HC Deb 19 April 2002 vol 383 cc835-43
Mr. Gareth R. Thomas

I beg to move amendment No. 2, in page 1, line 7, leave out "subsections (2) and" and insert "subsection".

Mr. Deputy Speaker

With this it will be convenient to discuss the following amendments: No. 3, in page 1, line 8, leave out subsection (2).

No. 1, in page 2, line 27, leave out Clause 2.

No. 6, in clause 2, page 2, line 40, after "cannot", insert— 'save with the written consent of the Financial Services Authority'.

No. 7, in page 3, line 34, at end insert— '(6) In exercising its discretion as to whether to give its consent under paragraph (c) of subsection (1), the Financial Services Authority shall have regard to the following matters:

  1. (a) the purpose or intention of the society's members evidenced by the rules of the society and, in particular, by the inclusion of the provisions referred to in subsection (1);
  2. (b) the interests of the community for whose benefit the society was registered and its successors;
  3. (c) whether the whole or any part of the value represented by the assets of the society should be dedicated to the continued benefit of the community; and
  4. (d) whether the transfer of engagements, amalgamation or conversion referred to in paragraph (c) of subsection (1) is necessary in the interests of the viability of the industry business or trade carried on by the society.'.

No. 5, in title, line 5, leave out from "company;" to "and" in line 7.

Mr. Thomas

I introduce the amendments in my name with some reluctance. I believe that the debates on clause 2 on Second Reading and in Committee have established the importance of ensuring that assets originally dedicated to a community, not to a society's members, should remain dedicated to that purpose. Following the discussions I have had, I believe that there is now strong sympathy for that position.

Our debates on the clause have also highlighted the importance and value of the community benefit form of industrial and provident society as a vehicle for the pursuit of public interest aims. I have already referred to the benefit of having a regulator, in the form of the Financial Services Authority, to ensure that any society registered under the legislation remains either a co-operative or a community benefit organisation.

Without that safeguard in industrial and provident society law, there would be little to stop the conversion of a co-op from a non-profit vehicle to a company operating for the benefit of its members, shareholders or whatever. Generally, the Registrar of Companies does not police such matters; rightly, he has no duty to do so where a company structure is used. The courts exist as a possible forum for enforcing provisions in company constitutions to protect assets, but unfortunately that would be an expensive and cumbersome process, and only complex structures involving trust arrangements, and a number of other corporate vehicles, can achieve such aims if the industrial and provident society structure is not used.

In comparison, industrial and provident society legislation provides a relatively cheap and effective means of establishing and maintaining social enterprises that operate in the interests of people other than their owners. Clause 2 would have bolstered and improved that system, but even without it, the House should recognise that the industrial and provident system still has great advantages.

Clause 2 and the debates that surrounded it have played their part in the wider process. I understand that the performance and innovation unit in the Cabinet Office has been working on such issues as part of an examination of social enterprise for the Government. I welcome the fact that that work is taking place.

In that spirit, I also commend the judgment of my right hon. Friend the Secretary of State for Trade and Industry in giving a Minister specific responsibility for this sector when she took up her post. The performance and innovation unit report is imminent, and when it appears the whole question of legal structures for social enterprise will be considered across Government Departments, so it seems appropriate that the issue of asset locking should be taken out of the Bill at this stage and examined as part of that wider discussion.

During our deliberations in Committee, my hon. Friend the Economic Secretary to the Treasury highlighted a number of technical issues that would have remained if clause 2 had stayed in the Bill. What she said is recorded in column 11 of the Hansard report of Standing Committee G for 13 February. Those technical issues need to be sorted out, so it is right to take clause 2 out. I hope that the performance and innovation unit report, and the consideration of it across Departments, will address those issues.

On that basis, I commend the amendments to the House. As I said, I do so with some reluctance—but I feel reassured that the issues will not drop off the agenda, and I am delighted by the work being done within Government. It is sensible that the issues raised by clause 2 should be considered as part of that general discussion rather than remaining in the Bill.

11.30 am
Mr. Love

I should like to speak to amendments Nos. 6 and 7, which are probing amendments designed to increase the flexibility of clause 2. I shall try to set out their context.

There are two classes of industrial and provident societies: bona fide co-operatives, and societies for the benefit of the community, which have a much wider role in society and operate not just for the benefit of their members. Indeed, their prime consideration is the community interest. When registering, all industrial and provident societies must give reasons for registration as an industrial and provident society; that touches on the previous debate about why there are different charges and why there is an onus on the Financial Services Authority to provide proper regulation of industrial and provident societies.

The FSA gives societies guidance on the registration criteria, which range from a desire to operate mutually under a one member, one vote constitution to business reasons. The important point, however, is that societies must be able to demonstrate their reasons to the registrar. Although there is a safeguard for industrial and provident societies, community benefit societies are vulnerable to asset stripping, and that is particularly true of those that have unclear rules on such circumstances. Someone could therefore exploit a loophole to achieve conversion to a limited liability company, with the assets falling into the hands of a restricted group of members.

The Royal Automobile Club operated under slightly different rules, but everyone was amazed to discover what happened to all the so-called members who signed up with the RAC and built it up over a long period. When its assets were distributed, the members of the best swimming club in London were the net beneficiaries, receiving £35,000 each, which was unfair then and is unfair now. Against that background, we need to protect industrial and provident societies.

Housing associations are safeguarded by the Housing Corporation, because public assets are involved, but if a housing association dispensed of its public assets it could convert for the benefit of a limited membership.

In my probing amendments, I wanted to test the Government's attitude to entrenching assets in an industrial and provident society. Governments of all persuasions, as has been said on numerous occasions in the past 10 to 15 years, have always resisted attempts to entrench assets, as is reflected in clause 2. However, in France, for example, AXA, a well-known brand name in this country and Europe, can be characterised as an industrial and provident society. There are other major examples of what we would consider industrial and provident societies throughout Europe, although that does not apply to every type of organisation. In this country, charities are perhaps the most prominent example of organisations that simply cannot change their charitable status. Everyone accepts that that is appropriate in the circumstances.

Ms Meg Munn (Sheffield, Heeley)

Does my hon. Friend agree that people who set up a community benefit organisation often do not think about what might happen subsequently? The danger is that they might not be clear about how the rules will apply if the organisation changes in a particular way? As he graphically illustrated with the RAC, unintended consequences might result. There is a genuine need to provide protection for organisations that seek to benefit the community and are not established to provide benefits, profits or surpluses for individual members.

Mr. Love

That is exactly the case that I am trying to make. Societies are often established with proper constitutions, but without thought about what will happen. I know that it is not possible, but if we interviewed people who originally set up many mutual organisations that have since been demutualised, we would discover that that eventuality was the last thing on their minds. Assets that have been built up over generations for mutual benefit should not be given to a limited number of shareholders who benefit from demutualisation. My amendments therefore seek to provide long-term protection.

Credit unions are another form of organisation with entrenched constitutions, perhaps because the Credit Unions Act 1979 was very much based on the Irish experience and did not sufficiently take into account the norms of British jurisprudence. However, it was decided that credit unions cannot convert in the same way as building societies or other mutual organisations. As my hon. Friend the Member for Harrow, West said, some discussions with the Government on public interest companies have covered the possibility of introducing legislation to entrench other forms of organisation. In principle, if the arguments are strong enough, there is no reason why entrenchment should not take place, which is why amendments Nos. 6 and 7 provide a flexible response to asset locking while allowing the FSA to use its experience and expertise to make the final decision. If, under clause 2, a society entrenches its assets, and if there is a move in future to convert the society, it will be for the FSA to sanction the decision.

Mr. Greg Knight

How does the hon. Gentleman envisage the FSA assessing the interests of the community under amendment No. 7? For example, does he envisage the FSA conducting a poll or seeking to take evidence from all members of the organisation to see whether a certain view is held by the whole membership? Or does he see the FSA going beyond the members of the organisation to ascertain the answer?

Mr. Love

I was going to come on to the issues that the FSA will need to take into account but, of course, the community interest is an extremely important consideration for community benefit societies. The FSA will have to have a way of taking the temperature of a community that may be badly affected. If the FSA had taken the temperature of RAC members when the RAC was demutualised, I strongly suspect that there would not have been support for the cause espoused by the limited number of members who benefited from demutualisation. However, it will be for the FSA to make the final decision to sanction demutualisation. We accept that there will be problematic cases, such as those involving declining memberships.

Concern has been expressed about the inability of certain credit unions to turn themselves into commercially viable organisations; the same is undoubtedly true of a number of industrial and provident societies. Their original purpose may have ended, or the community that they represented no longer exists in the same form; or they may simply need a business rescue and restructuring. There will therefore be circumstances in which it will be appropriate for the FSA to sanction change.

Mr. Butterfill

I am listening carefully to the hon. Gentleman, and I agree with everything that he has been saying. Does he agree that where assets have been built up over many years, there is an intergenerational responsibility, and that in principle it is wrong that, for financial gain, one group of people, at one snapshot in time, should enrich themselves at the expense of the continuation of activities? Only where there are circumstances that the hon. Gentleman has been describing, when such activities can no longer reasonably be continued, should the FSA agree.

> Mr. Love

That point is included in my amendments. The FSA will need to take into account what will happen to the assets of the society in such circumstances. Intergenerational issues will indeed be important; also important will be whether assets are distributed on the widest possible basis to the community or are restricted to only a few people. We know that although the community benefits from the activities of community benefit societies, their membership is normally restricted. There may be only a few people. All these issues need to be taken into account.

There are various important considerations, including the original purpose of the society as written into its constitution by its members on its formation. Another important consideration is the interests of the community. In addition, there are the assets. There may also be business reasons. We understand that sometimes the safeguarding of jobs and the continuation of the organisation may necessitate change. In those circumstances, that should be allowed.

The purpose behind the amendments is to ensure flexibility when problems arise. We cannot foresee all circumstances. One of the major concerns of government has been that to entrench for ever does not allow for unforeseen circumstances. The amendments will provide the flexibility that will safeguard the community benefit that the societies offer, and demutualisation where that is appropriate.

Many people will ask, "Why are we giving this power to the FSA?" We have discussed the duties that the authority has to undertake and whether costs will be increased. The authority already has considerable experience in this area. For example, it has a statutory duty to ensure that all industrial and provident societies are either bona fide co-operatives or community benefit societies. I say to those who think that that may be a theoretical issue that the largest retail co-operative society in the 1980s—it had a turnover of hundreds of millions of pounds and more than 50,000 employees—was deemed by the registrar not to be a bona fide co-operative. It needed to decouple itself from its wholesale organisation so that it would continue to be registered as a society.

If the registrar can take important decisions of that nature—it was supported by all genuine co-operators as being in the best interests of the industrial and provident society movement—that experience can be used to ensure that societies are maintained for community benefit but that demutualisation can be allowed in appropriate circumstances. There is inflexibility in having entrenchment without safeguards.

Mr. Greg Knight

The discretion that is provided in amendment No. 7, which is given to the FSA, is not absolute. The authority will have to take into account certain factors, which the hon. Gentleman has explained. As there is not absolute discretion, is there not a risk that we might see a plethora of court cases, with aggrieved parties challenging whether the FSA had acted properly and whether it had given due weight to certain matters? Would not absolute discretion have been a better way forward?

11.45 am
Mr. Love

There is considerable discussion about public interest companies that will be formed under Companies Acts procedures. The only means of challenge will be through the courts, with all the delay and expense that that involves. One of the great advantages of the process that I am advocating is that it will, in most instances, preclude recourse to the courts. There will be streamlining and it will be possible to use procedures with ease. In extremis, however, the courts may have to be used—for example, where it is felt that the FSA has not reflected properly the legislation that is on the statute book. We cannot have it all ways.

We have not gone for an absolute power. We want to increase flexibility, so the FSA should be able to make a decision within the broad parameters set out in the amendments.

We want to strengthen the protection of industrial and provident societies. We recognise that that will be achieved only by providing flexibility to the FSA, which is both independent and, we hope, objective when dealing with these matters. If it can adjudicate in circumstances where there is difficulty, that should provide the protection that the Government require, so that we do not entrench for all time where the circumstances are not supportive.

Dawn Primarolo

The Government support amendments Nos. 2, 3, 1 and 5. My hon. Friend the Member for Edmonton (Mr. Love) said that amendments Nos. 6 and 7 are probing amendments. I shall explain why the Government want to resist his amendments. I hope that, on that basis, he will feel able to withdraw them. If not, he must know that the Government do not support them.

On Second Reading and in Committee, the Government indicated that while we can see potential benefits in enabling community benefit societies to dedicate their assets to the benefit of the community, we were concerned about how that might work in practice. The right hon. Member for East Yorkshire (Mr. Knight) touched on one of many possibilities in this fraught area. That being so, I shall not speak at length.

Legislation that irrevocably commits assets to the benefit of the community must not have unintended effects. Asset lock-in would be a crucial decision for an individual society, and we must also take a view of the effect on the sector as a whole. For example, it must not reduce the flexibility of the sector to allow it to consolidate and grow.

One way to ensure continued flexibility within the sector and make provisions to deal with exceptional circumstances for individual societies would be through powers to reverse or amend asset lock-in in special situations. However, we think that this would raise further questions about defining any circumstances where the asset lock-in might be reversed—for example, who might exercise these powers and how they might be enforced.

The hon. Member for Christchurch (Mr. Chope) asked in Committee about the rights of members. The adoption of an irreversible asset lock-in rule by an existing society, without unanimous vote, could unwillingly deprive some of those members of rights in a way that might be incompatible with article 1 of the first protocol to the European convention on human rights. The right hon. Member for East Yorkshire might not have referred specifically to that, but he mentioned the possible range of involvement of the courts where somebody disagreed with a decision.

The performance and innovation unit is currently considering the organisational forms of social enterprise, and we look forward to considering its further analysis of the provisions that might help the sector to grow and thrive.

Provisions such as asset lock-in need detailed consideration. That is why I agree with the four amendments tabled by my hon. Friend the Member for Harrow, West (Mr. Thomas) to remove the clause and references to it elsewhere in the Bill. In principle, clause 2 has some attractions, but, in its present form, it does not fully resolve the issues of which we are aware, nor have we consulted widely to make sure that there are no other implications that would need to be considered.

Amendments Nos. 6 and 7 were tabled by my hon. Friends the Members for Edmonton and for Bristol, North-West (Dr. Naysmith). The possibility of allowing the Financial Services Authority to arbitrate on whether a society that had adopted an asset lock-in rule should still be allowed to convert to or merge with a company without such a rule is an interesting proposal. I see that, as my hon. Friend the Member for Edmonton pointed out, that might provide useful flexibility where a society was encountering financial difficulties. For example, the FSA could permit a society to merge with a local company or restructure in some way under company status and thereby avoid having to cease its activities.

Government officials examined such possibilities during their work with advisers assisting my hon. Friend the Member for Harrow, West in an attempt to address the Government's concerns about the clause. However, I do not consider that the two amendments would be sufficient to resolve the issues that have been discussed during the passage of the Bill.

In addition to the points that I have already raised, there are other issues that we would need to consider—for example, whether the FSA should be able to prevent a society from adopting an unalterable asset lock-in in the first instance; whether there should be circumstances in which a society could reverse such a rule once adopted; and whether all societies or bencoms should be able to adopt this irrevocable rule in their constitutions.

If it were necessary to wind up a society that had such a rule, would the FSA be the best authority to authorise the conversion or transfer, or should some other authority or even the courts take a role? Bearing in mind the discussion that we had in a previous debate about the cost of fees to the FSA, it is odd that the amendment would put greater obligations on the FSA.

I say to my hon. Friends the Members for Edmonton and for Bristol, North-West, as gently as possible and with the best of intentions, that although we appreciate their intentions, the Government believe that their amendments would not be sufficient or a substitute for a more detailed consultation and consideration of such powers. I sincerely hope that having had the benefit of putting—

Mr. Edward Davey (Kingston and Surbiton)

Will the hon. Lady give way?

Dawn Primarolo

No, I am about to conclude my remarks.

I support amendments Nos. 2, 3, 1 and 5, and hope that my hon. Friend the Member for Edmonton will be satisfied with having his comments on the record, in the knowledge that the matter needs and will receive further consideration and consultation. He can look forward to returning to the matter at some future date.

Mr. Gareth R. Thomas

I am grateful to my hon. Friend the Minister for her comments in support of my amendments. I commend the speech of my hon. Friend the Member for Edmonton (Mr. Love) and the amendment tabled by him and my hon. Friend the Member for Bristol, North-West (Dr. Naysmith). It is an ingenious device that would provide additional flexibility and improve clause 2 as it emerged from the Standing Committee. Nevertheless, as the Minister says, there are still issues that need to be resolved, and it is appropriate that that should be done in the context of the performance and innovation unit report and considered across Government. I hope that my hon. Friend the Member for Edmonton will withdraw his two amendments and instead support mine.

Amendment agreed to.

Back to
Forward to