Cooperative Investment Model
Ethical Investments is currently researching the possibility of establishing one or more Industrial Provident Societies to promote investment in the following areas:
The IPS structure has many advantages for ethical investors:
- It allows investors with a common interest to pool resources in order to conduct a business in a democratic way with direct control over the activities of the society.
- Shares can be redeemed to the society at par value (as long as it has sufficient reserves to do so) but cannot be traded (so speculators cannot influence the share value).
- Profits are distributed by way of an annual interest payment (which can be used to purchase more shares if desired).
- Members enjoy cost benefits by pooling resources - money, knowledge etc.
- Members can buy assets / commission services which would be beyond their means as individuals.
- The society will allow members to enjoy the benefits of "collective bargaining".
- The society can diversify its assets and activities to reduce risk.
- The society can invest in assets which themselves are illiquid but still give members the opportunity to redeem their shareholding if they need to (assuming the society is not in distress).
- The society will utilise profits to provide a capital reserve to protect investors from adverse trading conditions in future years.
- If sufficient reserves are available, the society can make interest payments to members even in years when trading conditions are poor.
- Shares can be held within a Self Invested Personal Pension (tax relief on contributions, no tax on interest payments).
- Shares in some societies engaged in qualifying activities attract Enterprise Investment Scheme Relief (20% Income Tax Relief on investment, deferral of Capital Gains Tax and exemption from Inheritance Tax after 2 years).
- Surplus profits are used to benefit the community.
Crucially, where the IPS is established for the "benefit of the community" it enjoys special treatment from the FSA in relation to the promotion of investment and the ongoing reporting requirements. This makes it a very cost-effective investment structure.
There are a few restrictions and issues to bear in mind:
- Responsibility and workload rests with the management committee and must be paid for.
- Members must be prepared to get involved if they want their views represented.
- The society must retain sufficient share capital to keep the running costs within an acceptable level and maintain profitability.
- The initial costs involved in setting up the society will mean that investors cannot expect substantial interest payments in the early years.
- In addition, investors wishing to withdraw in the early years cannot expect to receive a full return of their initial investment.
- The society must remain profitable and have sufficient cash reserves in order to pay the full value of shares on redemption.
- There is no guarantee that members will be able to redeem their shares on request for the full par value - or indeed at all.
- Members can never receive more than the price their originally paid for their shares - and may have to accept less.
- There is a cap on interest payments of 10% per annum. Surplus profits are used a) to bolster reserves for the membership as a whole and b) for the benefit of the community rather than being distributed to members.