PROPOSED AMENDMENTS TO THE FRIENDLY SOCIETIES ACT 1992

A Consultation Document by H M Treasury

May 1999

1. Friendly Societies (societies) have a long history of making mutual provision for members and their relatives, against loss of income through sickness or unemployment and for retirement. The provision of life and accident insurance and small scale savings products are the staple of most societies. The latest legislation governing them is the Friendly Societies Act 1992 (the 1992 Act). As at 31 March 1999 there were approximately 270 societies. Total funds of the movement were £12 billion and membership is estimated at over 5 million.

2. It is proposed to remove restrictions within the 1992 Act on the ability of incorporated friendly societies to form or acquire subsidiaries.

3. Please send your comments by 30 July 1999 to:

Graham Burbage
Home Financial Services Team
Room 42a/G
HM Treasury
Parliament Street
London SW1P 3AG

Tel: 0171-270 4957
Fax: 0171- 451 7544

Further copies of this document can be obtained from Zubeda Esmail on 0171 270 4487

5. The Treasury is minded to make the necessary legislative changes by means of an Order under section 1 of the Deregulation and Contracting Out Act 1994, which provides a power to remove or reduce certain statutory burdens on businesses or individuals so long as necessary protection is not reduced. This consultation document therefore constitutes formal consultation on the revised proposals as required under section 3(2) of the 1994 Act. This consultation document is being sent to all friendly societies and other interested parties.

6. Readers are invited to comment on the proposals. Comments received after the closing date will be welcome, but it cannot be guaranteed that they will be taken into account when assessing the outcome of the consultation.

7. Responses to this consultation document may be disclosed, unless the information relates to a particular person or business. Readers should identify any such information and tell us whether the person involved consents to it being made public in an anonymous form.

8. In considering proposals for new or amended regulations, the Government wants to hear from business how it views the likely impact of the proposals. In giving your views on the proposals contained in this document, it would therefore be particularly helpful if you could comment on the assessment of the likely cost implications (and any cost savings) which you believe would be likely to arise for your business.

Current Statutory Position

9. An incorporated society is limited by the following provisions of section 13 of the 1992 Act as to forming or acquiring subsidiaries.

13(1) Subject to the following provisions of this section, an incorporated friendly society may include among its purposes any of the following activities -

(a) forming subsidiaries;

(b) taking part with others in forming bodies corporate to be jointly controlled by it;

(2) An incorporated friendly society may form or take part in forming or may otherwise acquire control or joint control of the following bodies corporate (referred to as "qualifying bodies") but no others -

(a) companies whose objects are limited to the carrying on of any one or more of the activities specified in Schedule 7 to this Act; and

(b) bodies formed in another member State whose purposes are limited to the carrying on of any one or more of those activities in another member State.

(3) A company or other body corporate is not a qualifying body if its objects or purposes enable it to form or take part in forming or otherwise to acquire control or joint control of bodies corporate.

Description of the proposals

10. The Government proposes two measures to extend the powers of incorporated friendly societies to form or acquire subsidiaries:

(i) to include subsidiaries which may themselves, in turn, have a subsidiary or more than one level of subsidiary;

(ii) to include bodies formed in non-EC countries.

11. Both extensions will be subject to the requirement for the activities of a subsidiary to be restricted to the list of activities set out in Schedule 7 to the 1992 Act. Schedule 7 may be amended by the Friendly Societies Commission, with Treasury consent, by adding to or deleting any activity or varying the description of an activity.

Burdens which it is intended to remove

12. In recent years, in line with other financial institutions, the committees of management of about 20 societies (particularly the larger ones) have chosen to provide new services to members through subsidiary companies. However, acquisitions have not been straightforward in situations where a society has been seeking to acquire a group of companies, since the limitations of Section 13 have meant the separate purchase of each member of the group; alternatively the group has had to be suitably restructured before acquisition. This will have added to acquisition costs and some opportunities might have been lost because of these difficulties.

13. The proposals in paragraph 9 above (with a consequential extension of Schedule 7 to make the holding of subsidiaries a permitted activity within that Schedule) would allow an incorporated friendly society to form or acquire holding companies or groups of companies. But it would remain the case that companies whose activities do not fall within the list of activities in Schedule 7 to the 1992 Act could not be acquired.

14. The Treasury expects that these proposals would result in a net cost saving to business. The Treasury will be completing a full Regulatory Impact Assessment. The Treasury would be grateful for businesses' estimates of any cost implications as outlined in paragraph 8 above.

Comparable provisions affecting insurance companies

15. An insurance company (whether mutual or proprietary) may have any number of tiers of subsidiary. There is no restriction on the activities of those subsidiaries and they may be located anywhere in the world. The practice of having more than one level of subsidiary is widespread and some group structures are highly complex.

Protections

16. The Government does not consider that the present limitations in themselves provide any necessary protection and see no reason in principle for societies to be subject to different requirements in this respect from those applying to insurance companies. However, whilst there is no statutory requirement on a society forming or acquiring a subsidiary to obtain the prior approval of the Friendly Societies Commission, its prudential guidance does require societies to inform it of all proposed new business ventures for comment at an early stage. So the Commission will continue to be able to judge the capacity of the society to finance and control its subsidiaries in a way that ensures that members' interests are not jeopardised.

17. The Commission will retain its powers of intervention under the 1992 Act. These include (under Section 54) the power, where it appears that the activities of a subsidiary or subsidiaries are or may become disproportionate to those of the friendly society group as a whole, or are considered unsuitable for a member of a friendly society group, to give a direction to the society to take remedial action. This can include directing the society to cease control of a subsidiary or directing the winding up of a subsidiary.

18. In addition, the activities that any subsidiary of a society may undertake will continue to be restricted to those set out in Schedule 7 to the 1992 Act, as amended from time to time. These activities are restricted to those which are considered appropriate for a friendly society 'group' to undertake, commensurate with the nature of friendly societies.

Annex 1

Deregulation Proposals and Orders - Parliamentary Consideration

This note is sent to you at the request of the Deregulation Committee of the House of Commons and of the Delegated Powers and Deregulation Committee of the House of Lords.

Introduction

1. You are being consulted by the Government about a proposal which may lead to an order under the Deregulation and Contracting Out Act 1994. If it does, then, when the Government has completed its consultations, the Minister concerned may lay proposals before both Houses of Parliament, in the form of a draft of the order he or she proposes to make.

2. This note is to tell you about the Parliamentary stage of the process, and the opportunities available to you.

Deregulation Proposals

3. When the Minister lays proposals before Parliament, he or she must also lay a report setting out:

the burden proposed to be reduced;
whether there is "necessary protection" and how it is to be retained;
what cost savings are expected;
what other benefits there will be from the removal of the burden;
details of the consultation process;
any representations received as a result of that consultation; and
the changes made as a result.

4. On the day the Minister lays the proposals and report, the period for Parliamentary consideration begins. It lasts for 60 days, excluding Parliamentary recesses. If you want a copy of the proposals and the Minister's report, you should contact the Government Department concerned.

The Commons Deregulation Committee

5. Both Houses of Parliament have made special arrangements to scrutinise deregulation proposals and orders. In the House of Commons, an all-party Select committee of 18 members has been set up.

6. The Committee must consider in each case whether proposals:

appear to make an inappropriate use of delegated legislation;
remove or reduce a burden or the authorisation or requirement of a burden;
continue any necessary protection;
have been the subject of, and take appropriate account of, adequate consultation;
impose a charge on the public revenues or contain provisions requiring payments to be made to the Exchequer or any government department or to any local or public authority in consideration of any licence or consent or of any services to be rendered, or prescribe the amount of any such charge or payment;
purport to have retrospective effect;
give rise to doubts whether they are intra vires;
require elucidation or appear to be defectively drafted;
appear to be incompatible with any obligations resulting from membership of the European Union
and it may take oral or written evidence to help it decide these matters.

7. It must then report:

whether the Minister should proceed to lay a draft order in the same terms as the proposal, or
whether amendment is necessary, or
whether the order-making power should not be used (for example, because of the significance or sensitivity of the proposal).

If you want a copy of the Committee's Report, you may obtain it through HMSO. If you have difficulty doing so, contact the Committee staff.

8. After 60 days for Parliamentary consideration, the Minister may lay a draft order before both Houses, this time for the approval of Parliament.

9. In the House of Commons, the Deregulation Committee will examine the draft order to see how far its views have been taken into account. It must then report, within 15 sitting days, whether the draft order should be approved or not, and it is then for the House itself to take a final decision.

The House of Lords Delegated Powers and Deregulation Committee

10. The House of Lords Delegated Powers and Deregulation Committee has similar powers and will perform a similar function for that House. It is therefore not necessary to repeat these in detail here but you may wish to consult the Committee's Special Report (HL Paper 48 of session 1994-95, available from HMSO). The Lords Committee will consider proposals for deregulation orders, on which it may take evidence, and must report to the House in time for the House to debate that report within the 60 days should any Peer wish to do so. The Committee will also examine any final draft order to see how far its views have been taken into accounts.

11. Any final draft order must be approved by both Houses of Parliament before becoming law.

How to make your views known

12. Your first and main opportunity is to make your views known to the relevant department in the Government's consultation process, and you should send your views to the person named in the consultation document. If, when the Minister lays proposals before Parliament, you feel that your concerns have not been adequately reflected, you are welcome to put your views before the two Committees.

13. In the first instance, this should be in writing. The Committees will normally decide on the basis of written submissions whether to take oral evidence.

14. Your submission should be as concise as possible, and should focus on one or more of the criteria listed in paragraph 6 above.

15. Because of the time limit, your submission should reach the Committee staff as soon as possible after the Parliamentary stage begins. It helps if you let them know in advance that you intend to make a submission. In the Lords, the Committee must report within 60 days and in time to allow debate in the House. Accordingly, submissions for the Lords Committee should be made within 14 days of the laying of a proposal.

16. In order to save duplication of work by consultees, the Commons Committee will copy to the Clerk to the Lords Committee any submission it receives, and the Lords will copy to the Commons any submission received by them.

Your submission to the two Committees may be sent by post or delivered by hand to:

The Clerks to the Deregulation and Delegated Powers Deregulation Committees
c/o House of Commons
7 Millbank
London SW1P 3JA

17. It may also be faxed to 0171 219 2509; if you are faxing, please send a hard copy as well. Alternatively, you may send your submission on disc (Wordperfect 5.1).

If you wish to write directly to the Lords Clerk, the address is:

The Clerk to the Delegated Powers Deregulation Committee
House of Lords
London
SW1A OPW

18. If you need further information or guidance, write to the Clerk of the relevant Committee at the address or fax number above. You can telephone the Commons Deregulation Committee staff on 0171 219 2837 or 2833. The Clerk to the Lords Committee can be contacted through the Parliamentary switchboard (0171 210 3000).

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