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Mr. Greg Knight: How does the hon. Gentleman envisage the FSA assessing the interests of the community under amendment No. 7? For example, does he envisage the FSA conducting a poll or seeking to take evidence from all members of the organisation to see whether a certain view is held by the whole membership? Or does he see the FSA going beyond the members of the organisation to ascertain the answer?

Mr. Love: I was going to come on to the issues that the FSA will need to take into account but, of course, the community interest is an extremely important consideration for community benefit societies. The FSA will have to have a way of taking the temperature of a community that may be badly affected. If the FSA had taken the temperature of RAC members when the RAC was demutualised, I strongly suspect that there would not have been support for the cause espoused by the limited number of members who benefited from demutualisation. However, it will be for the FSA to make the final decision to sanction demutualisation. We accept that there will be problematic cases, such as those involving declining memberships.

Concern has been expressed about the inability of certain credit unions to turn themselves into commercially viable organisations; the same is undoubtedly true of a number of industrial and provident societies. Their

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original purpose may have ended, or the community that they represented no longer exists in the same form; or they may simply need a business rescue and restructuring. There will therefore be circumstances in which it will be appropriate for the FSA to sanction change.

Mr. Butterfill: I am listening carefully to the hon. Gentleman, and I agree with everything that he has been saying. Does he agree that where assets have been built up over many years, there is an intergenerational responsibility, and that in principle it is wrong that, for financial gain, one group of people, at one snapshot in time, should enrich themselves at the expense of the continuation of activities? Only where there are circumstances that the hon. Gentleman has been describing, when such activities can no longer reasonably be continued, should the FSA agree.

Mr. Love: That point is included in my amendments. The FSA will need to take into account what will happen to the assets of the society in such circumstances. Intergenerational issues will indeed be important; also important will be whether assets are distributed on the widest possible basis to the community or are restricted to only a few people. We know that although the community benefits from the activities of community benefit societies, their membership is normally restricted. There may be only a few people. All these issues need to be taken into account.

There are various important considerations, including the original purpose of the society as written into its constitution by its members on its formation. Another important consideration is the interests of the community. In addition, there are the assets. There may also be business reasons. We understand that sometimes the safeguarding of jobs and the continuation of the organisation may necessitate change. In those circumstances, that should be allowed.

The purpose behind the amendments is to ensure flexibility when problems arise. We cannot foresee all circumstances. One of the major concerns of government has been that to entrench for ever does not allow for unforeseen circumstances. The amendments will provide the flexibility that will safeguard the community benefit that the societies offer, and demutualisation where that is appropriate.

Many people will ask, "Why are we giving this power to the FSA?" We have discussed the duties that the authority has to undertake and whether costs will be increased. The authority already has considerable experience in this area. For example, it has a statutory duty to ensure that all industrial and provident societies are either bona fide co-operatives or community benefit societies. I say to those who think that that may be a theoretical issue that the largest retail co-operative society in the 1980s—it had a turnover of hundreds of millions of pounds and more than 50,000 employees—was deemed by the registrar not to be a bona fide co-operative. It needed to decouple itself from its wholesale organisation so that it would continue to be registered as a society.

If the registrar can take important decisions of that nature—it was supported by all genuine co-operators as being in the best interests of the industrial and provident society movement—that experience can be used to ensure that societies are maintained for community benefit but

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that demutualisation can be allowed in appropriate circumstances. There is inflexibility in having entrenchment without safeguards.

Mr. Greg Knight: The discretion that is provided in amendment No. 7, which is given to the FSA, is not absolute. The authority will have to take into account certain factors, which the hon. Gentleman has explained. As there is not absolute discretion, is there not a risk that we might see a plethora of court cases, with aggrieved parties challenging whether the FSA had acted properly and whether it had given due weight to certain matters? Would not absolute discretion have been a better way forward?

11.45 am

Mr. Love: There is considerable discussion about public interest companies that will be formed under Companies Acts procedures. The only means of challenge will be through the courts, with all the delay and expense that that involves. One of the great advantages of the process that I am advocating is that it will, in most instances, preclude recourse to the courts. There will be streamlining and it will be possible to use procedures with ease. In extremis, however, the courts may have to be used—for example, where it is felt that the FSA has not reflected properly the legislation that is on the statute book. We cannot have it all ways.

We have not gone for an absolute power. We want to increase flexibility, so the FSA should be able to make a decision within the broad parameters set out in the amendments.

We want to strengthen the protection of industrial and provident societies. We recognise that that will be achieved only by providing flexibility to the FSA, which is both independent and, we hope, objective when dealing with these matters. If it can adjudicate in circumstances where there is difficulty, that should provide the protection that the Government require, so that we do not entrench for all time where the circumstances are not supportive.

Dawn Primarolo: The Government support amendments Nos. 2, 3, 1 and 5. My hon. Friend the Member for Edmonton (Mr. Love) said that amendments Nos. 6 and 7 are probing amendments. I shall explain why the Government want to resist his amendments. I hope that, on that basis, he will feel able to withdraw them. If not, he must know that the Government do not support them.

On Second Reading and in Committee, the Government indicated that while we can see potential benefits in enabling community benefit societies to dedicate their assets to the benefit of the community, we were concerned about how that might work in practice. The right hon. Member for East Yorkshire (Mr. Knight) touched on one of many possibilities in this fraught area. That being so, I shall not speak at length.

Legislation that irrevocably commits assets to the benefit of the community must not have unintended effects. Asset lock-in would be a crucial decision for an individual society, and we must also take a view of the effect on the sector as a whole. For example, it must not reduce the flexibility of the sector to allow it to consolidate and grow.

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One way to ensure continued flexibility within the sector and make provisions to deal with exceptional circumstances for individual societies would be through powers to reverse or amend asset lock-in in special situations. However, we think that this would raise further questions about defining any circumstances where the asset lock-in might be reversed—for example, who might exercise these powers and how they might be enforced.

The hon. Member for Christchurch (Mr. Chope) asked in Committee about the rights of members. The adoption of an irreversible asset lock-in rule by an existing society, without unanimous vote, could unwillingly deprive some of those members of rights in a way that might be incompatible with article 1 of the first protocol to the European convention on human rights. The right hon. Member for East Yorkshire might not have referred specifically to that, but he mentioned the possible range of involvement of the courts where somebody disagreed with a decision.

The performance and innovation unit is currently considering the organisational forms of social enterprise, and we look forward to considering its further analysis of the provisions that might help the sector to grow and thrive.

Provisions such as asset lock-in need detailed consideration. That is why I agree with the four amendments tabled by my hon. Friend the Member for Harrow, West (Mr. Thomas) to remove the clause and references to it elsewhere in the Bill. In principle, clause 2 has some attractions, but, in its present form, it does not fully resolve the issues of which we are aware, nor have we consulted widely to make sure that there are no other implications that would need to be considered.

Amendments Nos. 6 and 7 were tabled by my hon. Friends the Members for Edmonton and for Bristol, North-West (Dr. Naysmith). The possibility of allowing the Financial Services Authority to arbitrate on whether a society that had adopted an asset lock-in rule should still be allowed to convert to or merge with a company without such a rule is an interesting proposal. I see that, as my hon. Friend the Member for Edmonton pointed out, that might provide useful flexibility where a society was encountering financial difficulties. For example, the FSA could permit a society to merge with a local company or restructure in some way under company status and thereby avoid having to cease its activities.

Government officials examined such possibilities during their work with advisers assisting my hon. Friend the Member for Harrow, West in an attempt to address the Government's concerns about the clause. However, I do not consider that the two amendments would be sufficient to resolve the issues that have been discussed during the passage of the Bill.

In addition to the points that I have already raised, there are other issues that we would need to consider—for example, whether the FSA should be able to prevent a society from adopting an unalterable asset lock-in in the first instance; whether there should be circumstances in which a society could reverse such a rule once adopted; and whether all societies or bencoms should be able to adopt this irrevocable rule in their constitutions.

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If it were necessary to wind up a society that had such a rule, would the FSA be the best authority to authorise the conversion or transfer, or should some other authority or even the courts take a role? Bearing in mind the discussion that we had in a previous debate about the cost of fees to the FSA, it is odd that the amendment would put greater obligations on the FSA.

I say to my hon. Friends the Members for Edmonton and for Bristol, North–West, as gently as possible and with the best of intentions, that although we appreciate their intentions, the Government believe that their amendments would not be sufficient or a substitute for a more detailed consultation and consideration of such powers. I sincerely hope that having had the benefit of putting—

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