A ten-minute rule bill to make provisions for the creation of mutual guarantee societies has passed the first reading in Parliament. The law would enable small and medium enterprises (SMEs) to form mutual guarantee societies to secure better access to finance. The mutual guarantee society would provide a guarantee on behalf of the SME, serving as a bridge between the SMEs and financial institutions.
Introduced by Labour and Co-operative MP, Christina Rees, the bill provides a definition of a mutual guarantee society and adds mutual guarantees to the list of regulated activities as set out in the Financial Services and Markets Act 2000. The UK’s current legislative framework does not recognise the mutual guarantee society model.
“I believe that correcting the legislative anomaly of the UK not benefitting from mutual guarantee societies is not just another step towards expanding co-operation, but also would importantly ensure that we increase the level of SME bank lending,” said Ms Rees.
“Put simply, my bill seeks to harness the positive power of co-operation in order to increase SME lending in this country.”
She explained that among European states, the UK was “almost unique” in not making use of mutual guarantee societies. In most European countries mutual guarantee societies tend to have a co-operative or mutual statute, she said.
“This means that the mutual guarantee societies’ capital is provided directly by the SMEs that apply for a loan guarantee in the form of co-operative or mutual shares. Each member has an equal voting right and participates in electing the general assembly and board of directors.
“By working together, SMEs can then negotiate a better deal from banks, while for the banks the underpinning of the mutual guarantee provides partial security on otherwise unsecured enterprise lending.
“The risk is lower, so the price of money is lower. The deal flow is greater, and underpinned by peer review from SME members, so access to capital is easier.”
Ed Mayo, secretary general of Co-operatives UK, welcomed the bill. “We are delighted to see Christina Rees MP propose a Private Members Bill on mutual guarantee societies in the House of Commons today. It represents a further step in our call for regulatory change that will open up a new route for small enterprises to access finance, following its recommendation in our report on self-employment last year and subsequent correspondence with the Chancellor.
“Access to credit continues to be a barrier for many smaller businesses, including co-ops. They find themselves in a weak position to negotiate better prices and terms of credit, while banks and other lenders are sometimes reluctant to lend on useful terms because of perceived risks. Mutual guarantee societies allow businesses to come together through a co-op and access finance, providing security for one another and a guarantee for the lender.”
Mr Mayo explained how across Europe around 8% of small businesses used a mutual guarantee society to access finance, with a portfolio of €80bn.
“The UK’s legislative framework, however, does not recognise the model. Our research and ongoing work with the Treasury has established that mutual guarantee societies would, under current arrangements, face onerous capital requirements, meaning that we do not see businesses in this country benefiting from them,” he added.
“As self-employment continues to grow, the need for micro enterprises to access credit will likely increase. Meanwhile we need to realise the potential of many small firms across the UK to thrive and create a more inclusive economy. So it’s welcome that the Co-operative Party is reiterating the need for this reform today.”
