Why the government should act now to stop further demutualisations

Gareth Thomas
© Chris McAndrew/CC BY 3.0

56 pence is all the chairman and chief executive think insurance company Liverpool Victoria is worth. 178 years after LV started trading as a friendly society to help the working poor in Liverpool avoid the then Victorian ‘scandal’ of a pauper’s funeral, it is being demutualised and sold to the controversial American private equity giant Bain Capital. For a paltry £100, or 56p for each year of trading, LV’s bosses – who stand to make millions from the deal – want its member owners to agree to sell up and gift the huge financial assets the business has built up from its members down the years to Bain.

We would all be shocked if the board of the National Trust, despite being in good financial health, decided to sell all their assets to a private company and take a stately home or two for themselves. We’d be even more so if we found out someone else had offered more money that would have kept the Trust and all their homes in public hands. The sale of Liverpool Victoria, which has only recently received a £1bn pound injection by selling its general insurance business, is the financial equivalent.

The board of LV have decided to sell the business they’re trusted to run for the benefit of their members to a private company. The man negotiating the deal has ensured that, while all the members are losing their ownership rights, he is being gifted shares, on top of a salary most of us could only dream of, in the company taking over. And, surprise surprise, sources have revealed that Royal London – another mutual, i.e. a business with members but no private shareholders – offered more money than Bain to keep those huge financial assets working for the benefit of British customers, not a controversial American company that typically sells up after a few years for a very tidy sum.

The cross-party all-party parliamentary group for mutuals has followed the proposed demutualisation of Liverpool Victoria closely. As with every previous demutualisation, it is not being led by members who own the business, but instead being driven by the chairman and chief executive. They have an obvious massive conflict of interest; negotiating a deal that will benefit them both hugely. Not surprisingly, they have kept the details of alternative bids secret, though apparently well-informed sources have been clear they received at least one offer that matched if not bettered the offer from Bain – it didn’t, however, include a continuing role for the current chairman and chief executive.

The self-interest of two men towards the end of their careers is driving the sale to a notorious private equity giant. Bain’s traditional modus operandi is to cut costs, axe jobs, take bigger and bigger sums out of the business as dividends, weaken customer service and fatten the business up for sale at a healthy profit a few years on.

‘So what?’ some might say – ‘that’s how markets work’. The difference is that the assets of this business have been built up over generations, being used to offer good quality financial services to customers who become joint owners holding in trust the assets to help other customers not shareholders.

There hasn’t been a demutualisation of a big financial services business since before the financial crash, when the sale of building society after building society led to bigger and bigger banks and helped ultimately to cause the financial crash.

Astonishingly, none of the regulators have bothered to consider any of the lessons from that wave of demutualisations, whether consumers benefited (they didn’t!) and whether it should be made harder for greedy directors to try to exploit huge financial assets built up over generations for their own personal financial gain.

The competition from this type of business helps to keep other traditional companies honest and after the financial crash surely one obvious point is the need to maintain diverse forms of ownership in the financial world.

As part of our inquiry, the all-party group looked at the role of the main regulators, the Financial Conduct Authority, and the Bank of England. What was remarkable was that they’d met with the Liverpool Victoria board and management over 60 times and not once offered to meet with the consumer/owners of Liverpool Victoria directly on their own separate terms.

They have routinely refused to disclose key information relating to the proposed demutualisation and sale, allowing the board to filter what it shares with its members. They have also approved the appointment of so-called independent experts that the law says are supposed to stand up for member owners, but who in practice have been chosen by, paid by, and briefed by representatives of LV’s management. These independent experts have backed the sale and demutualisation and the paltry £100 payoff, of course.

With the financial crash fading from memory, the wave of ex-building society collapses almost ancient history, another round of demutualisations could happen; the favourite to take over as chair of the board of Yorkshire Building Society is one of those helping drive through the LV sale. The law needs tightening to make it harder for private companies and individuals to get control of the assets built up by mutuals. These are national assets, built up by the contributions of hard-working British families – and the government should act now to stop them being sold off.

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