The Co-operative Bank: Ethics, Law, and Consumer Protection

Now that I’m back from Brussels it’s time to have a closer look at the use of the word “Co-operative” in the name of a bank 70% owned by Stock Market investors and 30% by the Co-operative Group.

I argue here that the shocking idea that the word “Co-operative” could be used in this way is legally questionable as well as being unethical.

It is the job of the Co-op Group directors, Co-operatives UK and the authorities charged with consumer protection to stop this NOW.

Naming Co-operatives: hard and soft Law

As many readers of this blog are aware co-operatives, as a form of business structure different from investor owned companies, are defined by the International Co-operative Alliance Statement on Co-operative Identity Values and Principles.

Here’s the ICA definition:

“A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.”

The core of that definition is that a co-operative is a “jointly owned and democratically controlled enterprise”. The ethics and values dealt with in the full ICA Statement are important but the definition focuses on ownership.

That has been reinforced by a series of International legal and policy documents.

ILO Recommendation 193, “applies to all types and forms of co-operative” and adopts the ICA definition. It tells member governments that:

“Measures should be adopted to promote the potential of cooperatives in all countries, irrespective of their level of development”

and that

“Governments should provide a supportive policy and legal framework consistent with the nature and function of cooperatives and guided by the cooperative values and principles”.

In 2002, the EU Commission communicated its position on the approach of EU member states to co-operatives. It advocated:

“The promotion of the greater use of cooperatives across Europe by improving the visibility, characteristics and understanding of the sector”

The Commission also related the ICA Statement to legal matters:

“Although laws governing cooperatives are diverse in approach and based on different traditions, they generally respect the co-operative definition, values and principles set out in the “Statement on the Co-operative Identity” adopted by the International Co-operative Alliance (ICA) in 1995 and recently endorsed by a resolution of the U.N. and fully incorporated into a Recommendation of the I.L.O. Consequently national legislators should be based [sic] on the co-operative definition, values and principles when drafting new laws governing co-operatives.”

Much of the above, is what is known as “soft law”.  An NGO Statement, a Recommendation by the ILO to Governments and an EU Commission Communication may not seem very important to hard nosed City lawyers trying to solve a tricky problem.

However, EU regulations are hard law. In the preamble to Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE) the EU legislator addressed the definition of a co-operative thus:

“Cooperatives are primarily groups of persons or legal entities with particular operating principles that are different from those of other economic agents. These include the principles of democratic structure and control and the distribution of the net profit for the financial year on an equitable basis”

The European Court of Justice also deals in hard law and it has stated:

“55 Cooperative societies……..conform to particular operating principles which clearly distinguish them from other economic operators. Both the European Union legislature, in adopting Regulation No 1435/2003, and the Commission, in its Communication on the promotion of cooperative societies in Europe, have highlighted those particular characteristics.

56 As stated in particular at recital 8 in the preamble to Regulation No 1435/2003, those characteristics essentially find expression in the principle of the primacy of the individual, which is reflected in the specific rules on membership, resignation and expulsion. Moreover, recital 10 in the preamble to that regulation states that net assets and reserves should be distributed on winding-up to another cooperative entity pursuing similar general interest purposes.

57 Cooperative societies are not managed in the interests of outside investors. According to recitals 8 and 10 in the preamble to Regulation No 1435/2003 and section 1.1 of the Communication on the promotion of cooperative societies in Europe, control of cooperatives should be vested equally in members, as reflected in the ‘one man, one vote’ rule. Reserves and assets are therefore commonly held, non-distributable and must be dedicated to the common interests of members.”

Joined Cases C-78/08 to C-80/08 Ministero dell’Economia e delle Finanze v Paint Graphos Sarl For more see my comments after the case.

So, the ownership structure is key and a listed PLC “managed in the interests of outside investors”  with a 30% stake for the Co-operative Group will not be a co-operative, however “ethical” its behaviour may be.

Protecting the Name: Law in the UK

The next question is how this applies in the UK. Here the main legal structure used by co-ops has always been the industrial and provident  society (IPS) registered under the Industrial and Provident Societies Act 1965. The Co-operative Group is registered as an IPS. However, the bank could not use an IPS structure with withdrawable share capital. An IPS with withdrawable share capital is prohibited from operating as a bank – s 7 IPSA 1965.

However, it is helpful to look at the criteria used to define a co-operative under that legislation as that casts light on the meaning of the word “co-operative” in a business name.  Sections 1(1) & (2) of the IPSA 1965 requires a registered society to be either a bona fide co-op or a benefit of the community society society. IPSA 1965 does not fully define a co-operative but section 1(3) reads:

“In this section, the expression “co-operative society” does not include a society which carries on, or intends to carry on, business with the object of making profits mainly for the payment of interest, dividends or bonuses on money invested or deposited with, or lent to, the society or any other person.”

The “bona fide co-operative” definition is fleshed out by the registering authority – currently the Financial Conduct Authority (FCA) as successor to the old Registrar of Friendly Societies.

The current version of the FCA Note with the registration form includes this statement:

“Control of the society lies with all members. It is exercised by them equally and should not be based, for example, on the amount of money each member has put into the society.  In general, the principle of ‘one member, one vote’ should apply. Officers of the society should generally be elected by the members who may also vote to remove them from office”

That indicates the importance of ownership and control and is very important as background to this issue for the Co-operative Bank PLC.

However, the bank is not a society. The liberal business structure law of the UK allows a co-op to use company, partnership or LLP structures. That gives welcome flexibility but means that the protection of the co-operative name and brand is an issue in the name used by any of those entities. That is dealt with in the Companies Act 2006 – see my blog post on this for a fuller discussion of the legal position on name protection.

On the issue of the name of the Bank the first port of call in the CA 2006 is section 55 on sensitive names. That requires permission from BIS (in practice Companies House) for their use. Under The Company, Limited Liability Partnership and Business Names (Sensitive Words and Expressions) Regulations 2009 SI 2009/2615 the word “co-operative” is protected from unapproved use in a company name, an LLP name, or by anyone carrying on business using any unregistered structure.

However, section 55 only applies at the point of company registration and not afterwards so it does not force the Bank to get permission for the continued use of the name “Co-operative” after the new ownership structure is in place. This has been pointed out by many on twitter (@coopnewsant & @theboyler) and it’s true. They mentioned the use of the word by Co-operative Travel after the joint venture with HSBC owned Thomas Cook. So section 55 is not the way to deal with this issue.

But section 55 is not the only relevant provision. Lets look at section 76 of CA 2006. It applies at any time after registration and states:

“ Misleading indication of activities

(1) If in the opinion of the Secretary of State the name by which a company is registered gives so misleading an indication of the nature of its activities as to be likely to cause harm to the public, the Secretary of State may direct the company to change its name.”

Now you may say “so what?”. It’s activity is a bank. It does banking. What is misleading about the name so far as activity is concerned?

In the case of the Association of Certified Public Accountants of Britain v Secretary of State for Trade and Industry [1998] 1WLR 164 the court upheld an order against the Association under the previous version of section 76. That was because the court found that the name suggested that members were certified on the basis of more than the three years’ experience and professional indemnity insurance that were all they needed.

Mr Justice Jacob said at p 173:

“Given all these facts, does the name of the association, “The Association of Certified Public Accountants of Great Britain,” give a misleading indication of the nature of its activities? I have….. come to the conclusion that it does. I think the word “certified” indicates, or is likely to indicate, to a substantial number of persons, that there is something objectively significant about the member’s qualification, training and experience…………

Next I must consider whether the name is likely to cause harm to the public. I think it is. People go to accountants expecting not only probity but a level of expertise. I think if you went to someone calling himself a “certified public accountant” you would expect more by way of formal professional qualification than just professional indemnity insurance and some experience……”

How does that apply to the Co-operative Bank?

Many of the Bank’s customers have accounts and do business with the bank because they believe it is a co-operative. It may attract new ones for the same reason. Customers may accept  worse terms or pay more for services because of that. For the reasons given above, even if the bank carries on its current ethical policies it will not be a co-operative. Customers are misled by the name and suffer loss because of that.

On that basis the Bank should be ordered by Vince Cable to change its name. If the bank objects to such an order in court, BIS should win using the Certified Accountants’ case as a precedent.

Whose Job is it?

Having set out the argument about the law, I now turn to the responsibilities of the people and organisations involved.

Directors of the Co-operative Group

The Co-operative Group Board will have to approve the new arrangements (or will already have done so). As the guardians of the co-operative nature of the society they have a duty to prevent the misuse of the name.

Here is why. The Co-operative Group’s Rules provide:

“1.2 The Society is registered under the law as a bona fide co-operative with the registration Authority”

“Why the Society exists

1.3 The Society exists in order to serve its Members by carrying on business as a co-operative in accordance with Co-operative Values and principles. This is the Society’s Purpose……..”

“2.10 The Board has the following roles and responsibilities (which it cannot delegate):

2.10.1 deciding the vision and strategy of the Society and its businesses in consultation with the Subsidiary Boards and having regard to the nature and extent of its interest in all of its businesses;

2.10.2 ensuring, whether directly or through other people, that the Society’s businesses and affairs are conducted and managed in accordance with its Purpose and Objects, and in accordance with the best interests of the Society and its Individual members and Independent Society Members” (my underlining)

The legal duties of the directors of society are governed by the equitable and common law principles developed in case law. They were consolidated for company directors in Companies Act 2006. Those duties, as expressed there, include exercising independent judgment to :

“(a) act in accordance with the company’s constitution, and (b) only exercise powers for the purposes for which they are conferred.”

– sections 171 and 173 Companies Act 2006.

 This shows that the Co-operative Group’s rules:

  • write in the Co-operative Values and the definition (rule 1) and

  • impose a duty on the directors to pursue that purpose (rule 2).

The directors must act in accordance with the constitution and exercise all their powers for the purpose for which they were conferred – s 171.

Does agreeing to the use of the name “Co-operative” by a PLC in which the Group has only a 30% stake comply with that? I think not.

Co-operatives UK’s remit

Anyone used to visiting the Holyoake House, Head Office of Co-operatives UK will be familiar with the magnificent display of objects on the outside wall.

This is the modern version.

“The purpose of the Society is to be a successful co-operative enterprise providing support for the creation and maintenance of businesses and enterprises which:

ƒreflect the aspirations of the founder of the Society to the creation of a Co-operative Commonwealth; and

are founded upon principles of social justice and democratic control, such as the International Alliance (“ICA”) Statement on the Co-operative Identity, the Co-operative principles published from time to time by the ICA or the principles of common ownership contained in the Industrial Common Ownership Act 1976″

– Rule 2 of Co-operative UK’s current Rules

I am sure that everyone at Co-operatives UK will be working hard to avoid the misuse of the name “Co-operative” by an investor controlled bank and we must all wish them success.

Consumer Protection Authorities

The Financial Conduct Authority – We have noted the role of the FCA as registrar of societies. However, they also have a consumer protection role for bank customers and the misleading name of a bank raises just those issues.

The Prudential Regulation Authority is the main bank regulator and have to approve the plan for the ex-Co-operative Bank and the change of control involved. They have no doubt been closely involved in discussions. It would seem strange for them to approve an arrangement which includes a misleading name for the new bank.

Companies House as an independent agency of the Department of Business Innovation and Skills can and should order the name change under section 76 of the Companies Act 2006.

It is for the FCA, the PRA and BIS to work together to prevent the use of the name co-operative to mislead the consumers and the public if the Co-operative Movement fails to do so.

Ethics and the City Ethos

The irony of this story is that the new owners of the Bank want to use the name to ensure that they maximise their profit from the ownership of the bank by keeping its ethical image. They fear that the loss of its “ethical” reputation will damage the value of their investment. I am sure their advisors have had much work to do and have been under pressure. City law firms  are used to finding “wrinkles” to get the client what they want. If they rely on some technical rule plus the inaction of Government agencies to use the name “Co-operative”, they serve their clients badly and undermine any claim to be ethical as opposed to just legal.

If the new owners try to keep a name to which they are not morally entitled by relying on the technicality that section 55 of the Companies Act 2006 does not apply, they will already have forfeited the claim to be ethical. They will be relying only on the inability of the Co-operative Group directors, FCA, the PRA and BIS to insist on a name that is not misleading. That is not ethical.

The new owners are welcome to choose a new name that expresses their ethical intentions and brand. There is no problem about making the bank sound “cuddly”. They can have an “ethical” board to try to keep the brand’s image. They can amend the Articles of Association.

They must not say that it’s a co-operative when it isn’t. That is disreputable.

© Ian Snaith 2013 This work is licensed under the Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

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4 Responses to The Co-operative Bank: Ethics, Law, and Consumer Protection

  1. Ed Mayo says:

    I appreciate the depth of analysis that you have offered here, Ian.

    Given you mention us, I thought I would explain our role. Co-operatives UK is the guardian of co-operative identity in the UK, in line with the International Co-operative Alliance (ICA) Statement of Co-operative Identity, .and recognised as the national apex body by the ICA.

    We have made a commitment to examine the co-operative identity of the Co-operative Bank, once the formal proposals are made, which are due shortly. This is a significant matter and it because of its importance, that we have said that we will not add to speculation by commenting on the media comments in advance, but assess this in a formal way when we have the formal details of structure and constitution. We do the same for any business that wants to call itself a co-operative. We are on record, though, with our approach to the matter, which is set out in our policy, the substance of which was subject to consultation with our members. This can be found on http://www.uk.coop/identity

  2. isn says:

    Ed, This is an extremely helpful response and makes perfect sense. I apologise for the delay in approving it and putting it up. I just came to it in my emails. Ian

  3. isn says:

    Hi Iain,

    came across your excellent blog last night – really interesting detail regarding the “Coop” Bank name. You say in one post:

    Vince Cable has indicated that, if complaints are received, he will consider requiring that the name no longer be used.

    How does one complain, and who to? As a Co-op bank customer for nearly two decades, I consider myself to have been considerably misled by the use of the name!

  4. isn says:

    Sorry to have been so slow to reply, Steve. I get lots of spam and deal with comments en masse every now and again. Are you aware of http://saveourbank.coop/? That was started by Ethical Consumer – http://www.ethicalconsumer.org/ – and is trying to rescue/reinforce the ethical policy by organising customers thinking of leaving. On the name, you can complain to the Department of Business Innovation and Skills by formally emailing them and raising a complaint under s76 Companies Act 2006 as a bank customer. Copy Vince Cable in as well at http://vincentcable.org.uk/en/page/business-secretary-contact-details. However, before that, you could try contacting Rory Ridley Duff through his website http://www.roryridleyduff.com/ to see how his campaign is going and whether he or http://saveourbank.coop/ are co-ordinating any collective action along these lines.

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