Clause 2 — Restriction on voting rights

Part of the debate – in the House of Commons at 10:00 am on 6th March 2015.

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Photo of Andrea Leadsom Andrea Leadsom The Economic Secretary to the Treasury 10:00 am, 6th March 2015

I would like to put on record my great pleasure at the extent of cross-party consensus on the importance of this Bill to support the mutuals sector. I thank my right hon. Friend and constituency neighbour Sir Tony Baldry, who raised some important points. I hope he will be persuaded to withdraw his amendments, as there are clear reasons for doing so.

One of the Government objectives for the Bill is to preserve the mutual status of firms in the sector. Government amendments give firms the option to provide membership rights to deferred shareholders, if they so wish. However, if deferred shareholders do become members of the firm, they will not be entitled to additional voting rights, regardless of the value of their deferred shareholding. This clause serves to protect the principle of mutuality. My hon. Friend Jonathan Evans set out very clearly why that is vital to ensure the success of this sector, which the Government have been so keen to support.

The proposals in the Bill have been carefully drafted to provide mutual organisations with a means to raise external capital in a way that preserves the mutual status of firms. This is no easy task, and the merits of attracting external capital into the mutual sector have been debated at length by mutuals, and some mutual organisations have taken steps to reform and issue mutual capital instruments. For example, in recent years building societies have commonly issued permanent interest-bearing shares that pay the holder a fixed rate of interest. The shares cannot be sold back to the society, although they can be bought and sold on the stock exchange, which means that the price can vary. Changes in banking regulation mean that those instruments will no longer be classed as core tier 1 capital, so the building society sector has designed a replacement mutual capital instrument, known as core capital deferred shares, which will enjoy the same tax treatment as ordinary shares.

Lord Naseby’s Bill originally permitted the Treasury to make regulations allowing friendly societies and mutual insurers to issue deferred shares, and to permit co-operative and community benefit societies to issue redeemable shares. The Government have, however, expressed caution about the merit of the redeemable share instrument for co-operative and community benefit societies, which already have a means of issuing redeemable shares, The Government do not therefore see a clear industry need or demand for such an instrument.

The Government take the view that it is too early to provide for co-operative and community benefit societies to raise further capital by means of redeemable shares, as there is no need at this stage. That position was agreed in Committee in the other House and was supported by Lord Naseby. The Bill as it stands today reflects that agreement. I strongly submit to my right hon. and hon. Friends that the deferred share capital instrument for mutual insurers and friendly societies is a good way forward, and that friendly societies and mutual insurers have demonstrated a clear need and demand for this instrument.

My right hon. Friend raised the matter of legislation that would allow mutuals to operate across Europe. The Government certainly want to promote the continued liberalisation of the European single market, and I would welcome comments from the industry regarding barriers to mutuals trading across Europe, as it has not previously raised the issue. In conclusion, I hope that my right hon. Friend will be minded to withdraw the amendment.