Changes for Co-ops and Bencoms from April 1st

Among co-ops, the Financial Services Act 2012 will have the biggest impact on credit unions. Most of their regulation moves to the Prudential Regulation Authority on 1st April 2013 - see my last post.

However, other industrial and provident societies may see some changes on or after 1st April 2013. That may happen for two reasons:

• the move of the registration role to the Financial Conduct Authority (FCA) on 1st April 2013 and
• the implementation (whenever that happens) of section 1 of the Co-operative and Community Benefit Societies and Credit Unions Act 2010.

Clearer Regulatory Role for the FCA and nature of Its Guidance

In general, the draft Mutual Societies Order simply transfers the functions of registering societies under the Industrial and Provident Societies Act 1965 to the FCA with a possible role for the PRA where necessary -see Schedules 2 to 4 of the Draft Order. However, Schedule 1 of the Draft Order makes two interesting changes.

Paragraph 4(1) of the Schedule provides:

"The FCA must maintain arrangements designed to enable it to determine whether persons are complying with requirements imposed on them by or under the mutuals legislation"

That imposes a legal duty on the FCA to have systems in place to police whether or not people (and societies) are complying with  requirements imposed on them by or under the "mutuals legislation". That expression includes the Industrial and Provident Societies Acts - see   para 1 of Schedule 1 of the Draft Order and section 50(2) of the Financial Services Act 2012 (which was the old clause 47(2) when the Draft order was written).

One of the requirements imposed on every society "by or under" that legislation is that, while they are registered, they should be either a bona fide co-operative or a community benefit society.

So, if the Mutuals Order is enacted as drafted, there will be an explicit legal duty for the FCA to "maintain arrangements" to make sure that is the case. That requires systems to ensure that on registration and while registered societies comply with those requirements so that, if they don't, their registration can be cancelled under the mutuals legislation.

Resources will have to be found by the FCA to operate that system and there will no longer be any ambiguity about their role. They are a registrar of co-operatives and bencoms and that involves more  scrutiny than is needed to register a non-CIC company and keep it on the register.

So how will the FCA decide who meets those requirements? They already publish some guidance together with the application form for registration - see pages 8-9 here. They have already taken legal advice and consulted on the advice and its suggested guidance and work continues on that.

While the content of future Guidance will be subject to further work and more consultation, the Draft Order makes it clear beyond doubt that FCA Guidance about mutuals is Guidance under the amended Financial Services and Markets Act 2000 and not just information provided under the mutuals legislation -see paragraph 2(2)(f) of the Draft Order and section 139A of FSMA 2000 to substituted in the 2000 Act by section 24(1) of the Financial Services Act 2012.

This does not impose the full panoply of formal consultation applicable to Guidance given to regulated persons in the financial services sector. But it does give the Guidance a more formal status than the present brief note to an application form. Interestingly, it also places beyond doubt the power of the FCA to pay other persons or organisations to give the guidance on its behalf - see new section 139A(2) of the amended FSMA 2000.

This means that the role of the FCA as the UK body making sure the society structure is only used by bona fide co-operatives or bencoms will have a firmer legal footing from 1st April 2013. It is  legally required carry out that function effectively.

Implementation of ss 1 and 2 of the 2010 Act

It is not clear when this will happen. It ought to happen by 1st April 2013. When it does, two important changes will be put in place.

One is that societies will formally, legally and for all purposes be known as co-operative or community benefit societies and not industrial and provident societies. Section 2 of the Act will achieve that.

The other is that any society which is registered will be registered formally and officially as EITHER a co-operative or a bencom.

Up to now, as long as a society met the criteria for one of these categories, it would be registered and there was room for some uncertainty or ambiguity about which category it was in at the time. Section 1 of the 2010 Act will amend industrial and provident society legislation with effect from the time of the amendment to make the basis of registration in one category or the other clear.

This, like the more formal legal status of Guidance on the criteria for these categories, makes clarity about the nature and role of the organisation vital.

Both of these developments bolster the role of the FCA as registrar and assist in protecting the "brand". The registration of phoney co-operatives or bencoms should be harder. Continued compliance with the registration conditions to avoid cancellation of registration is just as important.

Finally, when will this happen? In March this year, the Law Commission plans to provide a "draft Co-operative and Public (sic) Benefit Societies Bill to HMT" - see page 11 of this business plan. Will the 2010 Bill's implementation have to wait until parliament passes that new consolidating Bill?

Surely, it makes much more sense for sections 1 and 2 of the 2010 Act to be effective  on 1st April 2013 to coincide with the implementation of the Financial Services Act 2012 and a Mutual Societies Order made under it?

“Twin Peaks”, Regulatory Reform, and Credit Unions

On  19th December 2012  The Financial Services Act 2012 received the Royal Assent and became Law. Sections 50 to 57 deal with the transfer from the FSA to the new Financial Conduct Authority (FCA) of the registration function for industrial and provident societies. The FCA will come into existence on 1st April 2013 and since 2nd April 2012 the FSA has operated on the "Twin Peaks" basis of separating the functions currently within the FSA which move to the FCA from those moving to the Prudential Regulation Authority (PRA) in preparation for the "legal cut off" when the two new regulators exist.

For societies other than credit unions, the move is simply to the FCA and remains a matter of registration rather than regulation as  financial services firms. The FCA will carry out the function that was in the hands of the Registrar of Friendly Societies from the Industrial and Provident Societies Act 1852 until it was transferred to the FSA under the Financial Services and Markets Act 2000 (FSMA) in 2001.

Credit Unions face significant change. They will be registered as industrial and provident societies by the FCA which will also supervise them as financial services organisations for consumer protection purposes. However, the PRA will deal with issues about the "safety and soundness" of the organisation. Under the FSMA system, one body (the FSA) and one Credit Union Supervision Team within that body dealt with registration, prudential supervision and consumer protection for credit unions.

A special credit union newsletter from the FSA outlined these plans in September 2012. During 2012 the Credit Union Supervision Team was split into two teams the Prudential Business Unit and the Conduct Business Unit as part of the FSA's "internal twin peaks" preparation for the split between FCA and PRA in April 2013.  From April this year, most credit union regulation will be by the PRA, concerning capital, liquidity, loans arrears, large exposures, investments, borrowing, etc. The PRA will also be concerned with governance issues and the functioning and competence of boards in terms of prudential risks. This is reflected in CREDS which will continue to apply, presumably with some modifications. There is a hint that expectations of boards will be higher under the new system.

It will be interesting to see how well this threefold division of functions (registration, prudential supervision and consumer protection) for these modest sized financial services organisations works. Hopefully, there will be close co-ordination between the credit union teams within PRA and FCA as envisaged in their "high level" draft Memorandum of Understanding.

As I pointed out in a blog post last August when the Financial Services Bill was on its way through Parliament, for most societies the move of the registration function will largely be a formality according to the draft Mutual Societies Order provided to Parliament during its consideration of the Financial Services Bill. However, I notice two points in the draft order which will probably affect how the FCA will carry out its registration role.

In my next post I'll look at those.