2.1 Bona fide co-operative societies

The 2014 Act does not define or describe what a bona fide co-operative society is. In the absence of a statutory definition, the FCA provides guidance on how it determines whether a society is a bona fide co-operative. It uses two tests, outlined in the following paragraphs.

Section 2(3) of the 2014 Act states that a “co-operative society does not include a society that carries on, or intends to carry on, business with the object of making profits mainly for the payment of interest, dividends or bonuses on money invested or deposited with, or lent to, the society or any other person”.  The FCA registration guidance makes it clear that it will use this section of the Act as part of its determination of whether a society can be registered as a co-operative, and can remain registered as a co-operative. The FCA will do this by inspecting the proposed rules, rule changes, application forms, annual accounts and other published information, which presumably could include a community shares offer document. This approach to defining a co-operative society does not mean that a co-operative cannot distribute its surpluses to members; a matter more fully addressed in Section 6 of the Handbook.

The second test used by the FCA is based on the International Co-operative Alliance’s Statement on the Co-operative Identity, Values and Principles, which defines a co-operative as “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise.” 

The FCA use this definition to determine whether a society is a bona fide co-operative.  It also uses the values and principles, presented below, to verify and validate whether a society’s rules and governance arrangements are consistent with those of a co-operative.

Values Co-operatives are based on the values of self-help, self-responsibility, democracy, equality, equity, and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility, and caring for others.

Principles The co-operative principles are guidelines by which co-operatives put their values into practice.

1. Voluntary and Open Membership: Co-operatives are voluntary organizations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political, or religious discrimination.
2. Democratic Member Control: Co-operatives are democratic organizations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary co-operatives, members have equal voting rights (one member, one vote) and co-operatives at other levels are also organized in a democratic manner.
3. Member Economic Participation: Members contribute equitably to, and democratically control, the capital of their co-operative. At least part of that capital is usually the common property of the co-operative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing their co-operative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership.
4. Autonomy and Independence: Co-operatives are autonomous, self-help organizations controlled by their members. If they enter into agreements with other organizations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their co-operative autonomy.
5. Education, Training, and Information: Co-operatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their co-operatives. They inform the general public – particularly young people and opinion leaders – about the nature and benefits of co-operation.
6. Co-operation amongst Co-operatives: Co-operatives serve their members most effectively and strengthen the co-operative movement by working together through local, national, regional, and international structures.
7. Concern for Community: Co-operatives work for the sustainable development of their communities through policies approved by their members.”

The FCA expects to see principles 1 to 4 expressed in the rules and governance arrangements of a society, whereas principles 5 to 7 are more likely to be expressed in the policies and actions of a society. The FCA registration guidance places a particular emphasis on the associative characteristics of co-operative societies, focusing on the relationships between members. The purpose of a co-operative society is to serve the interests of members. It can distribute part of its surpluses or profits to members in the form of a dividend on their transactions with the co-operative. The FCA recognises the diverse nature of co-operative enterprise, and the many different arrangements between members for serving their mutual interests, based on co-operative principles. Co-operative societies are free to determine who can be a member, based on the principle that it should be open to all who can use the services of the enterprise. The involvement of non-user members is subject to specific FCA guidance on the matter.

In Northern Ireland where the Industrial and Provident Societies (Northern Ireland) Act 1969 still applies, there is no distinction between different society forms.