New mutuals’ bill disincentivises demutualisation but does not prevent it

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The private member’s bill on co-operatives, mutuals and friendly societies will take away the incentive for certain members of mutuals to seek demutualisation but does not prevent a mutual from seeking the agreement of its members to demutualise or transfer to another business if it feels that will be in members’ best interest.

Martin Shaw, chief executive of the Association of Financial Mutuals, said the bill, if passed, will put “carpetbaggers” off seeking demutualisation.

Introduced by the Labour MP for Preston Sir Mark Hendrick, the bill passed its second reading on 28 October.

Last week, the Treasury expressed support for the bill, which it said will provide mutuals, co-operatives and friendly societies with safeguards against demutualisation if they choose to adopt a so-called “asset lock”. 

This option allows firms to hold some of their surplus capital as non-distributable to members, meaning assets would be preserved and used only for purposes like reinvesting in the mutual. 

The Treasury said by allowing mutuals to adopt these restrictions, the bill will make asset locks harder to unpick: “The bill is therefore a valuable opportunity to support mutuals who wish to ensure that their underlying assets… are protected and the mutual model preserved into the future.”

It added: “It will ensure mutual capital is maintained for the purpose it is intended; to provide goods and services to those who need them now and for future generations.”

Only one component remaining

Shaw explained the original package of the bill had four purposes, but the government focussed only on the asset lock in the second reading because this mechanism was considered a form of defence against demutualisation. 

The four purposes of the original bill were:

• amending the Friendly Societies Act 1992;

• making provision about the taxation of mutual insurers that issue deferred shares;

• addressing other issues in the share capital issued by co-operatives; and

• permitting the capital surplus of mutuals to be non-distributable.

“The actual bill that went forward on 28 October was slimmed down,” Shaw said.

Although the other components have been removed from the bill, the government has promised it will instruct the Law Commission to review the legislation affecting the sector.

How is the bill different from the Mutuals' Deferred Shares Act?

Shaw told mallowstreet the latest version of the bill is designed to enable a mutual or cooperative to put in place an arrangement whereby if members vote in favour of demutualisation, they would not profit from it. 

“That therefore means that our members would have the knowledge that carpetbaggers wouldn't intervene in a successful mutual and force it to take a route that wasn't in the best interests of the members and the long-term future of the business,” he argued.

Some elements of the bill were created in response to UK insurer LV’s intention to demutualise in December 2020 with a sale of £530m of its business to US private equity firm Bain, he said.

The deal did not go through at the end, but the controversial proposal prompted MPs to investigate. In April 2021, a report by the All-Party Parliamentary Group for Mutuals found that the not yet fully enacted Mutuals’ Deferred Shares Act 2015 – designed to allow mutual insurers to raise equity capital while maintaining the mutual structure – “would have been a useful option for LV to consider as an alternative way of funding its business”.

The legislation has not been fully enacted because HMRC believes it would change the tax status of mutuals, and no solution has been found to solve the problem. 

The new bill is different from the MDS Act, Shaw explained, because the Act is about creating new capital, while the latest bill is about securing certainty over existing capital: “Both are very important for mutuals but obviously they behave in different ways.”

Shaw argued a call for demutualisation usually comes from a small group of members. The expected changes of the bill would mean that there would be a lock on the assets in the business, he added. 

“In other words, the incentive for carpetbagging members to seek demutualisation will be taken away because they wouldn't benefit from it,” he said

“Of course, that doesn't prevent a mutual from seeking the agreement of its members to demutualise or to transfer to another business if it feels that that will be in the best interest of the members. But it stops a vote based purely on the narrow interests of the current policyholders.”

Would the bill have prevented LV members trying to demutualise?

Shaw said if “the full set” of proposals of the bill had been in place, it would have “definitely given the LV board a viable alternative” to stay afloat. 

“Certainly, the arrangements that the bill is designed to take forward, had they been available three or four years ago, would have provided a better and independent future for LV without recourse to a sale to private equity,” Shaw said.

The bill, in its current form, is expected to move forward next year. Shaw said the mutuals’ association will continue to discuss the missing elements of the bill with the Treasury “with a view to those moving forward over the next year or so”. 

He believes the changes “very earnestly will benefit our sector and make us more competitive”. 

LV said that as a mutual, it is supportive of new initiatives that will help the sector to thrive and grow, including private members bill.

“It is essential that mutuals are supported to flourish as it increases consumer choice and the ability for their finances to be placed with an organisation that puts its members’ interests first,” said a spokesperson for LV.

“Mutuals are a vital part of the financial ecosystem; diverse business models give customers greater flexibility, choice and financial resilience.”

Why did LV want to demutualise?

The insurer decided to drop its mutual status with a sale its business to Bain Capital for £530m, arguing it was the only way to survive. Following a vote in December 2021, members rejected the deal. A majority (69%) of members voted to approve the sale, but the required threshold was 75%. Merger talks with Royal London soon followed, but in February this year LV said the discussion would no longer go ahead, citing “different mutual models”.

LV has had three different chief executives in the past three years. Richard Rowney stepped down at the end of 2019 after the sale of the firm’s general insurance business to Allianz. In January 2020, Mark Hartigan came along to lead LV on an interim basis just as it moved away from the friendly society status to become a mutual insurer, focussing on life insurance, pensions and investments. 

Hartigan left LV in September this year following the insurer’s failed attempt to demutualise and was succeeded by David Hynam. LV said Hynam’s appointment marks the insurer’s future as part of a “resurgent mutual sector”.

What else can be done to help the mutual sector thrive?

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