My Lords, noble Lords may wonder why I have become involved in the mutual world. I have to thank Peter Gray, one-time chief executive and chairman of the Tunbridge Wells Equitable and Friendly Society, who revitalised that society in the 1970s and 1980s, and the Association of Friendly Societies. It was he who inspired me to take a real interest and, as a result, I chaired that organisation from 1992 to 2005.
The other inspiration that has caused this Bill to see the light of day comes from the Chancellor of the Exchequer, the right honourable George Osborne, who somehow persuaded the powers-to-be to make in the Conservative manifesto a commitment to mutuality both in the workplace and in the structure of the mutual financial sector. There are broadly five sectors of the mutual financial world. Building societies, credit unions and co-operatives have all been helped by the Chancellor already. However, two of the five have yet to be helped—namely, mutual insurance companies and friendly societies. Why do they need help? It is simply because, unless they can raise additional capital, they will never be able to expand or develop to their true potential. Indeed, unless they are helped, I suspect that they will either wither on the vine or demutualise. So we have today’s Bill, which has been in gestation now for close on two years, helped by the Treasury—and I pay particular thanks to the right honourable Sajid Javid MP and his successor in looking after this Bill, Andrea Leadsom MP, who have also helped it on its way. I have had consistent help from my noble friend on the Front Bench this afternoon.
The Bill refers to two classes of shares—deferred shares and redeemable shares. One of the key hurdles that I and my team have had to jump was to persuade the regulator that both those vehicles meet the requirements of Solvency II and would therefore be eligible for tier 1 capital, which is absolutely vital for development capital. We have been successful with the deferred shares element, but have not yet persuaded all parties that it is possible for redeemable shares as well. I therefore had to make a decision on whether to go ahead now with just the deferred element of the Bill, which goes a long way to help mutual insurers and friendly societies, or whether to persevere to try to persuade the authorities about redeemable shares. I decided, in the face of having only five months left of this Parliament, to drop the redeemable element. I suspect that my noble friend on the Front Bench will do just that in Committee, in moving certain government amendments.
I want to look at the effect of the Bill. Clause 1 gives powers to the Secretary of State to permit the use of a new class of deferred shares. That is on the assumption that the redeemable element was removed. This will affect industrial and provident societies, friendly societies and mutual insurers. Furthermore, holders of shares must be or will become a member of the Society of Mutual Insurers. To maintain the mutual characteristics of the organisation, they will be entitled to only one vote as a member, regardless of the value or number of shares they hold. They will be entitled to only the level of remuneration payable under the rules of the mutual. Deferred shares may entitle the holder only to repayment of their nominal value on the solvent liquidation of the mutual. This removes any risk of carpet-bagging by those interested solely in demutualisation. The power to make regulations under the Act is exercisable by statutory instrument and must not be made unless a draft of it has been laid before, and approved by, resolution of each House of Parliament—that is, the affirmative procedure.
I will not talk about Clauses 2 and 3 because they relate exclusively to redeemables. Clause 4 sets out how regulations may provide for a mutual to issue deferred shares,
“being shares that incorporate a term which prohibits the repayment of any principal to the shareholders save in either or each of the following events … the winding up or dissolution of the … mutual … in circumstances where all sums due from the society or mutual insurer to creditors claiming in the winding up or dissolution are paid in full … the granting of relevant consent by the appropriate authority … The memorandum or rules of any society or constitution of any mutual insurer may exclude or restrict the issue of deferred shares … A society may only issue deferred shares if it is authorised to do so by its memorandum or rules and a mutual insurer may only issue deferred shares if it is authorised to do so by its constitution”.
This means that no shares will be issued until the current members have approved it. However, the key benefit—this is absolutely crucial—is that these shares would, when issued, be classed as tier 1 capital and meet the requirements of Solvency II.
Clause 5 restricts the voting rights of holders of a deferred share and obviously will need amendment to remove “redeemable”. It means that if their only membership is via holding such a share, they may not participate in any decisions concerning amalgamation, transfer of engagements or conversion into a company or, in any case, a proposed transfer or sale of business or property under Section 110 of the Insolvency Act 1986. This is a further safeguard against the motivations for demutualisation.
Clause 6 sets out the proper legal definitions for the various types of mutuals affected by this legislation. Clause 7 is the usual Short Title, commencement and extent.
I would like to spend a few moments explaining why this Bill is so important. It is important because it gives access to new capital, particularly for friendly societies and mutual insurers. First, all mutuals need to be able to play a full part in our economy with diverse corporate ownership. Friendly societies and mutual insurers do not have the ability to raise capital that some co-operatives and building societies do, or indeed public limited companies.
Secondly, without new capital, many mutuals could be driven into inappropriate corporate forms through demutualisation. If more mutuals convert to other corporate forms, consumer choice would be reduced and large numbers of consumers would no longer have non-listed, member-owned options in the financial services marketplace. This both reduces competitive pressure from the operation of different business models in the same market and adds to systemic risk to the economy.
Thirdly, a lack of capital limits mutuals’ growth and the ability to develop new services. The growth rate of a mutual is constrained by its relative inability to add capital through retained earnings.
Fourthly, like all businesses, mutuals need to be able to benefit from the economies of scale available only by growing their business. Mutuals need to gather sufficient capital to serve their members well, extend services to new members, expand their menu of services and achieve economies of scale.
Fifthly, it is important to learn the lessons from the recent financial crisis. If financial services businesses are to build up stronger capital bases, they require the legislative and regulatory agility with which to do so.
Sixthly, there are direct benefits of being able to issue these new shares. Debt, the alternative, is of a lower quality than equity for firms wishing to build their capital base. There is inevitably a limit to the amount of debt that can or should be raised. Mutual shares would therefore present an opportunity for small mutuals to raise funds that they may not be able to do otherwise, and for larger mutuals to raise tier 1 funds that subordinated debt does not provide.
These shares are alternatives to private equity buyout, which shows signs of growing. They are also alternatives to demutualisation, and this is crucial. When one looks back 20 years, the UK mutual insurance sector was the largest in Europe but now accounts for just 2% of mutual insurance premiums in the EU. Mutual insurers in 1994 accounted for 50% of the UK insurance market, and lack of access to capital was largely seen as the key reason for demutualisation. The small size of the market today means that any further demutualisation in the sector could hasten the entire sector’s early demise.
If the Bill goes ahead, mutuals will be able to source external capital without losing their mutual status, and some very specific benefits will follow. They could take part in tactical acquisitions, which will enhance their competitiveness. They could also look at local infrastructure potential. I shall give one example. In 2004, Family Investments friendly society and Brighton Council explored the concept of a city mutual. The idea was that Family Investments would raise a fund from its own capital and via a bond offering to local residents, which in turn would be used by the local council for a range of social housing and employment projects. Your Lordships may remember that on Monday I suggested something very similar for cottage hospitals. In the end, as far as the parties in 2004 were concerned, it was unclear whether the legislative arrangements were in place. This Bill will meet that requirement.
Finally in this area, there are a number of examples in overseas countries of similar mutual shares offerings. Examples from Canada and the Netherlands and across the whole European Union show how mutuals can enlist their members in raising capital through the issuance of new deferred shares. In summary, the benefits offered provide evidence that government support for the Bill would create a viable new opportunity for mutuals to attract new capital and deliver positive outcomes for mutuals and consumers.
The Bill has all-party support. Many colleagues have spoken to me in support of the Bill, and some have been good enough to write, particularly my noble friends Lord Hodgson and Lady Maddock. In the mutual world I have had wonderful support from organisations such as Liverpool Victoria, Royal London, Engage, Family Investments—steered so ably by John Reeve—and particularly Wesleyan Assurance, which is held in such high regard. Add to those the Association of Financial Mutuals, the Association of Friendly Societies and the All-Party Parliamentary Group for Mutuals—chaired by my friend Jonathan Evans MP, who will steer the Bill through the Commons, given the chance—and, above all, Mutuo, with its energetic and knowledgeable director Peter Hunt. I thank them all. I beg to move.
My Lords, I thank the noble Lord, Lord Naseby, for bringing forward this Private Member’s Bill for consideration in your Lordships’ House. This is the second time that he has tried to deliver these reforms. I very much hope that his Bill has a smooth and easy passage through your Lordships’ House. The co-operative and mutual sectors in the United Kingdom are very grateful to the noble Lord for what he seeks to do. This is a good Bill for a Labour and Co-operative Peer to respond to, and I am delighted to do so.
As the noble Lord said, the Bill in its simplest form will allow mutual societies to raise additional funds while safeguarding their mutual status. Why is that important? As the noble Lord, Lord Naseby, has told the House, the mutual sector faces significant problems in raising additional capital. By their construction they do not have equity shareholders. They were established to serve their members, who would be customers, employees or particular communities. Mutual businesses are strong. They grow patiently over a long time. They are very stable, but can also be said to be a bit risk-averse. It can be said that in some circumstances they struggle to respond to the ever changing needs and demands of their customers.
In large part, mutual organisations have not made major changes to their structures and have quite properly stuck to their founding principles. The Bill will enable them to continue to do so, but also allow them to raise additional capital by creating optional new classes of share through which specified mutuals can raise additional funds, provide defined rights to specified mutual society members and restrict the voting rights of certain members who hold only such shares, so that they cannot participate in any decisions to transfer, merge or dissolve the mutual. That is why the Bill is so important: it modernises the mutual structure, but also safeguards it.
A lot of excellent work has gone on looking at the problems of the mutual sector and also its great strengths. In addition to the noble Lord, Lord Naseby, I pay tribute to my friend in the other place, the shadow Financial Secretary Cathy Jamieson MP, for the work she has done, along with the All Party Group for Mutuals mentioned by the noble Lord, Lord Naseby, which produced an excellent report in September. I also pay tribute to the think tank ResPublica, which, in its report Markets for the Many, looked at how we create financial services that support small business and truly serve the needs of our citizens and communities.
It will be useful to look at the financial services scene to see why the Bill is so important and welcome. As the noble Lord, Lord Naseby, said, we have to learn the lessons. Following the financial crash there have been significant turbulent times and significant legislation has been passed, not least the Financial Services Act 2012 and the Financial Services (Banking Reform) Act 2013. These pieces of legislation are steps in the right direction, but we need diversity of ownership models in financial services to keep the sector healthy and encourage competition.
To diverge slightly, the rush to demutualise building societies in the late 1980s and early 1990s did not help consumers. All those former building societies either failed in their new-found status or were swallowed up by larger financial institutions. We know the names: Abbey National, The Woolwich, Halifax, Bradford & Bingley and many others. In the UK, building societies account for only 3% of banking assets; in many other parts of Europe co-operative and mutual banks have a much large share of the market.
There is a similar picture in our insurance sector. As the noble Lord, Lord Naseby, said, more than half of the UK insurance market was mutual in 1995, but since then, in fewer than 20 years, it has shrunk to 7.5%. In terms of our European neighbours, mutual insurers have a 50% market share in Holland and a 45% market share in Germany. The insurers demutualised in large part because they needed to raise additional capital and improve the products and services they offered to their customers. This process has not been beneficial to customers. ResPublica found in its research that policyholders often saw falling levels of customer service, higher levels of customer complaints and worse claims handling than was experienced prior to demutualisation. For example, Scottish Widows converted to a plc in 2000 and paid out a £6,000 windfall payment to each policyholder. However, prior to demutualisation it paid out £107,000 in 1998 for a 25 year with-profits policy based on premiums of £50 a month. From statistics posted in 2012, this had plummeted to £28,071, which was more than 34% less than the average mutual was paying out.
I do not intend to go on for much longer but I wish to say that this is a good Bill, a forward-thinking Bill and a Bill that seeks to protect our mutual societies, helping them to grow and compete on a more equal footing. It should have the support of the Government.
The Government should also do more to help the sector in general, as it has the potential to do real good in the UK. I like the suggestion that the Government should look at establishing a mutuals expansion project along the lines of the Credit Union Expansion Project. I think that there is a role for mutuals to help reduce financial exclusion, but they need the Government, the FCA and others to see that role for them and then enable them to deliver more financial products to those on lower incomes.
There are in general some very good Private Members’ Bills before your Lordships’ House and it is disappointing how so few of them make any progress. They are all committed to a Committee of the whole House but they then struggle to compete with other Bills in making further progress. Therefore, I ask the noble Lord, Lord Newby, to have discussions with the usual channels and also with the Clerk of the Parliaments about points 8.29 and 8.44 of the Companion. On my reading of those two paragraphs, there is no distinction between government Bills and Private Members’ Bills, and some Private Members’ Bills could be referred to a Grand Committee to deal with technical issues and speed up their consideration by this House. Just because we have never done that before does not mean that it cannot be done.
I will leave that point there and conclude by again thanking the noble Lord, Lord Naseby, for bringing this Bill forward. We are all very grateful to him and I hope that the Government help it to get on to the statute book and become law in this Session of Parliament.
My Lords, I begin by congratulating my noble friend on his work in this area over a number of years and on securing a Second Reading for this Bill, on which he has done an awful lot of work and which addresses a very important issue.
As the House knows, access to capital and credit is the lifeblood of any company, and the financial crisis and its ongoing impact have served to highlight this point in very stark terms. Mutuals are no different from other companies in that they need capital to extend into new areas, develop new products and services for their members, write new business or increase their financial resilience. However, the inherent design of mutuals can mean that they face difficulties when it comes to access to external capital, as noble Lords have pointed out. Mutuals are designed to serve their members, who will be customers, employees or defined communities, but they were not designed with capital investors in mind.
In broad terms, mutuals access their regulatory capital from retained earnings and by issuing subordinated debt. However, unlike other businesses, they cannot issue shares, which deprives them of access to the equity markets. They therefore tend to be restricted in how they can raise capital. Any capital for growth must be generated internally and that takes time to be built up. This patient and long-term approach is one of the hallmarks of the mutual sector and indeed one of its strengths. However, it can also limit the sector’s flexibility in adapting to new market conditions, as well as limiting a firm’s abilities to secure maximum investment in the business and to grow through acquisition.
Friendly societies and mutual insurers compete in a highly competitive UK insurance market, and the restrictions on raising external capital can place a limit on their ability to compete on equal terms with their public limited company counterparts. In the recent past, a number of friendly societies and mutual insurers have decided to demutualise, and in some cases the lack of capital was cited as a contributing factor to a mutual contemplating demutualisation. As both the noble Lords, Lord Naseby and Lord Kennedy, pointed out, this has led to a significant contraction of the mutual insurance sector in the UK.
The sector has made the case that current capital constraints are preventing friendly societies and mutual insurers acquiring other businesses that would strengthen the overall offer to members and policyholders. It may also be restricting these organisations in developing new or innovative products, especially if those products require material amounts of regulatory capital to be held. Growth in these areas would potentially be to the benefit of both with-profits policyholders and other members of the mutual.
The proposals put forward by the noble Lord in this Bill have been carefully drafted to provide these mutual organisations with a means to raise external capital in a way that preserves the mutual status of firms. The Bill addresses access to capital for two sectors: friendly societies and mutual insurers, and co-operative and community benefit societies. It provides that the Treasury may make regulations subject to the affirmative procedure to permit friendly societies and mutual insurers to issue deferred shares and to permit co-operative and community benefit societies to issue redeemable shares. The Government agree that the deferred share capital instrument for mutual insurers and friendly societies is a good way forward, and the mutuals have demonstrated a clear need and demand for this instrument. We therefore support these proposals in the Bill.
In respect of the proposed redeemable share instrument for co-operative and community benefit societies, the Government are unpersuaded about the merit of a redeemable share instrument as these societies already have a means of issuing redeemable shares. The Government do not see a clear need and demand for such an instrument, and as we have heard, in discussion with and the agreement of the noble Lord, Lord Naseby, we propose to bring forward amendments in Committee to delete these elements. But with that caveat, I hope that noble Lords will support the Bill today.
Finally, I should like to comment on the two very specific suggestions made by the noble Lord, Lord Kennedy, in his speech. He said that we should look at a mutuals expansion project to mirror that of the Credit Union Expansion Project. It is an interesting proposal and I will be happy to take it back to my colleagues in the Treasury. One of the challenges is how to recreate the conditions under which individuals feel that they want to invest their money in mutuals, take out policies of various sorts and engage in lending from them. I am a strong supporter of doing that.
As far as the way we deal with Private Members’ Bills is concerned, I have a considerable degree of sympathy with what the noble Lord said. I do not believe that the way they are being dealt with is as efficient as the way we deal with government Bills. Although it is far beyond my pay grade to suggest a way forward, I am more than happy to take his comments away. Apart from anything else, there is a real problem at the moment in that many noble Lords can secure a First Reading for their Bills, and then very often they—and more importantly, their supporters—think that those Bills are actually going to make progress. A huge amount of work goes into such legislation. Recently I was involved with a Bill that stood at number 25 or 30 in the list. A poor lawyer had spent months slaving over it. The promoter did not have the heart to tell that lawyer that, as I already knew, it stood zero chance of even getting a Second Reading. That is not sensible, and nor, frankly, are some of the subsequent ways of dealing with these Bills. This is not a matter for the Government but one for the whole House, and I am very willing to take it back, along with his other proposal.
With those comments, and with the caveat I gave earlier, I hope that noble Lords will support the Bill today.
My Lords, I thank all noble Lords who have listened to the debate and I want to pay particular tribute to Her Majesty’s Opposition for the support that they gave me during the early stages of the Bill and then right through until today. I will refer to the noble Lord, Lord Kennedy, as my noble friend because he has worked very closely with me on this, and I wish to give him my thanks and appreciation for all the trouble he has taken. Finally, I have to say to my noble friend to whom I have already referred that he is an extremely patient and persistent man. Without that attribute, this Bill would not be before the House today. It remains for me to hope that it will get a fair wind, that people will be conscious of the time limit of five months, and that the processes in both this House and another place—which I know only too well—ensure that this really worthwhile piece of legislation can see the light of day and be put on to the statute book. Without further ado, I hope that the Bill will be given a Second Reading.
Bill read a second time and committed to a Committee of the whole House.