Oireachtas Joint and Select Committees
Tuesday, 25 June 2019
Joint Oireachtas Committee on Jobs, Enterprise and Innovation
Scrutiny of the Industrial and Provident Societies (Amendment) Bill 2018
The committee is meeting to continue its engagements on the Industrial and Provident Societies (Amendment) Bill 2018. I welcome Ms Sinead Farrell and Mr. Darragh Walshe from the Irish Co-Operative Organisation Society, Dr. Olive McCarthy and Ms Bridget Carroll from the Centre for Co-Operative Studies at UCC and Mr. Brendan Murtagh and Ms Caitriona Allis from the Association of Chartered Certified Accountants. This session will be followed by engagement with officials from the Department of Business, Enterprise and Innovation.
I remind members, visitors and those in the Public Gallery to ensure that their mobile phones are switched off or are in flight mode for the duration of this meeting as they interfere with the broadcasting equipment, even when on silent mode. In accordance with procedure, I am required to read out the following.
By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If they are directed by the committee to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.
Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.
Members have been provided with a presentation submitted by today's attendees. I now ask Ms Sinead Farrell and Mr. Darragh Walshe from the Irish Co-operative Organisation Society to make their presentation to the committee. I thank all six witnesses and those with them for giving up their time to come here today; it is much appreciated.
Mr. Darragh Walshe:
I thank the Chair and Members of the Oireachtas for the opportunity to provide detailed scrutiny of the Industrial and Provident Societies (Amendment) Bill 2018.
By way of introduction, ICOS serves and promotes co-operative businesses and enterprises across multiple sections of the economy, making it the leading organisation for registering new co-operatives in Ireland and for providing reliable, experienced advisers on co-operative rules and governance. Our core business is to provide leadership to the co-operative movement in Ireland. We use our collective voice to put the needs of the co-operative movement and our member co-ops to the forefront of what we do. We draw upon the pioneering and innovative spirit of our founding members to help strengthen the co-operatives operating in today's ever-changing and competitive world.
Starting from the agricultural co-operative path set in 1894 by our founding president, Sir Horace Plunkett, ICOS has evolved to serve the co-operative sector in seven core categories: multipurpose dairy co-operatives; livestock sector co-operatives; store, trade and wholesale co-operatives; service-related co-operatives; community-orientated, culture and leisure co-operatives; food, forestry, fishing and beverage co-operatives; and advisory and education-related co-operatives.
ICOS member co-operatives, their subsidiaries and associated entities collectively have more than 150,000 individual members owning shares in them, employ more than 14,000 people in Ireland and a further 24,000 abroad, and have a combined turnover of almost €15 billion. A significant proportion of this turnover is spent throughout Ireland on employee wages, payments to suppliers such as farmers and other small rural businesses and payments or dividends paid to the 150,000 co-operative members. In addition to the economic benefits, co-operatives place great emphasis on enhancing the skills of co-operative staff and management. They do this via the ICOS Skillnet training programmes, which allow co-operatives of all sizes to avail themselves of a wide variety of training resources in order to develop the skills of their personnel.
The Bill proposes a reduction in the minimum number of members from seven to three. ICOS has reservations about the proposed reduction of special members for a number of reasons. We are of the view that it does nothing to materially promote the seven principles of co-operation in the manner that the current figure does. For example, the existing requirement of member numbers encourages the principles of voluntary and open membership, democratic member control, member economic participation and concern for community by simply requiring more people to be involved from the start. Co-operative societies are sustained best where market failure drives collectivism and loyalty. To mitigate this market failure and drive collectivism, there needs to be some level of scale. In ICOS's experience, though not a guarantee of that necessary scale, the seven-member requirement is at least a strong indication of it. ICOS has a degree of concern that the reduction could lead to what we term "cosmetic co-operatives", where a business operates as a limited company while holding itself out as a co-operative in order to artificially gain good public relations and goodwill.
If there are to be benefits for co-operatives, whether in statute or Government policy, for the very reasons of promoting the original market failure and the logic of achieving together what cannot be achieved alone, to reduce the minimum membership opens up greater risk of abuse by individuals who would otherwise pursue another type of company vehicle. If, as a result of the review of the Industrial and Provident Societies Act, it transpires that the existing provision for seven is reduced to a lower number, we would strongly advocate that access to establishing co-operatives at that reduced number must come with strict criteria to mitigate the risks I have just outlined.
As an aside, in ICOS's experience of establishing co-operatives, the member limit is not a barrier to successful co-operative establishment. What is a bar to successful establishment is start-up co-operatives not qualifying for certain supports, such as innovation vouchers, which are currently widely available to companies. This in turn discriminates against the co-operative model and thus reduces the number of co-operatives being established.
Section 14 relates to the annual return exemption and the filing of statutory accounts to the registrar. ICOS continues to support the transparency of filing accounts and the annual return, through AR15, to the registrar. However, it also supports audit exemption for co-operative societies subject to specific criteria. Over the past number of years, ICOS has received an increasing number of requests for assistance from small to medium-sized affiliates in respect of their increasing compliance burden. In addition, we have lost potential new co-operatives due to the prohibitive cost of a statutory audit having to be carried out. This results in them being unable to pursue their preferred corporate model and thus losing out on the co-operative benefits. While recognising the key role that a robust regulatory framework plays in providing stability and fairness in the economy, ICOS is in favour of a statutory audit exemption provided that clearly defined criteria are set out in legislation as follows: the society’s turnover not to exceed a stated amount; the society's balance sheet total not to exceed a stated amount; the number of employees not to exceed a stated number; and the society's membership not to exceed a stated number. In addition, the society's rule book must provide for the exemption and require an appropriate periodic approval by an appropriate majority of the membership for the society to implement the exemption for the society's accounts. Regarding the latter, we strongly advocate that the fundamental points advocated are varied only by an amendment to primary legislation.
The strength of a co-operative is that its members own and oversee the organisation. Co-operatives are answerable to their members and to future generations of members. It is essential that this strategic involvement is facilitated and promoted by any changes to legislation.
Ms Bridget Carroll:
The Centre for Co-operative Studies is a research centre based at UCC, which promotes education, training and research into co-operatives, social enterprises and local development. Co-operatives are jointly owned and democratically controlled businesses that provide goods and services to their member owners who work together for mutual benefit. They act as a means of facilitating collective action in many sectors of the economy, including financial services; housing; food processing and marketing; retailing; community, health and other social care services; and enterprise and development. The International Co-operative Alliance, an apex body for co-operatives, estimates that it represents close to 1 billion members of co-operatives, which employ 250 million people and generate more than US$2 trillion in turnover across the world.
The intention of the proposed amendment to sections 5 and 9 is to reduce the number of members required to establish a co-operative from seven to three. As mutual organisations, a distinct feature of co-operatives is that a group of people come together with a shared purpose to meet their common needs. In many cases, this will necessitate a comparatively large group of people, such as for agricultural processing or marketing, the provision of utilities such as water or housing, or retailing, where a large membership base may be needed to achieve economies of scope and scale and the services provided by the co-operative to members, or potential members, are likely to be in considerable demand. However, in other situations, the number of initial members needed to form a co-operative is likely to be much lower. For example, in the case of worker or employee-owned start-up co-operatives, which can operate in any sector of the economy, the initial membership base may be more similar to conventional, non-co-operative start-ups. There is some evidence that a requirement to have a minimum of seven members is high for groups wishing to operate as a co-operative, and it is likely to be higher than the average numbers involved in start-up companies in Ireland.
Consequences of the requirement to have seven members at the outset for such co-operatives may include potential co-operatives choosing other models of incorporation that may not align with the co-operative ethos and practice or with the ideals of the owners, and the use of proxy members.
By way of international comparison, the co-operatives unit of the International Labour Organization, ILO, which is an agency of the United Nations, UN, collates the minimum number of co-operative members required to register a co-operative among member states. Of member states, the United Kingdom, Canada, Italy, Spain, Germany, Finland, Japan, Belgium, the Czech Republic and Uruguay have a requirement for three members. Other countries require a higher number but many require three. Work in progress by the International Co-operative Alliance reports that in the countries where worker co-operatives are well developed, the minimum number of founding members is low, such as two in France, and three in Italy and Spain.
The proposed amendment will bring the legislation more in line with international practice and companies legislation in Ireland. It will also address ILO recommendation No. 193 of 2002, which applies to all types and all forms of co-operatives. The recommendation indicates that "cooperatives should be treated in accordance with national law and practice and on terms no less favourable than those accorded to other forms of enterprise and social organization"; that "governments should provide a supportive policy and legal framework consistent with the nature and function of cooperatives and guided by the cooperative values and principles"; and that they should "establish an institutional framework with the purpose of allowing for the registration of cooperatives in as rapid, simple, affordable and efficient a manner as possible".
Co-operatives in many sectors of the world and many sectors of the economy are diverse, may develop in novel ways in the future and should not be hampered from doing so. Worker co-operatives are few at present in Ireland and perhaps not sufficiently attended to in the current legislation. Changing the minimum number may be helpful and is unlikely to have much of a cost implication. A counter argument could be made, however, that reducing the number to three could lead to misinterpretation of what a co-operative is, namely, an organisation committed to providing solutions on a mutual and voluntary basis, open to all who can use its services and share in its benefits. In this context, three would make little sense for many co-operative sectors aiming to provide a service widely, such as the traditional sectors of credit and agriculture. As I mentioned, however, there are cases where a requirement for seven members sets the bar quite high, such as in enterprise development or new areas that might include youth employment initiatives, which are of particular interest to the committee.
It is important to remember that the proposed legislation, and legislation in general, is just one piece of the jigsaw of co-operative development. A range of other supports and easily accessible information on co-operatives is required to facilitate better use of the model. When promoted by co-operative development unit in the 1980s and 1990s, with support from the Government, trade unions and others, there was a marked uptake of the model. Similarly, support from Údarás na Gaeltachta over the years has seen a community co-operative sector emerge. Countries that provide such supports tend to have a vibrant co-operative sector.
On balance, we support the proposed amendment to reduce the number of members required to establish a co-operative to three. It will make registration easier and we do not envisage any significant unintended consequences.
The intention of the amendment to section 14 is to make regulations exempting specified classes of society from the obligations to file annual returns and other specified documents relating to the annual returns. The Bill's sponsor, Deputy Clare Daly, has acknowledged that part of the amendment will require some rewording or redrafting. In a small but recent study we conducted at University College Cork, we examined co-operative start-ups, how people use the co-operative model, what facilitates them and what barriers they have experienced. We found that members of small-scale co-operatives felt that what was required of them in respect of audited accounts and returns was disproportionate to the scale of operations and was scarcely different from the application of larger co-operatives. The audit requirement can be a costly, administrative burden on small societies but there are clear benefits to having audited accounts, such as transparency and trust. We recommend retaining the requirement for annual returns and audited accounts, while allowing specified societies to apply for an audit exemption under certain conditions, which might include an asset size or turnover threshold, or the criteria as outlined by ICOS, as is the case in companies legislation.
We need not spend much time on the use of electronic communication. As of December 2018, the RFS online portal has been available and I believe that takes care of it.
Mr. Brendan Murtagh:
I represent the Association of Chartered Certified Accountants, ACCA, a global body for professional accountants. The ACCA supports 219,000 members and 527,000 students in 179 countries. We support 12,000 members and 8,000 students in Ireland. The association was invited to make a submission to the committee on the Bill. In that submission we identified that it was a limited scope amendment to old legislation and our comments are limited to the matters being amended.
We identify two substantive issues the committee should consider and some minor technical amendments. Overall, we welcome the Bill as it will serve to reduce the administrative burden for industrial and provident societies. The first substantive issue is that industrial and provident societies should be required to prepare financial statements in accordance with generally accepted accounting practices, GAAP, similar to the requirements in companies legislation. The requirement for an annual return is substantially undermined if the financial statements attaching to the annual return are non-standard. The Minister should be given the power to prescribe the form and content of financial statements for industrial and provident societies by way of regulation. There is no evidence of abuse in the area but we have anecdotal evidence from our membership of different approaches being adopted for disclosure by various industrial and provident societies. This leads to a lack of comparability and potential obfuscation of details that might be important to the shareholders. Prescribing a set of rules to follow, as is done in company legislation, will ensure consistency.
The second substantive issue is that audit exemption should be available to industrial and provident societies on a similar basis to companies limited by guarantee. This will serve to reduce the administrative burden for the smallest industrial and provident societies while also allowing any single shareholder to demand an audit.
A more technical concern is that section 14A(2) does not appear to be linked to section 14A(1). The subsections will allow the Minister to grant exemption from public filing of annual returns and financial statements for certain classes of industrial and provident societies. The exemption under section 14A(1) should be available only where the generality of section 14A(2) is met. The two subsections need to be linked and the committee should consider changing "may" to "will", thereby requiring the Minister to provide an alternative when he or she provides an exemption rather than making it optional.
Mr. Brendan Murtagh:
Within the company legislation, a certain framework under which financial statements are prepared is prescribed. As a result, there is a consistency of the accounting treatment and of the disclosures in those financial statements. Currently, there is no equivalent prescription in the Bill, which means that any industrial or provident society could make its own determination on the accounting treatment or the disclosure, rather than what would be generally acceptable.
I thank our guests for their presentations. While the ACCA commented only on the annual returns and audits elements of the Bill, the association and the Centre for Co-Operative Studies are broadly in agreement on the legislation. There is an acceptance among those putting forward the legislation of the need for amendments to clarify the annual statements dimension.
Our guests from ICOS will have listened to the presentation from Ms Carroll. I appreciate that the organisation is focused heavily on the area of agriculture and food. Does it accept her point that ICOS's model of co-operatives, along with that of credit unions, requires a wider membership base or economies of scale for it to succeed?
There are other models of co-operatives that could, and would, need a reduction in the minimum number of seven. The witnesses will be aware of the international comparison in this regard. In a previous hearing, Deputy Clare Daly argued the ceiling here is a barrier because in comparison with other countries where the threshold is lower, the co-operative model is not working in Ireland. I would like to hear the witnesses' response to those arguments and to the points raised by Ms Carroll from the Centre for Co-operative Studies.
Ms Sinead Farrell:
To date, we have not experienced any issues with getting seven members. We have always managed to get seven members. There may be a limited number of areas in respect of which the minimum number needs to be reduced. While there are countries that have a lower minimum, one would need to examine the principles they are following and whether they are successful co-operatives. The purpose of a co-operative is economies of scale and the common purpose. The question is if that is feasible with three members. Seven is ideal because it means there are more people to help promote the purpose for which people have come together - the common goal. As I said, based on our experience there is no need to lower the minimum number.
Does Ms Farrell accept that predominantly the Irish Co-operative Organisation Society is focused on the agriculture, food and others sectors and that, as pointed out by Ms Carroll on behalf of the Centre for Co-operative Studies, it may be important or necessary to lower the minimum for its models to be successful?
Ms Sinead Farrell:
To be honest, we have a lot of agricultural co-operatives but we also have non-agricultural co-operatives. We cater for store trade, wholesale trade, service-related and community services, food, beverages and tea-coffee shops. We cater for and are open to all sectors. Any co-operative is welcome. We do not pick and choose. Co-operatives come to us.
Perhaps we could tease out this issue a little further. Dr. McCarthy said earlier that on balance the Centre for Co-operative Studies supports the amendment to reduce the number of members required to establish a co-operative to three but it has some reservations in that regard.
Dr. Olive McCarthy:
Our thinking is that while three might be a minimum it should not necessarily be a target. Growth is particularly important. In the area of worker co-operatives, many start-up companies would have one, two or three people establishing those companies and so to put the worker co-operative on an equal footing three would be an ideal number to enable more worker co-operatives to get started. We are not of the view that the minimum should remain at three forever. Perhaps what a worker co-operative should be trying to do is to grow its numbers and become much bigger over time. We see examples of this in France, where worker co-operatives start-up with three members but, on average, over the last four years, there have been 70 worker co-operatives wherein the numbers have grown to almost 21. We would see three as a starting point to facilitate the set up of co-operatives, but not necessarily as the number at which the minimum will always be set.
I thank our guests for their presentations. I would like to raise a couple of issues. Dr. McCarthy in addressing the issue raised by Senator Mac Lochlainn went some way towards addressing an issue I want to raise. Obviously, one size does not fit all. A workers co-operative is a very different entity to an agricultural co-operative or a retail co-operative.
The point has been made that when they start, they start small. Perhaps then some of the concerns raised could be addressed by some of the terms and conditions for exemptions. In other words, the number of members in a co-operative would be influenced by its turnover. As the co-operative gets bigger, the minimum number has to increase. This Bill seeks to ensure that a workers co-operative can start and benefit from co-operative status such that innovation and enterprise is not limited only to those who have money to invest. We need to encourage the worker-owned co-operative principle, which is a good principle.
On the innovation voucher, as I do not know much about it the witnesses might elaborate further on it and explain why start-up co-operatives do not qualify for it but businesses do. Auditing and filing accounts is an integral part of any business. Auditing is very expensive and so the criteria around it obviously need to be reviewed. This could be addressed in the Bill through amendments. Filing of accounts is a must. Everyone in business or involved in a co-operative should concern themselves with ensuring that accounts are being recorded properly and that there is no room for issues arising, as has happened all too often in this country in so many different organisations, big and small. People need to be protected. Not everybody in a co-operative, small or big, is gifted with the expertise to spot problems arising, and so they depend on professionals for it. I would welcome more information on the innovation voucher and so on.
Mr. Darragh Walshe:
The innovation voucher comes onto my radar when I am dealing with new and small co-operatives who are approaching local enterprise offices and so on for support and funding. It is one of the supports offered by the local enterprise offices. It has been brought to my attention on a couple of occasions in recent months that co-operatives are being deemed ineligible for such a support for the reason that they were co-operatives. They are being advised to set up as a private company or a company limited by guarantee. Support can be the difference between an idea getting of the ground or a co-operative getting to the next level or not. The level of support is relatively small, but for co-operatives operating on this level, it could be a percentage of turnover or, as I said, it could be what gets them off the ground or to the next level.
It is clearly a disincentive to co-operatives versus the person setting up a business. We want to encourage both, so we should not be favouring one over the other. The Department officials will be before the committee in the next session so we will be asking them about that.
I have one final question, to which I ask Ms Carroll and Mr. Murtagh to respond. The proposed amendment to section 14 of the principal Act, which deals with audits, recommends retention of the requirement for annual returns and audited accounts while allowing specific societies to apply for an audit exemption under certain conditions, which might include an asset size turnover threshold, as in the case in companies legislation. I note Mr. Walshe spoke a little on this issue but I would welcome Ms Carroll's and Mr. Murtagh's thoughts on it.
Ms Bridget Carroll:
As we are not accountants, we confined ourselves to making a recommendation. This is an issue for co-operatives and it also came up in research we were doing. We do not propose to get into the criteria except to say that some of the criteria mentioned by ICOS seem very sensible. What we were alluding to in our recommendation is that this provision already exists, although not willy-nilly for everybody.
It applies in specific circumstances. I suppose that is what we could look at in terms of a level playing pitch.
Mr. Brendan Murtagh:
We also agree that there needs to be some form of exemption regime. That already exists under the Companies Act. In terms of ensuring that stakeholders are protected insofar as is possible, those criteria have already been established within company law and they relate to turnover, assets and number of employees. Those criteria are reasonably substantial thresholds within company law. However, there is also a protection. In the context of something that would potentially be analogous, if we consider the position of companies limited by guarantee where we are looking at protecting our membership in that respect, there is the override that if there is a single member who is not comfortable with the fact that a company is availing of an exemption, that member can require an audit. Commercially, in terms of what is protecting stakeholder interests, the exemption thresholds are appropriate provided that safeguard is in place. Our issue here is that there should be a correlation between the Bill and the provisions in the Companies Act regarding the numbers. If there is a change, it should not necessarily be ignored. There should be a direct impact of that change such that if it is deemed that the thresholds should be larger, this would trigger a review of the thresholds relating to industrial and provident societies and vice versa.
Are there any further questions? Would anyone like to make any final comment? As our guests are aware, we are conducting legislative scrutiny of the Bill and the onus is on us to listen to what they all have to say. We will listen to the officials from the Department next. The committee will then compile a report outlining whether it supports the Bill. We must stand back and look at it purely from a point of view that we do not want to make bad legislation.
I have one comment that I meant to make earlier. I do not mean it to be seen as antagonistic to anybody. Obviously, co-operatives provide economy of scale, but the other point of a co-operative, particularly a workers' co-operative, is to have more worker participation in ownership. There is more than one issue driving this Bill.
As there are no further comments, I thank our guests for attending and for their input. I also thank them for their submissions. They have been very useful. I propose that we suspend briefly in order to allow the departmental officials to take their seats. Is that agreed? Agreed.
We resume scrutiny of the Industrial and Provident Societies (Amendment) Bill 2018. I welcome from the Department of Business, Enterprise and Innovation, Mr. Gary Martin, Ms Theodora Corcoran, Mr. Tommy Murray and Ms Caroline Kiernan. Apologies have been received from Ms Breda Power, assistant secretary with responsibility for the Department's commerce, consumer and competition division. I draw the attention of witnesses to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.
Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable. The presentation submitted by the witnesses has been circulated to members. I ask Mr. Martin to make his opening statement.
Mr. Gary Martin:
I thank the committee for the invitation to make a presentation on the Industrial and Provident Societies (Amendment) Bill 2018. The Department made a previous detailed submission on this Private Members' Bill on 10 May in which we addressed the issues raised by the joint committee. I will therefore confine my remarks today to the main provisions of the Bill. This submission will deal with the framing of the Bill as an amendment to the Industrial and Provident Societies Acts 1893 to 2018; its scope as determined by the proposed reduction in the number of members as a condition to form industrial and provident societies in section 2; the proposal in section 5 regarding exemptions by regulations for specified classes of societies from the requirement to file annual returns or certain specified classes of documents that would otherwise be required to be included as part of an annual return; and the proposed registration of industrial and provident societies and filing by electronic means as set out in section 6 of the Bill. My submission will draw, among other things, on stakeholder submissions to the public consultation on the operation and implementation of the Industrial and Provident Societies Acts 1893 to 2014, recent submissions to the Department on the issues raised by the Private Members' Bill by the Irish Co-operative Organisation Society, or ICOS, and the National Federation of Group Water Schemes, or NFGWS, as well as on examples of the way these issues have been addressed in co-operative legislative frameworks across Europe.
The Department understands that the Bill aims to make the process of establishing and registering a co-operative much easier. The Department recognises fully the continuing importance of the co-operative movement throughout Ireland and is undertaking a root and branch review of the legislation with a view to consolidating and modernising it to make it easier to understand and navigate. The committee will be aware that the Department has conducted a public consultation on the operation and implementation of industrial and provident societies legislation. The ten submissions received on foot of that consultation highlighted the need for a consideration of a wide range of issues, including providing co-operative societies with a distinct legislative identity which reflects the co-operative ethos, revising the provisions on debentures, the need to provide for a consolidated rule book, registration and electronic attendance and voting. Issues raised by the Private Members' Bill also featured in some of the submissions.
The Department is considering other issues, including modernising the language, removing references to other jurisdictions, governance and the powers of the Registrar of Friendly Societies, RFS. Following the completion of the comprehensive review of the legislative framework, it is proposed that a general scheme of modernised and consolidated legislation will be brought forward later this year. This will consolidate into one statute and modernise all existing legislation relating to industrial and provident societies in order to ensure a level playing field across co-operatives and the other legal options for structuring enterprise activities. It will also provide a conducive framework for realising the full potential of the diverse range of organisations that use the co-operative model.
I refer to the proposal to reduce the minimum number of members of a co-operative. Section 2 proposes to reduce from seven to three the minimum number of members required as a condition of registration of industrial and provident societies. The sponsors of the Bill indicate that the rationale for reducing the membership criterion to three is based on the average number of employees in SMEs, which they put currently at 3.87 per business. The sponsors also noted that the proposed minimum membership criterion prevails across other European countries and that the reduction in the minimum number of members has not resulted in any unintended consequences. As part of its review of industrial and provident societies legislation, the Department has analysed the submissions received, conducted research on practices across Europe and is engaging in bilateral discussions with stakeholders to explore the various policy options relating to this issue. While three of the ten submissions to the public consultation have suggested a reduction in the minimum number of members, there was no consensus on what this minimum number should be. For example, the Centre for Co-operative Studies at UCC suggested a reduction to three members, Co-operation Works proposed a minimum of two members and Co-operative Housing Ireland requested a reduction to either two or three members. In addition, recent submissions to the Department from two of the co-operative umbrella organisations, ICOS and National Federation of Group Water Schemes, NFGWS, do not indicate support for reducing the minimum number of members to three. While the NFGWS, which has over 400 affiliate group water scheme members, had no difficulty with reducing the minimum number of members, it considered three to be a low number given the community nature of these societies and the vital importance of proportional representation, in particular when a society is being established. ICOS, which represents 130 co-operative societies, was strongly of the view that the current requirement of seven members had never acted as an impediment to the establishment of a sustainable co-operative.
Different approaches have been taken across Europe in respect of the minimum number of members required to form a co-operative, ranging from one in Finland to ten in Poland. Research on co-operative legislation indicates a trend in co-operative law to reduce this minimum number, which, according to the International Handbook of Co-operative Law 2013, is three on average across European jurisdictions. The Statute for a European Co-operative Society requires five or more members for a co-operative straddling more than one EU member state. In considering the proposal to reduce the minimum number of members required to form a co-operative from seven to three, regard must be had to the need to ensure that the reduction in the minimum number of members does not act as an impediment to the establishment of viable and sustainable co-operatives with members who have the necessary skills to run these entities. While the Department fully recognises the importance of creating favourable conditions for encouraging a range of start-ups, including co-operatives, and is open to reducing the minimum number of members, the optimum number of members required to establish a sustainable co-operative will need to be carefully examined to ensure it meets the needs of Irish co-operatives. As part of its review process, the Department is engaging bilaterally with stakeholders in order to establish, among other things, the optimum minimum number of members.
I move now to the proposals relating to certain filing exemptions. Section 5 provides for the Minister to exempt, by means of regulation, specified classes of societies from the requirement to file annual returns or certain specified classes of documents that would otherwise be required to be included as part of an annual return.
Section 5 provides for the Minister to exempt by regulations specified classes of societies to file annual returns or certain specified classes of documents that would otherwise be required to be included as part of an annual return. The Bill provides that these exemptions may correspond to exemption provisions applying to companies.
None of the responses to the public consultation requested exemptions from filing annual returns, as the Bill proposes. However, five out of ten responses requested the introduction of audit exemptions for co-operatives in line with the approach taken in the Companies Act 2014.
The concept of an audit exemption applicable to companies derives from EU law. The threshold criteria which apply are set down by the EU. Private companies which satisfy certain conditions can be exempted from the requirement to have their financial statements audited. There is no similar regime on audit exemptions at EU level in respect of co-operatives. The available information indicates that member states provide audit exemptions which could be based on the exemption thresholds applying in EU company law or nationally set thresholds.
We note that at the meeting of the committee on 11 June, the sponsors of the Bill indicated that their intention was to seek audit exemptions rather than exemptions from filing annual returns. In light of that, I have not gone into any detail about the provisions on exempting co-operatives from filing annual returns as drafted in the Bill. The issue of introducing audit exemptions for co-operatives is being considered under the current comprehensive review. The Department is supportive of introducing audit exemptions for co-operatives and is working with stakeholders to establish the appropriate criteria for exempting co-operatives from having to have their accounts audited.
Section 6 of the Industrial and Provident Societies (Amendment) Bill 2018 provides for the registration of industrial and provident societies and filing by electronic means. While these are clearly worthwhile provisions, they have been overtaken by events. The Industrial and Provident Societies (Forms) Regulations 2018, which provide for the introduction of electronic filing for the most frequently filed Registry of Friendly Societies, RFS, forms came into effect on 13 September 2018. The RFS online facility was launched on 6 December 2018. It allows for the registration of new entities online and filing by electronic means of annual returns, amendments, including partial and full rule amendments, making online payments for filings and ordering documents online. The electronic forms are available on an optional basis. The fees for the RFS submissions were also changed in August 2018 to bring them in line with similar fee types used by the Companies Registration Office, CRO. The new regulations included a provision for the reduction in fees for documents filed online.
The Department recognises the important role of the co-operative model. It is clear there is support from stakeholders of the goal to modernise the legislation and align it with the realities of the 21st century business and regulatory environment.
Mr. Gary Martin:
A piece of string has a length. We are planning to bring forward the general scheme of the Bill towards the end of this year. It will include provisions such as the audit exemption. While the Department is supportive of introducing an audit exemption, the matter needs to be analysed further with stakeholders. We have conducted research on arrangements in other countries. What they have applied varies and it is not set out in EU law. Stakeholders have a different view, particularly as regards the safeguards which should be applied with an audit exemption and the specific criteria for the thresholds to be applied in terms of the numbers of members and employees, as well as turnover and balance sheet. That will have to be explored in further detail.
Mr. Gary Martin:
The Department is open to looking at a reduction in the number of members required. The question is to what it should be reduced. As I outlined, even from the stakeholders, there is a diverse range of opinions. The National Federation of Group Water Schemes represents a third of the current societies registered. We actively sought its views because it had not responded to our consultation process. It indicated that while it would support a reduction, three may not be the correct number.
The Irish Co-operative Organisation Society, ICOS, has strongly stated it would not like that minimum number to be reduced and outlined its reasons for that, while others have indicated they would like it to brought down to three. We will have to explore that further bilaterally with some more of the stakeholders, including Co-operative Housing Ireland which put forward the case in a consultation response for it to be reduced. We are planning to meet it in the coming weeks.
Has the Department identified the notoriously unintended consequences of such a reduction? Deputy Clare Daly has argued that the number should be three as the average number of a small and medium-sized enterprise, SME, is 3.5 employees.
Mr. Gary Martin:
We have not identified any evidence-based unintended consequences which may arise from our research so far in other countries. However, we are aware of the concerns raised by several stakeholders at the committee today about going to such a low threshold. There are pros and cons which we have to explore in more detail.
Mr. Thomas Murray:
I heard that earlier and I would be interested in learning exactly under what criteria they were refused innovation vouchers. As far as the Department is concerned, there should be no discrimination, irrespective of the size of a company, be it a sole trader, small or large company. The local enterprise office, LEO, doors are open to everybody. It is a first-stop shop.
Everyone accepts there are clear benefits to having audited accounts for openness and transparency. We seem to have a general consensus that the Department is supportive of introducing audit exemptions, as are the witnesses. It is to be hoped some common ground can be found on this matter.
On the reduction of members required for registering a co-op from seven to three, all co-operatives are different. Whereas three may work for some, it might not work for others. Seven could be too many for another. A threshold of five was not used at all. Could that be a way forward? As Senator Humphreys said, the average number of employees in a SME is 3.5 people. Seven may be a burden for some co-operatives.
It may not be burdensome for people on group water schemes, which may have dozens of houses.
The fact that the Department is engaging is very welcome. The committee's job is to scrutinise this Bill and, in fairness, the document we received from the Centre for Co-operative Studies is excellent in setting out the issues. On balance, it supports the proposed amendment to reduce the number of members required to establish a co-operative to three. The task of the Department is to prove now that having three members may not work. On balance, people feel that having three members will work. I am involved with many committees and I see three as a small number. If the choice was between three members and seven, I would consider having five. The more people there are at the coalface of an organisation or a co-operative, the more helpful it would be. I accept, nonetheless, that there may be times when, in the context of setting up a specific co-op relating to food or agriculture, it may not be possible to get more than three members. The Department still has a body of work to do.