I am much aware of that. My right hon. Friend and I have spoken about this matter and I know that that is his motivation.
I do not know whether this will help my right hon. Friend’s career—he and I are both leaving the House, so perhaps it does not matter—but we are good Europeans. We have always understood that it is in our country’s interests to engage positively with Europe, so I am pleased by his references to the European landscape. Most of my colleagues are aware that, having served in the House in the 1990s, I then spent a decade in the European Parliament as an MEP and for some of that time I was leader of the Conservatives in the European Parliament. The two aspects he has drawn to the House’s attention—the potential European mutuals statute and the debate about the European solvency rules—are matters that I have spent pretty much a decade of my life arguing about.
Given that my right hon. Friend drew attention to the European mutuals statute and quoted the original 1992 provisions and the 1993 revision, it might be worth pointing out that the important word, which he mentioned, was “draft”. The draft was produced, but there was then a long period of decided inactivity. In fact, those of us elected to the European Parliament first in 1999 had to engage in a major effort to get the issue of the European mutuals statute on to the European agenda. Given that, although my right hon. Friend referred to the restriction on voting rights in clause 2—which, he rightly said, might be inconsistent with a report produced more than 20 years ago—it is important to see that report in its context.
That report was produced in the context of the European mutuals landscape, which is rather different from the landscape in the United Kingdom. As I will set out—if, as I hope, we reach Third Reading—the history of the mutual sector in the 1980s saw a significant number of companies demutualised, for a range of reasons. That experience did not happen in Europe; therefore, our mutual sector today is something in the order of a third to a half of what it is in Europe. That report reflected much more the European experience, rather than taking into account the difficulties that arose for us in the United Kingdom, where so many companies demutualised in the 1980s.
Throughout the history of the mutual sector, companies and societies have had to raise regulatory capital through the retention of undistributed profits. That restraint has from time to time constrained the ability of those in the sector to invest in the growth of their businesses, as and when market opportunities arose. Mutual businesses accordingly responded to those constraints by building up large capital reserves. That is why in the 1980s, and also the early 1990s, many mutual companies had what might have been regarded as significantly more capital than they required to be able to run their businesses. That was an incentive for the invention of carpetbagging—the whole business of demutualising companies in ’80s and ’90s, so that depositors and policyholders could get their hands on that capital. The mutual sector also fell victim to boards that were keen to significantly grow their businesses and then required the freedom to raise capital through company share issues—which, as my right hon. Friend rightly outlined, is the situation for those who are unable to go through the mutual mechanism.
As my right hon. Friend said, more recently, major changes in the capital solvency rules—not only in relation to insurance, but in relation to building societies—have driven a need to ensure that mutual companies can raise regulatory capital much more easily. It is worth making the point that we have a range of iconic mutual companies in this country—companies that are currently going through the solvency II process, but which are fully and adequately reserved and would be among the leading companies in terms of solvency ratios. It is therefore certainly not the case that we need to get this measure through in order to put the mutual sector in a position to comply with solvency II. However, the experience of solvency II has shown us that there may be occasions when—whether for reasons of growth or, alternatively, where additional capital may need to be raised in circumstances that had not been anticipated—the mutual sector is at a disadvantage in responding to those challenges compared with the shareholder/proprietorship companies.
In the building society sector, there is a new instrument, called the core capital deferred shares structure, which has achieved regulatory recognition. I pay tribute to Nationwide’s work in promoting that concept. I also pay tribute to Members on both sides of the House of the House who have helped to ensure that regulators understand the need to respond dynamically to the pressure. However, although core capital deferred shares have been approved as an instrument in the context of the building society sector, they do not have the same effect in relation to mutual insurers and friendly societies, which is why the Bill was needed.
As I have said, the main purpose of the Bill is to create a new class of shares, which are not shares within the meaning of the Companies Act 2006. If the position were otherwise, the mutual status of mutual insurers and friendly societies would be compromised. The purpose of the Bill is to enable mutual insurers and friendly societies to issue shares in a way that satisfies the core regulatory capital requirements of the regulatory supervisors, whether they are in the United Kingdom or in Europe.
Clause 2 provides safeguards against demutualisation. My right hon. Friend the Member for Banbury seems to believe that it would somehow be more difficult to secure the investment if a requisite number of votes were not attached to it. Those of us who have spent a significant amount of time in the mutual sector—as I said earlier, I served on the board of NFU Mutual for a decade, but I also chair the all-party parliamentary group for mutuals—will recognise that if a member investing in such a way had disproportionate influence, we might see expected and, indeed, unsatisfactory outcomes in relation to the capacity of the investor to demutualise companies, which is against the whole thrust and purpose of the Bill. I believe that the investor who seeks to put up capital to assist a mutual company will be much more interested in what the return may be than in the individual number of votes that may be available for the purposes that accompany such voting power.
Clause 2 provides for the making of regulations to meet the tests that financial services regulators will require before they are prepared to recognise capital raised in this way for solvency capital purposes. I believe that removing the clause would defeat our objective in the Bill, and I know that that was not my right hon. Friend’s intention. The power to make the regulations is exercisable by statutory instrument, and is subject to the affirmative procedure. It will still be possible to ensure that the clause is applied in a reasonable and effective manner, and when the regulations appear, Parliament will have an opportunity to do that.
I hope that my right hon. Friend has found my explanation helpful, and that, in the light of what I have said, he will feel able to withdraw his amendment.