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Co-operative and Community Benefit Societies and Credit Unions Bill

Volume 712: debated on Friday 10 July 2009

Second Reading

Moved by

My Lords, I beg to move that this Bill be now read a second time.

This Bill arose as a Private Member’s Bill in another place introduced by my right honourable friend Mr Malcolm Wicks. Supporters of the Bill when it was published included honourable and right honourable Members from all the three main parties in the other place and the Bill passed through all its stages without amendment.

Following an extensive Treasury consultation entitled, Review of the GB Cooperative and Credit Union Legislation, a number of reforms were agreed which could be effected using a legislative reform order; for example, reforms regarding the minimum age for membership of and becoming an officer of an industrial and provident society; the modification of rules concerning share capital; the flexibility for such societies to choose their own year end; facilitating easier dissolution of societies and other such reforms. However, the legislative reform order can deal only with deregulatory issues. The Bill deals in legislative form with the issues arising from the consultation which could not be regarded as deregulatory and therefore could not be included in a legislative reform order. Thus the Bill completes the response to the public consultation.

I wish to set the subject matter of the legislation in a slightly broader context before I deal with its specific provision. The ideals and principles of co-operation and mutuality are well entrenched in our economic and social history. Very few people do not know something about Robert Owen and the New Lanark mill experiments, or the Rochdale pioneers, or are unaware of the writings of Sidney and Beatrice Webb. Those lessons of early co-operation and mutuality are well enshrined in our social and economic history and show the early significance of such co-operation and mutuality. Today we are at the end of a period of decline as regards the significance of co-operation. We are now in an era of resurgence—a renaissance—of co-operation and mutuality. Mutual building societies, bastions of financial stability, were demutualised, a handful of shares and a few hundred pounds being the bribe which people accepted to demutualise them. They gained an immediate small windfall in their pockets at the expense of generations of financial stability. We all know what happened to those who pursued the course of greed in order to demutualise those building societies. It was almost an act of financial vandalism. If anybody quarrels with that, I suggest that they would quarrel only with the word “almost”.

Today, the resurgence of co-operatives and mutuals reflects consumers who are looking for an ethical alternative to banks, which have significantly failed us, and the Co-operative Bank and the Britannia Building Society illustrate an admirable way forward when we see this planned merger creating a new £70 billion bank—a new super mutual.

Major developments are also to be found in the retail sector. The Co-operative Retail Society now has a unified management structure and more than 2,000 stores. The Co-operative Group has acquired Somerfield, and the combined operation has something approaching an 8 per cent share. I could go on, but I will not detain your Lordships’ House with a description of the virtues of co-operatives, credit unions and mutuals.

My Lords, does my noble friend agree also that the co-operative retail sector has been leading the way in fair trade and setting a very good example, which has been followed by other large retailers?

My Lords, my noble friend anticipated what I was going to say in a few minutes’ time, when I would have referred not only to fair trade but to ethical trade and the sustainability of trade. Those are all virtues of the co-operative sector.

Suffice it to say that these co-operatives, mutuals and community benefit societies belong to their members; they are not assets to be bought and sold to satisfy the short-term interests or short-term gains of shareholders. Co-operatives and mutuals are large players in the economy, with assets of more than £400 billion and about half our population in membership in some way or other. They serve many of the wishes of our people, including fair trade, ethical trade and sustainable development—as I had intended to say.

I turn to the Bill, which is of importance to this important sector of the economy. The Bill refers to three categories of organisation: co-operatives which are run for the benefit of their members; co-operatives which are run for the benefit of their communities—the so-called community benefit schemes, including many housing associations, social clubs and sports supporters’ clubs; and credit unions, to which I shall return in a short while.

This short Bill of eight clauses has five main clauses, while Clauses 6 to 8 deal with mainly technical issues, such as consequential amendments and regulations, commencement orders, and territorial extent. The main part of the Bill is in Clauses 1 to 5. Clauses 1 and 2 reflect the fact that, following the Treasury consultation, there was an overwhelming desire to change the outdated name of, and rebrand, industrial and provident societies more appropriately for today’s world; the purpose is to introduce alternative names.

Clause 1, therefore, provides that societies registered under the Industrial and Provident Societies Act 1965 shall be registered as co-operative societies or community benefit societies.

Clause 2 changes the name of the Industrial and Provident Societies Act 1965 and goes a long way towards removing from the statute book the rather outdated term “industrial and provident societies”.

Clause 3 is somewhat more complicated, but is simple in its objective. It applies the Company Directors Disqualification Act 1986 to officers of industrial and provident societies, as it applies to officers of companies, building societies and friendly societies. Under the current law, officers of industrial and provident societies who have mismanaged their society cannot be disqualified. Clause 3 makes such disqualification possible.

Clause 4 gives the Treasury powers to apply to industrial and provident societies, with appropriate modification, company law on investigation of companies, company names, and dissolution and restoration to the register. There is a substantial amount of detail concerning giving the Treasury a power to apply company law on striking off and dissolution of defunct societies, investigation of companies and requisition of documents, and on company names.

Clause 5, dealing with credit unions, is the final substantive clause. Credit unions are a different form of mutuality. As financial co-operatives, they operate in communities and workplaces around Britain. There are 480 credit unions in the UK, with some 730,000 members, assets of £558 million and an income of £31 million a year. A recent report from the New Local Government Network suggests that up to 200,000 more people in Britain are at risk from illegal loan sharks because they cannot access credit from traditional lenders. The diminished availability of regulated sub-prime credit is creating conditions where a sizeable number of people have little option but to borrow from illegal sources. The report suggests that at least 165,000 people already use loan sharks in the United Kingdom and that we can expect that number to rise significantly.

Credit unions are an imperative way of helping poor people to control that limited part of their financial self-government in an ethical way. I believe that they are central to government plans for tackling financial exclusion. That has certainly been so in recent years and we look forward to the continued development of that activity. However, the credit union movement is relatively small and I shall be addressing that question in another debate that should take place fairly shortly. In relation to credit unions, Clause 5 enables, where appropriate, provisions corresponding to building society law to be made for credit unions so as to recognise their existing, increasing and significant role as deposit takers.

Co-operatives, credit unions and other mutual societies provide another dimension of choice and diversity in the economy as a whole and especially in financial services. The Bill, besides the rebranding element, will improve corporate governance, make disqualification of officers possible, and make co-operatives and community benefit societies open to closer scrutiny by the registrar and through the FSA being given new powers of investigation.

As the co-operative and mutual sector is enjoying a resurgence, the Bill, if passed, will help the modernisation and rebranding of such societies, while simultaneously making an improvement in corporate governance. I conclude by commending the Bill to the House in the words of my right honourable friend Malcolm Wicks, who initiated this Private Member’s Bill. He said,

“while those of us on the left in politics are proud of the origins of the co-operative movement as part of a wider labour movement, there is a sense in which many of the virtues of mutuality, thrift, self-help and responsibility strike chords on the other side of the Chamber”.—[Official Report, Commons, 24/4/09; col. 507.]

I beg to move.

My Lords, it is a great pleasure to follow the noble Lord, Lord Tomlinson, in speaking on this useful Bill. He started his speech by talking about the history of the movement and said that everyone knew about Robert Owen and the Rochdale pioneers. The sad truth is that, although we all know about them, our children do not. When we talk about the resurgence of the co-operative movement, which many of us are keen to see, we have to accept that this is a novel concept to many people; it is not one with which they grew up. The demutualisation of the building societies means that, as young people, our children do not save with a mutual and do not, as I did, shop at the Co-op because there is not a Co-op within spitting, walking or driving distance of where we live. Therefore, there is a big job to be done in making the case for mutuality, which we hope in our small way to do.

The Bill is useful in that respect, particularly in consigning to history the phrase “industrial and provident society”. Whenever I heard it, a picture always came into my mind of Pennine towns and LS Lowry paintings. It has no relevance to the kind of institutions that we are all seeking to promote, so that is a useful change. It is also sensible to require all these bodies to register with the FSA in future. I hope that, in regulating them, the FSA does a better job than it did in regulating the Dunfermline Building Society, but one hopes that it has learnt its lesson in that respect.

The other detailed provisions of the Bill are all sensible pieces of tidying up. However, one thing that I never understand is why legislation relating to mutuals is always introduced via Private Members’ Bills. It is virtually the only bit of the legislative process that is always done by such Bills rather than by government Bills. We have banking Bills that no one would consider as being appropriate as Private Members’ Bills. The value presumably is that, paradoxically, it is easier to get a Private Member’s Bill through on something such as this, but it seems odd—almost unique in the way that we do business—that we have a dribble of Private Members’ Bills, however eloquently advocated, in respect of mutuals.

I am sure that, as the noble Lord, Lord Tomlinson, said, we will be debating credit unions again in future and we will undoubtedly debate building societies as we look to reform of the financial sector. I shall not weary the House with a discussion of those matters today but I have one question for the Minister. Yesterday’s banking White Paper says that the Government are already proposing to use a legislative reform order to enable members to invest more than £20,000 in transferable shares in industrial and provident societies. That seems a sensible change, but can the Minister tell us what the timetable for that order will be?

This is a tidying-up, modernising measure and it is eminently sensible. It does not grapple with the big issues around generating more resources for the sector, which I think are for another day, but I greatly welcome the Bill and the way in which it has been introduced by the noble Lord, Lord Tomlinson. We on these Benches strongly support it.

My Lords, the noble Lord, Lord Tomlinson, has made a well argued case for the Bill. It is of course masquerading as a Private Member’s Bill but it is, in all but name, a government Bill. I say at the outset that we shall not oppose it. My honourable friend Mr Mark Hoban in another place spoke at length about the Bill. I do not intend to rival that performance this morning but I have one or two things that I should like to say about it.

Noble Lords may know that I have often expressed scepticism in your Lordships’ House about mutuality in general. I have concerns about a mutual model in which ownership pressures are not sharp-edged. I can see that mutuals are popular and that they reach parts of society that financial services organisations generally do not, but I have never found any evidence that they are the most efficient way to deliver financial, or indeed any other, services. They do not give any assurance that things cannot go badly wrong. The Presbyterian Mutual Society was driven into administration last year by a misguided commercial loan portfolio, which stands proof that things can and do go wrong with mutuals.

If we look at building societies, we see that there are two big stories from the last century. The first, to which the noble Lord, Lord Tomlinson, referred, is the demutualisation of the larger building societies, which was largely followed by their disappearance into larger banking groups. I do not regard that as an act of vandalism. I believe that there were sound economic reasons for what happened. However, the bigger story is of a massive decline in the movement. A hundred years ago, there were 1,700 building societies; now, there are barely more than 50. That has little to do with demutualisation, which affected only a relatively small number. It has much more to do with the underlying fragility of the business model, which generally cannot withstand the management mistakes that litter the history of the building society movement. Within management mistakes, I include one of the more common reasons for the disappearance of building societies—namely, operating at an uneconomic scale. Those mistakes, in my view, have their roots in the ineffectiveness of the “membership equals ownership” construct, which allows inefficient or incompetent management to go unchecked.

Therefore, I have a particular scepticism about Clause 5 of the Bill, which will allow the Treasury to apply building society provisions to credit unions. I think that this means that the financial freedoms that got building societies into trouble could be extended to credit unions. I name the Dunfermline and the West Bromwich as building societies that have hit the headlines for serious failings in the past few months alone. I could name even more that have been forced into mergers for lesser, although none the less important, mistakes.

The Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 contains yet more powers for building societies to use wholesale funding. The Government are wisely refraining from activating those powers at present for building societies and I am not at all sure that we would ever want credit unions to have the freedoms that are contained in that building society legislation. I am not at all convinced of the merits of giving another sector of the mutual movement the freedoms that have allowed others to get into trouble in the past.

I also say to the noble Lord, Lord Tomlinson, that, although I concede that the term “industrial and provident” comes from an earlier era, I can see no reason to junk it. If it were necessary to trash every sign or symbol of the past, your Lordships’ House and indeed the whole of Parliament could well have been consigned to landfill some time ago. I am comfortable with tradition and it grieves me that the Benches opposite delight so much in what they call modernisation at the expense of a sense of history.

The new title of “co-operative” is hardly a modern one. Co-operatives were founded in the industrial era, so the term comes from precisely the same era as that which gave industrial and provident societies their name. Of course, I would have found the title a little easier to swallow had the co-operative movement not bequeathed its name to the Co-operative Party, which is a part of the Labour movement. I never quite understand precisely how the two fit together but I understand that there is a lot of intertwining between the Co-operative Party and the Labour Party. Using this Bill to immortalise a part of the Labour movement is not exactly to my taste.

Some bits of the Bill are positively worth while. I support compulsory registration of industrial and provident societies and their modernised successors. I also support the provisions about directors and officers in Clause 3 and, in broad terms, the other extensions of company law in Clause 4. However, I have some concerns about the regulation-making powers in Clauses 4 and 5. They both allow for the creation of criminal offences and I have never been a fan of creating criminal offences by secondary legislation. However, I accept that there are many precedents for that, so I shall not pursue the argument.

None the less, I wonder whether there should be some restriction on the power. Perhaps the noble Lord, Lord Tomlinson, or the Minister will tell me whether the power could be used to create a criminal offence where none exists under company or building society law. If so, I shall want to return to that at a later stage of the Bill. I note that the Delegated Powers Committee has suggested limiting this power so that it cannot be used to create a penalty in excess of the relevant one in company law or building society law. I was surprised that the noble Lord, Lord Tomlinson, did not refer to the 11th report from the Delegated Powers Committee, which contained a clear recommendation for a limitation on that power. I give notice that I shall want to return to that in Committee.

In addition, the Bill allows the regulations to confer power to make further orders, regulations and subordinate legislation. I am most concerned about the ability to make further legislation without reference to Parliament. The order-making powers in the Bill are subject to the affirmative procedure, which is right and proper, but those orders can make provision for further secondary legislation and, as far as I can tell, that does not require affirmative approval or, indeed, any parliamentary process. I shall want to revisit that issue, too.

I have one technical question in connection with Clause 5, which allows the Treasury to make provision for credit unions corresponding to any provision relating to building societies. Will the Minister, or the noble Lord, Lord Tomlinson, confirm that this power can bring credit unions within the special resolution regime provisions in the Banking Act 2009? It was set up for banks but has already been extended to building societies by a statutory instrument. Is it intended that a further extension could or should be made to credit unions and, if so, what will be the conditions for a credit union to fall within the special resolution regime powers?

Lastly, will the Minister update the House on the Government’s plans for the many regulations that will be necessary if this Bill, once an Act, is to be given effect?

My Lords, I am very grateful to my noble friend Lord Tomlinson, of Walsall, for his support for the mutual sector and for the eloquent manner in which he has presented this Bill, and to other noble Lords for their participation in the debate. The Government are a strong supporter of the mutual sector. They welcome the important contribution that the sector makes in providing choice and diversity in financial services and fostering financial inclusion and social cohesion. This Bill is particularly relevant to industrial and provident societies, community benefit societies and credit unions.

It may be useful for me to explain why the Government believe that the Bill is both good and timely. The crisis in the international financial markets and its impact on the economies of every major nation has reinforced the need for countries to have diversified economies and financial systems with a variety of different types of economic models. In the UK, the proprietary company form is the predominant model of choice for many new enterprises, offering limited liability and the scope for involving external shareholders. However, an interesting and often overlooked fact is that the mutual structure, with more than 30 million members, is not only a significant provider of services and products to local communities but a most viable alternative to the proprietary company model. For example, in some communities, and for many who are excluded from mainstream financial services, credit unions continue to offer the only credible alternative to loan sharks and unscrupulous doorstep moneylenders.

Access to capital and funds, or rather, as we have seen in recent times, the lack of it, is crucial and can have very destabilising consequences for businesses, members and customers. The Government applaud the role that credit unions play in encouraging a savings ethos among their members, as well as providing them with necessary capital when needed. Co-operative enterprises in the UK, as the noble Lord, Lord Tomlinson, noted, have more than 300,000 employees and assets in excess of £10 billion, and are the lifeblood of many communities. The Government recognise the valuable contribution they make to people’s lives, their fair-minded values, community participation and engagement.

The Government have displayed their commitment to the sector and in recent years have undertaken various policy and legislative initiatives aimed at enhancing the operational efficiency of mutuals. Recent legislation, such as the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007, which incidentally also started out as a Private Member’s Bill initiated in the other place by Sir John Butterfill, has demonstrated how the sector can seize the opportunities offered. This recent piece of legislation has been credited with having made possible the merger between the Britannia Building Society and Co-operative Financial Services, creating what my noble friend describes as a super mutual, to the benefit of many thousands of members.

The Government have also set up an £80 million growth fund for credit unions and community development finance institutions to lend on to their members. A further £18.75 million has been announced as additional funding in the 2009 Budget, bringing the total funding to almost £100 million. More than 160,000 credit union members have so far benefited from loans since the start of the growth fund in July 2006. The Government recognise that one way of helping the sector is by ensuring that it has an enabling legislative framework. The Government are taking forward legislative and policy reforms for credit unions and co-operatives under the legislative reform order, on which the Government will shortly be reporting as it begins its parliamentary process.

The Bill, which complements the work in the legislative reform order, focuses on the linked objectives of modernising the legislation and further increasing member confidence in societies by bringing their corporate governance standards up to “best in class”. It will give the Treasury power to make further changes to credit union law by importing building society law where appropriate. The sector has been seeking that to help it to move on to the next phase of development.

I shall address some questions that arose at Third Reading in the other place. The Bill gives the Treasury powers to apply to industrial and provident societies certain provisions of company law on investigation of company names and on dissolution and restoration to the register. In the other place, Mr Peter Bottomley sought an explanation of why that power had been conferred on the Treasury and not the Secretary of State. The simple explanation is that the Treasury does not have a Secretary of State. When power is conferred on the Treasury to make regulations by way of statutory instrument—as in the Bill—it is exercisable by the Treasury through the Commissioners of Her Majesty’s Treasury, as set out in Schedule 1 to the Interpretation Act 1978.

Mr Bottomley also inquired whether the powers granted in the Bill would apply retrospectively to allow the FSA to disapply a name if a company had already used the word “co-operative” in its title and that was challenged as being misleading. The powers granted in the Bill will enable the Treasury to give the FSA powers to order an industrial and provident society to change its name if its name is too similar to the name of another business or was obtained by providing misleading information. However, the Bill does not include powers for the Treasury to make retrospective legislation. Neither does it give the Treasury powers to deal with the use of the name “co-operative” by businesses that are not co-operatives, as the Bill concerns only co-operatives. General powers to regulate the use of business names by businesses remain with the Secretary of State for Business, Innovation and Skills.

I thank the Delegated Powers and Regulatory Reform Committee for its consideration of this Bill, published yesterday in its 11th report of this Session. The Committee commented on Clause 4, which enables the Treasury to apply to industrial and provident societies provisions of the Companies Acts relating to investigations, company names and dissolution, and Clause 5, which enables the Treasury to apply to credit unions provisions of building society law. The Committee expressed concern that the provisions which may be applied include many which contain criminal offences, some of which carry up to seven years’ imprisonment as a maximum penalty.

The Committee notes that your Lordships’ House will wish to consider whether the Bill should be amended on that point. An amendment, should your Lordships consider it necessary, would provide that the maximum penalty for an offence created by regulations under Clauses 4 and 5 may not exceed that for the corresponding offence under the legislation being applied. I can confirm that the Government do not intend to use regulations under Clauses 4 or 5 to impose an increased penalty for offences. I hope that my statement will persuade your Lordships that there is no need for an amendment of the type described by the Committee.

I am sure that your Lordships will agree that the proposed reforms in the Bill are both necessary and proportionate. They will help provide further confidence in this important sector and engender continuing improvement in governance standards.

The noble Lord, Lord Newby, asked about the timetable for the order. The Government intend to publish a draft legislative reform order by the end of July. We intend to lay the LRO before Parliament when the House returns from the Recess.

The noble Baroness, Lady Noakes, asked about the power to make further regulations in Clauses 4 and 5. Any further regulations—for example, prescribing fees—will use the same parliamentary procedure as the provision of company law to which they apply. The noble Baroness also asked whether the Bill will extend the SRR to credit unions. I am advised that it does not. One would need an order under the Banking Act 2009 to do that.

The noble Baroness also asked whether we could extend building society freedoms to credit unions. Clause 5 preserves key features of credit unions, as the key sections of the Credit Unions Act cannot be amended. The Building Societies Act does not contain restraints on what building societies can do. If I find that I can add helpfully to those answers, I will of course write to my noble friend Lord Tomlinson, the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby, to expand on those points.

The noble Baroness said that things can and do go wrong with mutuals. We know that to be the case with all forms of business ownership—incorporated, mutual and non-incorporated—but this timely and good Bill strengthens the governance of mutuals and, as such, deserves to be welcomed. Before I was a Minister, I produced a report for the Treasury on the governance of mutuals in the light of the failure of the Equitable Insurance Society, a failure which, as noble Lords will need no reminding, was determined by the judge to be a consequence primarily of bad governance and management of the society. I believe that the steps taken here will address some of those supposed weaknesses of the mutual model. Noble Lords will also need no reminding that Sir David Walker, who will be producing a report on governance of financial institutions fairly soon, was, after we gave him the original terms of reference for that review, asked to extend it to include mutuals, so he will be addressing some of the points raised by the noble Baroness.

The noble Baroness closed her remarks by saying that she was not always at ease with those who were delighted with modernisation for modernisation’s ends in itself. I am sure that those comments will be noted by Mr David Cameron.

My Lords, I thank the three other participants in this short but very useful debate. I very much value the intervention of the noble Lord, Lord Newby, and I share his views. I also very much welcome the intervention of the noble Baroness, Lady Noakes, although with slightly less enthusiasm for parts of her speech; she will understand why if I mention a couple of them. She seemed to be unwilling to recognise that co-operatives can be efficient. I used to have my house insurance and car insurance with the Co-operative Insurance Society. I stopped for a number of years during a period of fairly substantial inefficiency. I market-tested both my car insurance and my house insurance last year, and I returned to the Co-operative because it was cost-efficient. I was very pleased last week, because not only had I taken out a cost-efficient form of insurance, I got my letter to tell me that for the past half-year, my dividend has been £88. That is a further cost reduction.

I understand the point that the noble Baroness made. She referred to the Dunfermline Building Society. We should look at the two different arms of the Dunfermline Building Society. I believe that I am correct to say—I tried to check this with the Treasury this morning—that the traditional mutuality role continues. The Dunfermline Building Society got itself into troubling by moving into non-traditional activity.

The noble Baroness clearly does not like the Co-operative having an association with the Co-operative Party any more than I like Marks & Spencer or any other company identifying with the Conservative Party when it makes a financial donation to it.

My Lords, as a former chairman of Marks & Spencer, I assure my noble friend Lord Tomlinson that it has not made a donation to any political party for many, many years, which I welcome.

My Lords, I welcome that, too, but I can find many other companies that do make such donations. The Co-operative movement was not engaged in party politics at all until the outset of the First World War. When it found that the government distribution of groceries to members of Co-operative societies was discriminatory and that they could not get fair treatment, it decided that it had to engage in direct political activity; so it was an historical decision, taken nearly 100 years ago, to combat the discrimination of government in the distribution of scarce resources.

Finally, my noble friend the Minister replied every bit as efficiently as I would have done to the questions asked by the noble Baroness, Lady Noakes, and I agree with every word that he said. If anything leaves her unsatisfied, we will return to the matter in Committee.

Bill read a second time and committed to a Committee of the Whole House.