‘Shocking’ that a stock market bank can be called a co-operative

It is a shocking idea that the word “co-operative” could be used in a Co-operative Bank that is 70 per cent owned by stock market investors, and it...

It is a shocking idea that the word “co-operative” could be used in a Co-operative Bank that is 70 per cent owned by stock market investors, and it is legally questionable, as well as being unethical.

It is the job of the Co-operative Group directors, Co-operatives UK and the authorities charged with consumer protection to stop this now.

Co-operatives, as a form of business structure different from investor owned companies, are defined by the International Co-operative Alliance Statement on Co-operative Identity Values and Principles. The core of that definition is that a co-operative is a “jointly owned and democratically controlled enterprise”.

That has been reinforced by a series of International legal and policy documents from the International Labour Organization, and a communication from the EU Commission. Much of the above, is what is known as “soft law”, which may not seem very important to hard nosed City lawyers trying to solve a tricky problem.

However, EU regulations are hard law. In the preamble to Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE) the EU legislator addressed the definition of a co-operative as a group of “persons or legal entities with particular operating principles that are different from those of other economic agents. These include the principles of democratic structure and control and the distribution of the net profit for the financial year on an equitable basis.”

The European Court of Justice also deals in hard law and it has stated that co-operatives are not managed in the interests of outside investors. So, the ownership structure is key and a listed PLC “managed in the interests of outside investors”  with a 30 per cent stake for the Co-operative Group will not be a co-operative, however “ethical” its behaviour may be.

The next question is how this applies in the UK. On the issue of the name of the Bank the first port of call in the Companies House list of sensitive names. The word “co-operative” is protected from unapproved use in a company name.

However, this only applies at the point of company registration and not afterwards so it does not force the Bank to get permission for the continued use of the name “co-operative” after the new ownership structure is in place. So this is not the way to deal with this issue.

But section 76 of the Companies Act 2006 applies at any time after registration and states: “If in the opinion of the Secretary of State the name by which a company is registered gives so misleading an indication of the nature of its activities as to be likely to cause harm to the public, the Secretary of State may direct the company to change its name.”

Now you may say “so what?”. It’s activity is a bank. It does banking. What is misleading about the name so far as activity is concerned?

Many of the Bank’s customers have accounts and do business with the bank because they believe it is a co-operative. It may attract new ones for the same reason. Customers may accept worse terms or pay more for services because of that. For the reasons given above, even if the bank carries on its current ethical policies it will not be a co-operative. Customers are misled by the name and suffer loss because of that. On that basis the Bank should be ordered by Vince Cable to change its name.

Having set out the argument about the law, I now turn to the responsibilities of the people and organisations involved.

The Co-operative Group Board will have to approve the new arrangements (or will already have done so). As the guardians of the co-operative nature of the society they have a duty to prevent the misuse of the name, which is enshrined within its rules.

I am also sure that everyone at Co-operatives UK will be working hard to avoid the misuse of the name “co-operative” by an investor controlled bank and we must all wish them success.

It is also for the Financial Conduct Authority, the Prudential Regulation Authority and the Department of Business Innovation and Skills to work together to prevent the use of the name co-operative to mislead the consumers and the public if the Co-operative Movement fails to do so.

The irony of this story is that the new owners of the Bank want to use the name to ensure that they maximise their profit from the ownership of the bank by keeping its ethical image.

They fear that the loss of its “ethical” reputation will damage the value of their investment. I am sure their advisors have had much work to do and have been under pressure. City law firms are used to finding “wrinkles” to get the client what they want. If they rely on some technical rule, plus the inaction of Government agencies to use the name “co-operative”, they serve their clients badly and undermine any claim to be ethical as opposed to just legal.

If the new owners try to keep a name to which they are not morally entitled by relying on the technicality that section 55 of the Companies Act 2006 does not apply, they will already have forfeited the claim to be ethical. They will be relying only on the inability of the Co-operative Group directors, FCA, the PRA and BIS to insist on a name that is not misleading. That is not ethical.

The new owners are welcome to choose a new name that expresses their ethical intentions and brand. There is no problem about making the bank sound “cuddly”. They can have an “ethical” board to try to keep the brand’s image. They can amend the Articles of Association.

They must not say that it’s a co-operative when it isn’t. That is disreputable.

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