Insert Organisation Name Here Consultation Response

[Insert organisation name here] Consultation Response 1. Guidance on the FCA’s registration function under the Co-operative and Community Benefit Societies Act 2014 (Guidance consultation 15/4) July 2015

General remarks We welcome the decision by the Financial Conduct Authority (FCA) to consult on policy detail rather than just drafted guidance. Furthermore we are greatly encouraged by the enormous improvement in terms of policy and drafting now proposed by the FCA, compared with its October 2014 guidance. The proposals put forward by the FCA in this consultation go a long way to assuaging much of the confusion and concern caused by that guidance. We are aware that since October 2014 critiques from the sector have been numerous, detailed, varied, and frank; and in light of this the progress made in policy terms is praiseworthy. We hope this is representative of the revised guidance as a whole, which we expect in autumn 2015. Outstanding issues not covered in this consultation We would like to remind the FCA of important defects in the October 2014 guidance not covered by this consultation. One is to do with usability of the document and clarity in language and purposes. We recommend a much clearer delineation in the revised version between what is law, regulatory policy, and suggested good practice. A second serious defect not covered in this consultation is the outdated interpretation of what business conducted for community benefit often means in the context of a twenty-first century social economy. We recommend that in the revised draft guidance the FCA removes references to ‘charity’ and ‘philanthropy’ and replaces these with modern conceptions of democratic social enterprise. Thirdly we reassert a challenge to the certainty with which the FCA stated in the October 2014 guidance that societies cannot redeem shares. Whilst company legislation places strict limits on how company shares can be redeemed, there is no such limitation on the statute books for societies, so the only possible barrier to their redeeming shares is the old Trevor vs Whitworth case law. This is not a clear prohibition and FCA should not attempt to impose one through the guidance. Furthermore at the Second Reading of the Mutuals’ Redeemable and Deferred Shares Bill in October 2014, Government spokesperson Lord Newby (Deputy Government Chief Whip in the House of Lords) stated that “these societies already have a means of issuing redeemable shares.” 1

1 www.publications.parliament.uk/pa/ld201415/ldhansrd/text/141024-0002.htm#14102458000644 Finally we reassert our challenge to FCA statements covering transferable shares; namely that every share transfer should be “subject to committee consent”. This was part of an explicit policy of preventing these shares being resold in a secondary market, on the grounds that this is at odds with fundamental principles for co-operative and mutual practice. Whilst we recognise the extreme sensitivity of this area and appreciate the motivation behind the FCA’s policy, we believe that greater flexibility is required. If the majority of share capital in a co-operative was openly traded in a secondary market, then undeniably the mission of the enterprise change from meeting members’ common needs to generating financial returns for shareholders, and if this happened it would indeed breach UK law. However there are examples around the world of co-operatives issuing a variety of limited or non-voting shares to a controlled minority of ‘non-member investors’ or ‘investor members’.2 Many experts argue that if the co-operative model is to work at scale, perhaps through greater employee ownership, or in sectors with larger capital requirements such as public services, attracting external institutional investment will be essential.3 4 5 Inflexible over-regulation by the FCA risks closing off an avenue of opportunity for potential innovation that would stifle co-operative growth.

1 Do you agree with the indicators set out above relating to interest rates, and in particular: what do we need to add, remove, or amend? Overview and background 1.1 Before going on to review the proposed indicators we would like to express our agreement with much of the thinking that underpins them, as set out in paragraphs 2.1 to 2.5 of the consultation document. We hope this is representative of the revised guidance generally. Specifically we are delighted to see a clear assertion that societies should pay interest up to what is necessary to obtain and retain enough capital to run the business, with no attempts to impose simplistic blanket restrictions on rates of return. We also fully agree that societies must be driven by a mutual or community purpose, which we assert can align with but must not be overridden by, pursuit of financial returns for investors. It is also particularly pleasing to see clear acknowledgement up front that it is common for societies to raise capital from members and pay interest on shares issued. 1.2 We suggest it would also be beneficial for the FCA to acknowledge in its revised guidance how paying interest on member capital allows for larger member contributions than would otherwise be the case, and thus helps societies fulfil their mutual or community purpose. 1.3 We disagree with the FCA on one point; the assertion at the end of paragraph 2.3 that a variation in interest rates represents differing “interpretations” of the ‘necessary to obtain and retain’ principle. Rather we assert that most variation

2 http://ica.coop/en/media/news/filene-research-explores-debt-and-equity-instruments-used-finance-co-operatives

3 Co-operative Action (2004) ‘Co-operative Capital’

4 Cliff Mills and Ian Snaith (2008) ‘The funding of industrial and provident societies’

5 Mark Hayes (2013) ‘The capital finance of co-operative and community benefit societies’

Guidance consultation 15/4 3

arises from differences in circumstance and thus necessity; although we acknowledge that at the extremes some interpretations of this golden rule may be deficient or indeed lacking altogether. Where this is the case the FCA has our full support in combating what would be clear and damaging misuse of society legal forms and the co-operative model. Structural characteristics of withdrawable share capital 1.4 When assessing whether a society might be being misused as an investment vehicle we believe the FCA should recognise how the special nature of withdrawable share capital makes this less likely from the outset, though there are of course limits to this. 1.5 In investor owned and profit driven businesses ordinary share capital can be bought and sold with the market determining value. Investors are motivated by profit and are most likely succeed through a capital gain; that is by profiting from selling shares for more than they were bought. This orientates the purpose of the business towards maximising share value. 1.6 Withdrawable share capital is very different. It cannot be bought or sold and only ever retains par value. Members are rewarded with a steady return over the long term rather than short term capital gain from fluctuations in share price. It has been argued that as a form of equity it is akin to capital introduced by business partners.6 There is therefore no speculative pressure on societies that could detract from their primary purpose. 1.7 Furthermore withdrawal is the only form of exit open to shareholders in societies and this will often be tightly constrained for many years. Members therefore commit their cash for the long term, with no quick way to realise their investment. This severely reduces the likelihood that those motivated solely by financial gain would choose to invest in mutual societies. 1.8 The FCA must also take into consideration that the total return on investment possible from withdrawable share capital is always more limited in comparison to other available financial investments. Total return on investment is a time-weighted annual percentage, which includes dividends, interest, returns of capital, and crucially capital appreciation. The rate of annual return is measured against the principal amount of the investment. This is a standard method for comparing the performance of financial investments, including equity shares, bonds, funds, commodities, and many derivatives. Considering that historical annual capital appreciation in listed companies can be in the order of 5 percent 7 it becomes clear how much this adds to total return on investment in ways not possible with withdrawable share capital. As an illustrative example, a profit driven renewable energy company with even

6 Ibid

7 http://business.time.com/2010/02/08/dividends-vs-capital-gains-which-is-better/

Guidance consultation 15/4 below average 2.5 percent annual capital appreciation plus other commercial returns produces a total return on investment far in excess of that generated by a community energy mutual society just paying interest the sectoral average of 5 percent a year.8 1.9 We do of course acknowledge that there it is still possible to attract investors motivated by return alone with withdrawable share capital. Thus a clear regulatory approach is required to detect excessive rates. One member one vote democracy 1.10 We see one member vote democracy as another structural characteristic of investment in societies that reduces the likely appeal for those motivated solely by financial gain. Investment in a society cannot buy the power needed to orientate the business to maximising returns and helps retain collective focus on the mutual or communal purpose. Again, there are of course limits to how impactful this is, but it merits consideration when setting regulatory policy for societies. Proposals 1.11 There are many merits to having a set of indicators with which to assess interest offered and paid by societies. Such an approach will provide greater clarity as to what is expected and how regulatory decisions will be made. Crucially this clarity is provided while retaining essential flexibility for a very diverse range of businesses. The realisation of the society’s objectives is the main motivating factor for membership 1.12 This is the correct starting point. Societies are purpose driven businesses, wherein mutual and community objectives should not be overridden by generating financial returns on capital. For this indicator to be effective FCA registration processes will need to place great emphasis on mutual and community purpose (see our answer to question 2 for more on this where bona fide co-operatives are concerned). 1.13 It is vitally important when using this indicator that the FCA recognises how societies fulfil their purposes through commercial practices as businesses seeking to generate a surplus. This mutual commerciality must be allowed to extend to the raising and use of member share capital. 1.14 This indicator should cover motivation for investment as well, with a clear acknowledgement that members pool financial resources to meet their mutual and communal needs. But crucially this indicator must also accommodate the mixed motivations that are at the heart of mutual and community investment. Traditionally many co-operatives have been founded on a blend of mutual purpose and financial return that aligns the interests of individuals with a

8 Community Shares Unit research suggests community energy schemes target an average interest payment of 5 percent

common good. In recent years this accommodation has been adapted to create the officially recognised concept of social investment. This blend in which individual and common interests align is a massive part of what can make co-operatives and social enterprise so effective, and must be enshrined in these indicators. The method and content of communications inviting members to subscribe capital focus on the benefits of helping the society achieve its purpose 1.15 While there are some structural features of societies that are naturally unattractive to investors solely motivated by financial gain we acknowledge that these are not in themselves enough to prevent every form of misuse. Therefore the method and content of these communications is rightly a key consideration for the FCA. 1.16 We are reassured that this indicator aligns with best practice for community shares issues contained in the Community Shares Unit (CSU) Handbook. The work of the CSU, with invaluable input from the FCA, in creating a good practice toolkit for self-regulation of community share offers should assist the FCA in using this indicator. 1.17 However it is essential that we do not conflate best practice for community shares with best practice for member capital in general. There are many instances where societies will invite members to contribute capital away from a community shares setting, most notably in agricultural co-operatives and consumer societies. While we believe the general principle that the use of capital should be emphasised ahead of returns still applies, we warn against any simple application of community shares best practice in these similar yet different circumstances. The rate of interest paid on shares is set in advance 1.18 We assert the golden rule that interest rates should not exceed what is required to obtain and retain capital, and thus must not be driven upwards by the profitability of the business. Members should get a fair and competitive return, not the maximum business performance allows. Our firm position is that societies must actively and transparently impose limits on interest rates offered and paid. So we understand and agree with the FCA’s intentions in proposing this indicator, which seeks to divorce rates from performance, but it could be improved as currently written. 1.19 It should be made clearer that this indicator is an expression of the ‘necessary obtain and retain’ policy, and specifically aimed at divorcing rates from performance. We are pleased to see another indicator acknowledging that while performance should not positively impact on rates paid, it must be allowed to impact negatively, so that societies are not obliged to pay rates when the business position does not support it.

Guidance consultation 15/4 1.20 As proposed this indicator could easily be taken as a requirement for societies to contract to pay a fixed rate of interest year on year, without any relation to business performance. This could have the negative impact of turning society shares into ‘coupon shares’, or even a form of debt instrument. Surely the intention here is to echo the CSU Handbook, which says societies should set maximum interest rates in advance. Once again, the CSU Handbook contains best practice for community shares that we back fully but this is not automatically applicable across the board. 1.21 Crucially setting a maximum interest rate in advance is one of a number of methods societies can legitimately use to ensure they do not breach the ‘necessary obtain and retain’ principle. Different methods are appropriate for different businesses and circumstances and this indicator requires additional sophistication. We provide two examples below. 1.22 It will be legitimate for some societies to peg their maximum interest rate in relation to an external economic indicator pertinent to its sufficiency to obtain and retain capital over time, such as base rates.9 1.23 Alternatively some societies projecting years without sufficient funds to service interest, such as community energy schemes, could legitimately project variation in maximum rates as projects come on steam, reach capacity, and perhaps decline. We believe it is legitimate to consider total return on investment over a period of many years as part of calculating what is sufficient to obtain and retain capital.10 While projected business performance in this method is a factor it is not the deciding factor in rates projected or paid, and nor certainly is actual performance. The key driver in this method would be a total return on investment projected in advance that does not exceed what is sufficient to obtain and retain capital. Of course the calculation and communication of projected total returns must be done very carefully in order to protect both the business and members invited to invest. 1.24 It has also been proposed that we and the FCA should consider community energy co-operatives to be an exceptional case where, because a patronage dividend cannot be allocated in a traditional way due to regulatory barriers, we should allow interest rates to vary more in line with performance, especially in the earlier years, or for pioneer shareholders who have taken more of the risk. This is of course not without its controversy. But in this very specific case, where strong environmental aspirations can only be achieved through considerable member capital contributions in higher risk stages, and where the achieving the common purpose does not involve a direct trading relationship, and exception is perhaps possible. Note that even with such an exception total returns on investment would still need to be limited and the

9 Mark Hayes (2013) ‘The capital finance of co-operative and community benefit societies’

10 Ibid

method for limitation would need to be transparent. We would be interested in learning the FCA’s views on such an exception. Where a society sets a rate of interest in advance and cannot afford to pay that rate of interest, it pays a lower than indicated rate of interest, or no interest at all 1.25 We agree fully with this indicator. The set rate of interest is the lowest rate sufficient to obtain the necessary funds from members who are committed to furthering the society’s objects 1.26 This is a vitally important overarching indicator for assessing member capital, which has our firm but qualified support. 1.27 Firstly this indicator must accommodate societies that quite legitimately and with good reason calculate the sufficient rate by looking at total return on investment, rather than simply a rate per year. 1.28 Another caveat we must add to this indicator is that mutual investment does not by necessity start from a position of member self-sacrifice below what is fair and competitive, and regulation should not make such a presumption. The value of an indicator based approach is that when well calibrated it will provide a meaningful framework for assessing the sufficiency of interest rates without the regulator applying inappropriate downward pressure. Presumption of self-sacrifice and a preoccupation with low rates risks deterring people from being able to pool capital to meet their needs, because rates will not be fair and competitive compensation for risking their money and seeing it tied up for long periods. 1.29 Member commitment is a key factor among others in determining sufficient rates of return, and will quite legitimately vary within societies over time, and between societies serving different purposes in the economy. For example founders may be more willing or able to sacrifice on returns than a first wave of pioneer investors, and in larger well developed co-operatives degrees of commitment will differ again. So long as the mutual or communal benefit is real for members these differences and the variation in interest rates that arise should be viewed as legitimate. Other key considerations for societies in determining what is sufficient to attract and retain capital are risk, competition for capital, inflation, other rates in the economy, and the costs of alternative capital such as debt finance. There are recognised formulae for calculating cost of capital that take account of these, and societies may well adapt these to their own circumstances. 1.30 We also suggest the FCA keeps in mind a distinction between attracting and retaining capital. For instance more established societies may find that external changes in the economy start to tempt member’s to withdraw their

Guidance consultation 15/4 capital and put it elsewhere. In these circumstances we believe it would be legitimate for a board to raise interest rates in order to retain sufficient capital in the business. 1.31 Societies must be free to develop methodologies best suited to their business needs, objectives and membership. We are pleased the FCA states in paragraph 2.9 of the consultation document that it will not prescribe the method for setting the lowest rate sufficient to obtain and retain capital. In our view such flexibility on this point is absolutely essential. So we are similarly concerned by paragraph 1.9 of Appendix 1: draft guidance to see the FCA planning to put one example ahead of all others in the actual revised guidance. While this is not prescriptive as such we believe it is overly leading and recalls the approach taken in the October 2014 guidance that was so contentious. Furthermore the example chosen has little commercial merit and will be unworkable for most societies. We ask that this example either be removed or presented objectively among other more proven methods. 1.32 Lastly we need to be clear that this is an indicator for member capital only. It is established practice internationally for larger co-operatives to raise a minority of equity capital from non-members, often on the basis of curtailed voting rights to protect member control. Such innovations could become necessary in the UK and the returns offered to these investors will need separate regulatory treatment. Societies can justify a decision to pay interest at a particular rate, and be able to demonstrate the basis for that decision 1.33 We are fully supportive of this indicator. There are complexities in assessing necessary and sufficient rates across societies and even within specific sectors we believe determining a fair and competitive cost of capital will involve complexity, but this is not an excuse for any lack of transparency, nor should it be used as a cover for excessive rates. 1.34 We encourage the FCA to routinely ask these questions of societies making significant use of share offers and member capital, as a means of identifying bad practice. We hope this systematic enquiry comes to replace any blanket approaches to the registration of societies in sectors such as community energy. The rate of interest offered is too high 1.35 This indicator should be changed to read: “the rate of interest offered is in excess of what is required to obtain and retain capital” as this would make it clearer what the FCA means by “too high”. While we agree that this would be a leading indicator, it can only be assessed through use of others already proposed.

The method and content of communications inviting members to subscribe capital is likely to encourage membership from people primarily motivated by a return on investment 1.36 We agree fully, although again warn that this cannot simply mean applying community shares best practice to all societies and settings. The rate of interest paid to members for shares subscribed over the previous year is increased at the end of that year due to better than forecast profitability 1.37 We agree, with the caveat that the FCA accommodates the method set out in paragraph 1.23. Interest is accrued, or a greater rate of interest is paid one year because the society was unable to pay interest (or the rate of interest indicated) the previous year 1.38 We agree, with the caveat that the FCA accommodates the method set out in paragraph 1.23. Additional indicators 1.39 We suggest a further indicator that a bona fide co-operative is meetings its obligations could be its reinvestment and reserves policy. As businesses driven by mutual purpose it is established practice for co-operatives to commit to reinvesting portions of their surplus in meetings the needs and aspirations of their members, either directly or by way of reserves. Where co-operatives include robust reinvestment and reserve policies in their rules this could indicate to the FCA that mutual purpose is paramount. However we stress in the strongest possible terms that part of what makes the co-operative model so effective is the ability to align personal interests with mutual benefit. It is not just legitimate by actually beneficial and desirable for co-operatives to do this, by fairly rewarding capital contributions, and by equitably sharing profits through a dividend. Therefore this indicator should not automatically favour policies that commit to a very high or total reinvestment of surplus or discriminate against profit sharing. We also emphasise that for newly developed co-operatives in fields such as community energy the very high upfront capital requirements mean revenues will often be earmarked for repaying members for many years. 2 Do you agree with our approach to the ICA Statement in our application of the ‘bona fide co-operative society’ statutory test? 2.1 We are delighted and relieved to see the definitions of a co-operative that exclude consumer retail societies and worker co-operatives in the October 2014 guidance have been dropped, to be replaced by a much stronger focus on the actual wording of the ICA Statement. We find much to support in the FCA’s proposals, although we differ on the importance and utility of the

Guidance consultation 15/4 Definition, and how all the Principles should be used in relation to it in a statutory test. We also believe the draft revised guidance in Appendix 1 of the consultation document could be improved to make it clearer just what the statutory test will actually comprise of. 2.2 Overall we think the gap between our position and that of the FCA has closed significantly and a well-supported final agreement is within reach. A statutory definition? 2.3 We note the FCA mentions the lack of any statutory definition of a bona fide co-operative. We have heard from many in and around the sector who believe this a significant deficiency in the legal framework and at least one cause of our recent difficulties. We know there is at least some support among societies for a statutory definition that would provide clarity for the FCA, the sector, policymakers, and other existing and potential stakeholders. 2.4 However we share the concerns of many that a statutory definition is fraught with risk. If too restrictive we could leave the legal form unfit for economic and social innovation. Conversely an overly loose statutory definition would be a waste of legislation and a source of endless legal complications. 2.5 We would be interested to learn the views of the FCA on this issue. Recognition of the ICA Statement 2.6 While we are delighted to see further recognition of the ICA Statement by the FCA we note this was also present in the October 2014 guidance, but this did not prevent significant departures in that document. We need recognition of the ICA Statement to be backed up by clear and appropriate interpretation, leading to a well designed and implemented ‘statutory test’ for bona fide co-operatives. Defining ‘bona fide co-operative society’ 2.7 We believe the draft revised guidance in paragraphs 1.9 to 1.15 of Appendix 1 of the consultation document could be improved by including more detail on what the statutory test will actually comprise of and how it will be implemented. Below we make suggestions in this regard. 2.8 We agree with the FCA’s assertion in paragraph 1.9 that the onus is on an applicant organisation to demonstrate it passes the statutory test, and there is a similar onus is on registered bona fide co-operatives with regard to their ongoing activities. However, in the case of the latter, where the FCA has previously registered an enterprise as a co-operative and subsequently calls this status into question, it has a clear duty to be transparent about any changes in its underlying policy that may be impacting on its decision. We cannot accept a regulatory regime that undermines confidence in the legal foundations of established businesses because of unexpected and unclear changes in policy, real or perceived.

2.9 The draft revised guidance could be improved in our view by making it clearer at the beginning in fundamental terms what a co-operative is. We firmly believe the ICA Definition is extremely useful in this regard, and must be the starting point for defining a co-operative in a regulatory sense in the UK. It describes an autonomous business with a mutual purpose that is democratically owned and controlled; something that is clearly a distinctive model in our economy. So we disagree that the Definition is “too broad”. While it may lack detail, on member capital in particular, we reject the assertion that it misses out anything fundamental to the co-operative model. We are particularly in favour of using the Definition as a practical base for the statutory test because it emphasises mutual purpose. While it is essential that co-operatives live out the Values and Principles, first and foremost they must do something meaningful. We see a lack of focus on mutual purpose as one source of recent contention. 2.10 The Definition should provide the basis for designing and conducting the statutory test, and it breaks down into three parts, one relating to purpose, another to ownership, and a third to control:  Co-operatives meet the common needs or aspirations of their members (purpose)  Co-operatives are jointly owned by all their members (ownership)  Co-operatives are democratically controlled by their members (control) 2.11 We assert that these three parts: purpose, ownership, and control, should form the three parts of the statutory test. Adherence to the Definition cannot be negotiable on any terms. 2.12 We warn against a statutory test that uses the Principles as formal criteria in and of themselves. Firstly, the ICA Statement makes clear that they should not be read as such. Secondly they do not explicitly cover crucial aspects of the co-operative model, namely mutual purpose and ownership. And thirdly, as the FCA has clearly found, if they are used as criteria practical difficulties arise in deciding which ones are most important. We assert that different principles are in fact more important for different co-operatives and this diversity must be respected. Again, it is adherence to the Definition (mutual purpose, democratic ownership and control) that is not negotiable. 2.13 We can see why the FCA would propose a focus on Principles 1 to 4, as these are clearly more core than aspirational. But their core meaning: voluntary and open membership, democracy, pooled capital, and autonomy, are already covered in the Definition, even if their detail is not. 2.14 Crucially we view the Principles as adding essential practical detail to the Definition, especially Principle 3 on member capital and use of surplus, and Principles 5 to 7 on complex and multiple co-operative purposes (see

Guidance consultation 15/4 paragraphs 2.17 and 2.18). So in our view all 7 Principles must be cited as guidelines in the test, for the use of both applicants and the FCA. 2.15 From paragraphs 2.16 below we set out how the Principles should build on the foundation provided by the three parts of the Definition in a practical statutory test. Purpose 2.16 To pass the statutory test the purpose of the enterprise must be to meet some identifiable common needs or aspirations of its members. This will in most but by no means all cases be done through commercial practice that generates a surplus. It is notable that no principle explicitly covers co-operative purpose. 2.17 This part of the test requires in effect a community of interest among members, and as per Principle 1 actual membership of the organisation must be open and voluntary within reason. Establishing that the purpose of an enterprise meets this criterion should be the first part of the test. Flexibility is essential here. The needs and aspirations met by a co-operative can be economic, social (including cultural and psychological) or environmental, and can legitimately be met with or without a direct trading relationship. It is important to recognise that many co-operatives, such as consumer retail societies, have multiple complex purposes, and that equitable profit distribution via the patronage dividend can legitimately be one of these when aligned with others. 2.18 We believe the FCA should take account of principles 5, 6 and 7 in this regard as all relate directly to complex and multiple co-operative purposes. We disagree with the FCA’s claim that it would not be practical to ‘verify and validate’ enterprises against these principles through rules, reports and so on. Co-operatives can and do include objects aimed at the education and development of members, development of the co-operative economy, corporate responsibility, and social mission. And any co-operative could detail in its rules and reports how surplus is invested for these purposes. The question is not so much whether these principles can be used as criteria, but whether they should be. We do not believe it is acceptable for the FCA to simply push the last four principles into the background. But by adopting our suggestion that the criteria for the statutory test are based in the Definition, with all the Principles as clear guidelines, this problem can be overcome. 2.19 Any lawful purpose that meets common needs or aspirations should be admissible, so long as it is not compromised by the financial motivations of investors. As per Principle 3 members may pool capital to meet their common needs or aspirations, and should be fairly compensated for doing so. Generating of financial returns on capital must never be the primary purpose of the business, so share interest must be limited to what is necessary to attract and retain capital, and must never be a form or profit distribution. Yet

part of what makes the co-operative model so effective is the ability to align personal interests with mutual benefit. It is not only legitimate, but actually beneficial and desirable for co-operatives to do this, by fairly rewarding capital contributions, and by equitably sharing profits through a dividend. The intersection between this part of the statutory test and the indicators for interest rates is immensely important. 2.20 We propose that society rules, reports, and FCA forms place greater emphasis on articulating mutual purposes. Ownership 2.21 The second part of the statutory test should cover ownership of the enterprise, which must be shared equally between all members. This could be something akin to a partnership or full common ownership exercised en mass by the membership. The FCA must establish that ownership of the enterprise meets this criterion. It is notable that no principle explicitly deals with ownership, even though this is a fundamental part of the co-operative model, but proper regard to Principles 4, 5 and 6 will help to retain member ownership and control. Control 2.22 The third part of the statutory test should cover control of the enterprise. With reference to Principles 2 and 3 the FCA needs to establish whether all members are able to exercise democratic control over their enterprise and its capital. Proper regard for Principle 4 will help to retain member control. Again flexibility is essential here, which we find is provided by Principle 2. Differences in purpose, makeup of membership, size, and business needs create diversity in co-operative governance. The FCA must not be overly prescriptive. 2.23 We believe the FCA should also reference Principle 5 in this part of the statutory test, as education, training and information for members are the lifeblood of co-operative democracy. Meanwhile Principle 6 is very relevant here as co-operation between co-operatives can build mutual resilience that maintains viable autonomy. 2.24 Rules, governing documents and reporting will provide the basis for assessment here. Values 2.25 The ICA Statement gives no instruction about how to use the Values, but as they are presented as separate from the Definition we assert that they should not be used as criteria in the statutory test. Instead the Values make claims about the motivations behind co-operatives which should assist the FCA’s understanding. The Values should also be a guide to members in running their co-operatives.

Guidance consultation 15/4 2.26 We believe the FCA could use the Values as reference points when requesting further details evidence or justifications from prospective and registered co-operatives. We also believe the FCA should look favourably on societies that can legitimately explain their actions with reference to the Values. As an example the Values of self-help and self-responsibility help explain the motivations of people taking direct action to decarbonise the energy system in community energy schemes. 3 Do you agree with our approach to society names, in particular in our aim to align the naming regimes for companies and societies where possible? 3.1 We agree that the FCA’s society names policy should align with the companies naming regime. In general protections and assurances related to companies should also relate to societies. However we are keen to avoid unnecessary and obstructive regulation for societies wherever possible and so any names regime must be designed and implemented with due proportionality. 3.2 Despite the fact that the Act provides for the FCA to register bona fide co- operative societies we remain adamant that co-operative identity in the UK is not predicated on legal form. Instead it depends on whether an enterprise meets the internationally recognised definition of a co-operative set out by the ICA and translated by Co-operatives UK. We recognise and represent co-operatives incorporated as community benefit societies, community interest companies, companies and limited liability partnerships, as well as those that remain unincorporated. Just as the FCA requires certain purposes of business, rules, and governance arrangements in order to register a bona fide co-operative, these same components can overlay any other legal form. Community co-operatives 3.3 In UK law and regulation a false dichotomy has developed between provision of mutual benefit and communal benefit, when in reality the two often go hand in hand. In is entirely possible for a co-operative to provide a communal benefit or deliver a social purpose through meeting its members’ needs. Sdsd practice there are many community benefit societies that meet the ICA definition as community co-operatives, and would pass both the statutory test proposed by the FCA in its consultation and the amended test we propose in answering question 2. Cleary not all community benefit societies pass the co-operative test, just as not all companies do. But when members of a community are also members of a community benefit society operating under a community co-operative governance structure, it is possible that in serving the interests of the former the interests of the latter are served as well. Such mutuality and reciprocity in communities builds social capital and often makes successful delivery of community benefit more likely.

3.4 We are duty bound to recognise and champion the right of these societies to identify with the co-operative movement. Misleading the public 3.5 We note that one way a society name could be deemed “undesirable” is of it “gives so misleading an indication of the society’s activities it is likely to cause harm to the public.” We are wholly supportive of this. However we would object strongly if this were used by the FCA to prevent a community benefit society operating as a community co-operative from identifying as such. 3.6 From the perspective of members and the public the distinction between the two society legal forms will in these cases be meaningless. Indeed it could harm public understanding more if these societies were prevented from communicating their co-operative character. Where these nuances exist a flexible proportional names policy is required. Inappropriate indication of legal form 3.7 We note that in the Company, Limited Liability Partnership and Business (Names and Trading Disclosures) Regulations 2015, use of the exact legal term ‘co-operative society’ is controlled. This should be carried over into FCA policy as clearly it would be inappropriate for a community benefit society to say it was a bona fide co-operative society. However, we do not believe that a community benefit society using ‘co-operative’, or ‘co-op’ in their trading name would be indicating a legal form, and certainly not in a way that might mislead the public. 4 Do any words need adding or removing from the list at Appendix 1? 4.1 We believe the following terms should be added:  co-operative society (with and without hyphens)  co-op (with and without hyphens)  community benefit society  community benefit  community shares  charity

Guidance consultation 15/4