A recent FSA consultation gave a reprieve to the mutual sector from a possibly fatal course of action. Gareth Evans explains.
There is some quite detailed stuff on how they are helping Credit Unions. The action forcing Lloyds Bank to sell some of its branches to a mutual challenger (in the shape of the Co-op) gets a prominent mention too.
Importantly, the Coalition’s own ‘audit’ mentions the Financial Conduct Authority’s new objective, now enshrined in the Financial Services Act, to promote effective competition in the interests of consumers.
Not much else about the wider financial services market though. If someone were writing the mid-term report on the Government’s performance, “could do better” would be in the comment box.
There is a strong argument that it is every bit as important to have diversity in protection and other forms of insurance as it is in banking.
A diverse protection sector is more competitive; it gives greater choice to consumers and to their advisers. A diverse protection market promotes innovation in products but also in the service that supports them.
Drivers of innovation
Mutuals in the protection sector have been the drivers of innovation and change; the fact we have a diverse, competitive market in protection is down in no small part to mutual providers.
But this is not necessarily a recent phenomenon. We only need to look the Holloway companies, who since the 1880s have been offering simple income protection cover to parts of the market, where many providers dare not go for an example of the diversity that mutuals bring.
The fact mutuals are able to ‘do things differently’ is a function of the mutual business model. Freed of the necessity to report to shareholders and stockmarket analysts on a quarterly basis, mutuals have the time to allow new projects and propositions to establish themselves without the pressure of an immediate, and increasing, return on investment. That is not to say that mutuals should not be run with strict commercial discipline; that is essential.
in other words, innovate
It is just that mutuals have longer time horizons than their quoted counterparts and hence the time to let things develop – in other words, innovate.
Other mutuals, particularly those serving a particular occupational affinity group or geographic region, are able to design their proposition around the needs of their members thus providing insurance for groups in society who would otherwise struggle to find affordable cover due to the nature of their job or their income.
These affinity-based mutuals operate a true double bottom line approach, focusing as much on their social usefulness as their commercial returns.
Mutuals, of course do not have shareholders, they are owned by their members. It follows that because they do not have shareholders they do not have shareholder capital; instead they have the capital that has built up over years, generations even, supporting business of all kinds, including protection, and underpinning product development and innovation.
In a real sense the working capital of the mutual business is its life-blood. Typically this capital is held in the with-profits or ‘Common Fund’ of the mutual.
Some years ago now, prompted by some fairly controversial exercises in attributing a share of with-profits assets to shareholders, the FSA decided to look into the ownership of with-profits funds and the fair treatment of with-profits policyholders.
