One hundred and seventy years is a long time to wait for the law to change. That’s how long it’s been, give or take a few years, since the law governing co-operative societies was last updated. To put that into context, Queen Victoria signed off the legislation in the mid-1800s which gave the sector an institutional framework for the first time.
Unlike companies, which were treated to a legislative overhaul in 1906, 1960, 1985 and 2006, there hasn’t been a full scale reform of co-operative law in the UK since the very early days of the movement. We’ve had the odd act of Parliament here and there, but these were just tinkering around the edges. That is, until now.
The Law Commission has spent the last 12 months looking at the shortcomings in existing co-operative law, with an intention to open a consultation on potential changes in summer 2024. Responses to this consultation will feed into the Law Commission’s recommendations to Parliament, with a new statute hopefully being the end result. Co-operative law’s time has come.
There are multiple deficiencies in the existing legislation which a new act of Parliament could iron out. Fundamentally, a proper overhaul of co-operative law is needed, to give co-ops equal status to companies. We don’t want co-operatives to be the poor relation in the corporate family any longer: instead, we want co-operatives to be a genuine alternative to those looking for a new legal structure. So what changes are needed to help make this happen?
Firstly, co-operative societies should be moved out of HM Treasury and into the Department for Business and Trade. The Mutuals Team at the FCA do an excellent job with limited resources, but it’s always felt like an anomaly that responsibility for societies should sit within a small department of the financial services regulator. It makes no sense at all. By moving societies under the jurisdiction of Companies House, it would send a message to the rest of the world that societies are businesses too: they are not some obscure corporate form, to be relegated to a dusty basement.
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Secondly, information about co-ops should be more transparent. Information about companies is freely available to anyone who cares to look them up on the Companies House register. On contrast, the society register doesn’t list society directors, and the only way to find out the information is to dig through annual returns, with no guarantee that it is still valid. Improving the quality of public society registers would help reassure third parties about who they are dealing with, especially in a climate where corporate transparency is increasingly important.
A fundamental characteristic of a co-operative is democratic control, on a one member one vote basis. Under company law, shareholders and members have a statutory power to remove a director, regardless of what a company’s articles of association say. It provides a useful fallback position to ensure that the board remains accountable to its members. This is the basis of our third ask: a statutory power for co-op members to remove members of its board.
Fourthly, the law governing co-operative society share capital is woefully thin. Much of the detail is left to FCA guidance and interpretation, which in turn dictates what society rules may contain. Looking at company law, co-operatives could borrow ideas on share capital redeemable at the behest of a society, and fill in the legislative gaps governing withdrawable and transferable shares.
Finally, and perhaps most controversially, the law needs to give more detail on the legal definition of a co-operative society. The definition in existing co-operative law is light-touch to say the least: they must carry on an industry, business or trade, they must have at least three members (two if they are both societies), they must not carry on business solely to provide a financial return to members and they must be able to demonstrate, to the satisfaction of the FCA, that they are a ‘bona fide co-operative society’. It is this final bit which is the most difficult, as the law does not go on to say what a ‘bona fide co-operative society’ is. The obvious place to look for a definition is the International Co-operative Alliance’s Statement on the Co-operative Identity, but there is no legal basis for this in the UK. The current members of the FCA Mutuals Team may look to the ICA’s Statement, but there is no guarantee that future incumbents would take this into account. Only by enshrining a definition of a co-operative society in law can we advance the unique characteristics of this democratic business form.
There are many other things that this legislative review needs to sort out. However, we can’t just fiddle with little bits here and there. This is a once-in-a-generation opportunity to update co-operative law, making it fit for purpose and future-proof. Societies are not companies, but deserve to be treated as their equal, and we need a wholescale review of the law to make this happen.
Laura Moss is a solicitor and partner at Wrigleys Solicitors LLP, specialising in co-operative law
