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House of Lords

Friday, 10 July 2009.

10 am

Prayers-read by the Lord Bishop of Exeter.

Arrangement of Business


10.05 am

The Chancellor of the Duchy of Lancaster (Baroness Royall of Blaisdon): My Lords, before we begin proceedings on the four Private Members' Bills today it may be helpful if I say a few words about how we intend to proceed with the Committee stage of the Parliamentary Standards Bill.

During the Second Reading debate I received a very clear message about the concerns that many noble Lords hold about the Bill and about the timescale on which the Government intend to proceed. I have reflected on the debate and the strong views expressed about the Bill and it is my intention today to table amendments to the Bill which I hope will address those concerns. As soon as the amendments are tabled I will write to all noble Lords who took part in that debate explaining those amendments, and I will make copies of my letter available in the Library of the House and the Printed Paper Office.

On the timescale, I undertook to discuss the arrangements with the usual channels to see whether more time could be made available. If proceedings in Committee are not completed at the end of business on Tuesday 14 July, further time will be made available as first business after Oral Questions on Thursday 16 July. I take the views of this House very seriously and I have listened. I hope that the House will welcome what I propose.

Lord Shutt of Greetland: My Lords, I am very grateful for that statement which is helpful and useful for all Members of the House. Bearing in mind the difficulties that I understand are occurring with mail delivery, particularly this weekend, could electronic means be used to send the message to noble Lords?

Baroness Royall of Blaisdon: My Lords, that is an excellent idea. I will certainly do my utmost to ensure that all Members who have electronic facilities receive the letter and the attachments by electronic means.

Lord Lawson of Blaby: My Lords, I am most grateful to the noble Baroness the Leader of the House, but if she is doing that she could ensure, with an extra click of the button, that the message goes to all Members, not simply to those who took part in the Second Reading debate.

Baroness Royall of Blaisdon: My Lords, I have absolutely no problem with that, an extra click of the mouse is exactly what I will do. However, I know that some Members of the House are not electronically equipped. I am afraid that I cannot write to all Members but I will certainly e-mail all Members.

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Lord Goodlad: My Lords, I think that I probably speak for all members of your Lordships' Select Committee on the Constitution in thanking the noble Baroness the Leader of the House for what she has said and for her unvarying courtesy. I hope and believe that we will have adequate time to consider the matter.

Co-operative and Community Benefit Societies and Credit Unions Bill

Main Bill Page
Copy of the Bill
Explanatory Notes

Second Reading

10.08 am

Moved by Lord Tomlinson

Lord Tomlinson: My Lords, I beg to move that this Bill be now read a second time.

This Bill arose as a Private Member's Bill in another place introduced by my right honourable friend Mr Malcolm Wicks. Supporters of the Bill when it was published included honourable and right honourable Members from all the three main parties in the other place and the Bill passed through all its stages without amendment.

Following an extensive Treasury consultation entitled, Review of the GBCooperative and Credit Union Legislation, a number of reforms were agreed which could be effected using a legislative reform order; for example, reforms regarding the minimum age for membership of and becoming an officer of an industrial and provident society; the modification of rules concerning share capital; the flexibility for such societies to choose their own year end; facilitating easier dissolution of societies and other such reforms. However, the legislative reform order can deal only with deregulatory issues. The Bill deals in legislative form with the issues arising from the consultation which could not be regarded as deregulatory and therefore could not be included in a legislative reform order. Thus the Bill completes the response to the public consultation.

I wish to set the subject matter of the legislation in a slightly broader context before I deal with its specific provision. The ideals and principles of co-operation and mutuality are well entrenched in our economic and social history. Very few people do not know something about Robert Owen and the New Lanark mill experiments, or the Rochdale pioneers, or are unaware of the writings of Sidney and Beatrice Webb. Those lessons of early co-operation and mutuality are well enshrined in our social and economic history and show the early significance of such co-operation and mutuality. Today we are at the end of a period of decline as regards the significance of co-operation. We are now in an era of resurgence-a renaissance-of co-operation and mutuality. Mutual building societies, bastions of financial stability, were demutualised, a handful of shares and a few hundred pounds being the bribe which people accepted to demutualise them. They gained an immediate small windfall in their pockets at the expense of generations of financial stability. We all know what happened to those who pursued the course of greed in order to demutualise those building societies. It was almost an act of

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financial vandalism. If anybody quarrels with that, I suggest that they would quarrel only with the word "almost".

Today, the resurgence of co-operatives and mutuals reflects consumers who are looking for an ethical alternative to banks, which have significantly failed us, and the Co-operative Bank and the Britannia Building Society illustrate an admirable way forward when we see this planned merger creating a new £70 billion bank-a new super mutual.

Major developments are also to be found in the retail sector. The Co-operative Retail Society now has a unified management structure and more than 2,000 stores. The Co-operative Group has acquired Somerfield, and the combined operation has something approaching an 8 per cent share. I could go on, but I will not detain your Lordships' House with a description of the virtues of co-operatives, credit unions and mutuals.

Lord Foulkes of Cumnock: My Lords, does my noble friend agree also that the co-operative retail sector has been leading the way in fair trade and setting a very good example, which has been followed by other large retailers?

Lord Tomlinson: My Lords, my noble friend anticipated what I was going to say in a few minutes' time, when I would have referred not only to fair trade but to ethical trade and the sustainability of trade. Those are all virtues of the co-operative sector.

Suffice it to say that these co-operatives, mutuals and community benefit societies belong to their members; they are not assets to be bought and sold to satisfy the short-term interests or short-term gains of shareholders. Co-operatives and mutuals are large players in the economy, with assets of more than £400 billion and about half our population in membership in some way or other. They serve many of the wishes of our people, including fair trade, ethical trade and sustainable development-as I had intended to say.

I turn to the Bill, which is of importance to this important sector of the economy. The Bill refers to three categories of organisation: co-operatives which are run for the benefit of their members; co-operatives which are run for the benefit of their communities-the so-called community benefit schemes, including many housing associations, social clubs and sports supporters' clubs; and credit unions, to which I shall return in a short while.

This short Bill of eight clauses has five main clauses, while Clauses 6 to 8 deal with mainly technical issues, such as consequential amendments and regulations, commencement orders, and territorial extent. The main part of the Bill is in Clauses 1 to 5. Clauses 1 and 2 reflect the fact that, following the Treasury consultation, there was an overwhelming desire to change the outdated name of, and rebrand, industrial and provident societies more appropriately for today's world; the purpose is to introduce alternative names.

Clause 1, therefore, provides that societies registered under the Industrial and Provident Societies Act 1965 shall be registered as co-operative societies or community benefit societies.

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Clause 2 changes the name of the Industrial and Provident Societies Act 1965 and goes a long way towards removing from the statute book the rather outdated term "industrial and provident societies".

Clause 3 is somewhat more complicated, but is simple in its objective. It applies the Company Directors Disqualification Act 1986 to officers of industrial and provident societies, as it applies to officers of companies, building societies and friendly societies. Under the current law, officers of industrial and provident societies who have mismanaged their society cannot be disqualified. Clause 3 makes such disqualification possible.

Clause 4 gives the Treasury powers to apply to industrial and provident societies, with appropriate modification, company law on investigation of companies, company names, and dissolution and restoration to the register. There is a substantial amount of detail concerning giving the Treasury a power to apply company law on striking off and dissolution of defunct societies, investigation of companies and requisition of documents, and on company names.

Clause 5, dealing with credit unions, is the final substantive clause. Credit unions are a different form of mutuality. As financial co-operatives, they operate in communities and workplaces around Britain. There are 480 credit unions in the UK, with some 730,000 members, assets of £558 million and an income of £31 million a year. A recent report from the New Local Government Network suggests that up to 200,000 more people in Britain are at risk from illegal loan sharks because they cannot access credit from traditional lenders. The diminished availability of regulated sub-prime credit is creating conditions where a sizeable number of people have little option but to borrow from illegal sources. The report suggests that at least 165,000 people already use loan sharks in the United Kingdom and that we can expect that number to rise significantly.

Credit unions are an imperative way of helping poor people to control that limited part of their financial self-government in an ethical way. I believe that they are central to government plans for tackling financial exclusion. That has certainly been so in recent years and we look forward to the continued development of that activity. However, the credit union movement is relatively small and I shall be addressing that question in another debate that should take place fairly shortly. In relation to credit unions, Clause 5 enables, where appropriate, provisions corresponding to building society law to be made for credit unions so as to recognise their existing, increasing and significant role as deposit takers.

Co-operatives, credit unions and other mutual societies provide another dimension of choice and diversity in the economy as a whole and especially in financial services. The Bill, besides the rebranding element, will improve corporate governance, make disqualification of officers possible, and make co-operatives and community benefit societies open to closer scrutiny by the registrar and through the FSA being given new powers of investigation.

As the co-operative and mutual sector is enjoying a resurgence, the Bill, if passed, will help the modernisation and rebranding of such societies, while simultaneously making an improvement in corporate governance.

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I conclude by commending the Bill to the House in the words of my right honourable friend Malcolm Wicks, who initiated this Private Member's Bill. He said,

I beg to move.

10.22 am

Lord Newby: My Lords, it is a great pleasure to follow the noble Lord, Lord Tomlinson, in speaking on this useful Bill. He started his speech by talking about the history of the movement and said that everyone knew about Robert Owen and the Rochdale pioneers. The sad truth is that, although we all know about them, our children do not. When we talk about the resurgence of the co-operative movement, which many of us are keen to see, we have to accept that this is a novel concept to many people; it is not one with which they grew up. The demutualisation of the building societies means that, as young people, our children do not save with a mutual and do not, as I did, shop at the Co-op because there is not a Co-op within spitting, walking or driving distance of where we live. Therefore, there is a big job to be done in making the case for mutuality, which we hope in our small way to do.

The Bill is useful in that respect, particularly in consigning to history the phrase "industrial and provident society". Whenever I heard it, a picture always came into my mind of Pennine towns and LS Lowry paintings. It has no relevance to the kind of institutions that we are all seeking to promote, so that is a useful change. It is also sensible to require all these bodies to register with the FSA in future. I hope that, in regulating them, the FSA does a better job than it did in regulating the Dunfermline Building Society, but one hopes that it has learnt its lesson in that respect.

The other detailed provisions of the Bill are all sensible pieces of tidying up. However, one thing that I never understand is why legislation relating to mutuals is always introduced via Private Members' Bills. It is virtually the only bit of the legislative process that is always done by such Bills rather than by government Bills. We have banking Bills that no one would consider as being appropriate as Private Members' Bills. The value presumably is that, paradoxically, it is easier to get a Private Member's Bill through on something such as this, but it seems odd-almost unique in the way that we do business-that we have a dribble of Private Members' Bills, however eloquently advocated, in respect of mutuals.

I am sure that, as the noble Lord, Lord Tomlinson, said, we will be debating credit unions again in future and we will undoubtedly debate building societies as we look to reform of the financial sector. I shall not weary the House with a discussion of those matters today but I have one question for the Minister. Yesterday's banking White Paper says that the Government are already proposing to use a legislative reform order to enable members to invest more than £20,000 in transferable shares in industrial and provident societies. That seems a sensible change, but can the Minister tell us what the timetable for that order will be?

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This is a tidying-up, modernising measure and it is eminently sensible. It does not grapple with the big issues around generating more resources for the sector, which I think are for another day, but I greatly welcome the Bill and the way in which it has been introduced by the noble Lord, Lord Tomlinson. We on these Benches strongly support it.

10.26 am

Baroness Noakes: My Lords, the noble Lord, Lord Tomlinson, has made a well argued case for the Bill. It is of course masquerading as a Private Member's Bill but it is, in all but name, a government Bill. I say at the outset that we shall not oppose it. My honourable friend Mr Mark Hoban in another place spoke at length about the Bill. I do not intend to rival that performance this morning but I have one or two things that I should like to say about it.

Noble Lords may know that I have often expressed scepticism in your Lordships' House about mutuality in general. I have concerns about a mutual model in which ownership pressures are not sharp-edged. I can see that mutuals are popular and that they reach parts of society that financial services organisations generally do not, but I have never found any evidence that they are the most efficient way to deliver financial, or indeed any other, services. They do not give any assurance that things cannot go badly wrong. The Presbyterian Mutual Society was driven into administration last year by a misguided commercial loan portfolio, which stands proof that things can and do go wrong with mutuals.

If we look at building societies, we see that there are two big stories from the last century. The first, to which the noble Lord, Lord Tomlinson, referred, is the demutualisation of the larger building societies, which was largely followed by their disappearance into larger banking groups. I do not regard that as an act of vandalism. I believe that there were sound economic reasons for what happened. However, the bigger story is of a massive decline in the movement. A hundred years ago, there were 1,700 building societies; now, there are barely more than 50. That has little to do with demutualisation, which affected only a relatively small number. It has much more to do with the underlying fragility of the business model, which generally cannot withstand the management mistakes that litter the history of the building society movement. Within management mistakes, I include one of the more common reasons for the disappearance of building societies-namely, operating at an uneconomic scale. Those mistakes, in my view, have their roots in the ineffectiveness of the "membership equals ownership" construct, which allows inefficient or incompetent management to go unchecked.

Therefore, I have a particular scepticism about Clause 5 of the Bill, which will allow the Treasury to apply building society provisions to credit unions. I think that this means that the financial freedoms that got building societies into trouble could be extended to credit unions. I name the Dunfermline and the West Bromwich as building societies that have hit the headlines for serious failings in the past few months alone. I could name even more that have been forced into mergers for lesser, although none the less important, mistakes.

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The Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 contains yet more powers for building societies to use wholesale funding. The Government are wisely refraining from activating those powers at present for building societies and I am not at all sure that we would ever want credit unions to have the freedoms that are contained in that building society legislation. I am not at all convinced of the merits of giving another sector of the mutual movement the freedoms that have allowed others to get into trouble in the past.

I also say to the noble Lord, Lord Tomlinson, that, although I concede that the term "industrial and provident" comes from an earlier era, I can see no reason to junk it. If it were necessary to trash every sign or symbol of the past, your Lordships' House and indeed the whole of Parliament could well have been consigned to landfill some time ago. I am comfortable with tradition and it grieves me that the Benches opposite delight so much in what they call modernisation at the expense of a sense of history.

The new title of "co-operative" is hardly a modern one. Co-operatives were founded in the industrial era, so the term comes from precisely the same era as that which gave industrial and provident societies their name. Of course, I would have found the title a little easier to swallow had the co-operative movement not bequeathed its name to the Co-operative Party, which is a part of the Labour movement. I never quite understand precisely how the two fit together but I understand that there is a lot of intertwining between the Co-operative Party and the Labour Party. Using this Bill to immortalise a part of the Labour movement is not exactly to my taste.

Some bits of the Bill are positively worth while. I support compulsory registration of industrial and provident societies and their modernised successors. I also support the provisions about directors and officers in Clause 3 and, in broad terms, the other extensions of company law in Clause 4. However, I have some concerns about the regulation-making powers in Clauses 4 and 5. They both allow for the creation of criminal offences and I have never been a fan of creating criminal offences by secondary legislation. However, I accept that there are many precedents for that, so I shall not pursue the argument.

None the less, I wonder whether there should be some restriction on the power. Perhaps the noble Lord, Lord Tomlinson, or the Minister will tell me whether the power could be used to create a criminal offence where none exists under company or building society law. If so, I shall want to return to that at a later stage of the Bill. I note that the Delegated Powers Committee has suggested limiting this power so that it cannot be used to create a penalty in excess of the relevant one in company law or building society law. I was surprised that the noble Lord, Lord Tomlinson, did not refer to the 11th report from the Delegated Powers Committee, which contained a clear recommendation for a limitation on that power. I give notice that I shall want to return to that in Committee.

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