In September, the Law Commission (the Commission) presented its final report “Review of the Friendly Societies Acts 1974 and 1992” (the Report) and accompanying draft bill (the Bill) to parliament. The Report follows on from its consultation paper issued in March last year and contains its recommendations to simplify and modernise the legislation applying to friendly societies in line with the Government’s ambition to double the size of the mutuals sector.

The key recommendations outlined in the Report and accompanying Bill are:

  1. Repealing the Friendly Societies Act 1974 (the 1974 Act) and grouping all friendly societies under the Friendly Societies Act 1992 (the 1992 Act).

This would achieve the aim of simplifying the legislation currently applying to friendly societies which the Commission describes as “complex, fragmented and outdated” and “disproportionately complicated”, and also recognises the long-anticipated retirement of the 1974 Act which has been closed to new registrants for some time.

An additional benefit would be to enable Friendly Societies to benefit from incorporation; societies registered under the 1974 Act do not have a separate legal personality; their property is held through trustees.

To allow sufficient time for Friendly Societies to re-register or convert, the Report recommends that the repeal takes place three years after the Friendly Societies (Amendment) Bill takes effect as law, extendable once by HM Treasury for a further three years. If reform goes ahead, the Financial Conduct Authority (the FCA) has indicated it will offer support with re-registration or conversion. Any society or branch still registered at the end of the transitional period would have its registration cancelled.

  1. Amendments to the regulatory and constitutional framework by:
  • Giving the FCA an effective toolkit (currently limited to prosecution of members for certain breaches), to manage serious non-complianceincluding registration cancellation in cases of wilful noncompliance by friendly societies, though a series of procedural steps (a warning notice, a proposed cancellation notice giving time to rectify the breach, the right to make representations, and a right of appeal to the court) are proposed to be built in.  A second ground for registration cancellation would exist where the society has fewer than three members.
  • Permitting friendly societies to form and hold subsidiaries without first having to amend their memorandum to include that power (which requires a special resolution and FCA registration).
  • Mandating three new friendly society rules concerning: (1) conflicts of interest, (2) delegation of committee of management powers, and (3) communication with members.
  • Removing the requirement for statutory declarations for amendments to a society’s rules or memorandum (whilst preserving the FCA’s role in checking compliance with applicable legislation before the amendments take effect).

The Commission has proposed the retention of a flexible framework, as opposed to restricting the scope of the 1992 Act to regulated friendly societies (those carrying out or effecting contracts of insurance) alone (noting for example that this would make it harder for friendly societies to exit insurance business).

  1. Putting the core duties of the committee of management on a statutory footing, following the Companies Act 2006 model, modified to be appropriate for friendly societies (for example, the section 172 duty to promote the success of the company should not import a shareholder value concept of success). Further alignment with company law is proposed by allowing disqualification for persistent breaches.
  1. Amendments of the rules applying to transfer/amalgamation of business, including:
  • Changing some of the preclusion grounds on which the FCA can decline to confirm a transfer. For example, the regulator would refuse confirmation if the transfer “would materially harm the interests of members and other recipients of insurance or other benefits,” replacing the current test of whether the transfer is positively in the interests of members.
  • Introducing a more flexible fast-track process with new regulatory discretions for “smaller” regulated friendly societies (annual gross written premiums of no more than £25 million, falling outside Solvency UK) and non-regulated friendly societies. Key safeguards would be retained as would regulatory oversight with confirmation by the FCA retained in an amended form.
  1. Expanding the range of permitted insurance purposes to encompass “the full range of insurance activities regulated under the Financial Services and Markets Act 2000 (FSMA), subject to limited exceptions”. Whether a Friendly Society would be permitted to carry on a particular activity in practice would be determined by the  Prudential Regulation Authority (PRA) through the Part 4A FSMA authorisation process.
  1. Removal of reinsurance restrictions. Current restrictions confine friendly societies to reinsuring risks insured by another friendly society and only where the risk is of a class the society already writes. The report recommends enabling friendly societies to reinsure business that may otherwise be transferred to them, subject to regulatory permissions and supervision under FSMA.
  • The need to introduce capital-raising mechanisms for friendly societies, given that the lack of such mechanisms is a barrier to growth for some friendly societies. The Mutuals’ Deferred Shares Act 2015 remains inoperative because the necessary regulations have not been made, primarily due to unresolved tax implications.
  • The issue of asset protection in friendly societies. The Co-operatives, Mutuals and Friendly Societies Act 2023 already gives HM Treasury power to introduce voluntary asset locks, but no regulations have yet been made. The main difficulties with an asset lock are potential adverse tax consequences and conflict with the regulation of with-profits funds.

The Commission declined to recommend extending administration and restructuring mechanisms to friendly societies or aligning regulated friendly societies with the insolvency regime for commercial insurers. For friendly societies carrying on long-term insurance business, the Commission noted that the priority in financial difficulty remains “protecting policyholders by transferring policies to another provider, rather than rescuing the existing entity”.

The Report follows and dovetails with the PRA’s consultation (see our summary here) on updating its guidance for Part VIII amalgamations and transfers under the 1992 Act. The PRA confirmed it would continue to engage with the Commission and stood ready to update its policy further if the legislative review leads to statutory changes.

It is now for the Government to decide whether to implement the recommendations.