2.5.3 Loans and loan-stock

The FCA’s registration guidance includes guidance for societies intending to issue loan-stock or similar forms of debt security. It is concerned that any rights given to the loan-stock holder or other lenders does not undermine the society’s compliance with the conditions for registration. There are three main areas of concern.

Firstly, the FCA is concerned that the loan-stock agreement does not confer any constitutional rights to the loan-stock holder or lender which could compromise member control of the society.

Secondly, although the FCA accepts that the rate of interest on any form of loan is a commercial matter, the loan agreement should not be a vehicle for distributing profits. This implies that any form of profit-sharing arrangement would not be acceptable to the FCA.

Finally, the FCA acknowledges that many loan-stock agreements include an arrangement to allow loan-stock to be converted into shares at some later stage. If such arrangements are to be included in an agreement then they must take a form that ensures the society remains compliant with the conditions for registration. This should include provisions to accommodate the legal maximum individual shareholding a member may have in a society, and the arrangements for non-user investor shares highlighted in Section 2.2.4.

If you have any questions or suggestions for new information you would like to find in the Handbook, contact the team by email at communityshares@uk.coop