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Government promotes Industrial and Provident Societies

Print publication

10/02/2014

Since the current UK Government was formed in 2010, it has been keen to promote Industrial and Provident Societies (IPSs) and mutuals as part of the diversity of the UK economy. In July 2013 it published a consultation on reforming the law governing IPSs and in December it published its responses, which included introducing the Co-operative and Community Benefit Societies Bill into Parliament.

Background to IPSs
IPSs were introduced as a legal form by the Industrial and Provident Societies Act 1965. This created two types of co-operatively owned societies: co-operative societies (businesses owned and run by and for their own members) and community benefit societies (businesses operating for the benefit of their community, e.g. housing associations). The IPS structure, currently regulated by the Financial Conduct Authority (FCA), remains popular in the UK, with more than 7,600 IPSs currently active and a membership of over 15 million. They cover a wide range of businesses and industries, from public service mutuals to wind farms, football clubs to credit unions. The Government wants to keep the unique features of the traditional IPS form so that the sector stays focused on serving its members and can contribute further to the success of the UK economy.

Reforms
The consultation proposed bringing into force a number of provisions in the Co-operative and Community Benefit Societies and Credit Unions Act 2010 (the CBSA), which until now have not been implemented. These are:

  • Section 1 – provides the option to register as ‘Co-operative Societies’ or ‘Community Benefit Societies’ instead of Industrial and Provident Societies – a change requested by the sector as more appropriate and up-to-date
  • Section 3 – making the Company Directors Disqualification Act 1986 applicable to IPSs
  • Section 4 – provides the power to apply certain legal provisions relating to companies (see below for what changes the Treasury intends to make under this section)
  • Section 5 – provides the power to establish a framework for credit unions similar to those applicable to building societies. The Government does not intend to use this power at present but will keep it under review.

Sections 4 and 5 came into force on 1 December 2013 and the other sections will be coming into force shortly.

The consultation also asked for views from the co-operative sector on six proposed primary changes to IPS legislation. It has decided to proceed with four of them. The six were:

  1. a raising of the limit on withdrawable share capital in an IPS – this was set at £20,000 in 1994 and if increased by RPI would only be £31,000. The Government will now raise the limit to £100,000
  2. introducing insolvency rescue procedures for IPSs – arrangements under the Companies Act 2006, company voluntary arrangements and administration procedures under the Insolvency Act 1986 for the benefit of IPSs
  3. the introduction of insolvency procedures for Credit Unions along a similar model to that applied currently to building societies – the Government has decided to wait and see if this is needed over and above the measures set out in 2. above, so it is not proceeding with this at present
  4. IPS officers will be liable to investigation by the FCA in respect of improper or unlawful behaviour in IPSs. This is intended to create a level of equality between the regulation of IPSs and companies, with the rationale that this will increase consumer confidence in the IPS sector
  5. providing greater transparency in the IPS sector by providing for the inspection of the register of IPS members in a similar manner to that currently employed by the Companies Act 2006 – following concerns expressed by key stakeholders, the Government is not implementing this
  6. optional electronic registration for new IPSs. This will be cheaper and faster than the current system to encourage the take up of the IPS structure, and brings the registration system in line with that for companies.

Co-operative and Community Benefit Societies Bill
A further strand to the reforms is the Co-operative and Community Benefit Societies Bill (the Bill), which received its second reading in the House of Lords on 13 January 2014. This is a consolidation bill, aiming to bring together in one Act all the legislation relating to IPSs, in a similar way to how the Charities Act 2011 consolidated charity law. The Bill does not make any substantive changes to the existing law but it does seek to clarify ambiguities and inconsistencies in the overlapping Acts that it will replace.

One interesting point regarding charitable IPSs was made by Lord Hodgson (who was in charge of the Charities Act review) regarding the test for registration as a community benefit society. Clause 2 of the Bill states that a society can only be registered as a community benefit society if it is shown to the FCA’s satisfaction that its business is being, or is intended to be, conducted for the benefit of the community. Lord Hodgson was concerned that this might be a lower test than the public benefit test that an organisation must pass in order to be registered as a charity and that there is “a danger that the unscrupulous will game the system to take advantage of whichever regime is the laxer”. Charitable IPSs are exempt from registration with the Charity Commission and it seems that this exemption will continue (there was talk at one point of abolishing it but there is no mention of this in any of the reform documents).

We will continue to monitor developments.

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