How will your community-led housing group be affected by proposed legal changes?

The Law Commission is consulting on changes to co-operative and community benefit society law. Learn how you might be affected and have your say.

The law governing co-operative and community benefit societies has been largely unaltered since the 1850s, so an overhaul is long overdue.

You have until 10 December to have your say on the proposals and we would encourage CLH groups to contribute their views.  This is a genuine consultation and the Law Commission wants to hear from anyone affecting by this legislation.  It is a once-in-a-generation opportunity to shape the law in this area.

Although all of this is important, if you’re short of time, we would ask that you consider answering the questions on definitions (1-8), Charity Commission registration (questions 9-10), directors’ duties (questions 35-37) and FCA powers (question 66).  Our comments on these questions are below.

What is the current law?

Many community-led housing groups are registered under the Co-operative and Community Benefit Societies Act 2014.  This is the legislation which the Law Commission has reviewed and put forward proposed changes. 

It’s likely to be a couple of years before any changes come into force.  At this stage, the Law Commission is seeking views on their proposals.

What changes are the Law Commission proposing?

There are several changes which will affect CLH groups.  We have summarised these below, along with our comments.  We’ve also referred to the question numbers in the consultation, so you can easily have your say on the topics we think we most relevant to you.

• Definitions (questions 1 – 8 and question 39 of the consultation)

The Law Commission is proposing a new statutory definition of ‘community benefit society’ and ‘co-operative society’.  Whereas community benefit societies would need to exist for the ‘sole benefit of the community’, co-operative societies would need to exist mainly for the benefit of its members, through transactions with its members.

At the moment, when a new society is registered, it must choose whether it is a co-operative or community benefit society.  However, this is a relatively recent requirement.  Any society registered before 1 August 2014 is referred to as a ‘pre-commencement society’ and in some cases can switch between being a co-operative or a community benefit society.  The whole notion of having two types of society only dates back to the late 1930s, when it was introduced to prevent share pushing. 

We would prefer the Law Commission to revert to a single definition of ‘society’, which makes it distinct from a company.  In our view, societies exist on a spectrum.  Societies may benefit both members and the wider community (for example, where tenants of a community land trust are also members of it).  In some cases, it comes down to how large a membership is: a housing co-op may own a single property with a handful of resident members, or it could have many thousands of members across a wide geographical area, in which case it would be easy to see how it benefits the general community.  The current proposal would leave too much to the discretion of the FCA, as registrar, in deciding whether a society meets the appropriate test to be a co-operative or a community benefit society.

If the Law Commission goes ahead with the current proposal, there are some issues with the proposed definitions from a CLH perspective:

• The society’s purposes is to carry on ‘business’: is this an appropriate word for the provision of housing?

• Membership should be ‘voluntary’: some CLTs require membership as a condition of acquiring a property from them.

• Membership should be ‘open to all’: in many cases, CLH groups will want to set criteria for membership and have the ability to refuse or expel members.

• One vote per member: although this is fine in principle, exceptions must be possible e.g. to allow weighted voting among constituency groups.

• ‘Sole’ benefit of the community’ (for community benefit societies): this is too narrow.  What about tenant members?  Or members of a community pub who get discounts on drinks?  It would be more restrictive than what is permitted by charity law.

• Benefitting members ‘through transactions with its members’ (for co-ops): this is too narrow.  Members (and others) may derive other benefits from a co-op’s activities rather than just transactional.  A housing co-op may bring more general benefits to an area than an absentee landlord, with tenants being responsible for their own property and being able to set their own rents.

The Law Commission is suggesting that a definition would have retrospective impact on existing societies, with 18 months for societies to transition and decide which form of society they are.  This could be problematic for societies in the middle of a long term plan and does not give anywhere near long enough for a project like this.

Finally on this point, there is a proposed right to appeal a decision by the FCA on a society’s registration as a co-op or CBS.  This is definitely welcomed (question 39).

• Charity Commission registration  (questions 9 – 10 of the consultation)

The Law Commission are proposing that charitable community benefit societies would cease to be exempt charities, and must become registered with the Charity Commission. 

These societies would get a charity number, which could make it easier to get grant funding and to liaise with third parties.  However, it would be additional burden on trustees of charitable societies.  CLTs which are registered providers of social housing would end up with three regulators: the FCA, the Charity Commission and the Regulator of Social Housing (this already happens in Scotland).

• Society share capital (questions 11 – 27 of the consultation)

Some CLH groups issue community (withdrawable) shares as a way of raising finance for their housing projects.  The Law Commission is proposing some changes to the law around society shares.

One change would be to define ‘withdrawable’ and ‘transferable’ shares in the legislation, as this is currently missing.  This is broadly welcome.

The Law Commission are also proposing to clarify that a society can have different classes of shares.  Although we believe this is already permitted by the current legislation, it would be good to clarify it in any new law.

Finally, the Law Commission are proposing to set out statutory rules on the payment of interest on share capital by societies.    

• Society officers (questions 28 – 34 of the consultation)

At the moment, there is no public list of a society’s officers are (unlike companies).  The Law Commission is proposing to change this. 

Broadly, this change is welcome.  We hear anecdotally that many societies find it difficult to deal with third parties, such as banks, because there is no public register of directors/officers.

The Law Commission is also proposing some other minor changes to the requirements to keep a register of members and officers, none of which are particularly controversial.

• Duties of directors / officers (questions 35 – 37 of the consultation)

The Law Commission is proposing that the duties of a society officer should be made explicit in law.  These may be copied across from the Companies Act, which apply to directors of companies.

We have two main comments on this:

•  Should these duties apply to just the directors (i.e. the members of the management committee) or a wider group, to include other officers and senior managers?  We would suggest the latter approach.

• Should these duties be made more bespoke than the Companies Act duties, to suit the social, community-focussed and democratic nature of societies?  We would welcome this.

• Suspension and cancellation (questions 40 – 43 of the consultation)

These proposals are to get rid of the ability to suspend registration and streamline the provisions around society cancellation.  These are largely non-controversial and are to be welcomed.

However, there is currently no proposal for a society to be restored to the register following cancellation (which is a possibility open to companies).  We would recommend asking for this as an option, because where a society’s registration is cancelled and they own land, it can be incredibly time consuming and expensive to sort out.

• Entrenchment of society rules (questions 44 – 48 of the consultation)

Entrenchment is where a rule or rules can only be changed by a super-majority of votes.  Companies can do it and the Law Commission is proposing that societies are also given a statutory power to do this.  It would be up to a society to set out in its rules the voting threshold needed to change that rule or rules.  This would be a welcome clarification to the existing law. 

• Asset locks (questions 49 – 53 of the consultation)

The proposal is that all CBSs should have the statutory asset lock, automatically.  There would no longer be a choice for CBSs about whether or not to have the statutory asset lock.

Co-ops would have the option to adopt a statutory asset lock.

This sits alongside proposed updates to the legislation to iron out some current inconsistences which prevent asset-locked societies from converting into a charitable society or becoming a registered provider of social housing.

• Electronic-only filing of documents (question 60 of the consultation)

The Law Commission asks whether the FCA should have the power to require electronic-only filing of documents.  We would reject this proposal, because in our experience not all boards have the technological capacity to file everything electronically.

• FCA powers

There are a number of proposed changes to the powers of the FCA:

• a proposed power for the FCA to fine a society for late filing of the annual return (question 62);

• a proposed power for the FCA to direct a society to change its name if the name has become ‘undesirable’: this would need some clarification to identify what ‘undesirable’ means (question 63); and

• a proposal that the registrar should be able to use their available powers of intervention, where the registrar believes that intervention is ‘appropriate in the circumstances’ (rather than ‘only to the extent necessary to maintain confidence’ in societies) (question 66).  We disagree with this proposal.  This would give too much discretion to the registrar.

• Audits (question 67)

These proposals would simplify the audit rules, with societies below a certain size should be able to opt out of audit.  However, the FCA would be able to insist on an audit.

• Reporting (question 68)

This proposal would require societies to report on how their activities pursue their objectives (in the same way a CIC does).  Although this is another burden for society committees to comply with, it would generally be welcome in the interests of transparency and accountability.

• Other administration changes

Finally, there are a whole raft of minor administrative changes proposed, none of which are particularly controversial:

• Societies should be able to execute documents with single signatory with a witness (like companies) and appoint an attorney to execute documents on its behalf (questions 71 and 72).

• A proposal to repeal the current requirements to display a balance sheet and registered name at a society’s registered office/place of business (questions 70 and 74).

• A proposal to explicitly permit virtual or hybrid meetings (rule 75).

What action should you take now?

This is a chance for you and your organisation to put forward your views and experiences to shape and improve the law. The Law Commission is keen to hear from organisations about the challenges they face to ensure these can be addressed. It is the first major review of society law in 175 years, so this opportunity does not come around often!

You can access the consultation until 10 December.