The planned sale and demutualisation of Liverpool Victoria (LV=) was back on the agenda in Parliament yesterday in a debate raised by Labour/Co-op MP Gareth Thomas.
Mr Thomas – chair of the All Party Parliamentary Group on Mutuals – said the plan, which involves the sale of the mutual to US private equity firm Bain Capital – is the first proposed demutualisation of a major financial services business since the financial crash.
The debate comes amid concern in the co-op movement over demutualisation, with two leading players in Canada – Mountain Equipment Co-op and Economical Insurance – recently taking that route. At the recent UKSCS Conference, Mutuo’s Peter Hunt warned of the demutualisation threat and highlighted the legislative flaws that allows them to happen.
He warned: “The tidal wave of private equity money apparently available for purchases of British firms prompts the inevitable question of whether this proposed demutualisation is a one-off or whether it is the start of another wave of demutualisation.”
Related: Lessons to learn from the demutualisation of Economical Mutual Insurance
The APPG conducted an inquiry into the proposed demutualisation earlier this year, interviewing LV= CEO Mark Hartigan, Matt Popoli of Bain Capital, regulators, the Association of Financial Mutuals, and representatives of other mutuals. It also received submissions from individual consumer-owners of LV=. It has written subsequently to the Prudential Regulation Authority, the Financial Conduct Authority, and the Pensions Regulator.
“We concluded that it was very difficult for an individual member of LV= to be able to assess whether the proposed demutualisation was in their interests, given the scarcity of information with which they had been provided,” said Mr Thomas. “We agreed that, on the basis of the evidence available to us, the leadership of LV= had not been open and transparent with members about its intentions for their business. Indeed, we felt that there had been a notable disregard for the interests of members and a cavalier attitude towards the member governance of the business.”
The APPG is also concerned that the plans would “damage the diversity of financial services providers in the UK, and that there had been insufficient policy attention on mutuals in recent times, particularly on the need to be able to raise capital”, he added. “Regulators needed to have a fundamentally different approach to the threat of demutualisation. Indeed, we were staggered that no lessons had been learned from the pre-crash wave of building society demutualisations.”
Mr Thomas said LV= chair Alan Cook has “questions to answer”, and he has formally invited him to Parliament to address these issues.
“There has never been a clear, easy-to-understand explanation as to why demutualisation is needed. The business is well capitalised – indeed, it recently sold its general insurance business for over £1bn – and it has raised significant sums on the capital markets,” he said. “So why, really, is this plan being pushed?
“Indeed, there are persistent rumours that a major mutual offered more money than Bain Capital offered. The consumer-owners of Liverpool Victoria have a right to know whether that is true and why, if so, it was turned down.”
Mr Thomas added that the benefits of the sale to LV= members were unclear. “Previous demutualisations have always been driven by the chair, chief executive and board, who usually benefit from significantly enhanced remuneration packages,” he said. “It is time for the board to be honest. For example, by how much more will the chairman and chief executive benefit if this deal goes ahead?
“The way in which Liverpool Victoria’s chairman and board have gone about the process of demutualising raises the question as to whether – I say this gently – they knowingly misled the regulator and their customer-owners about their plans.”
Mr Thomas said that when, in May 2019, the mutual’s board persuaded members to approve its conversion from a friendly society to a company limited by guarantee, chair Alan Cook, “explicitly assured members that this would mean no change to the mutual status”.
“The real significance of that change in legal governance only emerged much later. In LV=’s rulebook, to demutualise, it needs a 50% turnout of the membership in any such vote and 75% of those voting to vote in favour. In short, practically, it is impossible – deliberately so. It was a rule put there to protect future consumer-owners of LV= against the greed of carpetbaggers and directors.”
But the rules governing companies allow boards to approach our courts to ask for a scheme of arrangement for permission to ignore a particular rule in their constitution.
“Assuming there is even a small majority voting in favour of demutualisation, this is what LV=’s leadership are now determined to do. Revealingly, in February this year, in a webinar for LV= customers, Mr Cook noted that his plan to demutualise and sell to Bain Capital would not have been possible if they had not converted to a company limited by guarantee.”
Labour/Co-op MP Rachel Maskell said Benenden Health, a significant mutual in her York Central constituency, “has serious concerns about the ramifications of this demutualisation for the whole mutual sector and its reputation” asked how regulation could be tightened to avoid a repeat of the situation.
Mr Thomas said he shared these concerns, adding: “The current vice-chair of Yorkshire Building Society sits on the board of Liverpool Victoria and appears to have been actively involved in the demutualisation plans, prompting a rather obvious question about the future of Yorkshire Building Society.”
Co-op News contacted YBS for comment; a spokesperson said: “We do not comment on the activities of other businesses. We are very happy with Alison’s contribution to our board and the skills and expertise she brings to our senior leadership team. We are also extremely proud of our mutual business model and have no plans to change this.”
Mr Thomas also criticised the FCA for refusing to consider together the decisions to converst to company limited by guarantee and to pursue demutualisation.
“The failure to consider interlinked business decisions in a holistic way was a fundamental failing identified by Dame Elizabeth Gloster in her devastating report on the London Capital & Finance debacle,” he said. “This appears to be a clear repeat of that mistake, albeit with a very different business.”
He added: “There are other concerns about the performance of the regulators, the PRA and the FCA. Together, they have admitted that they have had nearly 60 meetings to discuss the demutualisation with the board of LV=, but not one with LV=’s consumers and owners.”
And he warned: “When we saw the last wave of building society demutualisations, there were large numbers of job losses. I gently warn those who work for Liverpool Victoria to be wary of any assurances they have been given about their jobs if the sale to Bain and the demutualisation go ahead.”
Mr Thomas said the financial crash of 2008 had proven the need for corporate diversity and the importance of financial mutuals in maintaining competition and the interests of consumers.
“I hope that the demutualisation of Liverpool Victoria will be a further wake-up call to look more seriously at the needs of financial mutuals and specifically their ability to raise capital, and to put into law disincentives to demutualise.”
“What is being proposed in the demutualisation of LV= is the looting of nearly two centuries of legacy assets,” he said. “That is money built up from the working capital of the business over years of transactions, starting with small contributions from the working people who were the original members of the Liverpool Victoria Burial Society, who set the society up to avoid the Victorian scandal of a pauper’s funeral.
“Over time, those small contributions became a substantial sum, and they were augmented by the funds transferred into the friendly society from a series of mergers with other mutuals. In good faith, those other mutuals brought their assets to share with a broader membership for their common purpose.
“Today, we have the spectacle of a demutualisation that looks to be driven by the simple desire to appropriate this money.”
From the government bench, economic secretary John Glen said: “I have seen the clear benefits of mutuals both for the economy and for society as a whole … which is why, over the years, we have shown ourselves to be a supporter of the mutuals sector.”
He said the Treasury had held a mutuals workshop two years ago, looking at the challenges facing the sector, and “as a result, my officials have been working hard to raise awareness of the mutuals model across government to ensure that other departments are equally focused on supporting it”.
The government is committed to amending the Credit Unions Act 1979 to allow credit unions to offer a wide range of products and services, he added.
Mr Glen said the LV= issue was a priority and he remains “in close communication with regulators and the firm itself,” but warned: “I cannot intervene directly in the sale or the demutualisation of a firm. The sale’s approval is a matter for the financial services regulators and the courts, both of which are independent of government.”
He added: “I have been reassured that the regulators are undertaking rigorous processes, as evidenced by the number of meetings that they have had, to assess the viability of the transaction and the suitability of Bain to manage an insurance business.
“Ultimately any future sales, irrespective of whether the firm is a mutual, will and should be considered on a case-by-case basis, in line with the regulators’ and courts’ duties and requirements.”
Mr Thomas came back with two further questions: he called on Mr Glen to ask the FCA to explain its decision not to consider together the decision by LV= to convert to a company limited by guarantee and the subsequent proposal to demutualise.
And he asked Mr Glen to request publication of the details of the two independent experts appointed by the board of LV= so that customer-owners can contact them.
Mr Glen said he was happy to take this forward. “I suspect there may be legal impediments to the publishing of some of that information, but I will certainly ask the questions and seek to relay to the hon. gentleman the fullest answer that I am able to.”
LV= have been contacted for comment.
