Members’ money: UK retail societies and withdrawable share capital

From their earliest beginnings, co-operatives were set up to meet the needs of people, not to generate a speculative return on capital invested in them.

“The primary motive for people forming a co-operative is to be self-reliant,” says the International Cooperative Alliance’s guidance notes to the third co-op principle – member economic participation – describing how members invest in their co-operative, raise or generate capital and allocate surpluses.

The background to the debate on the formulation of the 3rd principle shows that its key economic concept is that, in a co-operative, capital is the servant, not the master of the enterprise. “Members contribute equitably to, and democratically control, the capital of their co-operative.”

Jean-Louis Bancel, who co-wrote the guidance notes to this principle, shares more of his thoughts on principle 3 here. The principle prompts an interesting discussion on what form economic contributions take, and how co-ops themselves promote awareness of and use this capital – particularly as the wider question of capital finance for co-operatives comes to the fore with the launch of Coop Exchange and, in the UK, the Law Commission review of the legal frameworks governing co-operatives, community benefit societies, and friendly societies.

In the UK, one of the earliest forms of economic participation in retail co-operatives by members – alongside day-to-day trading – was through the purchase of shares that are withdrawable (at the discretion of the board of the society) and non-transferable; today, the rules of societies who still offer this option should include details of the process of withdrawal, and the maximum interest someone may have in the shares of the society. (There are options for non-withdrawable and transferable shares as well as fixed-term investments – but we’ll look at those another day).

In 2020, Co-operatives UK commissioned Anthony Collins Solicitors to write a tool kit looking specifically at withdrawable share capital (WSC). The research was prompted by nine of the UK’s retail societies who wanted a document to review the legislative background and provide an up-to-date summary of the law. They wanted to take into account the guidance of the Financial Conduct Authority and generally minimise regulatory and other risks.

The toolkit described how WSC played a crucial part in the rapid expansion of retail co-operative societies from 1852, well into the 20th century – and how for many years this function also provided basic financial services to individuals who did not have access to banking services.

Today, the availability of modern banking services and their regulatory framework mean that WSC no longer fulfils this function for members, with most societies having scaled back their facilities for members to deposit and withdraw WSC. Historically, these transactions took place at store counters; now most transactions involve written requests to societies and a significant waiting period; but the basic legal facility for WSC remains in place, and continues to be actively used and encouraged by some societies.

Of course, owning WSC is not the same as investing in the shares of a company: it is primarily for the purpose of supporting a society in furthering its purpose and objects, and forms part of that society’s capital funding along with borrowing and retained earnings.

Unlike shares in a traditional company, WSC is turned into cash by withdrawing the funds, not selling the shares; does not increase in value; and does not give the member a share in the underlying value of their society.  Although a society can pay interest on share capital as compensation to the members for the use of their funds, such interest is not a mechanism to share profits – and co-ops do not carry votes in proportion to the shares.

At the time the toolkit was being developed, there was “a desire amongst retail societies to explore the opportunities for WSC to continue to attract members’ funds […] both as a way of providing societies with access to such capital, and as a way of facilitating increased members’ participation, broadening and strengthening the relationship between members and their society,” wrote Anthony Collins Solicitors.

The toolkit considers two main aspects of law in relation to WSC: the legislation under which co-operative societies are registered the Co-operative and Community Benefit Societies Act 2014 (alongside guidance by the Financial Conduct Authority on their registration function under that legislation) and the law relating to the regulation of financial services contained in the Financial Services and Markets Act 2000 and related secondary legislation.

On the back of the toolkit, and Anthony Collins’ recommendations, Co-operatives UK reviewed its Code of Best Practice on Withdrawable Share Capital, and in doing so, noted that “there are various areas of potential best practice which the Code might cover, if Societies wished it do so, but which would require more extensive consideration and discussion before they could be progressed further”.

This included the monitoring and management of WSC to ensure capital stability and the approach to be taken in decision-making about rates of interest and whether payment should be made. It also suggested that a discussion was needed around the situations in which the board of a society might decide to suspend withdrawals, and the principles to be followed in relation to the repayment of capital where it is restricted, or where a society decides to repay capital that exceeds its requirements.

Like a run on a bank, a run on a co-op is a risk that can occur when many people at once withdraw their WSC – possibly because they believe the organisation may fail in the near future, or members are frustrated with decisions being made by an organisation. In this context, the need to suspend – or limit – WSC has been touched upon recently.

Earlier this year, Channel Islands Co-operative saw a number of members queue to withdraw shares in response to a board proposition which would allow the board to determine whether to pay no dividend or reduce dividend rates at the annual meeting in May. And during the pandemic, some societies (including Chelmsford Star) placed a temporary limit on share withdrawal to ensure the security of the organisation.

But these and other societies also have the opportunity to use member share capital to do great things for the organisation – to use it as the servant, not the master. And it’s not small sums, either. Midcounties’ accounts, for example, show that in January 2023 it held over £82m in share capital, which, says the society’s website, is used to “play an important part in our growth, development and ability to support your communities”.

The WSC toolkit declares a need to promote “a greater understanding of the nature of co-operative capital, and emphasise its distinctiveness from shares in a company” – to mitigate risk caused by general misunderstandings of the relevant legislation.

But there is also a potential opportunity here – to promote a greater understanding to members and encourage their economic participation in a way that is, today, rarely talked about by societies, and even more rarely understood by the members themselves.