Draft Friendly and Industrial and Provident Societies Act 1968 (Audit Exemption) (Amendment) Order 2006

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Fourth Standing Committee on Delegated Legislation

The Committee consisted of the following Members:

Chairman:

Hywel Williams

Anderson, Mr. David (Blaydon) (Lab)
†Bottomley, Peter (Worthing, West) (Con)
†Cruddas, Jon (Dagenham) (Lab)
Dunne, Mr. Philip (Ludlow) (Con)
†Goodman, Helen (Bishop Auckland) (Lab)
†Huhne, Chris (Eastleigh) (LD)
†Jackson, Glenda (Hampstead and Highgate) (Lab)
†Kramer, Susan (Richmond Park) (LD)
†Laxton, Mr. Bob (Derby, North) (Lab)
†Lewis, Mr. Ivan (Economic Secretary to the Treasury)
†Mountford, Kali (Colne Valley) (Lab)
†Murphy, Mr. Denis (Wansbeck) (Lab)
†Pritchard, Mark (The Wrekin) (Con)
†Selous, Andrew (South-West Bedfordshire) (Con)
†Todd, Mr. Mark (South Derbyshire) (Lab)
†Villiers, Mrs. Theresa (Chipping Barnet) (Con)
†Watson, Mr. Tom (Lord Commissioner of Her Majesty’s Treasury)
Geoffrey Farrar, Committee Clerk

† attended the Committee

 
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Tuesday 31 January 2006

[Hywel Williams in the Chair]

Draft Friendly and Industrial and Provident Societies Act 1968 (Audit Exemption) (Amendment) Order 2006

4.30 pm

The Economic Secretary to the Treasury (Mr. Ivan Lewis): I beg to move,

That the Committee has considered the draft Friendly and Industrial and Provident Societies Act 1968 (Audit Exemption) (Amendment) Order 2006.

The Chairman: With this it will be convenient to consider the draft Community Benefit Societies (Restriction on Use of Assets) Regulations 2006.

Mr. Lewis: It is a pleasure to serve under your chairmanship, Mr. Williams. I have not had the privilege of doing so before, and I look forward to it. I also welcome the hon. Member for Chipping Barnet (Mrs. Villiers) to what is possibly her first Delegated Legislation Committee. I am sure that all Committee members congratulate her on her new position.

The last time I met the hon. Member for Richmond Park (Susan Kramer) in such a setting, I accused the hon. Member for Eastleigh (Chris Huhne) of being a bit precipitous in commenting on his party’s leadership question, because he was such a new Member of Parliament. Little did I realise at the time that he intended to be a candidate for leadership. On the other hand, having heard his contributions to our debates during the past few months, I am not entirely surprised that the man believes he ought to be leader.

Peter Bottomley (Worthing, West) (Con): Are we to take those remarks as an attack on the hon. Member for Eastleigh? If so, was he given notice?

Mr. Lewis: No. They were meant to be a commentary on his confidence and assertiveness.

I am pleased to introduce two pieces of legislation that aim to improve the position of industrial and provident societies, or I&Ps, as they are known to the substantial numbers of people who participate in or benefit from their activities. Both measures are important steps forward in the modernisation of I&P law. They follow a key consultation document published in July 2004, which demonstrated support for the proposals enshrined in both of the instruments before us.

Before I describe what the measures seek to achieve, I shall say a few words about the importance of industrial and provident societies. There are two types: the co-operative, which is run exclusively by and for
 
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the benefit of members, and the community benefit society, which is run by its members for the benefit of the wider community.

The Government welcome the significant role played by societies of both types in providing greater choice and diversity in the wider economy and for the public. We welcome the tradition of democratic involvement and member engagement that many such societies represent and admire how the co-operative movement has been transforming itself to fit a modern business framework to meet the requirements of community engagement and sustainable enterprise for the 21st century. We also welcome the recent trend for I&Ps to deliver local services such as leisure, football supporters’ trusts and child care. For example, the Cardiff Blues and the Widnes Vikings have both joined the growing number of rugby union and rugby league supporters’ trusts.

The Government have found recent developments in the sector encouraging. Considering our party’s great history and tradition, we find it particularly pleasing that such organisations are not dying or ossifying but modernising. They are a major part of the solution to the problems and challenges of the 21st century. That is one reason we seek to reform the current provisions to help them, and it is why we have supported two private Member’s Bills in recent years whose objective was to modernise I&P law.

In 2002, we backed a Bill, promoted by my hon. Friend the Member for Harrow, West (Mr. Thomas), which eventually became the Industrial and Provident Societies Act 2002. A year later, we supported a Bill promoted by my hon. Friend the Member for South Derbyshire (Mr. Todd), who I am glad to say is in his place and claims credit, so I assume that it was successful. That Bill went on to become the Co-operatives and Community Benefit Societies Act 2003. Today, I am introducing two statutory instruments to develop the sector further. I hope that hon. Members will agree that those actions, taken together, demonstrate a level of commitment to I&Ps that is unprecedented in recent history.

We support such measures not just because of the general importance of I&Ps but because of the need to ensure a broad equivalence or parity of treatment—to use a clichéd but still useful phrase, we want to create a more level playing field between I&Ps and companies. We recognise that many in the sector believe that I&P law is becoming outdated in a number of ways. For example, many involved with I&Ps have been particularly concerned about their relationship to a new legal entity: community interest companies, established by the Companies (Audit, Investigations and Community Enterprise) Act 2004 and the Community Interest Company Regulations 2005, which use as a basis a variant of company law to provide a vehicle for pursuing social enterprise goals.

The social enterprise sector is diverse, and the Government acknowledge the need for a range of different legal forms to sustain it. Alongside I&Ps, the community interest company will offer greater choice and opportunity for social entrepreneurs. However, the introduction of this new legal form most certainly
 
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does not mean that the Government intend to leave I&Ps to wither on the vine—not least because the I&Ps’ tradition of democratic member engagement is particularly appropriate to forms of social enterprise for which stakeholder involvement is key. The two instruments today provide further testimony that we see a vital role for I&Ps.

The first instrument will give community benefit societies the option to apply a lock on the value of their assets. That asset lock aims to allow them to close off the possibility that assets accumulated during a lifetime for the benefit of the community might be distributed to private individuals, following a vote to convert to a company. The instrument requires that a society’s locked assets must be transferred to another body with an equivalent asset lock, should the original society convert.

The aim is to provide members with the certainty that their investments will be used for the benefit of the community, a certainty that should promote the general growth of the community benefit sector. That is particularly important because an asset lock is already built into the legal form of the community interest company that I mentioned earlier. Unless action is taken to allow community benefit societies a similar option, those wishing to invest for the benefit of the community may well turn to community interest companies instead.

The instrument takes another important step towards ensuring a level playing field between societies and other bodies. The consultation document showed that respondents broadly agreed with the proposals put forward. Two key issues in that document were which community benefit societies should be allowed to apply an asset lock and how that asset lock should be regulated.

On the first, we propose to exclude registered social landlords that have incorporated as I&Ps as well as charitable, industrial and provident societies. Both types of community benefit societies are already subject to restrictions on the use of their assets through their obligation to comply with housing and charitable law respectively. Respondents to the consultation broadly agreed that to allow such bodies to be able to apply the asset lock being introduced today would lead to unnecessary confusion and duplication.

On the issue of how the asset lock should be regulated, consultation respondents were asked to consider whether a light-touch approach or more rigid framework would be more appropriate. There was a clear preference for a light touch, and the Government agree that that is a more sensible way forward. Given the democratic ethos inherent in community benefit societies and the fact that they are traditionally closer to their members than proprietary companies, we believe that members would be well placed to ensure that locked assets are used appropriately.

Putting in force a more rigid framework might also impose costs and burdens that relatively small community bodies would struggle to meet. One consultation respondent, for example, described the light-touch approach as “sensible, practical and democratic”, a view that we are happy to accept.

 
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However, we have put in place a number of measures to ensure that there is sufficient deterrence against the misuse of locked assets. The Financial Services Authority, which currently registers industrial and provident societies, has agreed to take on responsibility for overseeing the light-touch approach. If a community benefit society is considered to be in breach of the asset lock regulations, we have given the FSA the power to require it to take all necessary steps to bring that contravention to an end. That will be done by issuing an enforcement notice—in effect, a cessation order.

If an officer of a society has been knowingly involved in the contravention of the regulations, the FSA may require them to make restitution for the society. Naturally, I do not expect the FSA to make frequent use of those powers, but a deterrent is important and the measures provide an effective response to any wrongdoing on the part of a society or its officers.

We have worked closely with the FSA on the proposals and I pay tribute to its officials for their help. I also thank Co-ops UK for its help, during and since the consultation, to ensure that these draft regulations meet the needs of the community society and benefit it.

The regulations are made under the Co-operatives and Community Benefits Societies Act 2003 and amend the Industrial and Provident Societies Act 1965. They are divided into five main parts: part 1 provides the citation, commencement and interpretation provisions; parts 2 and 3 set out how the restriction on the use of assets will apply and how they may be used; part 4 sets out the enforcement measures; and part 5 deals with miscellaneous and supplemental matters.

I shall now turn to the second of the instruments, which raises the audit threshold for charitable and non-charitable I&Ps. At present, the 1968 Act generally requires societies to appoint a qualified auditor to audit their end-of-year accounts and balance sheet, but non-charitable societies can choose to disapply that obligation if their turnover is below £350,000 and their balance sheet total is less than £1.4 million. There are two reasons why we might want to raise the threshold in both cases.

First, the audit threshold for companies is significantly higher and was raised recently by regulations under the Companies Act 1985. This order will create a more level playing field by ensuring that small I&Ps are not required to pay more in auditing fees than equivalent-sized companies.

Secondly, the Charities Bill currently before the House makes further increases in equality. It will raise the threshold for all charitable entities, including charitable companies and societies. It would be odd for non-charitable I&Ps to be given less regulatory flexibility than charitable societies in this area. The proposals will not only bring the threshold in line with companies but provide a degree of future-proofing. There is a good case for raising the audit threshold for non-charitable societies so that it becomes and stays higher than that for charitable societies.

 
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Raising the audit threshold for non-charitable societies will mean that I&Ps should be able to save significantly on costs. The regulatory impact assessment estimated savings for an individual society of some £2,000, which across the whole sector could mean savings of as much as £2.4 million. I&Ps that wish to continue to have their accounts audited—for example, to enhance their reputation and reassure investors—will of course be able to continue doing so if they wish, but those that wish to put the potential savings to other uses, in the same way that smaller companies can, will now be free to take that course of action. The Treasury consulted on this proposal in July 2004, and I am pleased that support for raising the threshold was nearly unanimous. Respondents clearly agreed that a level playing field is both appropriate and desirable.

I shall now quickly go through the statutory instrument. The Committee will note that it uses for the first time what has become known in the sector as the Gareth Thomas power—obviously, that is a credit to the Under-Secretary of State for International Development—by amending I&P law in line with and following a change in company law. This power was given by the Industrial and Provident Societies Act 2002, which I mentioned earlier.

The order amends the 1968 Act inasmuch as it sets out the conditions which must be satisfied for a society to disapply section 4 of that Act, which imposes a duty on a society to appoint a qualified auditor to audit its accounts. Article 2 of the order provides that, for a society to be able to disapply section 4, its assets must not exceed £2.8 million, instead of the £1.4 million at present, and its turnover must not exceed £5.6 million, instead of £350,000.

Article 3 provides for the amendments to have effect in respect of any year of account ending two months or more after the order comes into force. Copies of the consultation document on these instruments, the summary of responses and the RIA are available on the Treasury’s website.

Looking forward, the Government will continue to work with the sector to enable I&Ps to fulfil their potential. However, to provide for a more strategic and co-ordinated approach, we plan to wait until the major overhaul of company law that is currently in train has been completed before considering whether further action needs to be taken on I&P law. That will enable us to consider what, if any, further steps need to be taken to maintain the level playing field between I&Ps and companies. The measures that we have been discussing today have been designed, in part, to achieve that.

The review will also provide stability, which is particularly important to smaller societies that may not have the resources to deal with ongoing legal change. However, in the short term, I hope that we can agree that much has been done already and that much is being done now. We have taken significant steps to update I&P law. I hope that those in the Committee who recognise the importance of the contribution that
 
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mutuals make to this country will welcome these common-sense proposals. I commend the statutory instruments to the Committee.

4.44 pm

Mrs. Theresa Villiers (Chipping Barnet) (Con): I need not take up too much of the Committee’s time this afternoon because the Opposition broadly welcome both orders. I shall spend a few minutes raising one or two points for reflection and consideration by the Committee. The statutory instruments deal with an important issue because there are about 17,000 community benefit societies that could be affected by the asset-lock provisions, and I believe that they hold £61 billion of assets. We should, therefore, give the instruments proper scrutiny.

The Opposition supported the Co-operatives and Community Benefit Societies Act, which was aimed at reducing the time those organisations spend dealing with regulation and allowed them to expand the scope of their activities. I echo the warm words of the Minister.

4.45 pm

Sitting suspended for a Division in the House.

4.52 pm

On resuming—

Mrs. Villiers: To take up where I left off, I echo the warm words of the Economic Secretary about the co-operative sector and social enterprise generally. The question of how we encourage social enterprise has formed an important part of the Opposition’s discussions during the past few months and in the wake of the election of our new leader. Social enterprise can play such an important role in renewing and regenerating our most deprived communities, particularly those in our inner cities. It can also play an important role in delivering social justice and in pioneering solutions to the most important problems that our communities face today.

Mr. Lewis: I want to dwell on that point. The Leader of the Opposition referred this week to this Government continuing much of what Thatcherism stood for, and the hon. Lady referred to social enterprise in that context. Was not it the Opposition’s policy or philosophy, which we are supposedly continuing, that there is no such thing as society? How does social enterprise have a crucial role if the philosophy is that there is no such thing as society?

Mrs. Villiers: There is such a thing as society; it is just not the same as the state. The state should work in partnership with individuals and social enterprise to deliver solutions to today’s crucial problems: family breakdown, chaotic home environments, drug abuse, poverty of aspiration and poor public space. They are all areas in which social enterprise can flourish, and I am pleased that the Economic Secretary put on record the Government’s intention to encourage and provide the environment for social enterprise. I urge the Government to consider measures such as social
 
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enterprise zones to give further encouragement to such an important part of our attempt to solve these serious social problems.

Given the importance of the subject under discussion, it is vital to ensure that the legal framework set out in these two statutory instruments is effective at protecting the community interest. In turn, we must balance that against the need to ensure that the legal and regulatory framework set out the in the instruments is efficient and proportionate, enabling social enterprise to flourish without subjecting it to unnecessary red tape. The Opposition consider it useful for community benefit societies to have the option of locking their assets for community use. It should help reassure those who want to devote funds to public benefit and public good that once their funds have been given to a community benefit society, they are devoted permanently to community use. I note that some of the respondents to the consultation felt that the asset lock could increase the attraction of the community benefit society model and encourage the general uptake of social enterprise. From that perspective, the statutory instrument is welcome.

Those who choose to fund community benefit societies will, when they have chosen to adopt an asset lock, have the reassurance of knowing that carpetbaggers cannot join the association with a view to winding it up and distributing the assets.

I would like the Committee and the Economic Secretary to consider some brief questions. They arose when I read the debate on the Industrial and Provident Societies Act 2002. When the Government took that Bill through Parliament, they decided against introducing provisions for an asset lock. The Paymaster General referred to the importance of ensuring that such provisions did not reduce the flexibility of the sector to consolidate and to grow. More importantly, she said:

“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.”—[Official Report, 19 April 2002; Vol. 383, c. 842.]

Can the Minister assure the Committee that that point is no longer a problem? I presume that it is covered by the optionality of the asset-lock provisions that we are now considering. As the measure requires only a 50 per cent. turnout and a 75 per cent. majority of members to introduce an asset lock, I would be interested to hear what caused the Government to develop their thinking and persuaded them that they are safe to introduce these provisions on asset locks after all.

The Economic Secretary stated today, as does the explanatory memorandum, that one of the aims of the measure under consideration is to ensure a level playing field between community benefit societies and community interest companies. That is a worthwhile ambition on which the Opposition are broadly in agreement with the Government. I note that the asset lock is compulsory for community interest companies, whereas for community benefit societies the proposal is that it will be optional. Again, I would be interested
 
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to hear from the Economic Secretary why that distinction has been made. It may be related to my previous point about the Human Rights Act 1998.

I agree with the Government’s conclusion that it probably does not make a great deal of sense to bring organisations such as registered social landlords into the framework as they are already covered by existing rules.

On enforcement mechanisms, the Minister this afternoon and the Government in their impact analysis emphasised that they prefer a light touch approach in the framework and to rely on people to come forward and complain before action is taken. I support that light touch approach, but some of the provisions seem a little cumbersome in some ways. I want to sound a note of caution about placing a further burden of responsibility on the Financial Services Authority, which already has a wide-ranging remit and significant responsibilities. We should be cautious about giving yet more responsibility to a regulator with so much on its plate already. Perhaps the Government should bear in mind that if in future they wish to give still further responsibilities to the FSA, there is a danger that they may jeopardise the effectiveness of the regulator in forming its functions if it is given too much work to do.

Before turning to the second statutory instrument, I appreciate what the Economic Secretary said about the power to charge those who have been knowingly involved in abusing the asset lock or misappropriating property, but it is important to ensure that the penalty, which is a potentially significant surcharge, is used proportionately. I agree that a deterrent is useful, but I hope that the FSA will exercise its powers with common sense and proportionality, given that we could be talking about compensation payments of an extremely high level.

On the implementation of this statutory instrument, I simply ask the Government to put on record for the FSA, if it ever reads the debate, that it is important to make this useful provision as user-friendly as possible for community benefit societies so that they can find a way to adopt a simple, easy-to-understand asset lock. I hope that they will not have to pay significant professional fees to enable them to do that. As I have said, the Opposition think that the measure is useful and we hope that it will be widely used.

When the other statutory instrument is adopted, I believe that up 1,200 societies will no longer have to have their accounts externally audited. There could be significant potential cost savings for them. The Opposition are supportive of the aims of the statutory instrument and the cost savings that it could produce for industrial and provident societies. I examined the value of the audit process in my former role as a Member of the European Parliament and my experience was that it is extremely valuable, but that it is not appropriate in every case. The Government’s approach is therefore proportionate in this instance. It is entirely reasonable to make an exemption for smaller industrial provident societies and the thresholds in the statutory instrument seem to make a great deal of sense.

 
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I have only a couple of questions. There still seem to be some differences between the thresholds for charitable and non-charitable societies. Will the Economic Secretary explain those thresholds and explain why there is still a distinction in the treatment, despite the fact that what he said today, and much of the explanatory memorandum, emphasises the importance of treating those very similar societies, with very similar goals, identically? The Charities Bill makes special provision in relation to those charities whose small turnover exempts them from audit. Is it proposed to introduce any sort of similar requirement for industrial and provident societies that are exempted from that audit? I believe that there is a suggestion in the Charities Bill that an examination of the accounts should be conducted by an accountant. The Committee may wish to consider that. Are the Government considering any other safeguards to ensure that we do as much as possible to prevent errors, fraud and maladministration in the accounts of those small industrial and provident societies that are covered by this statutory instrument?

Again, I express my broad support for the two measures. I would be interested to hear the Committee’s response on the points that I have raised.

5.14 pm

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Prepared 1 February 2006