Regulation  

Bill proposes capital-raising powers for mutuals

Bill proposes capital-raising powers for mutuals

Financial mutuals could gain the ability to raise capital without surrendering their mutual status, under a bill backed by the government.

The Mutuals Deferred Shares Bill would allow friendly societies and mutual insurers to issue instruments known as deferred shares in order to raise capital, but provisions have been made to stop them surrendering too much control in doing so.

As part of the bill, which began in the House of Lords, deferred shares could be transferred but not withdrawn, and a repayment of principal would only be made if the institution issuing them consented to this or was wound up.

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The shares would also have restricted voting rights, allowing only one vote for each holder.

An eight-page research paper about the bill, dated 29 December 2014, said: “By definition mutuals are owned by their members.

“They do not have an option to issue free-standing shares on the open stock market.

“Their capital is essentially their deposit base. But, such a base is to a greater or lesser degree non-permanent – depositors can withdraw their deposits.”

Conservative peer Lord Naseby, who introduced the bill in the House of Lords in October 2014, has argued that the measures are needed so mutuals can grow and develop new services, benefit from economies of scale and build up capital buffers in case of a financial crisis.

He said: “All mutuals need to be able to play a full part in our economy with diverse corporate ownership.

“Friendly societies and mutual insurers do not have the ability to raise capital that some co-operatives and building societies do, or indeed public limited companies.”

The publication of the bill met with approval from Martin Shaw, chief executive of industry body the Association of Financial Mutuals, who said: “Being able to raise new forms of capital will help mutuals to deliver their business strategy more effectively, to adapt better to new market conditions and to grow through acquisition.”

Background

The AFM also produced a Manifesto for Financial Mutuals in November 2014. In this, the AFM called for a co-ordinated approach to promoting mutuals and a rational approach to capital from regulators.

Adviser view

Alan Solomons, director of London-based Alpha Investments and Financial Planning, said: “Anything that helps mutuals to compete with the main banks is a good thing. Mutuals definitely have their place.”