By their very nature, mutuals are limited in how they can raise capital. Like all businesses, they can retain profits and can borrow against future earnings, but they have no equity shareholders and so do not have access to this type of prime capital.
These restrictions are well known and mean that the debate around capital in mutuals is not new. To date however, in the UK at least, mutuals have not made significant alterations to their basic capital framework, which was designed more than 150 years ago.
The reason for this is that mutuals have been wary of introducing external capital into their business for fear that it could subvert the purpose of the firm and could lead ultimately to demutualisation in extreme cases.
The challenge therefore is to amend the capital regime in mutuals to permit the injection of external capital, whilst safeguarding both the core purpose and mutual integrity of the business. We can point to existing examples where this has been achieved in other countries such as Canada, France and The Netherlands. We believe that similar provisions should also exist in the UK.
The Mutuals’ Redeemable Shares Bill
The Mutuals’ Redeemable Shares Bill seeks to make the necessary legislative changes to permit UK mutuals to access additional capital whilst safeguarding their mutual purpose and status.