The name of a bank: ethics, the law and consumer protection

The use of ‘Co-operative’ in the name of a bank 70% owned by stock market investors and 30% by the Co-operative Group may be legally questionable as well as unethical, but it seems unlikely that effective steps to force a change of name will take place. This area of our law needs reform to protect co-operative identity.

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 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.”

For registered societies, that is applied by the Financial Conduct Authority (FCA) as registrar. The Department for Business, Innovation and Skills (BIS) deals with the use of the word by companies.

Clearly, the ethics and values dealt with in the Alliance’s full statement are important, but the definition focuses on ownership, and this has been reinforced by a series of international legal and policy documents.

The Co-operative Bank, a listed plc managed in the interests of outside investors with a stake of little more than 20% for the Co-operative Group, is not a co-operative, however “ethical” its behaviour. It seems clear that it should not use the name, despite the contractual arrangements and complex “brand” arrangements it has inherited from its days as a 100% owned Co-operative Group subsidiary.

Technically, legislation protecting ‘Co-operative’ as a sensitive name cannot be used by BIS in the case of the Co-operative Bank. It only applies at the point of company registration, not afterwards.

However, section 76 of the Companies Act 2006 applies at any time after registration and states that “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 [currently Vince Cable] may direct the company to change its name.”

In the case of the Association of Certified Public Accountants of Britain v Secretary of State for Trade and Industry [1998], the court upheld an order against the Association, finding that its name suggested members were certified above the minimal three years’ experience and professional indemnity insurance they needed.

Applying this to the Co-operative Bank, many of its customers have accounts and do business with it because they believe it is a co-operative. It may attract new business for the same reason and customers may accept worse terms, pay more for services because of that. This may harm at least part of the public. Arguably, this gives BIS power to act. If the bank objected to such an order in court, BIS might win using the Certified Accountants’ case as a precedent.

As the UK’s guardian of co-op identity, Co-operatives UK also had a role. It worked hard with the Bank to agree a way forward and has set out criteria for use of the word ‘co-operative’. Co-operatives UK was in an impossible position since the market value of the Group’s stake in the Bank could be affected by BIS intervention. The Group is an important Co-operatives UK member.

Co-operatives UK played its limited hand as well as it could. The Bank has now been admitted as an associate member of Co-operatives UK, which is a gesture of support by the Bank to the co-op movement. According to Co-operatives UK rules, associate members support “the purpose and objects of [Co-operatives UK], co-operative principles and practice” and, according to the website, wish to support Co-operative UK’s “work to grow the co-op economy.” The Bank’s support is welcome, but does not change its ownership structure.

Other bodies had responsibilities too. The FCA has a consumer protection role for bank customers and the Prudential Regulation Authority had to approve the plan for the ex-Co-operative Bank and the change of control involved. It is unclear whether they looked at the name issue when dealing with the Bank rescue.

In all likelihood, the government’s concern to have an ‘ethical’ competitor bank and relief that the Bank was rescued by a “bail in” without the use of public money mean that Vince Cable and Companies House were and continue to be unlikely to act for fear of disrupting the Bank and its efforts to improve its position, including by issuing further shares on the stock market.

The irony of this story is that the new owners of the Bank want to use the name to ensure they maximise profit by keeping its ethical image. They fear that the loss of its ‘ethical’ reputation will damage the value of their investment.

But if the new owners try to keep a name to which they are not morally entitled, many will conclude they already have forfeited the claim to be ethical. Hopefully, in due course, new owners of the Bank may choose another name that expresses their ethical intentions and brand. It’s fine to make the Bank sound ‘cuddly’, but they should not say that it’s a co-operative when it isn’t.

This story shows the clash between the UK’s liberal system of legal rules on business structures and the need to protect the ‘co-operative’ name. The International Co-operative Alliance’s recent branding exercise is very helpful in this respect, but UK business names law needs to be reviewed to give co-operative identity greater protection.

This is an updated version of an article Ian Snaith wrote for his own website. The original can be read here.