The search for co-operative finance

Peter Hunt, the irrepressible chief executive of Mutuo, is in bullish mood.  The think-tank’s Mutuals’ Redeemable Share Bill has had its First Reading in the House of Lords and Peter seems genuinely confident that the Bill can wend its way through the sometimes tortuous maze of Parliamentary legislation.


The Bill needs government support if it is to have a Second Reading in the Lords and consideration in the near future in the Commons.  “There is an indication that the Government supports it,” says Hunt.  “We think there is a lot of political support for it.  But that is different from the Government ensuring it gets allocated time.  So we are now campaigning for time for a Second Reading and to get it into the Commons.  And that means getting a Second Reading [in the Lords] before Christmas.”


The best way of achieving that, believes Mutuo, is if a large number of people in the co-operative sector back the Bill by lobbying their MPs and ministers.  “We are urging people to support this,” continues Peter.  “There could not be a better time to debate this than now.”


It is the crisis in The Co-operative Bank that makes the Bill so timely.  Peter believes that the Bill creates opportunities for co-operatives to raise finance from existing members in a way that does not either potentially hand over control to those who finance the business, nor run the risk of demutualisation.


As the name of the Bill makes clear, the shares would be redeemable by the co-operative, rather than being withdrawable on demand, as is the current share model for co-ops, or tradable on an exchange, as will potentially be the case with The Co-operative Bank’s proposed share issue.  “What we are trying to do is create something which is a completely new option,” explains Peter.  “It is mirroring other legislative systems.”


The model which has been examined and copied is that of Desjardins, in French Canada.    Desjardins is the largest federation of credit unions in North America, with assets of CAN$200bn (£124bn).  It is significant and arguably fundamental that it operates in a legal system that is not Anglo-Saxon. English law is based around recognising personal property rights and has difficulty dealing with the concept of collective rights.  Mutuo believes that by borrowing from the French Canadian recognition of collective ownership rights, the UK co-op movement can move forward in its long standing attempts at raising additional finance without diluting existing ownership structures.


“Like all financial services businesses, Desjardins were keen to tap into new capital,” explains Peter.  “In 2012 they raised about CAN$1.2bn (£740m) through a share issue.  This was permanent capital, rather than withdrawable shares, which can generate an annual return.  They were entirely subscribed by the existing membership.  You have to be a member to buy the shares and they can only be bought through the local Caisse [credit union].  Typically they can be held for five or seven years.  This additional capital which is provided to the business is really, really important and enables it to compete.”


But, adds Hunt, it is the legal framework that is important for this to happen without the risk of demutualisation.  “In French Canada and many other legislative frameworks you have an asset lock,” he explains.  This restricts a distribution of funds from a dissolution to a transfer to other co-operatives, or donations to good causes that were specified in the original objectives.  Mutuo believes that its Bill provides a potential statutory underpinning to protect the co-operative and its assets from demutualisation, while creating an attractive class of shares for those mutual businesses that would benefit from them.


There has been some comment within the co-operative movement that the Bill was drawn-up by Mutuo without any engagement with Co-operatives UK, which has separately been developing and consulting on its own proposals for improving co-operatives’ access to the financial markets.  But Peter plays down any significance in this.  “We have worked with the largest co-operative in the UK [the Co-operative Group] and the Association of Financial Mutuals,” he comments.  “Mutuo works with the people who support it.  We don’t have any support from Co-ops UK.  We are hoping they will work with us.”


Ed Mayo, chief executive of Co-operatives UK, says that he believes the Bill could be very important for friendly societies, but he is clearly unconvinced that it provides a solution for other types of co-operatives and mutuals.  Specifically Ed points to the fact that co-operatives can already draw significant amounts of new capital from existing members and he hopes that as a result of this year’s Budget, the limit will be raised to as much as £100,000 per member.  The principle of a limit relaxation, he adds, was made possible by successful campaigning by the co-operative sector.


“Martin Shaw of the Association of Financial Mutuals confirmed to me that what is proposed will be of interest to friendly societies and that they have been able to have a dialogue with Mutuo on the substance of a bill like this,” says Ed. “Certainly, we can be supportive of a proposal such as this Bill if it is of assistance to friendly societies.


“The proposal for the scope for a new form of shares in a co-operative society that can be redeemed – ie repaid when the business chooses to – is a perfectly reasonable and helpful suggestion. But it will not be any form of magic wand, nor will it necessarily open up significant new sources of capital. Moreover, it can be argued that industrial and provident societies already have the power to issue redeemable shares, or are not prohibited from doing so, so that it is not one hundred per cent clear that the Bill will add anything to this.”


There are, it needs to be added, some differences of view between lawyers as to whether the Bill as it stands is watertight, or whether it needs to be refined.  Ed comments: “It may be that some of these issues can be ironed out in the course of the development of such proposed legislation, or that earlier contact and engagement around the substance of the proposal would have done the same. But if this delivers as is for friendly societies, then of course we wish them well and will aim to be constructive where we can in our engagement around this work.”


The key difference of opinion between Mutuo and Co-ops UK, it seems, is whether the focus should be on redeemable share capital, or withdrawable share capital.  “Withdrawable share capital has always been the most flexible form for societies to raise new capital from members and one that is fast growing in the form of ‘community shares’,” argues Ed.  He believes that raising the limit from the current level of £20,000 to his preferred level of £100,000 – for which Co-ops UK has done economic modelling – would be a very positive move, not least for the agriculture sector.  Ed, too, is asking the movement to lobby MPs and ministers – in this case for the substantial rise in limits on withdrawable share capital.


Raising sufficient finance for co-operatives, while ensuring one member one vote democratic control, has always been a source of tension within our movement.  Despite the proposals from both Mutuo and, soon, from Co-ops UK, it will probably always remain a tension.



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