Consultation outcome: Getting a better deal for societies

Co-operatives UK is eager to work with members to co-produce a clear and cohesive agenda for improving the corporate framework for co-operative and community benefit societies.

As part of this process we ran a members’ consultation in October and November 2018 ('Getting a better deal for societies').

This page contains the outcome of that consultation. Below we discuss the responses we received, make our conclusions and set out next steps. 

Summary of outcomes

Statutory common capital

Based on this consultation, we are now firmly of the view that the law should be changed to give co-operative societies the option of adopting either, or both, of the following 'statutory common capital' provisions:

  • non-distributable assets
  • indivisible reserves

We will work with specialists to draft 'non-distributable assets' provisions, to be inserted into the Co-operative and Community Benefit Societies Act at the earliest opportunity. 

More work is needed to understand the requirements for a statutory indivisible reserve. We will work with experts and members to further develop the design of statutory indivisible reserves, with a view to drafting legislation in the near future.

Other legislative action 

We now also believe we are in a position to proceed to specialist drafting of legislation and to seeking government or parliamentarian action to enact the following:

  • rules for distributable residual assets - a requirement for co-operative societies to clearly state in their rules how distributable residual assets are to be distributed among members

  • community benefit society asset lock - allowing community benefit societies with a statutory community benefit asset lock to adopt a stronger charitable asset lock

With the following, we believe we are in a position to play a fully supportive role in the next project phase:

  • statutory indivisible reserves - We will work with experts and members to further develop the design of statutory indivisible reserves, with a view to drafting legislation in the near future
  • repaybale shares - We will support the work of experts and members to develop the design of a new repayable equity instrument for societies  
  • statutory purpose lock - We will work with experts and members to develop the design of a statutory purpose lock for co-operative societies and then consult the sector

With the following, we believe more consultation with our members is needed before we can take a position:

  • a project to adapt features of company law for society law
  • measures to improve the transparency of membership 
  • a statutory solvency statement

Non-legislative action

In June 2018 government promised to explore non-legislative options to improve ‘regulatory clarity’ for societies. We now know that this commitment will be fulfilled through a Social Sector Forum, promised in the Civil Society Strategy, and that Co-operatives UK is down to play a leading role for societies. We’ll be using the responses we received from this consultation to inform our priorities for this forum. 

Our priorities for the Social Sector Forum, drawn from this consultation are:

  • registrar policy and process
  • Making Tax Digital for societies
  • accounting standards 
  • supporting sector-led initiatives on standards for societies
  • societies in government procurement

Please note: While recent commitments we've secured from government create the space for both non-legislative and legislative options to be 'explored', the opportunities to have primary legislation for societies enacted are always rare. There is even less scope for such legislation while responsibility lies with HM Treasury rather than the Department for Business. And Brexit may well continue to take up a considerable amount of government and Parliamentary time and energy in the near future.

That said, there may well be opportunities to pursue primary legislation on some issues in the near future, either originating in government or perhaps through a Private Members' Bill. A change in government in Westminster may mean that significant opportunities materialize very quickly. This consultation has put us in a position to respond to any such opportunities that come along. 

But as a whole we should be prepared for the 'next steps' detailed here to amount to a 5-10 year programme. 

We are extremely grateful to everyone who took the time to participate in this consultation, including those who completed the quick online poll, made more detailed written submissions and attended the meeting we held in our Manchester office.

In all 38 different members took part. We received 30 responses to the online poll and 9 written submissions.

There was very valuable diversity among the respondents in terms of co-operative practice, experience and aspiration. This includes responses from leading consumer retail co-operatives, workers’ co-operatives, community co-operatives, housing co-operatives and co-operative development practitioners. Some responses came from very large and established businesses, while others provided insights from co-operative formation and early development.

This participation has greatly enriched our understanding of our members’ needs and aspirations regarding the society legal forms and has provide invaluable nuance, which will refine our priorities and proposals for policymakers.


Executive summary

Statutory common capital 

In the online poll, 28 members responded in favour of changing the law to give co-operative societies the option of adopting a statutory asset lock, while 2 members responded against. Also in the online poll, 29 members responded in favour of changing the law to give co-operative societies a separate option of adopting a statutory indivisible reserve, while 1 member responded against.

The majority of comments in the online poll and most responses to the more detailed consultation expressed a clear desire for members of co-operative societies to have the option of giving their 'common capital' statutory protection. Common capital is widely understood as capital that cannot be shared out between members and is reinvested in the co-operative and/or recycled back into the wider co-operative economy.

We heard that 'statutory common capital' would be very useful as means of bolstering the right kind of investment in co-operative societies, as a protection against demutualisation and as a way of conserving more capital in the co-operative economy.

Some respondents argued that we should focus on creating statutory indivisible reserves but the majority of respondents had aspirations for a statutory provision that could be used to protect all assets in a co-operative society, not just specified cash reserves.

A very small minority of respondents argued against statutory common capital. It was argued forcibly that legislation alone cannot be used to make up for shortcomings in cultures and institutionalized behaviors in the UK co-operative sector. It was also argued that statutory common capital would violate the voluntary, democratic and autonomous principles of co-operatives. Arguably, this could too often result in dangerous additional powers in the hands of executives and bureaucrats at the expense of members, which at a minimum would undermine economic democracy and moreover could lead to serious corruption and decay.  While a minority view, these opposing arguments contain important warnings and identify risks that are, in some cases, sadly borne out in reality. As such, they cannot be ignored.

We now firmly believe there are two statutory common capital tools that should be created in law:

  • non-distributable assets 
  • indivisible reserve

However, heeding the warnings of those who oppose statutory common capital altogether, we should avoid over-engineering and over-mandating in the design of these provisions. We suggest any new statute should do the bare minimum needed to give common capital the fully protected status that so many of our members would like it to have. But this consultation tells us that, at least at present, legislative reform should go no further in this regard. And any focus on legislative reform must only ever be part of a much broader agenda for advocacy, facilitation, formation and development, focused on what co-ops and communities can do for themselves, as well as on what governments can do to complement this. 

We will work with specialists to draft 'non-distributable assets' provisions, to be inserted into the Co-operative and Community Benefit Societies Act at the earliest opportunity.

More work is needed to understand the requirements for a statutory indivisible reserve. We will work with experts and members to further develop the design of statutory indivisible reserves, with a view to drafting legislation in the near future.

Rules for distributable residual assets

We believe there would be strong support for amending Section 14 of the Co-operative and Community Benefit Societies Act, to require that all co-operative societies include in their rules a provision that clearly states how distributable residual assets should be dealt with. 

We will work with specialists to draft an amendment to the Co-operative and Community Benefit Societies Act that requires co-operative societies to clearly state in their rules how distributable residual assets are to be distributed among members, to be enacted at the earliest opportunity.  

Community benefit society asset lock

We believe there would be strong support for amending the Community Benefit Societies (Restriction on Use of Assets) Regulations 2006, to allow societies with a statutory community benefit asset lock to adopt a stronger charitable asset lock.

We will work with specialists to finalise drafting an amendment to the legislation that would allow community benefit societies with a statutory community benefit asset lock to adopt a stronger charitable asset lock, to be enacted at the earliest opportunity.  

Statutory purpose lock

We believe support would be widespread for amending the Co-operative and Community Benefit Societies Act, to create an optional provision that, if applied, would fully prevent the future conversion of the co-operative society into, transfer of engagements to, or amalgamation with, a company. But we believe this should be tested further, with more detailed examination of the pros and cons, before any attempt at legislative action is made.

We will work with experts and members to develop the design of a statutory purpose lock for co-operative societies and then consult the sector.

Repayable shares

There is clearly an openness to exploring legislative options to give societies a new equity instrument that is repayable at the option of the society rather than withdrawable at the option of the shareholder. 

We will support the work of experts and members to develop the design of a new repayable equity instrument for societies.

Other matters requiring further consultation

  • a project to adapt features of company law for society law
  • measures to improve the transparency of membership 
  • a statutory solvency statement

Non-legislative priorities 

In June 2018 government promised to explore non-legislative options to improve ‘regulatory clarity’ for societies. We now know that this commitment will be fulfilled through a Social Sector Forum, promised in the Civil Society Strategy, and that Co-operatives UK is down to play a leading role for societies. We’ll be using the responses we received from this consultation to inform our priorities for this Forum. 

Our priorities for the Social Sector Forum, drawn from this consultation are:

  • registrar policy and process
  • Making Tax Digital for societies
  • accounting standards
  • supporting sector-led initiatives on standards for societies
  • societies in government procurement

Responses

The responses we received are detailed in the Annex at the bottom of this page.


Our conclusions

In the dropdown sections below we set out our more detailed conclusions, based on the responses we received. 

Legislative options

Statutory common capital

Common capital is a feature of co-operatives introduced in ICA Principle 3 and expanded upon in the ICA Guidance Note. Common capital is not distributable to members, not transferable to non-co-operative ownership and control and is committed to the development of the co-operative or the wider co-operative economy. According to ICA Principle 3 common capital can be partial, for example just specified ‘indivisible reserves’, or could include all assets of the co-operative.

From this consultation we conclude there is very significant support among a broad range of co-operatives for amending the Co-operative and Community Benefit Societies Act, to create provisions for what we will refer to as ‘statutory common capital’, by which we mean forms of common capital that have statutory protection and which once adopted cannot be undone.

Optionality

From this consultation we also conclude that these new statutory common capital provisions must be an optional extra for co-operative societies to apply or not. Members should be able to apply these provisions at registration, or afterwards, perhaps by way of a special resolution.

Terminology: why ‘statutory common capital’

We will not frame this project in terms of ‘asset locks’. One crucial point that has emerged from the detail of the consultative process is the need to avoid taking existing UK asset locks for CICs, charities and community benefit societies as a starting point. The shorthand of ‘asset lock’, while useful for some, can create confusion and sets us on the wrong path. Instead we will take ICA Principle 3 as our starting point, thus our decision to describe these reforms as creating ‘statutory common capital’.

Not just indivisible reserves

We recognize that some very expert stakeholders believe the focus must be on indivisible reserves alone. However, we are very mindful that a key motivation among those who support reform in this area is to give statutory force to existing rules-based practice. Our priority is not to create in law a wholly new mechanism previously unknown in UK co-operative practice. Rather it is improve co-operative society law so that it better meets the practical needs of its users and potential users.

We note that a great many co-operative societies already have common capital in practice. Because of shared good practice and the use of model rules, these co-operatives have provisions in their rules that establish reserves for the continuation and development of the co-operative. And they also have provisions that prevent their residual assets – including reserves - being distributed to members on dissolution. Such rules also tend to stipulate that these assets should be used to develop the co-operative economy instead.  Furthermore many co-operative societies have rules that restrict transfers of engagements to societies, and conversions to companies, to those that have comparable common capital rules.

The outline of statutory indivisible reserves that emerges from this consultation would be inadequate to meet the expressed needs and aspirations of many stakeholders, because they would only regulate and protect specified cash reserves, not the total assets of a co-operative. The results of the online poll and related comments, as well as a number of written submissions, lead us to believe there is a desire for a statutory option to prevent all assets being distributed to members or transferred out of co-operative ownership and control. This is particularly relevant with regards to appreciable assets such as real estate that would not be governed by an indivisible reserve. It should be noted that even if such assets were to be liquidated, the emerging outline of statutory indivisible reserves would not guarantee the cash became common capital. This would be inadequate for many supporters of reform.  

Thus we believe there are two statutory common capital tools that should be created in law, which we list below:

  • non-distributable assets 
  • indivisible reserve

Non-distributable assets

Based on what we’ve been told in the consultation, we think primary legislation should create an optional provision in the Co-operative and Community Benefit Societies Act that, when applied by members:

  • prevents the distribution of assets among members during the lifetime of the co-operative society, except through dividends at year-end and share withdrawals (including interest in accounts) 
  • prevents the distribution among members of the co-operative society’s residual assets at dissolution, except to pay out withdrawable share capital (including interest in accounts)
  • prevents, as part of an amalgamation or transfer of engagements, the transfer of the co-operative society’s assets to another co-operative society that does not have the same statutory provision
  • prevents, as part of a conversion, amalgamation or transfer of engagements, the transfer of the co-operative society’s assets to any other organization that is not a community interest company, community benefit society or a charity

The exact stipulation for how non-distributable residual assets should be used instead requires further consideration. Existing model rules that contain such provisions will provide practical partial blueprints when determining the exact wording of the legislation.

More work is needed to determine whether the provision should also make stipulations about any transfers of assets out of the co-operative society that are not part of an amalgamation, transfer of engagements or a conversion. Certain provisions of the community interest company asset lock attempt to regulate transactions that might transfer assets that are supposed to be protected. However, we should certainly avoid overly restricting the ability of members to control their common capital.

This optional provision should also stipulate enforcement measures. Again, this requires further consideration but we suggest the starting point could be the enforcement provisions contained in Part 4 of the ‘Community Benefit Societies (Restriction on Use of Assets) Regulations 2006’.

Once applied, the law should state that this provision cannot be disapplied.

Indivisible reserve

Based on what we’ve been told in the consultation, we think primary legislation should also create a separate optional provision in the Co-operative and Community Benefit Societies Act that, when applied, creates in the co-operative society an indivisible reserve that:

  • is built up out of reported surpluses at year-end
  • during the lifetime of the co-operative society, can only be used to develop the co-operative or the co-operative economy
  • cannot be distributed to members during the lifetime of the co-operative society, including not being available to fund share withdrawals
  • cannot be distributed to members on solvent dissolution, including not being available to pay out withdrawable share capital, and instead must be recycled back into the co-operative economy
  • cannot, as part of an amalgamation, transfer of engagements or conversion, be transferred to a co-operative society that does not have statutory common capital
  • cannot, as part of conversion, amalgamation or transfer of engagements, be transferred to any other organisation that is not a community interest company, community benefit society or a charity

The exact stipulation of how the indivisible reserve should be recycled back into the co-operative economy upon solvent dissolution requires further consideration. Existing model rules that contain non-distributable residual asset provisions will provide practical partial blueprints when determining the exact wording of the legislation.

This optional provision should also stipulate enforcement measures. Again, this requires further consideration but we suggest the starting point could be the enforcement provisions contained in contained in Part 4 of the ‘Community Benefit Societies (Restriction on Use of Assets) Regulations 2006’.

Once applied, the law should state that this provision cannot be disapplied.

Given the significant divergence in opinion among supporters of this reform, further research and consultation is certainly required. We will look at the findings of the Principles of European Co-operative Law (PECOL) project for possible design detail, but are wary of over-engineering and over-mandating. 

Additional statutory requirements 

Some respondents argue for mandatory payments of surpluses into statutory indivisible reserves (where adopted) and mandatory payments of common capital into statutory co-operative development and investment institutions. However, this is not what most respondents expressed a desire for. And moreover, heeding the warnings of those who oppose statutory common capital altogether, would perhaps be pressing too far down a route of statutory and institutional control.

Thus, rather than seeking to over-engineer and over-mandate, we suggest any new statute should do the bare minimum needed to give common capital the fully protected status that so many of our members would like it to have. But this consultation tells us that, at least at present, legislative reform should go no further in this regard. 

Tax reliefs

A number of respondents mentioned how statutory common capital in other countries attracts tax reliefs. For example, in a number of jurisdictions surpluses paid into indivisible serves are taxed at a reduced rate. While a corporate income tax relief on surpluses paid into the reserves of a co-operative society with statutory common capital would be beneficial and justifiable, this falls outside of reform to co-operative and community benefit society law.

We must not develop society law mainly with a view to gaining tax benefits. There must be strong ethical and commercial reasons for developing statutory common capital tools that are inherent in their function, regardless of tax treatment.

Rules for distributable residual assets

The recent judicial ruling that a worker co-operative society with no rules to say otherwise should share its residual assets among members in accordance with the size of their shareholding, has set a very inappropriate precedent for co-operative societies.

From our consultation, we believe there would be strong support for amending Section 14 of the Co-operative and Community Benefit Societies Act, to require that all co-operative societies include in their rules a provision that clearly states how distributable residual assets should be dealt with. To clarify, distributable residual assets would be any not protected by a statutory common capital provision, were those to be introduced.

Removing dysfunctions in the community benefit society asset lock

We believe there would be strong support for amending the Community Benefit Societies (Restriction on Use of Assets) Regulations 2006, to allow societies with a statutory community benefit asset lock to adopt a stronger charitable asset lock.

We suggest that any confusion over how to interpret other parts of the Community Benefit Societies (Restriction on Use of Assets) Regulations 2006 would best be dealt with through clearer guidance, rather than legislative action.

Statutory purpose lock

The surest route by which a co-operative society can demutualise, either to continue trading as a non-co-operative entity, or as a precursor to sale or liquidation on non-co-operative terms, is conversion into, or amalgamation with, a company. From this consultation we conclude there is support for amending the Co-operative and Community Benefit Societies Act, to create an optional provision that, if applied, would fully prevent the future conversion of the co-operative society into, transfer of engagements to, or amalgamation with, a company.

At present Section 113 of the Co-operative and Community Benefit Societies Act requires that at least 75 percent of members vote in favour of a special resolution to effect such a conversion or amalgamation, in a vote in which at least 50 percent of members participate. This high threshold was introduced following a wave of demutualisations where predatory 'carpet bagging' was a feature. We think Section 113 does provide significant protection for many types of co-operative. But clearly there is a body of opinion that this high threshold for conversion/amalgamation is not adequate protection in all circumstances.

It would be important to clarify how a purpose lock could interact with statutory common capital. It would be possible and legitimate to be a co-operative society without statutory common capital and at the same time choose to lock-in co-operative purpose by preventing conversion into/amalgamation with a company.  And it would be possible for a co-operative society without a purpose lock but with statutory indivisible reserves to convert into a company, though the indivisible reserves could not be transferred as part of the process. 

The six to one majority in support of this reform leads us to believe support would be widespread. But we believe this should be tested further, with more detailed examination of the pros and cons, before any attempt at legislative action is made.

Repayable shares

There is clearly an openness to exploring legislative options to give societies a new equity instrument that is repayable at the option of the society rather than withdrawable at the option of the shareholder.  

Co-operatives UK is eager to support all societies in engaging with a project to develop options for reform. From this consultation we can identify the following principles that we think should help guide this particular project:

  • it takes society form and function as a starting point - does not 'adapt' company share redemption
  • it must complement and not undermine the development of fixed-term withdrawable share capital 
  • it must build on the existing protections provided by the FCA's 'non-user investor member' policy and incorporate further safeguards to prevent investors acquiring the underlying value of the society, perhaps by developing in tandem with statutory common capital 

'Repayable' not 'redeemable' 

The concept of share redemption - where a company buys back its shares from a shareholder - cannot be adapted into society law. Companies have a fixed amount of share capital that combined stands for the total value of the business. Buying these securities means acquiring a share in the underlying value of the company. The transaction of company share redemption involves companies buying back from investors a share in their own underlying value. 

A transaction that gives shareholders in societies their money back (other than a withdrawal) would be better described as a 'repayment' by the society, rather than a redemption. The investor would be getting back the money they put into the business, but no share in the underlying value of the society would be changing hands. 

Protection of creditors

Those leading a repayable shares project would need to consider what safeguards should be put in place to ensure share repayments controlled by a society do not undermine the interests of creditors. Given that adapting company share redemption rules would not be appropriate, we suggest the following principles to help guide this area of work, which we draw from society best practice for withdrawable share capital:

  • share repayments should only be funded out of accumulated trading surpluses 
  • societies should only action repayments when they can also pay their debts

Re-siting the legislative and registry functions for societies

In recent years we have worked with officials at HM Treasury, the Department for Business Energy and Industrial Strategy (BEIS) and the Office for Civil Society to gain official recognition that there may be problems with the current arrangements for societies. 

Re-siting the legislative function

As a priority, we believe legislative and policymaking responsibility for societies should be moved from HM Treasury to the Department for Business. The current siting of responsibility in government is illogical and dysfunctional. The benefits of this change would be:

  • societies would be served by officials with a specific business framework remit, rather than by officials responsible for financial services
  • while not a panacea allowing instant improvements for societies, seeking action through departmental and ministerial channels with a specific business framework remit would constitute a considerably lessor challenge compared with the status quo
  • the Department for Business has primary legislation slots specifically to change corporate law, HM Treasury does not 
  • once the Department for Business has practical responsibility for the society corporate framework it will be easier for this to be maintained alongside the company framework as matter or course, reducing future disparities
  • it would allow easier development of holistic co-operative business policy, without the need for so much complex cross-departmental liaison

In 2015 Treasury officials conducted an internal review, which led them to accept the rationale for moving the legislative function to the Department for Business but also to emphasize the complexities involved. 

Re-siting the legislative function would require primary legislation. There are a number of complexities involved in this, most notably the fact that credit union legislation is a bolt-on to society legislation and HM Treasury may be minded to retain control of the former. 

Re-siting the registry function

While there could be benefits in moving the society registry function out of the Financial Conduct Authority (FCA) into something better-purposed, better-resourced and closer to the orbit of the Department for Business and Companies House, we see this institutional arrangement as less dysfunctional and thus less of a priority to remedy.

Current measures by the FCA to improve the deal for societies, most notably through the introduction of an online filing portal and the scrapping of some fees, make this less of a priority. 

Furthermore, we are hopeful that issues with clarity in policy and process can start to be addressed through the new Social Sector Forum, which government has promised in response to our repeated raising of issues faced by societies. 

However, there are increasingly significant challenges for societies that come about because their registry is not part of the developing Companies House-HMRC digital nexus. If government can't make the investments needed to integrate the Mutuals registry into this nexus, then a wholesale re-siting of the function may be the only option. 

Other matters requiring further consultation

The meeting held in our offices on 15 November highlighted other possible legislative developments that we believe require further investigation and consultation.

Transparency of membership 

It was suggested that the corporate framework for societies might be improved by a statutory measure to increase the public transparency of member registers.  

We have no view on this at the moment, though recognize that transparency of beneficial ownership is increasingly important in fostering a fairer and more ethical economy.

Any measure would need to minimize the administrative burden on societies and protect the personal details of members. 

More consultation with members is required before we can take a position. 

Solvency statement

It was suggested that issuing withdrawable shares and managing withdrawable share capital liquidity might be made more robust by the introduction of a statutory statement of solvency, similar to that found in company law.​

The FCA Guidance strongly encourages societies to only fund withdrawals when they can also pay their debts, which in effect means society directors are already asked to make the considerations company directors make for a solvency statement. 

We believe that if introduced carefully, a statutory requirement could help improve clarity for societies and cement good practice, rather than just create a new administrative burden.

More consultation with members is required before we can take a position. 

Adapting features of company law

In our view development of society law should keep with the distinct form and function of societies and should proceed with its own logic and rationale, rather than being driven by developments in company law. 

That said, company law is amended regularly in ensure it remains fit for purpose. From time to time government introduces changes to company law that could, if appropriately adapted, benefit the society corporate framework. 

We will ask members to suggest features of company law that they think would benefit societies. 

Regulatory recognition of social purpose

We conclude that there is no basis for taking this forward.

Non-legislative options

In June 2018 government promised to explore non-legislative options to improve ‘regulatory clarity’ for societies. We now know that this commitment will be fulfilled through a Social Sector Forum and that Co-operatives UK is down to play a leading role for societies. We’ll be using the responses we received from this consultation to inform our priorities for this Forum. 

Our priorities for the Social Sector Forum, drawn from this consultation are detailed below. 

Registrar policy and process

Community benefit

We will ask for a review of the FCA's interpretation of 'community benefit', with a view to improving clarity and updating guidance.

We will also ask for clearer guidance from the FCA on interpreting the 'use or dealing’ of assets ‘directly or indirectly’ for community benefit provisions in the Community Benefit Societies (Restriction on Use of Assets) Regulations 2006. 

Converting shares

We will also ask the FCA to provide clear guidance on whether and how it is appropriate to convert members' shares from one form to another - for example to convert non-withdrawable shares into withdrawable shares. If clear guidance cannot be given because the legislation itself is too vague then primary legislation may be necessary to provide this clarity. 

Non-user investor members

We will also seek greater clarity for societies on what the published policy for 'non-user investor member' share capital could allow in practice.

Sweat equity and founder status

We will also seek clearer guidance for co-operative societies on how sweat equity and founder status could operate in a co-operative society.

Registration and AR30 forms

We welcome that the FCA is introducing much-improved registration and AR30 forms. But we will explore whether more can be done to improve the capture of membership churn.

Process, accountability and redress

We will also seek an exploration of options for:

  • reducing perceived subjectivity in FCA decisions
  • setting the FCA Mutuals Team a ‘mission’ 
  • improving redress for societies and the accountability of the FCA Mutuals Team  

Making Tax Digital for societies

We will use the Social Sector Forum as one arena (among many) to press for societies to be better served by government's Making Tax Digital project. 

Accounting standards

We will explore what support central government and the Financial Reporting Council might be able to provide for the creation of a bespoke co-operative SORP (statement of recommended practice) for accounting and reporting.

Sector-led standards for societies

It has been suggested that we could facilitate sector-led efforts to develop, clarify and promote best practice for all societies to comply with the Co-operative and Community Benefit Societies Act and registrar policy, with a particular need in relation to finance, governance and innovation in co-operative societies. The suggestion is that when it comes to a sector-led approach, we take what has worked in the Community Shares Standards programme. 

We will ask government to consider what it could do to support any such sector-led initiatives to improve clarity for all societies.

Societies in government procurement

We will ask Cabinet Office to require/encourage public procurers to use credit reference services that include societies, as part of its renewed social value procurement agenda.

We will also gather other examples where legislation, policy and practice unreasonably disadvantage or exclude societies in public procurement and public service delivery, and seek remedial action through the Social Sector Forum.


Next steps

Non-legislative options

We are waiting for government to provide more details about its new Social Sector Forum and will prepare a priorities paper in advance of its first meeting.

Legislative options

With the following, we believe we are in a position to proceed to drafting legislation and seeking government or parliamentarian action to enact.

  • We will work with specialists to draft 'non-distributable assets' provisions, to be inserted into the Co-operative and Community Benefit Societies Act at the earliest opportunity 
  • We will work with specialists to draft an amendment to the Co-operative and Community Benefit Societies Act that requires co-operative societies to clearly state in their rules how distributable residual assets are to be distributed among members, to be enacted at the earliest opportunity  
  • We will work with specialists to draft an amendment to the Co-operative and Community Benefit Societies Act that would allow community benefit societies with a statutory community benefit asset lock to adopt a stronger charitable asset lock, to be enacted at the earliest opportunity  

With the following, we believe we are in a position to play a fully supportive role in the next project phase.

  • We will work with experts and members to further develop the design of statutory indivisible reserves, with a view to drafting legislation in the near future
  • We will support the work of experts and members to develop the design of a new repayable equity instrument for societies and then consult the sector
  • We will work with experts and members to develop the design of a statutory purpose lock for co-operative societies and then consult the sector

With the following, we believe more consultation with our members is needed. We will discuss future consultations at the policy session that will form part of Congress 2019.

  • A project to adapt features of company law for society law
  • Measures to improve the transparency of membership 
  • A statutory solvency statement

If any of our members would like to speak to us about any of the above, please contact our policy officer, James Wright:

e: [email protected]

t: 0161 214 1775


Annex: responses

Online poll: statutory common capital 

Our members’ consultation included a quick online poll, which specifically called for views and canvassed support for ‘common capital’ reforms.

This part of the consultation summarised a rationale for using primary legislation to give co-operative societies the option of adopting two types of ‘statutory common capital’, one referred to as a 'statutory asset lock' and the other referred to as a 'statutory indivisible reserve'.

The results to the two questions asked are as follows:

Do you support changing the law to give co-operative societies the option of adopting a statutory asset lock (which would by extension make reserves indivisible)?

Yes: 28

No: 2

Do you support changing the law to give co-operative societies a separate option of adopting a statutory indivisible reserve?

Yes: 29

No: 1

Comments in favor of a statutory asset lock

Some comments provided specific rationale for supporting this measure. A desire to keep assets in common ownership in perpetuity and to prevent ‘carpet bagging’ was expressed. A particular need in relation to co-operative housing was highlighted. It was also suggested that a statutory tool would provide a simple proposition for members trying to ensure their assets remain in the co-operative economy. Co-operative development practitioners responding here told us that in their professional experience, the lack of a statutory asset lock for co-operative societies had forced suboptimal choices of legal form onto a significant number of their clients.

One comment provided a qualification for supporting the measure, emphasising that it must be for the members of a co-operative society to choose to adopt this option, or not.

One comment was that the co-operative society asset lock provisions should take the same form as those for a community benefit society.

Comments opposed of a statutory asset lock

A respondent against the measure commented that we had not provided a robust rationale for it.

Comments in favor of a statutory indivisible reserve

Two respondents commented that while they were very much in favour of co-operatives being able to distribute some surpluses among their members, they also thought it was essential that some surpluses should become common capital, either for future investment in the co-operative or in the wider co-operative economy. It was implied that a statutory indivisible reserve would facilitate these aspirations.

Another respondent commented that a the statutory indivisible reserve would suit some co-operatives better that a full asset lock, as it created protected common capital in the form of specified cash reserves, but also left greater flexibility over the treatment of other assets.

One supporter gave the qualification that the directors of a co-operative society should retain discretion as to the actual use of a statutory indivisible reserve. 

Another supporter commented that any statutory indivisible reserve must not prevent the payment of a dividend.

Comments opposed of a statutory indivisible reserve

A respondent against the measure commented that we had not provided a robust rationale for it.

Part 1: Common wealth reforms for co-operative societies

Below we summarise the written responses we received to the questions asked. 

Question One: Do you agree that it would be good to develop a system of common wealth creation in our co-operative economy? If you do not agree, please explain your answer.

All five respondents to this question agreed that an effective system for growing, pooling and recycling common capital among co-operatives is important in building a vibrant and resilient co-operative economy. 

But one respondent felt that it was unhelpful to introduce and emphasize the concept of 'common wealth', as this is not found in co-operative Values and Principles.

Another respondent said we already have a system of common wealth creation in the UK, that would best be improved through institutional, collaborative and cultural change, not changes in the law.

Question Two: Which of the following options do you support?

a) Making no new statutory provisions in this area

b) Providing co-operative societies with the option of adopting a wider statutory asset lock only (which would also create a kind of statutory indivisible reserve)

c) Providing co-operative societies with the option of adopting a statutory indivisible reserve only

d) Providing co-operative societies with the option of adopting either a statutory indivisible reserve or a wider statutory asset lock, or both

Three respondents were in favor of  'c) Providing co-operative societies with the option of adopting a statutory indivisible reserve only'. Two of these explained that in their view, it would not be appropriate to adopt an asset lock approach as seen in other parts of UK corporate law. It was argued that indivisible reserves, not asset locks, are specified in ICA Principle Three. Furthermore, as indivisible reserves are part of co-operative law and practice around the world, we have these examples to draw on in our design work. Furthermore, we were advised to draw on findings of the Principles of European Co-operative Law (PECOL) project, which specifically covers indivisible reserves.

However, while one respondent said they favored statutory indivisible reserves over a tool for assets more generally, their response suggested that they were interested in developing a tool that went beyond protecting only specified cash reserves.  

Three respondents were in favor of 'd) Providing co-operative societies with the option of adopting either a statutory indivisible reserve or a wider statutory asset lock, or both'. One gave as a reason that they never wanted to be bought by anyone. Another said their support was conditional on these being optional features of co-operative society law.

One respondent was in favour of 'a) Making no new statutory provisions in this area'. This opposition to statutory common capital contains some very important points that should be considered fully. We are warned that law cannot be used to make up for shortcomings in the cultures and institutionalised behaviors that hold back the UK co-op movement. A true 'common wealth’ system that builds, shares and recycles capital within the co-op economy, requires a more collaborative sector. A stronger legal bases for common capital will not make this happen. This opposition also sees any rules regarding common capital that are statutory and irreversible as violating the voluntary, democratic and autonomous principles of co-ops: founders binding future members and inviting regulatory control. Lastly, and perhaps most critically, we are warned that statutory systems for regulating capital within and between co-ops can result in dangerous additional powers in the hands of executives and bureaucrats at the expense of members, which at a minimum can undermine economic democracy and moreover can lead to serious corruption and decay. 

*In the next part of the consultation we discussed the rationale and possible design of statutory common capital tools in more detail*

Question Three: Would you support giving co-operative societies the option of adopting a statutory asset lock as set out above? If not, please explain your answer.

Four respondents said they would not support a statutory asset lock as we proposed. Three gave as a reason that they were only in favor of a statutory indivisible reserve. The other respondent was opposed to statutory common capital in general. 

One respondent said they would support a statutory asset lock as we proposed.

Question Four: Should such an asset lock allow holders of non-withdrawable share capital to get their money back at par value at dissolution, or should this share capital be subject to disinterested distribution? Please explain your answer.

Two respondents addressed this question directly, saying that in their view all equity capital should be recoverable by shareholders, up to par value, on dissolution.  

Question Five: Should any separate indivisible reserve be indivisible even for the purposes of funding share withdrawals? Please explain your answer.

Two respondents said that indivisible reserves should be beyond the reach of members, even for purposes of withdrawals. 

One respondent was interested in statutory indivisible reserves not only as a tool to protect co-operative capital from demutualisation by members, but also as a means of protecting co-operative capital from being lost to creditors. It was suggested that if statutory indivisible reserves were operated alongside divisible reserves, and if the members were required to pay significant parts of their surpluses into both reserves, then there would be justification for granting statutory indivisible reserves greater protection from creditors. Furthermore, in this arrangement, even upon insolvency indivisible reserves could be available to pay back members’ withdrawable share capital.

Conversely, the other respondent in favour of indivisible reserves listed increased creditworthiness and greater protection of creditors as one of the benefits such reserves can bring. 

Question Six: What are the drawbacks and risks of this statutory approach and how can these be minimised and mitigated?

One respondent said that careful drafting and clear objectives would minimise and mitigate the drawbacks and risks of statutory common capital. 

Another respondent said the drawbacks and risks of statutory common capital would always outweigh the perceived benefits. 

Part 2: Other important reforms

Question Seven: Would you support legislative action to remove dysfunctions that prevent asset locked community benefit societies from adopting a stronger charitable asset lock?

Two respondents would be in favour of legislative action to remove the dysfunction discussed.

One respondent would not be, as they see more significant shortcomings in the community benefit society asset lock as a whole. 

Question Eight: Do you think legislative action is needed to improve clarity around ‘use or dealing’ of assets ‘directly or indirectly’ for community benefit? Or could this be better dealt with through non-legislative means, such as improved guidance?

One respondent would be in favor of improved guidance. 

Another respondent agreed that legislative action would be useful.

Another respondent did not think that this was an aspect of the community benefit society asset lock that required particular attention. 

Question Nine: Which of the above options would best ensure co-operative practice is followed? (This question relates to options for encouraging co-operative societies to be clearer about how they want residual assets that do not form part of common capital to be distributed) 

Four respondents were in favor of changing the law to require all co-operative societies to adopt a rule that clearly sets out how distributable residual assets are to be distributed to members.

One respondent was in favor of non-legislative efforts to encourage good practice in this regard.  

Question Ten: Would you support changing the law to allow co-operative societies the option of adopting a statutory ‘purpose lock’? How should such a lock operate?

Six respondents were in favor of changing the law to allow co-operative societies the option of adopting a statutory mechanism to exclude any possibility of conversion or transfer of engagements to, or amalgamation with, a company. 

One respondent opposed this as it goes against the principles of voluntarism, democratic member control and autonomy.

Question Eleven: Would you support changing the law to allow co-operative societies to apply for regulatory recognition of social purpose alongside co-operative purpose? How would this work? Please explain your answer.

One respondent opposed this outright. 

Another respondent would be very wary of anything that invited additional regulation in this area. 

Another respondent said there were issues worth exploring here, but suggested that a great deal more research and consultation would be necessary before any coherent view could be formed.

Another respondent said they could support something like this, if it involved gaining recognition of the social value in worker ownership and control. 

One respondent said they would support this. 

Question Twelve: Do you believe it would be beneficial to develop a form of equity that is redeemable/refundable at the option of societies, rather than withdrawable at the option of members?

Three respondents were clear that there would be benefits in this, including notably two consumer retail societies.

One respondent saw possible benefits for many types of society, but said it would be more prudent to explore and exhaust non-statutory options first. 

One respondent said they did not see benefits and expressed concerns that redeemable shares would undermine withdrawable shares. It was also argued that 'inorganic' growth of the kind needing more conventional investor capital is not core to the co-operative model anyway, and therefore should not be a priority. Such growth could be funded by debt instead.

One respondent expressed uncertainty. 

Question Thirteen: What risks and challenges do you see in adapting company share redemption to society law? How can these be mitigated and overcome?

Two respondents said that “adapting company share redemption” should not be the approach taken. Rather, any solution should to be approached through a society rather than a company lens.

Part 3: Non-legislative improvements

Question Fourteen: Are there any other non-legislative issues for societies we have missed off this list?

One respondent said the registry function for societies should be re-sited away from the FCA. 

Another respondent told us that societies sometimes fail to qualify for public sector tenders because tenderers use credit reference agencies that do not collect financial data on societies. It was suggested that public sector tenderers should be required to obtain and consider societies’ full financial data, to prevent inadvertent discrimination.

Another respondent said the FCA's AR30 form was cumbersome. 

Question Fifteen: Have we listed something above that you do not believe to be an issue? If so, please explain your answer.

No respondents said we had wrongly identified something as an issue.

Notes from meeting

On 15 November we held a members' meeting in our Manchester office to discuss legislative and non-legislative options for societies. A small number of members and experts convened. Below are the key points raised during our discussions.

Statutory indivisible reserve

Attendees came to a broad agreement that the priority for common capital reform should be a statutory indivisible reserve, rather than an asset lock. The following are the key positions agreed through discussion.

Features of a statutory indivisible reserve

  • There should be a statutory basis for indivisible reserves in co-operative societies
  • By 'indivisible' was meant:
    • Cannot be distributed between members during the lifetime of the co-op or upon its dissolution
    • Would be permanent and could not be undone
    • At dissolution, if insolvent, used to pay creditors, if solvent, committed to being recycled back into the co-operative economy
  • Indivisible reserves would NOT regulate or protect any assets outside the specific cash reserve
  • Indivisible reserves would be built up out of reported surpluses at year-end
  • Indivisible reserves would be optional for co-operative societies to adopt
  • We should look at Principles of European Co-operative Law (PECOL) project for more possible design detail

Other possible legislative issues

  • Possibly, the Co-operative and Community Benefit Societies Act is too vague on governance
  • Perhaps the Co-operative and Community Benefit Societies Act should include provision for a statutory Statement of Solvency
  • There is an unhelpful lack of clarity regarding whether and how it is permissible to convert non-withdrawable, transferrable shares into withdrawable shares
    • We should encourage the FCA to clarify its interpretation in this regard
    • We could also explore how the Co-operative and Community Benefit Societies Act could be amended to improve clarity in this regard
  • Greater clarity on what withdrawability (of share capital) legally means would be very useful
    • We should encourage the FCA to clarify its interpretation in this regard
    • We could also explore how the Co-operative and Community Benefit Societies Act could be amended to improve clarity in this regard
  • Possibly, measures are required to increase the transparency of membership of societies, for example through a publicly displayed register of members

Registrar policy and process

  • Registration forms and AR30
    • Is the FCA collecting the right information on member churn?
    • Forms need to engender more consistent and clearer responses from community benefit societies in the community benefit test, at registration and in their AR30s - linked to this, we need to ask the FCA to provide clearer policy and guidance on its community benefit test
  • We should encourage the FCA to be better at engaging with societies and practitioners to reduce confusion over policy, interpretation etc.
  • We need to seek a reduction in the subjectivity in FCA decisions
  • Does the FCA team have the right ‘mission’? How is it held to account? What are the policy recommendations that could address this?

Promoting good standards in applying society law and registry policy 

  • Co-operatives UK should work with partners to broaden the standards work for community shares to cover societies more broadly, especially in relation to capital and financial governance in co-operative societies.
  • Could there be a Societies Standards Board to drive consistent good application of the Co-operative and Community Benefit Societies Act, especially given that the FCA finds it hard to do this in its capacity as a registrar?
  • Is this something that central government could help with?

Adapting useful features of company law

  • We should go through company law and identify features that could be useful for societies
  • We should then ask HM Treasury to bring these features into society law via secondary legislation using section 134 of the Co-operative and Community Benefit Societies Act