Co-operative and community benefit societies will be protected from further regulation of capital raising, in an important decision by the Financial Conduct Authority (FCA) announced in October 2016.
At the start of 2016 we saw a genuine risk that member capital in societies would mistakenly be treated as any other form of retail investment and subjected to a new regime for ‘social investments’. This came off the back of a concerted lobbying effort by some in the crowdfunding and social investment industries which led to parliamentary and ministerial pressure for a full FCA review, which duly came in December 2015. Some in that lobby were calling for lighter treatment of social investment within the onerous financial promotions regime, while at the same time calling for member investment in societies to be brought under greater regulatory control. Co-operatives UK was particularly concerned by a narrative which portrayed member investment in societies as an exploitation of loop holes not open to other legal forms.
We were especially mindful that community share offers and member investment in consumer retail co-operatives could have been adversely affected.
We are very pleased to report that in line with our position the FCA has decided not to impose new regulatory burdens on any form of member investment in societies.
In its 'feedback' on the consultation the FCA sets out its decision not to alter the current arrangements. It has reiterated that society capital is already subject to regulation under the Co-operative and Community Benefit Societies Act and intimates that so long as societies raise capital from members in accordance with its Guidance there is no need to impose further regulation.
This is one of the best outcomes we could have hoped for. It safeguards essential freedoms for people in the UK to pool capital to meet their own needs and aspirations, in line with our co-operative values and principles.
At the same time this outcome reinforces our collective obligation to manage member investment responsibly, both to protect members who invest and to ensure societies are not misused as investment vehicles. This makes the Community Shares Unit's Handbook and Standards Mark as important as ever and underlines the need for all societies to engage fully with the FCA Guidance, especially on the subject of share capital.
Summary of our key positions
Co-operatives should be committed to acting responsibly and taking issues of consumer protection very seriously. As vehicles for collective action in an uncertain world participation in co-operatives can come with risks for members and these need to be properly mitigated. This is especially true when members are invited to invest financially.
One of the most powerful and fundamental qualities of co-operatives is how they allow people and organisations to pool capital to meet their common needs and aspirations, often delivering on a social mission. We believe the FCA should commit to a policy approach which allows people to pool resources to meet their own needs and aspirations while minimising the risks inherent in them doing so.
Distinctive features of co-operatives and societies
Co-operatives, particularly ‘bon fide co-operative societies’ and ‘community benefit societies (collectively referred to as societies), are distinctive in the social economy in form and function. They have evolved specifically to allow people to pool capital to meet their own needs and aspirations and to benefit their communities. This distinctiveness should be a key consideration for the FCA when assessing differing forms of social investment and degrees of risk for retail investors.
Scope of consultation
We do not consider most forms of member investment in co-operatives to be retail investments. Thus, we urge the FCA to ensure particular co-operative activities remain outside the scope of any future policy in this area. The following forms of member investment in co-operatives should remain outside the scope of this consultation:
- Mandatory member capital subscriptions
- Any member investment in ‘enterprise co-operatives’
- Any member investment in ‘worker owned co-operatives’
- Voluntary member investment in ‘consumer’ co-operatives
We assert that the following are forms of retail investment in societies within scope of this consultation:
- Community shares
- Non-member investment in the share capital of bona fide co-operative societies
The case for supporting co-regulation of retail investment in societies
We recognise that good intentions alone will never provide adequate protection for retail investors. Indeed, it is entirely possible for individuals and groups striving to create mutual and social value to act irresponsibly in a manner prejudicial to the interests of themselves and others. Furthermore we recognise that nothing in the form or function of co-operatives and societies fundamentally alters the fact that investment in business carries inherent risks.
That said societies do have structural features which reduce some risks for retail investors, particularly in relation to exit, relationship with the enterprise, motivation, and possible returns on investment. These are subject to robust regulation by the FCA Mutuals Team under the Co-operative and Community Benefit Societies Act (2014).
Two crucial risk factors we have not addressed above are business performance and changes in the circumstances of investors. Members investing in societies still run the risk that the business will underperform or fail altogether, resulting in either lower than anticipated returns, or a partial or total loss of their investment. And while there are clear exit horizons in societies, withdrawal may not be possible in the earlier years of many investments, which creates risk for investors who may suddenly need to liquidate their investment due to a change in their circumstances.
Core standards for the communication of business plans and the full disclosure of risk are thus required to mitigate in these regards, and it is these core standards that the Community Shares Unit (CSU) is successfully and effectively developing in its co-regulatory approach. The CSU is driving good standards in retail investment offers made be societies. This approach is bespoke to the form and function of societies and focused on consumer protection.
Retail investment offers made by societies require just such a bespoke approach. A ‘financial promotions regulations lite’ applied across legal forms indiscriminately would not be appropriate. The FCA should strengthen support for the current bespoke co-regulatory approach.
The case for developing a co-regulatory approach for community interest companies and charities
A case can be made for developing regulation for social investment in community interest companies and charities that is different from that for investment in PLCs.
However, the form and function of these entities requires a different approach to that for societies. Key differences relate to exit, investor relationship with the enterprise, motivations, ownership and control, and the possible returns on investment.
The FCA should develop separate co-regulatory approaches for community interest companies and charities. This should encourage enterprises which seek investment from a related community of interest, have democratic governance, and open up membership to investors.