Reforming laws governing co-operatives

For too long, the laws that apply to co-operatives and community benefit societies (often described as ‘mutuals’) in the UK have remained largely unchanged, but at last change is afoot and it is an opportunity that must not be missed. 

Following a short delay, the Law Commission has completed a review of the Co-operative and Community Benefit Societies Act 2014. The commission has published its findings and some proposals in a consultation document, inviting comments by 10 December.

The aim of the review was to assess whether the laws that govern co-operatives and community benefit societies (CBSs), which have remained largely unchanged since Victorian times, are fit for purpose. Can these organisations achieve what they need for the benefit of the communities they serve? Are they getting the support from policymakers that they deserve? The review process has also helped to highlight an area of law that is poorly understood.

Key to understanding the role of co-operatives and CBSs and the benefits they can and do bring to society is an appreciation of their core purpose. Unlike private companies, which are established mainly as a vehicle for delivering profits to shareholders, co-operatives and CBSs serve communities which have been failed by the markets, and whose needs have not been met. The first co-operative shop in the UK was opened in Rochdale in 1844 for the purpose of buying healthy food from wholesale markets and selling it at a fair price to disadvantaged people who would otherwise not have been able to afford it.

The problem is that the current law has failed to move with the times. While some tweaks have been made, fundamental changes are now needed to support co-operatives and CBSs, which are mainly run for social good. For example, a clear legal definition of what it means to be a co-operative or a CBS is required, as this could make it easier for policymakers to introduce tax breaks and other incentives, similar to those that already exist in several European jurisdictions. A clear legal definition could also help the Financial Conduct Authority to introduce more robust governance to protect members of such organisations.

Some of the Law Commission’s proposals are targeted at introducing greater protection for the members of co-operatives and CBSs. In the past, it has been possible for co-operatives to convert into private companies, allowing directors to take money out of the organisation. If the proposed changes confirm the creation of an ‘indivisible reserve’, then this kind of asset-stripping would no longer be possible. The consultation also includes proposals that could improve how co-operatives and CBSs raise funding by issuing share capital. This could be especially helpful to organisations looking to raise finance to enter new markets. For example, setting up a new mutual bank to lend funds to the local community at a fair rate of return has not proved possible under current law, as it would require a large capital injection to get things started.

At a time when major societal problems urgently need to be addressed and public money is in short supply, establishing the right legislative framework for co-operatives and CBSs could deliver an effective and sustainable solution. For example, the care sector urgently needs support, and co-operatives could play an important role in meeting the needs of local communities. In the utilities sector too, there is an opportunity to alleviate pressures caused by the cost-of-living crisis by replacing company structures that are geared to rewarding shareholders and investors. Instead, a co-operative structure could give ownership of water and energy companies to the people that use their services every day.

The decision to press ahead with a consultation on the Law Commission’s proposals is a sign that the government wants to see a change in the law – unsurprising really, as Labour’s manifesto pledged to double the size of the co-operative and mutual sector. The stakes are high for this government, however – act on the Law Commission’s proposals and empower communities to find alternative ways to meet their needs, or do nothing and miss a big opportunity.

David Alcock is partner and head of social business at Anthony Collins