“(1) The Co-operative and Community Benefit Societies Act 2014 shall be amended as follows.
(2) In section 4, leave out subsections (1) and (2).
(3) Leave out sections 67 and 68.
(4) In section 69, leave out subsection (2).”
This new clause would revoke restrictions in the Co-operative and Community Benefit Societies Act 2014 on registered societies with withdrawable share capital from undertaking banking activities.
I beg to move, That the clause be read a Second time.
This is the final new clause for the final bit of the Bill, so I am hoping that this time round, given the season, the Minister will withdraw his Scrooge-like refusal to amend the Bill, not least because I genuinely think that on this new clause and this area of policy he probably agrees and recognises that there has been an oversight in its consideration. I also hope that Government Members will support the new clause, because it is surely what they came into office to do—to remove the red tape and bureaucracy that holds back enterprising, entrepreneurial people in our local communities.
I speak as a proud Co-op as well as Labour MP, and this new clause is about co-operative banking—perhaps not what people might first think of when they talk about co-operative banking, but it is about how mutual banks are set up. Local mission-led mutual banks are common in other parts of the world, but not so much here in the UK. They are, however, something that people are increasingly looking at and trying to support, particularly around Greater Manchester and elsewhere, and local leaders in Liverpool and Preston have plans to establish such institutions as well.
As people would understand, is quite difficult to start a bank: there are often requirements, even for a standard for-profit shareholder-controlled model. Much of the difficulty boils down to the challenges involved in raising the amount of equity capital that regulators require for institutions before they will issue an operating licence. That is what we are talking about today. Frankly, someone would need to raise millions in equity to get a banking licence.
The problem for mutual banks is that many investors struggle to understand what a mutual is. Ultimately, the mutual might offer good long-term returns, but there are no opportunities for those bumper dividends or speculative gains that people might traditionally associate with banking. That is part of a model that invests in communities, supports people and has people as part of the process. People think about credit unions; this is about what the 21st century co-operative banking models might be.
One of the challenges holding back the co-op movement is an antiquated piece of legislation. Let me be clear: the passage of the Co-operative and Community Benefit Societies Act 2014 was very welcome and helped to level the playing field. The capital requirements regulations are a hangover from Disraeli’s time. Those provisions can be traced back to the Industrial and Provident Societies Act 1876. I am talking about simply removing them from the legislation, because the requirements that they make are already covered for co-operative banks by other forms of prudential regulation in the Bill. Their existence creates an artificial level of complexity for the setting up of co-operative banks.
I do not want to go into too much detail, but the law currently prevents co-operative societies from being banks if they have what is called withdrawable share capital. That restriction was imposed in 1876; things have moved on. First, we now separate and have strong regulation of banks’ capital adequacies, as we discussed earlier in the Bill process. Furthermore, we have clear and specific regulation setting out how co-operative withdrawable share capital can safely be used to help to capitalise banks. It is firmly established today that societies retain the absolute right to suspend share withdrawals, giving their capital the essential features of equity under international and UK accounting standards.
If mutual banks were able to add withdrawable share capital to their mix, that would help to enable them to diversify their offer to investors and therefore broaden the range of investors to whom they could be marketed. It would open up significant opportunities for co-operative banks to get off the ground, because they would have the ability to raise the equity that they need to get a banking licence. Surely, Members from all parties can agree, in good Christmas cheer, that such competition in our banking sector would be a good thing, so it would also be a good thing to remove this archaic piece of legislation on capital equity from the legislation book.
The Bill is about financial services, and the co-operatives throughout the country want to offer financial services. The Minister may still be drawing on pot 3, on the Ghosts of Christmas past and present, but on the Ghost of Christmas future, in the Lords or on Report, might he give us a glimmer of hope, Tiny Tim-style, that he will listen to the co-operative banking sector? They have written to him in support of this amendment and I know he has met representatives from the sector to look at what more he can do to support them. I hope he will remove these pieces of red tape and take back control of the mutual sector this Christmas.
I am grateful for the enticement to be generous, but I was quite generous on new clause 8. I gave some positive indications about the intentions of the Government, and I look carefully at everything that is said by Members from across the Committee. I am very engaged with the mutual banks and with the co-operative sector generally, which I will say more about in a moment.
This amendment aims to remove the restriction which prevents co-operative societies holding withdrawable share capital from carrying out the business of banking. I share the interest of the hon. Member for Walthamstow in how the mutual model of financial services can add much-needed diversity and competition to the sector. Treasury officials and I have had constructive conversations with individuals seeking to set up regional mutual banks, and I look forward to continuing those. I will not mention their names, because they are going through different regulatory processes, and I am told that that is sensitive and so I should not do so. I try to help them.
Ensuring that banks hold the appropriate capital is critical to a stable and functioning financial system. It is therefore important that we consider any legislative changes in this area. I have thought about the amendment, and there are several immediate concerns about the potential risks to financial stability and consumer protection, which the Government have a duty to consider.
I will set out our most pressing concerns. As the global financial crisis highlighted, sufficient regulatory capital is needed by financial institutions as a source of resilience and to ensure losses can be effectively absorbed. To ensure capital fulfils this function, capital held by banks must always be readily available to absorb losses, which cannot be the case where investors can withdraw capital. Enabling co-operative banks to hold withdrawable share capital, as this amendment intends, could place consumer deposits at risk, create an inconsistent regulatory regime between co-operative and non-co-operative banks, and cause risks to the stability of the financial system, if it led to banks being inadequately or inappropriately capitalised.
I have had representations from the prospective regional mutual banks sector that they would seek to use this amendment to issue additional tier 1 capital instruments, or contingent convertible bonds. These are complex instruments that would need further thought to ensure they fulfilled their purpose within the legislative framework for co-operatives. It is also unlikely that the ability to raise additional tier 1 capital would be very beneficial to regional mutual banks currently, given they are at the early stages of their development where raising core equity capital is the priority.
I also note that the activity of deposit taking, in the form of withdrawable share capital that co-operatives and community benefit societies carry out under the present legislation, is subject to certain exemptions from regulatory requirements, which are applicable to other institutions carrying out business activities. These may no longer be appropriate if they were generally allowed to carry out the business of banking.
In conclusion, the Government believe that the fundamental issue is that it is not appropriate for deposit takers to rely on withdrawable share capital. In any case, certainly a measure like this would need further consideration of the legislative and regulatory implications rather than being introduced by way of amendment. I will continue to look carefully at these matters with the sector, but in the context of what I have said I ask the hon. Member for Walthamstow to withdraw her amendment.
I am so sorry to hear that the Minister is still listening to Marley rather than Bob Cratchit about the true spirit of Christmas. This is legislation from the 1800s. It is about £400 worth of share capital. It is outdated and needs a little more Christmas cheer. The Minister said that he would commit to working with the sector to get this amendment right, and if amended this Bill could be great. I think I will push the new clause to a vote—if nothing else, to put on the record that there are those of us who understand that co-ops want to move into the 21st century—and wish everyone a merry Christmas at the same time.