The defeat at the end of last year for the attempted sale and demutualisation of LV= – formerly known as Liverpool Victoria – has left the UK facing serious questions around the regulation and governance of its mutuals sector.
Had the sale gone through, the iconic mutual – founded in 1843 as a means for poor people to save for the cost of a funeral – would have been left in the hands of US private equity business Bain Capital.
LV=’s leadership said the deal was the best way for the business to raise vital capital – despite the sale of its general insurance business to Allianz in 2019, for £1.1bn – but critics thought otherwise and led a long campaign against the sale. Led by the All-Party Parliamentary Committee (APPG) on Mutuals, and sector thinktank Mutuo, which provides pro bono services to the APPG – they argued that members had not been properly consulted on the sale.
They also accused management of trying to change the playing field in favour of the Bain sale, having changed LV=’s structure in 2019 from a friendly society to a company limited by guarantee. And it was planning to scrap a rule requiring at least half of its 1.1 million members to take part in any vote that could result in demutualision, had members backed the sale.
But on 10 December, members voted to reject the Bain deal. This leaves LV= facing the question of what it does now to preserve its future and its mutual status – along with a £43m bill for the costs of the failed Bain sale process. Labour/Co-op MP Gareth Thomas, chair of the APPG, paid tribute to the members for holding firm.
“It’s the first time a demutualisation of a major financial organisation has been defeated,” he said. “But now the legislation needs to be overhauled with tougher safeguards on incentives for demutualisations, and more rights for members.”
Mutual members also need to protect themselves against the prospect of a board going against their interests. “Extra protections from this is something members can push for. It’s interesting that previous board at LV= had put in 75% threshold for votes to protect the business from carpetbaggers and demutualisers. This is worth considering for all mutuals.”
Now, Mr Thomas wants LV=’s chair Alan Cook and CEO Mark Hartigan to resign. “When 90 of the mutual’s member-owners don’t back plan, it’s not a resounding vote of confidence. They should be open and honest with members, hold a general meeting, discuss what happens next, and have board members who are committed to mutualism.
“Members need to ask what went wrong – £43m of members’ money was spent on this, without their permission to start the process, and some of the members will be concerned and disappointed. The FCA should ask the board to be more upfront with members.”
Good regulation and sympathetic government is also crucial, says Mr Thomas. “In the UK it’s difficult to see FCA as interested in the rights of consumers – it met 60, 70 times with LV= board, but not once with the consumers. We need greater responsibility placed on our regulators with regard to mutuals – their owners have rights, which should be defended.”
He adds: “In the end the FCA takes its lead from government and there is not enough understanding of the sector at senior government level. There is more now after LV debate – but ministers need to get a grip and bring in change.”
One positive from the saga, says Mr Thomas, is that it put the spotlight on the value of the UK’s mutuals sector, with the popular press throwing its weight behind the APPG’s campaign. The role of mutuals in building a more resilient and diverse financial sector also drew attention, he says. “And Liverpool Victoria was recognised as a great British asset, owned by its members, which provides financial security to ordinary people.”
Q&A, Peter Hunt and Mark Willetts, Mutuo
What changes to the regulatory framework would you like to see?
The approach from regulators remains that listed businesses are the norm, and this is the framework into which co-operatives and mutuals must fit. Little thought is given to members’ interests or the importance of having differently owned businesses in the marketplace.
For example, there is this concept of an ‘independent expert’ who is supposed to judge the accuracy of the board’s statements, but they are appointed and paid for by the board so there is still no independent voice for members.
There’s also a legislative component. Countries should continually keep their co-operative and mutual laws under review alongside company law, to ensure laws (tax, regulation, competition) do not work to the detriment of co-ops.
In respect of UK mutual law, the Friendly Societies Act 1992 needs updating. In fact, this was one of the factors that led to the LV= saga unfolding as it converted to a company two years ago. The net result is that the sector is unable to fully realise its potential under outdated laws. Costs are higher because some of the efficiencies taken for granted elsewhere are not afforded to societies, and energy is diverted to work-around solutions.
Capital raising is also key. Access to capital is presented as the motivation in almost every demutualisation. In the LV= example, we thought the argument was particularly hollow but nevertheless that was the story members were given. Although the Mutuals Deferred Shares Act (which would permit the likes of LV= to raise capital without risking its mutual status) became law in 2015, it continues to be caught up in a tussle with HMRC and is currently unusable. The opportunity to refresh the Act, address the taxation problems, and build on the experiences of similar legislation for building societies, and the successful approach recently adopted in Australia, will give much-needed support to the mutual sector.
In many countries there is also the concept of indivisible reserves – this is entered into voluntarily by the co-operative or mutual and means that in the event of a winding up the remaining assets must be used for their intended purpose or transferred to a different mutual. Where this exists we see fewer demutualisations.
How can mutuals reduce the risk of demutualisation?
This is a crucial question. In the LV= case, there were a number of difficulties particularly in relation to the appointment of the chief executive, the total lack of honesty with members in the early stages of the process and the weak nature of the board in relation to a plan apparently concocted by the chief and chair alone. There remain questions around corporate governance.
In most respects, mutuals are no different from any corporate. There are failures of governance at every level at different times and corporates go through the same search processes to find non-executive directors. They will have the same faults and the same successes.
Particular problems arise with mutuals when there is no representation of membership, no consumer voice, no member-owner voice in this situation. This is a critical challenge if firms are to protect themselves against the threat of demutualisation.
What lessons are there for members of other co-ops and mutuals?
Mutuo is working on a toolkit for mutuals that will address this very question. The key part is preparation. The lesson from the LV= debacle is that private equity – which is going through an extraordinary boom – has its eyes on us.
We’ve seen from the recent example of Canada’s Mountain Equipment Co-op how this story can quickly go the other way. Mutual businesses need to be ready even before they are approached. This means they need a strong member value proposition (aided by tools such as The Australian Business Council for Co-operatives and Mutuals’ Mutual Value Measurement). They need to work with their industry bodies to argue for legislative change and share best practices – this threat is to the whole sector not just to individual firms. On top of this, in every country where co-ops and mutuals operate it’s crucial to build a network of pro-mutual influencers. This means supportive politicians and friendly journalists. Had the UK All-Party Parliamentary Group [APPG] for Mutuals, which has genuine cross-party understanding and affection for our sector, not become involved, the outcome would have been very different. You also need support from the mainstream media, particularly the business desks of the major papers which were vital allies in the LV= case.
Once any attempted demutualisation is underway then you need permanent support. We spent an enormous amount of time in 2021 assisting the APPG. On the other side, you will have an army of paid consultants, lawyers and media public affairs specialists. It is crucial to have similar support. Individual mutuals must be able to lean heavily on their trade/peak bodies at such a time. In the final push, you need to work closely with media, be sure of your facts, find and work with sympathetic members and create traction online in the form of petitions, social media and comment pieces.
What would you like to see happen next at LV=?
The ball is very much back in LV=’s court. Either continuing as an independent mutual business, if that’s a realistic possibility, or merging with another mutual would be our preferred outcome. Whatever happens, having wasted an enormous amount of members’ money on the attempted sale, LV= has a lot of work to do to regain their trust.