Official Report: Minutes of Evidence

The Chairperson (Mr O'Toole): We will now have a briefing on cooperatives and mutual banks from Michael Scholes from the Assembly's Research and Information Service (RaISe). Michael will talk us through his research. Please go ahead, Michael. I ask members to indicate to the Clerk as we go along if they wish to ask questions.

Mr Michael Scholes (Research and Information Service): Thank you, Chair. It is quite a small paper. I will go through the main points and allow plenty of questions afterwards.

I will start by describing the term "mutual". It refers to any organisation that is owned by its members.

It is often used as an umbrella term to mean a cooperative or a building society. Currently, over 9,000 UK mutual organisations are registered by the Financial Conduct Authority (FCA). They include cooperatives, community benefit societies, credit unions, building societies and friendly societies. Such organisations are registered as mutual entities under various UK and Northern Ireland statutes. I have listed them at page 4 of the paper.

The regulation of mutual organisations that carry out certain financial services is conducted by two bodies: the Financial Conduct Authority and the Bank of England's Prudential Regulation Authority (PRA). The FCA regulation focuses mainly on the protection of consumers, market integrity and the promotion of healthy competition, whereas PRA concentrates more on an organisation's stability, its resilience, including guaranteeing capital, and its risk management procedures.

In recent years, the Community Savings Bank Association (CBSA) has led a campaign to introduce 19 regional mutual banks across the UK, including Northern Mutual in Northern Ireland. It estimates that a capital investment of approximately £20 million would be required to set up such a bank. The key features of a proposed Northern Ireland regional mutual bank include the fact that it would be mutual, meaning that it would be owned by its members and customers and for those members and customers; it would be regional, serving only Northern Ireland; it would be ethical, meaning that it would not be profit-driven, unlike a commercial bank; and it would be inclusive, meaning that no one would be refused an account.

The potential merits of such a model include democratic decision-making; the ability to offer more financial services than a typical credit union would, such as mortgages and business loans; a larger element of community involvement; and the ability to reach people who are financially excluded by normal commercial banks.

The potential downsides include the fact that, initially, such a bank would have low access to capital; it could have poor branch and ATM access to cash services; and it would not have the global reach that most commercial banks have, meaning that it would be more vulnerable to an aggressive takeover.

That is a quick synopsis of the paper. I am free to take any questions, Chair.

The Chairperson (Mr O'Toole): Thanks, Michael. I have a couple of questions first. There is a proposal to set up a full-blown mutual bank, but we have an existing landscape and ecosystem of credit unions, friendly societies and organisations such as the Presbyterian Mutual Society, which is a famous example because it had problems — I will not go down that road. The general credit union model in Ireland is obviously a famous example.

To the extent that the research showed it, can you explain a bit about how we differ from, for example, the situation across the water when it comes to the presence already of what you could call community banks or mutuals and credit unions? We have quite a healthy ecosystem of them, in some ways, but obviously they are limited in what they can do.

Mr Scholes: Yes, absolutely. The main difference between us and GB is the proliferation of credit unions, which offer an awful lot of community services and one-to-one services. The difference here is that the mutual ownership banking model that is proposed would offer things such as business loans, mortgages, overdraft facilities and current accounts, whereas a credit union is really just a savings and loan facility. That is the essential difference.

You are absolutely right that, in Northern Ireland, we have a lot more credit unions. We have a good relationship with them. People tend to use credit unions an awful lot more than people in GB do. One of the main issues may be the difficulty in setting up a bank, which is about getting the banking licence. It is very difficult to get. That is where the problem arises. There have been 19 proposed regional mutual banks, and none of them is operating yet.

The Chairperson (Mr O'Toole): Is that just for here? For Northern Ireland?

Mr Scholes: No, for across the UK. Northern Mutual is the one that is proposed for Northern Ireland. A lot of them have been set up as a mutual entity with the regulation under different types of legislation but have not received a banking licence, which requires the Prudential Regulation Authority's approval. If you wanted to offer those services that credit unions do not offer, that is the key.

The Chairperson (Mr O'Toole): One might assume that a mutual bank would be able to do more flexible types of business loan than a credit union would. At the minute, if you are an entrepreneur, a community or social enterprise, or just a small-scale business person in the community setting up a cafe or whatever, you can get a loan from a credit union, but it is not usually a specific business loan. Someone from a credit union will write to tell me otherwise. Some credit unions are very proactive when it comes to support, but a mutual bank would be able to offer other types of services that are a bit more ambitious.

Mr Scholes: Absolutely. One of the best ways in which to think about it is that the —.

The Chairperson (Mr O'Toole): A credit union cannot offer an overdraft, for example.

Mr Scholes: A credit union is for its members. A business, such as a factory, is not a member of a credit union. Individuals —.

The Chairperson (Mr O'Toole): An individual can take out a credit union loan to open a barber's.

Mr Scholes: Yes. I think that there has been some provision for agricultural loans, because farmers tend to be sole operators, so they would be a member of the credit union and could possibly get a loan for agricultural machinery, for example. However, you would need to speak to someone in a credit union about the specifics of those types of loans. The best way in which to think about it is that credit unions provide services for their individual members.

The Chairperson (Mr O'Toole): I am not denigrating the big four traditional providers, because they have lots of customers whom they have served for a long time, and I am sure that they support lots of businesses perfectly well, but one of the observations, which we heard last week, is that the closure of branches and the gradual withdrawal from very small business banking in particular — it is fairly obvious that that is because the margins are less — means that there is a gap in the market. You could also call it the absence of a service for very small businesses and social enterprises. They are not getting the kind of rich, focused customer service that they might have expected 20 or 30 years ago in a branch from a dedicated manager who knows them, the area and the market in the area, with whom they can build a relationship. Is that the kind of thing that a mutual bank might be able to —?

Mr Scholes: Yes, absolutely —.

The Chairperson (Mr O'Toole): And that would be the ethical —.

Mr Scholes: Absolutely. It is about a cash flow problem that a window cleaner, a sole trader or someone such as that might have. We are talking about purely business loans, but it is about those short-term loans of a couple of thousand pounds to keep a cash flow or pay a few bills. More often than not, those decisions by a commercial bank are now automated: you type something into a computer, and there is a yes or no answer. There is no interaction with the bank manager. They would have no sense of the context of the individual loan, and there is no grey area; it is a binary, black-or-white yes or no.

The mutual bank would have an idea of what is needed for the region as well, so it could invest for the benefit of the region, not just for the individual or the firms. That is another way of potentially thinking about it.

The Chairperson (Mr O'Toole): Post 2008-09, a whole range of new reforms took place, some of which were cultural and international, to do with capital ratios and, effectively, lending restrictions and reserves that had to be held by commercial banks.

Are they relevant, in the same way, to mutual banks? Which rules are they not necessarily exempt from but are —?

Mr Scholes: They would be relevant because it would be a bank. It would have to go through the Prudential Regulatory Authority's process of receiving a licence. All those checks would have to be done in the way that they are done for a normal bank.

I had a look. There is a register of banks on the Bank of England website. There have been 29 since 2013. They tend to be big, commercial, global banks that have operated in the UK as an offshoot. There have been no new banks from the ground up; none of the type in the film 'Bank of Dave' — you may be familiar with that — that serves the community in that way.

The Chairperson (Mr O'Toole): As in a mutual?

Mr Scholes: Yes, exactly.

The Chairperson (Mr O'Toole): For me, the most recent example is the Co-operative Bank, but that is not a particularly positive precedent, for obvious reasons.

Mr Scholes: Cooperative banks have an element of foreign investment. I included a couple of figures in the paper to show how the money flows around from the traditional high street bank. The sort of cooperative bank that you describe would still have that element of investing outside the region and making decisions that are not necessarily in the best interests of the people who live in that region. They would still be answerable to shareholders to some degree and would make commercial decisions about their loans and activities, whereas the regional mutual bank would not have that.

The Chairperson (Mr O'Toole): OK. I will bring in other members.

Mr Brett: Thank you very much for your briefing. It is a really useful paper. Your paper outlined the fact that no mutual banks are operational in the UK. Are there any in the Republic of Ireland?

Mr Scholes: No, not that the research could find operating in the same way. I found a couple of really interesting models in Australia that focus on sectors. There is a teachers' one: anyone who is involved in education in Australia can be a member. It is just for teachers or anyone working in education. Any of the investments that it makes are in education. However, those models do not operate as a regional thing in the way that the mutual regional banks do. They have some elements of commercial investments, and they are answerable on some level to some "foreign" investments, for want of a better word. They do not strictly fit the "mutual banking" definition that, I think, the Chair and Committee members are talking about for Northern Ireland.

Mr Brett: There are none in place anywhere on these islands. Where are they? Which closest neighbour has them? Are they anywhere in mainland Europe?

Mr Scholes: My research did not cover that. I can certainly go back and look.

Again, the problem when you research all this is the way in which the terms are bandied about: "building society", "cooperative society", "mutual bank". It is not a mutual bank if it has commercial investors and makes commercial decisions. They are not mutual at all. That is one of the issues.

Mr Brett: Thank you.

The Chairperson (Mr O'Toole): Most building societies were mutual at one point. Nationwide would have been a version of a mutual at one point.

Mr Scholes: Yes, absolutely. They all started in the 19th century, especially in America, for the benefit of the town and the people who lived there.

The Chairperson (Mr O'Toole): You mentioned Australia. I left about 10 bucks in an Australian bank account when I ceased working in a pub in Sydney in 2006. If anyone from the Commonwealth Bank of Australia is watching, I would love to know how much is in that account now. I could retire from politics.

Dr Aiken: I hope that you declare those foreign earnings in your register of interests as leader of the Opposition [Laughter.]

The Chairperson (Mr O'Toole): I am now declaring it. It should go in the register.

Miss Hargey: On the Australian one, it would be interesting to see what makes it viable, because one of the restrictions or considerations here a number of years ago was the population size. In the North — certainly in the Six Counties, anyway — there is not the population scale. Is that issue coming out? It is maybe not just the licensing issue. When you look at Australia, you see that, in 2020 or 2021, 19% of the country's bankable population was with mutual banks. There is a story of around 4 million of the population there. Something enables it to work. It would be interesting to see what that is and how it would fit with the regulatory system here.

Things have gone quiet on the Northern Mutual. I have not heard anything. Are you aware of there having been much activity or engagement with Departments on that?

Mr Scholes: No.

Miss Hargey: When I engaged with them in 2020, they were looking to government to put down the financial commitment to make it work.

I want to ask you about the community bank in the north-west of England. I cannot remember whether this is in your paper or a different paper. Preston City Council and Liverpool City Council were looking at having a council-led regional community bank. I would be interested to know how that has progressed or whether it has not progressed. I would also be interested to know about any advancements in Scotland.

This links into community wealth-building and keeping the wealth in the local economy, with more of a focus on local economic development than on what international markets are predicting or prioritising. It is about having a more regional and localised approach.

Even if those mutual banks have not been set up yet, are they close to setting them up, and have they had to make changes? The big question is this: is the population here a restriction for us? My understanding is that it was. Is there any potential for North/South cooperation — even under the Windsor framework and all that — or is it a case of two completely different markets in the jurisdictions?

Mr Scholes: First, I will say something about the 19 regional banks and government intervention. The Welsh Government have committed to investing in the Welsh bank — there is a Welsh name for the bank, but I cannot pronounce it. They have done that. None of those regional banks has a licence yet; none of them is trading. As far as I am aware, however, the Avon Mutual, which is in — where is that?

Miss Hargey: Is that the one that is in Preston in the north-west?

The Chairperson (Mr O'Toole): Somerset, or the south-west anyway.

Mr Scholes: As far as I am aware, that one is the most advanced. As I mentioned in the paper, a lot of those are on the FCA register. However, there is also a Prudential Regulation Authority register, and they are not on that. Basically, that tells you that they have not got through the list of criteria required by the prudential regulator to get a licence to be a bank. That answers your question on investment.

The regional investment with the councils is interesting. The councils in England are a bit bigger: they have more powers, additional responsibilities and, arguably, more money. That is one element. One of the big things to consider, when it comes to the people in Northern Ireland, is the £20 million in assets that we need. My research showed that, more often than not, venture capital starts banks: people invest to start banks in order to make money, and that is how the money comes in, because they need the capital assets. Venture capitalists cannot invest in this model, however; it is not available to them. To get the start-up money is problematic. In Northern Ireland, that start-up money is £20 million. In public finance terms, that is not a lot of money, but it is a huge sum for private individuals to try to get together. Unfortunately, you fall in between two stools with that. You are quite right about the regional investment in Northern Ireland.

It was interesting to find out about people who are normally excluded from banks, such as those who are unemployed or long-term sick. In my paper, I refer to a presentation that the Northern Ireland Council for Voluntary Action (NICVA) gave. It suggested that it would cost £15 to start an account. That would be enough to have an account in a future Northern Ireland regional mutual bank, and no one would be refused, regardless of their credit history, their job, their financial situation, their health or anything to do with that.

To answer your question, there are problems with it. Theoretically, it would be an interesting answer, and it would plug the gap, but the practical hurdles still have to be overcome. The problem with North/South cooperation is that you would come across the different regulations and legislation, so that might be a halt to having an all-Ireland regional mutual bank. Perhaps, the Committee and Department could look into that.

Miss Hargey: It is to do with the population. Have you identified whether there is still an issue around the scale to which we could go? We might never go there, because, when you look at some of those areas in England that we have mentioned, you see that the councils that are coming together cover a greater population spread than ours. We do not have that population yet.

Mr Scholes: Population did not come up. I can go back and have a look at that.

Miss Hargey: OK. It was an issue back in 2020. I am not sure whether they have got round that now.

Mr Scholes: It was more to do with finance. A pre-application list from the Prudential Regulation Authority provides a checklist of what is needed: sources of funding and corporate governance, for instance. Population is not listed, but that does not mean that it is not included.

Miss Hargey: No worries. Thank you.

Mr Frew: What sort of guarantees or protections would the mutual bank have compared with the other banks? I cannot remember the threshold, but your money is protected to a certain degree.

The Chairperson (Mr O'Toole): £80,000.

Mr Scholes: It is £85,000.

Mr Frew: What is £5,000 here and there? What such protections would be provided in a mutual bank? Would it be the same?

Mr Scholes: Yes. At the moment, credit unions go through that as well; credit unions are signed up to that agreement. To sign up to that agreement, the entity — the bank, credit union or whatever — must pay a percentage of its income or money to the —.

Mr Frew: Is that like an insurance pot?

Mr Scholes: The financial services compensation scheme would pay for that. It is £85,000 per person.

Mr Frew: That would be important for confidence in any new bank.

What is the real, main benefit of a mutual bank? Is it because it is low level? Everyone should know their bank manager, but those days are gone. Surely it cannot be about competition, because a small mutual bank would never be able to compete with the four established banks and the raft of new banks — computerised banks, internet banks, or whatever you want to call them — that are coming in and flooding the market. The Committee has had evidence from businessmen who are going to those types of banks rather than to the local bank down the street. Apart from the nitty-gritty of, "I can't get a bank account anywhere else, so the mutual bank will have to do me. I'll get to know the bank manager or, at least, the cashier", what is the real benefit of a mutual bank?

Mr Scholes: There are a couple of things. They are not under pressure to make profit in the way that a commercial bank is; they are not answerable to shareholders. They do not have to make those gains, so their margins would be a lot broader. They can redistribute the deposit income a lot thinner. "Thinner" is not the right word: more democratically, perhaps. As I mentioned earlier, the whole idea is that the small business person who is short of cash to pay a bill can get a short-term loan. Favourable rates are another big thing. Rates are linked to the profits that are demanded from the shareholders in a commercial bank, but that would not be the case in a mutual bank. You would not have that pressure, so you could offer loans at better rates for your customers.

The Chairperson (Mr O'Toole): And better rates for savings accounts.

Mr Scholes: Yes, because the mutual bank would not be driven by the need to make the shareholders happy.

Mr Frew: What is to stop an aggressive takeover? If a mutual bank were being very successful in a region — no matter how small — what is to stop a big fish coming in and eating it up?

Mr Scholes: That is going to be an issue, and it is possibly a question for banking experts. It will definitely be a problem. There is legislation going through, I think, at the moment, in GB, because that happened to one of the mutual building societies there. I think that it was London Victoria (LV=). I think that there is legislation going through at the moment to try to stop that from happening or to change the rules around it. Yes, it is definitely a consideration.

Mr Frew: Is there any legislation to stop one of the big, established four from doing that to create a new arm or branch of their corporate product?

The Chairperson (Mr O'Toole): It would be a mutual.

Mr Scholes: The only thing that I can think of is that they would still be answerable to shareholders. Would shareholders be happy with that? Maybe they would. It might be a positive for the corporate image of the bank. Again, these are really quite complicated legislative matters. I mentioned in the paper that the Committee may want to take legal advice on the setting up of a mutual bank in Northern Ireland, because it is an extremely complicated area.

Mr Frew: Sure. Thank you very much. Thank you for your paper.

The Chairperson (Mr O'Toole): There is also a question about the fact that we have a higher proportion of people — I do not know whether you were able to get the statistics — with credit union accounts, even though, as you say, those are for savings and loans, and a high number of friendly societies. I know that there are lots of credit unions attached to loyal orders, the Hibs, friendly societies — all those types of things — and other types of mutuals attached to the Churches and such things. Part of what you need to make a mutual bank work is enough deposits to be able to recycle the money. You still need depositors, particularly if you are not going to be capitalised by some big commercial entity or a stock flotation. You need to have people putting in thousands of pounds in savings to generate the loans. That might be a challenge.

Mr Scholes: That is the only way that it could work, really.

Mr Frew: I have one question, if I may. What is there to protect a mutual bank from lost profits as a result of a run?

Mr Scholes: If it joined the financial services compensation scheme, it would guarantee the money of individual members up to £85,000. That is it.

Mr Frew: What if some members of the Committee were banking there? That is small fry for some of these guys

so how could you protect their money?

The Chairperson (Mr O'Toole): Part of the challenge is that a mutual bank has to be public about the investments that it makes, and you would imagine that it would be cautious and conservative. Part of the problem with the Co-operative Bank was that that is not what happened at the end, and it was leveraged and exposed in ways that it, as a bank that was supposed to be ethical, should not have been.

Mr Scholes: You probably would not have an awful lot of people with that amount of money in a credit union or a mutual bank. A lot of credit union accounts are limited to £15,000 in savings, so that would not necessarily be the case. I get your point: it could be an issue.

Mr Frew: What is the more profitable system: to have a lot of depositors with small accounts or big businessmen with big accounts?

Mr Scholes: It depends on what you want to do with the money. If you are just talking about profit, I guess that it would be the businessmen with the larger amounts of money, because you could invest a larger amount of money in foreign markets and the money markets that the commercial banks invest in, but that would not be the case in this situation.

The Chairperson (Mr O'Toole): No mutual bank would attract someone worth £10 million or £100 million, because that is not what they are there for. They would get a higher return somewhere else, so it is a different thing.

Mr Scholes: Yes, and a mutual bank cannot invest in foreign markets anyway.

The Chairperson (Mr O'Toole): Yes, of course.

We covered quite a lot there. It is a primer for us going forward with this stuff. Thank you very much, Michael, for your time.