Proposed changes to co-operative and community benefit society law – further thought needed?

The Law Commission (sponsored by HM Treasury) has undertaken a review of the key piece of legislation governing co-operative and community benefit societies in England and Wales, the Co-operative and Community Benefit Societies Act 2014 (the 2014 Act) and has issued a consultation on proposed changes (the Consultation). The purpose of the Consultation is to explore whether the 2014 Act meets modern requirements for societies and to assess whether the current law stymies opportunity. The Consultation is open until 10 December 2024 for responses.

Key issues discussed within the Consultation include:

• Whether there should be new legal definitions of co-operative and community benefit societies, to narrow the discretion of the Financial Conduct Authority (FCA) in registering new societies;
• Whether charitable community benefit societies should cease to be exempt charities; 
• Changes to the law governing the issue of shares by societies; and
• Changes to the role of FCA to create a “more proportionate and effective regulatory environment”, including the introduction of a right to appeal.

Points to note for housing associations

The majority of non-profit housing associations in England and Wales are registered as community benefit societies (CBSs). Key proposals to note from the Consultation are:

1. Move to open membership – If introduced, the new statutory definition of a CBS would apply retrospectively, and would include a requirement for membership (shareholding) to be voluntary and open to all, with one vote per member. Existing societies would need to show how they met this requirement. While the Consultation discusses whether open membership should be seen as an aspiration for CBSs rather than an absolute requirement for each society, this would introduce a contrary expectation to the trends we have seen across the social housing sector in the last ten years, where there has been a general move to closed membership i.e. with membership consisting solely of the society’s board members from time to time. Such a move could also pose a barrier in rescue/forced merger scenarios, because of the need to obtain shareholder approval to rule changes, transfers of engagements or amalgamations. There also appears no real logic to this position, as CBSs are supposed to operate for the benefit of the community, rather than members (unlike co-operative societies). 
2. Exempt charity status – The Consultation proposes the removal of exempt charity status for charitable CBSs, thus requiring them to register with (and be directly regulated by) the Charity Commission in order to continue to benefit from charitable status. If introduced, the transitional arrangements would need careful consideration in order to avoid any “gap” in current exempt charity societies receiving the benefits of continued charitable status e.g. tax exemptions. This would also have significant implications in relation to asset disposals and intra-group arrangements, where it is likely that Charity Commission would need to be obtained to (for example) dispose of land to a commercial subsidiary. There have been discussions of a potential exemption for registered providers of social housing, as removing this exemption altogether does raise questions around other applications of exempt charity status e.g. to universities.
3. Investments, deposits and loans – At present, powers in relation to investments, deposits and loans are governed predominantly by a society’s rules, with the National Housing Federation’s Model Rules 2015 permitting such activities on such terms as a society determines. The Consultation proposes the introduction of further restrictions on the interest rates payable on investments, deposits and loans, including that interest rates must be reasonable and no more than needed to obtain the necessary funding.
4. Event driven filing – Similar to the requirements applicable to companies, the Consultation proposes a requirement for societies to notify the FCA of changes concerning its officers (board members, secretary etc) within 14 days. Currently such changes are only notified via the Annual Return. 
5. Board members’ duties – The Consultation proposes that those directors’ duties set out in the Companies Act 2006 should also apply directly to board members of CBSs and co-operative societies. In reality, this is unlikely to be a significant departure from the current position based on caselaw on fiduciary duties; however, it may also impose a requirement to report on matters the board has had regard to in making decisions, as applies under s172 of the Companies Act 2006 to specified companies.
6. Execution of documents – The Consultation proposes to align the execution requirements for co-operative and community benefit societies with those for companies, to permit deeds to be executed by one authorised signatory and a witness. This would be a welcome flexibility for many societies.
7. Virtual meetings – in line with changes adopted by many societies through their rules since the Covid pandemic, the Consultation suggests including explicit provisions in legislation to allow societies to hold virtual/hybrid meetings.
8. Withdrawable shares – A small number of housing associations which are CBSs utilise withdrawable shares as a means of raising capital. The Consultation proposes to introduce further conditions for the withdrawal (or transfer) of shares, beyond what is set out in a society’s rules, including that payment for withdrawable shares should only be made where the society is able to pay its debts as they fall due over the following year. 

A less attractive model?

If the changes outlined in the Consultation in relation to requiring open membership for CBSs, applying a rigid “one member, one vote” position and removing exempt charity status are implemented, this may make the CBS structure a much less attractive model when compared to company status. However, the statutory merger mechanisms available to CBSs (as opposed to companies) may mean the CBS continues to be the legal structure of choice for many non-profit housing associations.

Next steps

The Consultation closes on 10 December 2024 and responses can be submitted here: Law Commission consultation on co-operative and community benefit societies

We will be hosting a virtual roundtable in mid-November to discuss the Consultation and key issues emerging for housing associations – if you would be interested in joining, please email Gemma Bell.