An amendment to the Financial Services Bill comes before MPs this week, aimed at making it easier to set up mutual banks in the UK.
Tabled by Labour/Co-op MP Stella Creasy, the amendment is aimed at encouraging a more diverse banking system.
Ms Creasy wants to remove a regulatory barrier which has been in place since the government of Benjamin Disraeli imposed them in 1876. These rules prevent co-operative societies from being banks if they have ‘withdrawable share capital’. At the time this was a valuable safeguard, ensuring depositors’ money was not put at risk if a bank’s shareholders can withdraw their capital at will.
Modern rules, such as the capital requirements regulations enforced by the PRA, and the fact that co-ops now retain the absolute right to suspend share withdrawals, mean the Disraeli regulations are no longer needed – but they do block the road for new mutual banks.
“These provisions within the Co-operative and Community Benefit Societies Act are no longer necessary, but leaving them there is not a harmless industrial history curiosity,“ said Ms Creasy.
“It discriminates against co-operative banks and ultimately harms competition and choice in the banking sector.
“That’s why I’ve put down an amendment to the Government’s Financial Services Bill, which will look to remove the offending section of the Co-operative and Community Benefit Societies Act, and level the playing field for co-operative and mutual banking initiatives.
“Removing unnecessary and damaging restrictions that hold back the co-operative banking sector is an important step in allowing the sector to flourish. As we look to recover from the devastating impacts of the ongoing pandemic, it’s co-operative values found in these institutions that will be critical – and I’ll be encouraging the Chancellor to recognise their value to the communities they serve and to support my amendment that gives them an even greater chance of doing so.“
Supporting her proposals, sector body Co-operatives UK said: “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.“
It added: “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.”
Co-operatives UK points to attempts to develop mutual banks, including in the south west of England, Greater Manchester and Preston.
It added: “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.”
The sector body added that this is largely down to challenges in raising the millions in equity capital that regulators require institutions to have before issuing an operating license. You need to raise millions in equity to get a banking license.
Investors struggle to understand mutuals, said Co-operatives UK, and wile they offer good 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.”
Given these disadvantages, Co-operatives UK is calling on MPs on the Financial Services Bill Committee to support Ms Creasy’s amendment when they debate it tomorrow (3 December) so that other options are not closed off to them.