June 2010

The austerity budget- letter to the Chancellor from AFM

The Rt Hon George Osborne MP

The Chancellor of the Exchequer

8 June 2010

Dear Chancellor

Association of Financial Mutuals letter ahead of the Budget

This month’s Budget comes at a time where the UK faces significant challenges. By the same token it is also the prime opportunity for the new Government to establish the way it intends to govern for the future, as well as how it deals with the budget deficit in the immediate term.

The coalition government’s programme, launched in May, set out several thoughts on how the broader mutual sector can support the government in accomplishing a number of its aims. This note sets out the thoughts of the Association of Financial Mutuals on how some of these might be achieved.

The Association of Financial Mutuals (AFM) was established on 1 January 2010, as a result of a merger between the Association of Mutual Insurers and the Association of Friendly Societies. Financial Mutuals are member-owned organisations, and the nature of their ownership, and the consequently lower prices, higher returns or better service that typically result, make mutuals accessible and attractive to consumers.

AFM currently has 56 members and represents mutual insurers and friendly societies in the UK. Between them, these organisations manage the savings, protection and healthcare needs of 19 million people, and have total funds under management of over £80 billion.

Child Trust Fund

The announcement on efficiency savings on 24th May also included a decision to end government contributions to the Child Trust Fund by the end of 2010. As a sector that manages over half of all CTF this decision was greeted with significant surprise and great disappointment- given that it runs contrary to the stated aims of encouraging self-reliance (or at least reducing the dependence culture), and of supporting the mutual sector.

We predict this will challenge many mutual organisations, whose business strategies were heavily reliant on the Child Trust Fund, and that it will accelerate the trend towards consolidation in the mutual sector. But whilst the specific impact of this announcement is felt mainly amongst AFM members, the general implication- that industry cannot rely on government maintaining initiatives that require significant capital injection- will have far-reaching consequences.

As the most profound implications of the closure of CTF are felt within the friendly societies, we suggest that government takes a very targeted mitigating action- by increasing the investment limit on the Tax Exempt Savings Plan to £100 per month (current investment limits have been held at £25 per month since Kenneth Clark was Chancellor). This would incur little exchequer cost, give a bolster to friendly societies, but also encourage people to begin to better plan for the longer term.

We also believe that the recent announcement on the future of the CTF referred only to the government voucher, and thereby left flexibility for providers to continue to open new CTF accounts from January 2011, albeit with no government contribution. We conclude that retaining the CTF, even without vouchers, will be a helpful aid to supporting choice in saving as well as bolstering providers who have invested so heavily in the development of the accounts. This would in itself enable mutuals to more confidently embrace the transitional arrangements from August, where vouchers reduce to £50, which would otherwise be likely to be unviable for many if not all providers. It would be helpful to see clarification of these points in the Finance Bill.

The future role of mutual insurance

Leaving aside the issue of CTF, as the Annex to this note indicates, there is plenty for AFM and its members to applaud in the government programme. The indication that consumers will be given the tools to determine the best way that public companies are run, sits entirely comfortably alongside the mutual model, where customer ownership and high standards of service work hand in hand.

That said and as evidenced by the decision on Child Trust Fund, the government programme appears to give rather less attention to mutual insurance and friendly societies than it does to other mutual models such as building societies and examples from other sectors.

This ignores the pedigree of mutual insurers and friendly societies in helping to run the Welfare State when it was first created, as well as their experience of operating protection and healthcare provision at low cost and very efficiently that currently sit alongside government provision.

As our notes below show, there are many reasons for the government to set equally ambitious expectations of the future role of mutual insurance.

A legislative environment where mutual can compete on equal terms

Whilst it is encouraging that the government has identified a growing role for mutuals, our experience in financial services is that top-line messages need to be supported by effective legislation and regulation.

The mutual sector suffers from legislation that has failed to keep pace with company legislation, such that mutuals often operate at a significant disadvantage. To be able to compete on equal terms with proprietary organisations and public services will require mutual legislation- such as the Friendly Societies Act and Building Societies Act- to be updated. As illustration, better business initiatives introduced by the Companies Act are not carried over the mutuals without equivalent legislation- for example friendly societies are still unable to adopt electronic communications with their members, despite this being introduced for companies in 2001, because the relevant legislative order has never been made.

Equally the Financial Services Authority has so far demonstrated no effective capability to take diversity of ownership into account when developing the regulatory rulebook. Mutual insurers and building societies both suffer from rules designed to improve the accountability and solvency of large banks, which simply do not translate into mutuals. This is partly explained by FSA’s reluctance to engage of issues around capital, and in turn this owes much to the failure of FSA to appoint a senior person with responsibility for overseeing mutual policy. And indeed this situation is mirrored in the Treasury.

Other regulatory initiatives that appear to have a more detrimental impact on mutuals include Solvency II, with higher compliance costs and greater capital requirements, and the Retail Distribution Review, which has yet to resolve the problem of how less affluent investors get access for financial advice.

Poor regulation is probably the single greater threat to the future of the mutual sector.

The scale of government ambition for the mutual sector

According to research by Mutuo (who bring together different wings of the mutual sector to promote a better understanding of mutuals and to encourage mutual approaches to business and public policy), mutual organisations generate revenue of over £95 billion a year, nearly a million people are employed in them, and half the population are a member of at least one mutual. Mutual organisations are therefore a significant force for good, and we would welcome a dialogue with the government about how we can do more.

Some of the ideas we might explore include:

  • Mutual insurers hold significant volumes of capital: unlike building societies this money is not lent to borrowers, but is instead invested- in equities, property, or gilts. It may be possible to develop a wider range of options for investment that are more efficient in the real economy and to support government initiatives- such as creating investment vehicles to invest in infrastructure projects, or in providing the seed capital that would enable the creation of new mutuals.
  • Current long-term savings policy is confused and ineffective- questions over the implementation of NEST contribute to that. But the general concept around personal pension planning is that working people are taxed, and that part of their tax is recycled to provide the incentives needed to get them to save for the long-term. When they reach retirement there are significant restrictions on how they can use their pension pot. All of this seems inefficient and public sector pensions are even more uneconomic. A radical overhaul of pensions’ policy is needed.
  • Equally there is little focus on enabling young people to save for targeted purposes such as funding secondary education, house deposit, or marriage. Ironically the Child Trust Fund was the one product best designed to achieve that. As consumers have a range of savings needs that interweave throughout their lifetime we would argue that the concept of lifetime savings accounts should be introduced into the UK. Further work on financial inclusion is also needed: AFM and its members have been very active in this area: with members involved in the pathfinder money guidance project and our websites focused on consumers in general ( and on young children (
  • Given mutuals’ heritage of providing benefits before the welfare state, there is scope to contract out certain state benefits to the mutual insurance sector. For example the sector has significant experience of running products that sit alongside statutory sick pay and long term invalidity benefits- and all the evidence suggests mutual companies can operate such schemes more cost effectively and with better claims handling and monitoring. Contracting out this work would enable employers to offload sick pay costs to insurers, individuals to have sick pay schemes tuned to their own circumstances, and generally reduce exchequer costs.
  • Similarly, we believe there is scope for a broader role for mutuals in UK healthcare, where AFM members already provide complementary services and would make ideal prospective partners to the NHS.
  • We hope that alongside the significant macroeconomic themes that will be addressed in the Budget on 22 June, there is opportunity to consider the issues that affect people in their everyday lives. We trust in turn there is scope to involve mutuals in the development of new policy, and look forward to working with the new government across these themes.

With that in mind, we welcome the opportunity to meet with relevant Ministers ahead of the Budget.

Yours sincerely,

Martin Shaw,

Chief Executive

Association of Financial Mutuals


cc The Rt. Hon. Vince Cable MP, Secretary of State for Business, Innovation and Skills

Mark Hoban MP, Financial Secretary to the Treasury



The Coalition: our programme for government


  • We want the banking system to serve business, not the other way round. We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry.
  • We will seek to ensure an injection of private capital into Royal Mail, including opportunities for employee ownership. We will retain Post Office Ltd in public ownership.
  • We will encourage the reform of football governance rules to support the co-operative ownership of football clubs by supporters.
  • We will reduce spending on the Child Trust Fund and tax credits for higher earners.
  • We will encourage community-owned renewable energy schemes where local people benefit from the power produced. We will also allow communities that host renewable energy projects to keep the additional business rates they generate.
  • We will ensure that there is a stronger voice for patients locally through directly elected individuals on the boards of their local primary care trust (PCT). The remainder of the PCT’s board will be appointed by the relevant local authority or authorities, and the Chief Executive and principal officers will be appointed by the Secretary of State on the advice of the new independent NHS board. This will ensure the right balance between locally accountable individuals and technical expertise.
  • We will give local communities greater control over public health budgets with payment by the outcomes they achieve in improving the health of local residents.
  • We will support the creation and expansion of mutuals, co-operatives, charities and social enterprises, and enable these groups to have much greater involvement in the running of public services.
  • We will give public sector workers a new right to form employee-owned co-operatives and bid to take over the services they deliver. This will empower millions of public sector workers to become their own boss and help them to deliver better services.
  • We will use funds from dormant bank accounts to establish a ‘Big Society Bank’, which will provide new finance for neighbourhood groups, charities, social enterprises and other non-governmental bodies.
  • We will make Network Rail more accountable to its customers.
  • We will turn the rail regulator into a powerful passenger champion.

[1] Summary prepared by Mutuo,

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