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Demutualisation of Liverpool Victoria

Volume 700: debated on Wednesday 15 September 2021

Motion made, and Question proposed, That this House do now adjourn.—(Michael Tomlinson.)

The proposed demutualisation of Liverpool Victoria is the first proposed demutualisation of a major financial services business since the financial crash. If the demutualisation goes ahead, it will see controversial United States private equity giant Bain Capital given ownership of a British customer-owned business with considerable financial assets. The tidal wave of private equity money apparently available for purchases of British firms prompts the inevitable question of whether this proposed demutualisation is a one-off or whether it is the start of another wave of demutualisation.

The all-party parliamentary group for mutuals, which I am fortunate to chair, conducted an inquiry into the proposed demutualisation earlier this year. We interviewed Mark Hartigan, who is the current chief executive of Liverpool Victoria, as well as Matt Popoli of Bain Capital, the regulators, the Association of Financial Mutuals and representatives of other mutuals, and we received submissions from individual consumer-owners of Liverpool Victoria. I am grateful to the hon. Member for Wycombe (Mr Baker), my hon. Friend the Member for Rochdale (Tony Lloyd), the hon. Member for Thirsk and Malton (Kevin Hollinrake), my hon. Friend the Member for Neath (Christina Rees), the hon. Member for Harrow East (Bob Blackman), the noble Lords Curry and Wrigglesworth, and Viscount Trenchard for their assistance and support. We have written subsequently to the Prudential Regulation Authority and the Financial Conduct Authority, and I have also written to the Pensions Regulator.

We concluded that it was very difficult for an individual member of LV= to be able to assess whether the proposed demutualisation was in their interests, given the scarcity of information with which they had been provided. We agreed that, on the basis of the evidence available to us, the leadership of LV= had not been open and transparent with members about its intentions for their business. Indeed, we felt that there had been a notable disregard for the interests of members and a cavalier attitude towards the member governance of the business.

We concluded, too, that the plans would damage the diversity of financial services providers in the UK, and that there had been insufficient policy attention on mutuals in recent times, particularly on the need to be able to raise capital. Lastly, we concluded that regulators needed to have a fundamentally different approach to the threat of demutualisation. Indeed, we were staggered that no lessons had been learned from the pre-crash wave of building society demutualisations.

I believe now that Alan Cook, the chairman of Liverpool Victoria, has a series of questions to answer about the proposed demutualisation and sale to Bain Capital. Earlier this week I formally invited him to Parliament to enable him to do just that.

Since our report was published, and despite many invitations to do so, the leadership of Liverpool Victoria have thus far refused to provide a more open and transparent explanation of their motives and their intentions. First, there has never been a clear, easy-to-understand explanation as to why demutualisation is needed. The business is well capitalised—indeed, it recently sold its general insurance business for over £1 billion—and it has raised significant sums on the capital markets. Both the chairman and the chief executive were arguing that the business was in very good financial shape right up until their plans for putting Liverpool Victoria up for sale were leaked to the media.

So why, really, is this plan being pushed? Why can Liverpool Victoria not survive as a stand-alone business in its own right? Its members, I believe, have a right to know. If, for a moment, we take at face value the idea that the new chief executive spotted a major flaw in the business model of his predecessor, so great that significant investment was needed for Liverpool Victoria’s customers to continue to enjoy the fruits of their investment with LV=, then why did they not choose another mutual? Indeed, there are persistent rumours that a major mutual offered more money than Bain Capital offered. The consumer-owners of Liverpool Victoria have a right to know whether that is true and why, if so, it was turned down.

Secondly, it is difficult to see how the members or owners of Liverpool Victoria will benefit from the demutualisation. Previous demutualisations have always been driven by the chair, chief executive and board, who usually benefit from significantly enhanced remuneration packages. It is time for the board to be honest. For example, by how much more will the chairman and chief executive benefit if this deal goes ahead? Thirdly, the way in which Liverpool Victoria’s chairman and board have gone about the process of demutualising raises the question as to whether—I say this gently—they knowingly misled the regulator and their customer-owners about their plans.

The board of Liverpool Victoria successfully persuaded their members to approve Liverpool Victoria’s conversion from a friendly society to a company limited by guarantee. At the time, they proposed this to their members, the chairman, Mr Cook, explicitly assured members that this would mean no change to the mutual status of Liverpool Victoria. With that assurance, the consumer-owners of LV= approved the conversion to a company limited by guarantee in May 2019. The real significance of that change in legal governance only emerged much later. In LV=’s rulebook, to demutualise, it needs a 50% turnout of the membership in any such vote and 75% of those voting to vote in favour. In short, practically, it is impossible—deliberately so. It was a rule put there to protect future consumer-owners of LV= against the greed of carpetbaggers and directors.

Given the assurances of Mr Cook, the board and the chief executive, one might have assumed that LV=’s mutual future would continue, notwithstanding the change from a friendly society. Under the rules governing companies, however, boards can approach our courts to ask for a scheme of arrangement for permission to ignore a particular rule in their constitution. That is not currently within the friendly society rules. Assuming there is even a small majority voting in favour of demutualisation, this is what LV=’s leadership are now determined to do. Revealingly, in February this year, in a webinar for LV= customers, Mr Cook noted that his plan to demutualise and sell to Bain Capital would not have been possible if they had not converted to a company limited by guarantee. It appears—again, I say this advisedly—that Mr Cook, the chairman of LV=, has been determined to demutualise for some time and has not been straight with the consumer-members of LV=.

What has added to that sense is that the previous chief executive of LV, Richard Rowney, left the organisation in December 2019, and it is difficult not to think that he was fired for not wanting to demutualise. His replacement, Mark Hartigan, was announced just 10 days later, and within less than three months Liverpool Victoria was up for sale—this at a time when assurances of Liverpool Victoria’s continuity as a mutual were being given. Frankly, it is stretching credibility to believe that the decision to sell was the unexpected decision of a strategic review landed by an incoming chief executive with no experience of working for a mutual and after less than three months in the job. What is also remarkable is the decision of the Financial Conduct Authority not to investigate whether members of LV= were deceived into supporting the conversion to a company limited by guarantee.

I thank my hon. Friend for the excellent speech he is making. Benenden Health is a significant mutual in my constituency, and it has serious concerns about the ramifications of this demutualisation for the whole mutual sector and its reputation. How does he believe that regulation could be tightened to avoid this kind of situation occurring again?

My hon. Friend and Benenden are right to be concerned about whether there are wider implications and we will see other businesses demutualising. The current vice-chair of Yorkshire Building Society sits on the board of Liverpool Victoria and appears to have been actively involved in the demutualisation plans, prompting a rather obvious question about the future of Yorkshire Building Society.

The conversion to a company limited by guarantee and the decision to pursue demutualisation are both fundamental to the treatment of Liverpool Victoria’s consumers. The FCA is refusing to consider both decisions together and to investigate, as I have indicated, whether the chairman in particular and other members of the board knew much earlier than they have been willing to admit thus far that demutualisation was their desired end point. The failure to consider interlinked business decisions in a holistic way was a fundamental failing identified by Dame Elizabeth Gloster in her devastating report on the London Capital & Finance debacle. This appears to be a clear repeat of that mistake, albeit with a very different business.

There are other concerns about the performance of the regulators, the PRA and the FCA. Together, they have admitted that they have had nearly 60 meetings to discuss the demutualisation with the board of LV=, but not one with LV=’s consumers and owners. The FCA should at the very least require the so-called independent experts who have been appointed by LV=’s board, who have been briefed by LV= and who will be paid by LV=, to set up meetings to explain the background to what one presumes will be their inevitable decision to recommend to members a vote for demutualisation and sale to Bain. Will the Minister ask the FCA to make that happen?

My hon. Friend is being generous. I also want to ask about the impact the proposals will have on staffing levels. We know that staff are fearful that many could lose their jobs at this time. What guarantees have been given to staff that their jobs will be safe?

My hon. Friend will know that when we saw the last wave of building society demutualisations, there were large numbers of job losses. I gently warn those who work for Liverpool Victoria to be wary of any assurances they have been given about their jobs if the sale to Bain and the demutualisation go ahead.

After the financial crash, there was recognition across the House that the wave of demutualisations of building societies had been, at best, a dismal episode, that corporate diversity needed to be encouraged, and that financial mutuals in particular had a crucial role to play in maintaining competition and the interests of consumers. For the Government and this Minister in particular—I welcome him to his place, as I know he is diligent in his interest in the mutual sector—I hope that the demutualisation of Liverpool Victoria will be a further wake-up call to look more seriously at the needs of financial mutuals and specifically their ability to raise capital, and to put into law disincentives to demutualise. We need protections for legacy assets, and we need a review of how financial mutuals are regulated under the Financial Services Act 2012. Certainly representations we had from the Association of Financial Mutuals suggest an urgent review to modernise that Act is overdue.

I hope that the Minister will also ask the chief executive of the FCA to revisit the question of whether the owners of LV=—its consumers—were misled when the conversion to a company by guarantee took place.

This demutualisation is proof that we need again to celebrate and enhance the position of mutuals in our markets. After all—I say this gently and reluctantly—what is being proposed in the demutualisation of LV= is the looting of nearly two centuries of legacy assets. Of course, it is being dressed up as something different, but that is money built up from the working capital of the business over years of transactions, starting with small contributions from the working people who were the original members of the Liverpool Victoria Burial Society, who set the society up to avoid the Victorian scandal of a pauper’s funeral. Over time, those small contributions became a substantial sum, and they were augmented by the funds transferred into the friendly society from a series of mergers with other mutuals. In good faith, those other mutuals brought their assets to share with a broader membership for their common purpose.

Today, we have the spectacle of a demutualisation that looks to be driven by the simple desire to appropriate this money. None of the promoters of the demutualisation has made any contribution to the accumulation of the assets, yet they want to take advantage of them. It seems that the attraction of the assets means that the executives, the board members and the private equity players will do whatever is necessary to appropriate them. Token windfall payments to members in exchange for their vote will, just like in every other demutualisation, transfer the value from those who contributed and their descendants to those who did not. I gently suggest that that can never be fair, and it is wrong that, to date, our legislative and regulatory regime not only permits that to happen but actively facilitates it.

I congratulate the hon. Member for Harrow West (Gareth Thomas) on securing the debate. He is a strong and sincere supporter of the mutuals sector, and he has regularly raised issues with me in the, I think, 44 months that I have been in post. I very much value his knowledge and insights on these matters and welcome the opportunity to discuss his concerns.

During my time as Economic Secretary to the Treasury, I have seen the clear benefits of mutuals both for the economy and for society as a whole. In essence, these businesses focus on service, and their frequently innovative nature means that they provide a unique, distinct offer to both their customers and their communities as well as a much-valued degree of service. The Government recognise those benefits, which is why, over the years, we have shown ourselves to be a supporter of the mutuals sector.

That support has manifested itself in a wide variety of ways, including, first, in engagement. We think it is vital that we understand the sector’s needs, so two years ago the Treasury held a mutuals workshop dedicated to understanding the challenges facing the sector and how they can be overcome. We have tried to take on board the points raised in that workshop, and we continued the conversation. As a result, my officials have been working hard to raise awareness of the mutuals model across Government to ensure that other Departments are equally focused on supporting it.

Secondly, we are helping the sector to be ready for the future. That is why at the Budget we committed to amending the Credit Unions Act 1979 to allow credit unions to offer a wide range of products and services. Finally, we have ensured that mutuals have also received financial support throughout the covid crisis, recognising their vital contribution to communities up and down the country. Mutuals were able to benefit from the furlough scheme and other forms of Government financial help. In addition, the Corporate Insolvency and Governance Act 2020 introduced new insolvency support mechanisms for businesses, including many in that sector.

I would now like to address the subject of this debate in more specific detail. The hon. Gentleman has set out in some detail a range of observations about what has happened over recent months. As he is aware, the sale of LV= to Bain Capital and the ultimate demutualisation of the firm is something that I have engaged with him on and discussed previously. I want to assure the House that this continues to be a priority for me. I am closely engaged on this matter, and I am in close communication with regulators and the firm itself.

However, while I am very focused and aware of the views that the hon. Gentleman holds and the concerns that he raises, I cannot intervene directly in the sale or the demutualisation of a firm. The sale’s approval is a matter for the financial services regulators and the courts, both of which are independent of Government. The hon. Gentleman has done a lot of work to trace the interactions between the firm and the regulators, and I know that they are very aware of his interest in the matter. I am sure that that is going to lead to a very rigorous process, which I think he understands and I know is under way.

Therefore, I do not think it is appropriate for me at this point to comment on the substance of that ongoing independent process, but what I can say is this. The approval process involves safeguards designed to ensure that members and policyholders are kept informed and that their interests are protected. I recognise that we are not at the end of that process yet, and the hon. Gentleman is somewhat anxious and perhaps, I may suggest, sceptical about what the final outcome will look like. But I have been reassured that the regulators are undertaking rigorous processes, as evidenced by the number of meetings that they have had, to assess the viability of the transaction and the suitability of Bain to manage an insurance business. Importantly, the statutory objectives of the regulators put policyholders’ interests, as well as consideration of the impact of the transaction on the market, at the heart of their assessment. I greatly support the regulators in their roles, and trust that they will endeavour to secure the best outcome in the interests of members and policyholders.

I recognise the points that have been raised about further demutualisations by the hon. Member for York Central (Rachael Maskell). As I mentioned earlier, I believe mutuals have a very special place in our economy, and I very much value that contribution, but ultimately any future sales, irrespective of whether the firm is a mutual, will and should be considered on a case-by-case basis, in line with the regulators’ and courts’ duties and requirements.

I recognise that, in the course of this debate this evening, some suggestions have been made about the sorts of interventions that may be appropriate to safeguard the sector. I would be very happy to meet the hon. Member for Harrow West and the hon. Member for York Central to discuss their views on this subject, but I am, as I demonstrated earlier, very much focused on helping the sector to thrive. That means continuing the conversation so we can identify how best to facilitate the growth of the sector and understand the concerns in more detail, recognising that, across the range of mutuals of different sizes and different roles in the economy, different concerns may exist.

Therefore, I hope the hon. Member for Harrow West will relay the message to the sector that my door continues to be open to it. I would like to thank both Members for their constructive comments.

I have two interlinked questions, if I may. First, the Financial Conduct Authority, in its letter to the all-party group of 5 August, made it clear that it had already decided it would not review the interlinkage, or not, of the decision by LV= to convert to a company limited by guarantee and the subsequent proposal to demutualise. I recognise that the Minister cannot intervene with the regulators directly, but he can, as I understand it, because he meets with the chief executive of the FCA, seek an explanation of that decision. Secondly, if the FCA will not engage with that question sufficiently to satisfy me, could he at least ask it to publish the details of the two independent experts appointed by the board of LV= so that customer-owners can begin to make contact with them to ask them questions about what exactly the plans of LV= are?

I am always ready to look at constructive suggestions and am happy to take this forward. I suspect there may be legal impediments to the publishing of some of that information, but I will certainly ask the questions and seek to relay to the hon. Gentleman the fullest answer that I am able to. I am frequently in my current role in between this place and independent regulators. It is right that our regulators are independent and I see the frustrations that exist within that, but I am happy to take forward a constructive dialogue as far as I can.

I do not think I can add much more at this point. I recognise the sincere commitment of hon. Members who have spoken to this issue, their frustration with what has happened, the apparent unnecessary nature of this transaction, given the history and the apparent change in the direction of travel with little warning, but I am clear that the regulators are very aware of their obligations to safeguard the interests of members and I look forward to the judgments coming forth in the coming weeks and months. I hope that that gives the hon. Gentleman some satisfaction on the matters he has raised this evening.

Question put and agreed to.

House adjourned.