Co-operative registrations authority, the Financial Conduct Authority, has started a consultation on how it deals with co-operatives and community benefit societies.
The Co-operative and Community Benefit Societies Act 2014 came into force on 1 August, which combined 17 pieces of different legislation. This consultation is ahead of a policy statement that the FCA intends to publish either at the end of this year or early 2015 on its functions related to both business types to make the registration process “more transparent”.
Kevin Jaquiss, partner at DWF, which advised the FCA in the early stages of development of the guidance, says DWF may raise some points of clarity and detail, but it supports the FCA’s proposals. “The guidance takes a bold approach, marking out clearly the distinctive characteristics of societies and contrasting them with companies,” he said. “In an environment where public policy is stretching definitions of ‘mutual’ and ‘co-op’ to their limits and beyond this is welcome.
“It means that those wanting to use a society model will have to work harder to demonstrate that they’re entitled to do so. This will be controversial for some but the principles set out in the proposed guidance are fundamentally sound. The real as opposed to theoretical risks of a ‘real co-op’ being refused registration are very low.”
Ian Snaith, law tutor and consultant solicitor at DWF, worked with the FCA on the draft guidance. “The FCA are keen to have views from the co-op movement on the published draft,” he said. “The guidance clarifies the difference between co-operative societies and other legal forms, including community benefit societies registered under the same legislation. That’s welcome as the protection of co-operative identity is very important in developing and promoting clear alternatives to the company model. Clarity about who can use the society structure is also important to the FCA’s role as society registrar.
“It follows that the co-op business model only fits projects that pursue the interests of members as suppliers (whether of labour or other goods or services), customers or clients, or other non-investor stakeholders. Members must also control the society.
“In some cases, a community benefit society will fit a non-co-operative project. Sometimes another business structure, such as a community interest company (CIC), a charitable incorporated organisation (CIO) or another company structure will be best.”
He says the protection of co-operative identity has to be balanced against adaptation to meet new social and business needs, but the International Co-operative Alliance’s definition of values and principles must be respected. “The draft guidance emphasises their importance,” he added. “Limiting the return on capital invested in a project is and always has been important to ensure member benefit in a co-op and community benefit in a community benefit society.
“The FCA takes the view that those objectives also need protection to justify the exemptions that societies enjoy from the full investor protection available when companies raise capital. The Co-operatives UK/Locality Community Shares Unit is developing and applying good practice to protect investors where FCA regulation doesn’t apply.
“While some wording in the draft guidance could no doubt be clearer I think it’s a welcome improvement on previously available information about the FCA’s approach as registrar.”
The FCA is asking for views on the following points:
For co-operative societies, the FCA says it takes into account the Statement of Co-operative Identity, Values and Principles published by the International Co-operative Alliance in deciding whether the conditions for registration are met, and expects all co-operative societies to demonstrate compliance. “We look for evidence that members of co-operative societies will actively participate in the main business of the society and that members’ primary motivation for joining is the opportunity to participate in the business,” says the document. “In line with provisions under the Act, we will not register societies that exist primarily to pay returns on subscribed capital.”
Community benefit societies exist to benefit a defined community. The interests of the members of these societies must be subordinate to those of the community identified in the society’s rules.
Registration as either of these types of society provides a corporate vehicle with limited liability. Registration also allows societies to issue shares without the need to comply with the financial promotion and prospectus rules, which are designed to protect consumers by ensuring they are better informed of the risks attached to an investment.
The FCA suggests that businesses not demonstrating those characteristics may be better suited to an alternative form, such as community interest company, a company or a limited liability partnership.
What the FCA does
- Registers new societies
- Assesses rule amendments, resolutions and other documents
- Checks that societies are complying with the Act
- Takes action against non-compliant societies
- Deregisters societies
- Keeps details of societies for the public to check
What the FCA doesn’t do
- Give advice on how to set up or run a society
- Give feedback on governance arrangements
- Get involved in disputes between members and their society
The FCA’s powers
- Require that societies give them information and documents
- Can have accounts audited by a qualified auditor
- Can appoint an inspector to inspect the society
- Can suspend or cancel a society’s registration
- Can prosecute societies, which can result in a fine from the court
What a co-operative can and can’t do
Co-operatives should be carrying out a business, industry or trade. They must not have an objective of making profits mainly to pay interest, dividends, bonus on shares or any other money lent to or deposited with the society.
A co-operative must also meet the FCA’s following criteria, which, it says, is partially aligned, to the International Co-operative Alliance Statement of Identity, Values and Principles.
- Community of interest: there should be a common economic, social or cultural need or interest among all members of the co-operative.
- Conduct of business: the business will be run for the mutual benefit of its members. The benefit members obtain will stem principally from their participation in the business.
- Membership: membership should be open to anyone who participates in the business of the society. There should be no artificial restriction on membership, but there may be some common sense limits. For instance – a social club may be limited by the size of its premises, or a workers’ co-op limited to employees. Also, it is reasonable to demand some form of commitment, e.g. a housing co-operative may require someone to go through a probationary period before being offered membership.
- Democratic control: control of the society lies with all members. It is exercised by them equally and should not be based, for example, on the amount of money each member has put into the society. In general, the principle of ‘one member, one vote’ should apply. Elected representatives, such as directors or committee members, must be accountable to the membership and can be elected and removed by the members.
- Interest on share and loan capital: the payment of interest on shares or loan capital should not be used as a means of profit distribution. Any interest paid on shares or loan capital must not be more than is necessary to obtain and retain enough capital to run the business.
- Profits: if the rules of the society allow profits to be distributed, each member should receive an amount that reflects how much they’ve traded with the society or taken part in its business based on a fair calculation method. For example, in a retail trading society, profits could be distributed as a dividend or bonus on the value of purchases or sales.
- Subsidiaries wholly owned by a co-operative parent should still remain fully committed to the co-operative values and principles.
An organisation cannot be a co-operative if
- Most of its goods or services are sold or delivered to non-members
- Its business mainly benefits non-members
- More than 25% of the membership are simply investors, and don’t have any other relationship with the society
Naming a society
The FCA says it can reject any name that it finds undesirable. Names should reflect the character of the society.
The key principle common to both forms of society is that a decision to acquire shares should mainly be motivated either by the opportunity to participate in a co-operative business, or to support the objectives of a community benefit society. It should not be the prospect of the financial return, if one is offered. This financial return should generally be set at levels that do not exceed the return on savings
What do you think?
Read the full document online and share your views with the FCA by 28 November. Until this Friday (7 November), Co-operatives UK is asking its members a series of questions to help formulate its response. Take part here.