interested to learn that the term “mutual” is used as an umbrella term for several different ownership models. Mutuals are often described as being characterised by the extent to which members have democratic control of the business and share in its profits, in contrast to investor-controlled companies. This is a bit of a misleading distinction; all limited companies really operate for the benefit of their members—the shareholders who invest in a company limited by shares or the guarantors of a company limited by guarantee. These members are involved in the control of the business whether directly or through the scrutiny of the actions of the directors, or simply by buying and selling shares in response to the company’s performance.

The distinguishing characteristic of a mutual is that the organisation is owned by and run for the benefit of its members, who are actively and directly involved in the business—whether it is employees, suppliers, or the community or consumers that it serves—rather than being owned and controlled by outside investors.

Mutuals can be based on a variety of different legal structures. Even limited companies, partnerships and limited liability partnerships are essentially mutual because the partners own and run the business for their own benefit. There is also an incorporated legal structure, which is specifically mutual: the industrial and provident society. There are two types of these: co-operative societies and community benefit societies.

Co-operative societies operate for the benefit of their members, and distribute any surplus not reinvested in the business to those members. Community benefit societies conduct business for the benefit of their community. Any profits are not distributed among members, but returned to the community. They therefore provide a legal structure designed for social enterprise. However, not all co-operatives use those legal structures and many are, in fact, limited companies.

Although mutual ownership models may not be appropriate for all businesses, evidence shows that mutual models can form the basis for high-performing, profitable businesses, and deliver genuine business advantage. For example, mutual ownership can help to ensure that decisions are focused on the long-term sustainability of the business. Employee-owned mutuals often involve some form of employee engagement and participation, allowing employees a say in the running of the company. This can help to align the interests of management and employees, increase motivation and job satisfaction, and can be a means to raise new capital without going public.

Mutual ownership models and social enterprises offer a way for communities to share the wealth that businesses create more widely in the community, and, indeed, for communities to come together to solve problems. In Hastings and Rye, we have a number of successful and evolving social enterprises, including White Rock Neighbourhood Ventures, which is a joint venture between three social enterprise organisations: Meanwhile Space CIC, Jericho Road Solutions and Heart of Hastings CLT.

White Rock Neighbourhood Ventures owns Rock House, which was redeveloped as a mixed-use project, breathing new life into a previously underused building situated in the White Rock area of Hastings town centre. It is a large building and is home to living space, work space and a community hub. The redevelopment was funded by a number of organisations, including Big Issue Invest, Jericho Road Solutions, and the Government, through the former Ministry of Housing, Communities and Local Government, now the Department for Levelling Up, Housing and Communities. Rock House fosters creative enterprise and has generated jobs and self-employment, and is a real social enterprise asset to Hastings.

The Bill’s proposed legislative measures involving share capital and non-distributable capital surplus would enable significant new investment, innovation and development to take place in a wide range of co-operatives for the purpose of greater economic, environmental and social impact. The current legislation governing the raising of capital for co-operatives is rather inflexible; the Bill would enable co-operatives to raise more money by issuing equity shares that are repayable at the option of the society, rather than being withdrawable at the option of the members. By introducing repayable shares, it would enable co-operatives to raise amounts in excess of the current £100,000 holding limit for withdrawable shares. It would provide legal certainty as to whether co-operatives can choose to repay non-withdrawable shares. It would also give co-operative societies the option of adopting a statutory provision guaranteeing that their residual capital surpluses are non-distributable among members. However, the provisions would not interfere with co-operative societies’ ability to pass profits on to members or to pay interest on share capital.

The accumulation and reinvestment of capital surplus is a feature of the co-operative model, as recognised internationally and in UK policy. For this reason, most co-operative societies include non-distributable capital surplus provisions in their rules. The issue is that these rules-based provisions fall short of the permanent legal guarantee sought by many co-operative entrepreneurs, investors and policymakers.

This legislative change would have a number of economic benefits. It would create better conditions for investment and asset growth in co-operative societies by setting the right boundaries and engaging with the appropriate motivations of entrepreneurs, members and investors, and by preventing perverse incentives to destroy co-operative value, such as unnecessary demutualisation; it would boost business investment by committing more capital surplus to reinvestment in economically, environmentally and socially productive enterprise; and it would give co-operative entrepreneurs more optimal choices of legal form, enabling innovation and impact to take place in the social economy.

These changes have the potential to lead to large capital-driven co-operative societies raising millions of pounds more each year in equity, which could then be used to invest in important initiatives, tackling issues such as decarbonisation, technology and the current cost of living crisis. This is compassionate capitalism at its best. The Bill has much merit, and it deserves our support.