Stella Creasy MP has tabled an amendment to the Financial Services Bill, aimed at making it easier to establish a mutual bank in the UK. Government should accept this amendment, because local mutual banks can help achieve its policies of ‘levelling up’ and building back greener, stronger and fairer from COVID-19.
Local, mission-led mutual banks, owned and controlled by the communities they serve, could play an important role in building community wealth across the UK. This type of local financial mutual is common throughout the world, but not in the UK.
A few pioneers around the UK are trying to change this. Embryonic mutual banks are developing in South West England, Greater Manchester and elsewhere. And ambitious local leaders in cities like Preston have plans to help establish such institutions too, often as part of wider community wealth building initiatives.
The capital challenge
It’s not easy starting a new bank in the UK, even when using the standard for-profit, shareholder controlled model. Starting a new financial mutual is very hard. New credit unions are rare, a new building society now looks like a once in a generation event.
Much of this boils down to challenges in raising the amounts of equity capital that regulators require institutions to have before they’ll issue an operating license. You need to raise millions in equity to get a banking license.
But investors struggle to understand mutuals. And ultimately, while a new mutual bank might be offering investors good long term returns, there are no opportunities for the bumper dividends or speculative gains investors are used to, no rights to the underlying assets of the bank and a very limited say in how the bank is run. The patient investor, motivated in part by social impact and comfortable with mutual structures, is still a rarity, especially among those who usually invest in financial services.
Outdated legal restrictions
Given that mutual banks raising capital have these extra challenges, it’s vital that potentially fruitful options are not unnecessarily closed off to them. Unfortunately, there are outdated legal restrictions in co-operative law which currently do just this. It is these legal restrictions that Stella Creasy is seeking to get rid of with her amendment to the Financial Services Bill.
Without going into too much detail, the law currently prevents co-operative societies from being banks if they have ‘withdrawable share capital’. When these restrictions were imposed in 1876, there were good reasons for doing so. In lieu of other safeguards, depositors’ money is put at greater risk if a bank’s shareholders can withdraw their capital at will.
Things have moved on since Disraeli's day. For one, we have separate and very strong regulation of banks’ capital adequacy (Capital Requirements Regulations) enforced by the PRA. Furthermore, via the EU, we have clear and specific regulation setting out how co-operative withdrawable share capital can be safely used to help capitalize banks. And today it is firmly established that societies retain the absolute right to suspend share withdrawals, giving this 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, this would enable them to diversify their offer to investors and broaden the range of investors that can be marketed too. It would open up significant new opportunities to raise equity they need to get a banking license.
Anyone trying to get rid of law previous Parliaments saw fit to enact should consider ‘Chesterton’s Fence’- the philosophical principle that you shouldn’t change something until you understand why it was put there in the first place. And in view of the above, Stella Creasy has found some fences that are long overdue for removal.
The Financial Services Bill Committee in Parliament will debate Stella Creasy MP's amendment on Thursday 3 December 2020.