Mutuals’ Deferred Shares Bill [Lords]

Debate between Tony Baldry and Jonathan Evans

Friday 6th March 2015 Commons Chamber

[Sir Tony Baldry]

I should make it clear at the outset that the Bill is an extremely valuable and useful one. The House is grateful to my hon. Friend the Member for Cardiff North (Jonathan Evans) for promoting it here. The Bill started in the other place, where there was a comparatively short debate on Second Reading and no Committee stage. I believe that, because time was short, the Government Minister said to the Bill’s promoter, Lord Naseby, “If you agree to certain amendments, we will support the Bill. If you do not, we will not support it.” Lord Naseby, being a very wise former Deputy Speaker of the Commons, agreed to the amendments and came to a sensible compromise. The Bill came to the House of Commons and was debated in Committee, which was skilfully navigated by my hon. Friend, because he managed to persuade the Chair to have one debate on all the clauses. There was no reference whatever to clause 2 during the debate.

The reason I tabled amendment 1 as a probing amendment is that there is potentially a conflict in the Bill. The Bill seeks to help mutuals to raise further money, funds and solvency. On the other hand, it says that however much anyone invests in a mutual, they will get only a single vote. I will describe this in more detail in a second, but the European Union Commission has proposed a statute for European mutuals. Under that proposed European law, members of a mutual would have more than one vote, and decisions would be made by a majority vote. The potential conflict is this: how do we encourage people to invest in mutuals but at the same time tell them that, however much they put in, they will get only a single vote?

Mutuals are an important part of what is known more broadly as the social economy, which staggeringly accounts for 10% of all European undertakings—the amount undertaken by mutuals in the UK is less than the amount undertaken by mutuals in other EU member states. Mutuals have been described as voluntary groups of persons whose purpose is primarily to meet the needs of their members rather than to achieve a return on investment. All hon. Members will recall mutuals in their constituencies that go back to the 18th or 19th centuries—they would have been set up in workplaces or neighbourhoods to provide sickness help, funeral cover and various reliefs of that kind, some of which were overtaken by the Beveridge report and the welfare state. There has always been a sense of each person making a contribution and getting something out.

Mutuals were put into difficulty because of the so-called solvency II directive, which called for increased solvency margins, but there are differences between different financial services providers. Smaller and medium-sized mutuals are often focused on one risk or cover one homogenous group. As a consequence, they have more difficulties in acquiring risk capital compliance with the solvency II rules. That has significant consequences for them and can result in their dissolution. As I understand it, the Bill seeks to deal with that conundrum in the solvency rules.

The basic principles behind the solvency II directive, which was adopted in 2009 and came into force in 2013, are that insurance institutions in Europe should be based on a better risk assessment, better spreading of risks and better financial foundations so as to improve the stability of the market and reinforce consumer protection—all sensible stuff. The main innovation introduced by the directive is that in establishing an improved foundation for the insurance sector, the directive concerns more than only the capital solvency requirements as they existed at the time, and it also lays down rules on the whole organisation of insurance takings in Europe. Within the European Union, it also concerns the taking up and pursuit of self-employment activities—the direct insurance and reinsurance, the supervision of insurance and reinsurance groups and the reorganisation and winding up of direct insurance undertakings.

[Jonathan Evans (Cardiff North) (Con)]

For the avoidance of doubt, I should call attention to my interests in this respect. I am the chairman of a regulated insurance company, but it is not a mutual company. I was on the board of a mutual company but not since I have been a Member of Parliament.

My right hon. Friend mentions solvency II, but it is important to remember that that is an effort by Europe to catch up with a regime that has already been in operation in the United Kingdom for 10 years or so. The issue that he has outlined in relation to better risk assessment is something that our regulators required companies to do a decade or more ago. Europe is catching up in that regard.

[Sir Tony Baldry]

I have no doubt that Europe is seeking to catch up with the United Kingdom in many instances, but in reality the Bill is trying to square the circle of how mutuals manage to cope with increasing solvency requirements, whether imposed by domestic legislation or by EU directives. One of the interesting factors of mutuals is that at present they cannot and do not cross national boundaries. If a mutual wants to trade in more than one EU member state, it can do so at present only by setting up a joint stock company to manage the variations in the regulations and laws between the different member countries.

I would be interested to learn from the Minister—I am pleased to see her in her place on the Treasury Bench—what approach the Government think they should take to legislation that would make it easier for mutuals to operate across Europe and, especially if the UK is in the lead in certain aspects of mutual activity, how we could take better advantage of that. The EU internal market rules apply generally to the operators insurance sector, but it is predominantly attuned to for-profit companies, and it is widely acknowledged that the rules do not always recognise the specific position of other company forms such as mutuals.

Within the framework of completing the internal market, with a view to allowing the free movement of people, goods, services and capital with equal terms of competition between different sectors and legal forms in the same markets, way back in 1992, the European Commission proposed regulations for a European mutuals statute, together with statutes for co-operatives and associations, in order to improve the legal embedding of the social economy in the European Community. Each draft regulation was supplemented by a directive on the involvement of employees. In the opinion of the Commission, mutuals, like other organisations within the social economy, should have been able to take advantage of the single market in exactly the same way as other companies, without having to discard their specific characteristics. It was considered that a European statute would help mutuals overcome the legal and administrative difficulties hampering their cross-border and transnational activities and co-operation in the internal market.

Returning to my amendments, the draft regulations were revised in 1993 and a statute proposed for European mutuals, including provisions for members of a mutual to have more than one vote and for decisions to be taken by a majority vote. I would be interested to hear from my hon. Friend the Member for Cardiff North and the Minister how they see this circle being squared—there is the perfectly understandable desire to get more money into mutual societies so that they can meet the solvency requirements, but how can that be done if those who invest substantial amounts get only a single vote? Given the history and record of mutual societies in this country, would it not be more sensible to use European-wide legislation that would enable UK mutuals to work and win business elsewhere in Europe, without companies having to go through the rigmarole of setting up joint stock companies to act as a bridge between other mutual societies in other member states?

[Jonathan Evans]

Having spoken to my right hon. Friend the Member for Banbury (Sir Tony Baldry) earlier, I know that he is a friend of the mutuals sector and that his aim is not to undermine the intention of the Bill.

[Sir Tony Baldry]

I come to praise my hon. Friend’s Bill, not to bury it.

[Jonathan Evans]

I am much aware of that. My right hon. Friend and I have spoken about this matter and I know that that is his motivation.

I do not know whether this will help my right hon. Friend’s career—he and I are both leaving the House, so perhaps it does not matter—but we are good Europeans. We have always understood that it is in our country’s interests to engage positively with Europe, so I am pleased by his references to the European landscape. Most of my colleagues are aware that, having served in the House in the 1990s, I then spent a decade in the European Parliament as an MEP and for some of that time I was leader of the Conservatives in the European Parliament. The two aspects he has drawn to the House’s attention—the potential European mutuals statute and the debate about the European solvency rules—are matters that I have spent pretty much a decade of my life arguing about.

Given that my right hon. Friend drew attention to the European mutuals statute and quoted the original 1992 provisions and the 1993 revision, it might be worth pointing out that the important word, which he mentioned, was “draft”. The draft was produced, but there was then a long period of decided inactivity. In fact, those of us elected to the European Parliament first in 1999 had to engage in a major effort to get the issue of the European mutuals statute on to the European agenda. Given that, although my right hon. Friend referred to the restriction on voting rights in clause 2—which, he rightly said, might be inconsistent with a report produced more than 20 years ago—it is important to see that report in its context.