Co-operatives can raise more funds in credit union legislation change

Co-operatives now enjoy exciting new opportunities in legislation which need to be explored by directors and executives. 

Co-operatives now enjoy exciting new opportunities in legislation which need to be explored by directors and executives. 

This week saw reforms to co-operative, community benefit society, and credit union law. The changes were first proposed in 2007 and apply in England, Scotland and Wales, but not Northern Ireland. These changes add to the reform introduced in April 2011 to allow societies to communicate electronically with their members and with the FSA. The changes are summarised in full, below, but some are more important than others.

For co-ops and bencoms:

  • The limit on the value the shares that can be held in a society is abolished for shares which are not withdrawable
  • Societies can decide their own years of account for the purpose of their annual returns

For co-ops, bencoms and credit unions:

  • Societies can charge up to £5 to provide a copy of their rules to people who are not members or to members who have already had a copy
  • The minimum age limit of 16 for membership of a society is abolished and the minimum age for serving on the board and signing documents and receipts becomes 16. The society's rules may still limit membership to people aged 18 or more
  • Dormant societies with no transactions in their accounts (apart from FSA fees, dividend payment and interest payments) for two years before the current accounting year can be dissolved by special resolution of their members. A credit union also has to have FSA confirmation of the resolution.
  • Societies may publish unaudited interim revenue accounts and balance sheets together with its latest year end account and balance sheet as long as it clear marks them as unaudited.

For credit unions only:

  • New and more liberal membership requirements
  • Corporate members permitted subject to conditions and limits
  • Limit on percentage of non-qualifying members removed
  • Deferred shares and interest bearing shares allowed
  • Effect of securing loan on member's shares clarified
  • Fee for ancillary services not limited to recovery of cost of providing them
  • Liberalisation of limit on share dividend payable by credit unions

Perhaps the most important development is the removal of the limit on the value of shares that can be held in a co-op or bencom — as long as the shares are not withdrawable. This will allow societies to raise funds more easily by using shares.

Members can be allowed to transfer their shares to other members and, with the right provision in the rules, it may well be possible for the society to pay back the value of the shares at certain times. This may make societies less dependent on loans as a major source of capital and allow them to improve their financial gearing. Of course, the return on share capital must be limited and the purpose of the society must either be the co-operative provision of goods or services to members or the benefit of the community.

Its objective must not be the creation of profits for distribution to shareholders. The FSA as regulator will check rules and share issues to prevent abuse. But as long as the mutual nature of the society is honoured, share capital can now be used more readily to raise much needed investment funds.

Allowing societies to choose their own year of account and to publish unaudited interim accounts puts them in the same position as companies and reduces costs. Likewise, the ability to recruit under-16’s as members and to have 16 to 18 year olds as directors means that co-ops can be promoted for young people who get real hands-on experience of managing their own society and developing their own mutual business. Companies have always been able to have younger members. Now co-ops can as well.

For credit unions, the latest changes allow for a larger membership (including some corporate members). The provision of additional services such as current accounts and direct debits becomes easier and more flexible financing through deferred shares and the payment of dividend on shares opens up. This allows more flexibility and freedom but ensures that credit unions remain credit co-operatives regulated by the Financial Services Agency like other financial services businesses.

Now is the time for societies to review their rule books and decide whether they can take advantage of these new opportunities. Can shares be a useful additional source of capital? Can more be done to increase the involvement of young people? How can best advantage be taken of the new accounting rules? Credit unions will be looking at the new opportunities to expand and improve the service they offer their members and communities, with the possibility of corporate members and business lending as well as more scope for offering extra services and new products.

For Government, the next step is to bring the Co-operative and Community Benefit Society and Act 2010 into force to allow the full renaming of societies through a new registration system and to introduce new powers to update the law for credit unions and other societies. The application to insolvent societies of rescue procedures long available to companies has been waiting for implementation since 2002. In the present economic climate, Government should regard that as a matter of urgency if its Big Society is to have expression through mutual societies and co-operatives. 

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