Mutuals are now widely recognized as a central part of the business environment. At the same time, there is acceptance that the needs of the sector differ from those of equity-financed companies. Those perceptions are evident in the ‘Plan for Growth’, published by the Treasury and the Department for Business, Innovation and Skills as part of the Budget papers.
The big question, though, is whether the Government’s expressed commitment to co-operatives and mutuality is merely superficial and whether proposals included in the Plan for Growth have any real significance. Look below the surface and the signs are not good.
Co-operatives, mutuals, building societies and social enterprises are referred to repeatedly in the Plan for Growth. Commitments and comments in the plan include:
- The UK already has a vibrant and expanding social enterprise sector. Clearer and more
comprehensive guidance on appropriate legal forms and ownership models for this sector has
the potential to promote growth. There is also widespread acknowledgement that the
framework for mutuals is in need of further modernisation, to remove complexity and
inflexibility and to address issues of inadequate governance and regulation.
- The Government will modernise the legislation governing mutuals, and ensure that they
remain competitive in future.
- The framework for mutuals needs to be modernised to remove complexity and
inflexibility, and to address governance issues and overregulation. The Government has
committed to a programme of reform, including to:commence the Co-operative and Community Benefit Societies and Credit Unions Act 2010. This will modernise the outdated name ‘Industrial and Provident Societies’, improve corporate governance, and allow some co-operative and
community benefit societies law to be brought in line with company law; enable the greater use of electronic communications by mutuals by making an Order under the Electronic Communications Act 2000; andassess whether changes are required to update building societies legislation.
- Alongside this, the Government will complete the passage of a Legislative Reform Order,
which will relax the rules on age limits for membership, year-end dates and allow credit unions
to offer interest on deposits. The Government will ensure that the legislation governing mutuals
is kept up to date, so that businesses using these legal forms can remain competitive in the
future. The government is also consulting on the future of mutual registration and regulation as
part of its reform of financial services regulation.
- Together, these changes will remove the burdens for those businesses and other
organisations that wish to use the mutual form, with estimated savings for mutuals of £12
million a year according to sector estimates. The changes will ensure that they can operate
effectively and place them on a more even footing with other corporate forms in the future.
- The Government will improve the guidance on businesslink.gov.uk to support business and social enterprise start-ups.
- The Government is committed to making the UK the best place in the world to build and
grow a social enterprise. As a part of this commitment, it will improve guidance on
businesslink.gov.uk to help businesses and other organisations make better choices about legal
form and ownership model, including employee ownership. It will also improve the availability
of advice for individuals, including public sector employees, about all other issues and questions
involved in setting up and running different types of social enterprise.
In addition, says the Plan for Growth, the formation of public service delivery mutuals is to be supported by requiring local authorities and other public bodies to be clearer about the obligations that would be imposed on organizations taking over the delivery of public services under the Transfer of Undertakings (Protection of Employment) (TUPE) legislation.
Despite the long list of commitments, the response to the measures has not been positive. Ed Mayo, Secretary General of Co-operatives UK, explains: “For us, this is absolutely frustrating. It is what is already happening. There is nothing there that contributes to growth. Some of it pre-dates the current government. It’s actually worse than that. The Treasury is being less than competent in the way it is putting through what it should have been putting through already.”
In particular, Mayo complains, implementation of the Co-operative and Community Benefit Societies and Credit Unions Act is two years late, while onerous obligations on co-operatives regarding electronic communication with members were laid on 22 March for implementation by the end of March. “This is no way to run a rail road, let alone a system of regulation,” says Mayo.
“We have a long list of things we would like to see, but they are not here,” continues Mayo. He says that while ministers’ speeches display an understanding of what is needed to support the growth of co-operatives and other mutuals, there is much less recognitioin shown in the actions of departments. “When I came into this job I realized there was a lack of understanding about co-operatives and mutuals in government,” says Mayo. “We have a huge job of education on co-operation to do on Whitehall.”
The Plan for Growth overlooks the very major challenges facing the mutual sector in the coming period. These include the effective discrimination against banking mutuals in the way that minimum capital requirements are formulated and in the way that the Financial Services Compensation Scheme levies charges based on the size of deposits, rather than according to an institution’s risk profile. My personal opinion is that there is also a pressing need to find ways to improve corporate governance at smaller credit unions.
The House of Commons Treasury Select Committee – now chaired by Conservative MP Andrew Tyrie – has addressed the points relating to building societies and co-operative banks in its new report ‘Competition and Choice in Retail Banking’. It made clear its concern about the way in which building societies and other financial mutuals are suprevised, both regarding the fees they are charged and their capitalization requirements. The committee was told by Lord Turner, chairman of the Financial Services Authority, that some of the liberalization of building societies introduced under Margaret Thatcher’s government might need to be reversed to ensure that financial mutuals return to their focus on home loans, serving savers and a low risk business model. (A view not shared, it should be noted, by the Nationwide Building Society.)
The select committee observed that the Government had promised in its ‘Plan for Growth’ to assess whether building society legislation needs to be updated. “We will study that assessment carefully,” said the MPs. It appears that the Treasury Select Committee is more aware of the pressures on financial mutuals than is either the Treasury or the Department for Business, Innovation and Skills. That is a major cause for concern.