Clause 51 - Building societies: creation of floating charges
Financial Services Bill
Christopher Leslie (Nottingham East, Labour)
Clause 51 looks technical and detailed, although it is short and sweet. Government Members welcome the clause’s updating of the Building Societies Act 1986. My hon. Friends will recall that that particular Conservative Administration introduced legislation that liberalised the rules on building societies. The 1986 Act, of course, allowed widespread demutualisation of the building society sector. My hon. Friends will know the saga that occurred thereafter.
Clause 51 makes further changes to the 1986 Act—the previous Administration made a number of changes—that will hopefully go some way towards strengthening the defences of the mutual sector. The Minister, like my hon. Friends, has said elsewhere on a number of occasions that the actions of demutualised ex-building societies played a part in the growth of sub-prime lending in this country. As a Labour and Co-operative Member, therefore, I want to ensure that we introduce provisions that properly regulate and defend the good name and honour of the non-plc, mutual sector. That excessive risk-taking—that dash for profit—and the associated risks were hastened and amplified following demutualisation. My general thesis is that, had we had more protection for the building society and mutual sector, we might not have seen such difficulties with Northern Rock and other previously mutual financial services institutions. To that end, I would be grateful if the Minister put on record his view on the importance of building societies with particular regard to their role in ensuring a stable financial services sector.
Specifically on clause 51, the previous Government gave the Treasury secondary legislative powers to allow building societies to create what are known as floating charges where such a move might be necessary for stability. As far as I understand it—as a layman in such issues—a floating charge is a form of security interest giving preferential rights over a fund of changing assets that floats, or hovers, until its conversion or crystallisation into a fixed charge. A body of case law and common law governs many such floating charge arrangements. In literature on these matters, there is a lot of discussion about the ambiguity of some of that common law and whether, over the past 100 years or so, there has been sufficient definition about how the courts define floating charge arrangements. They have often been cited as legal devices created by lawyers, without necessarily requiring any statutory or legislative support.
Floating charges give a certain degree of latitude to transfer circumstances, where building societies might, for various reasons, need to be subsumed or merged with other entities. Will the Minister explain why the clause goes further at this time than in the past? The only safeguard I can see built into the provisions is a reliance on European definitions of “participants” in debt payment systems. Does the Minister feel that that offers adequate protection to building societies?
The clause amends the Building Societies Act 1986 to legalise the application of floating charges. Apparently, there is an existing prohibition against floating charges, which inhibits the building societies sector’s ability to access private sector funding. An exemption to the 1986 general prohibition against floating charges was made by the previous Government, to enable assistance to distressed building societies to be made. In 2010, my noble Friend Lord Myners proposed changes to a series of arrangements for building societies, and an order was made. Although there was a consultation on the floating charge arrangements, he did not in the end decide to proceed with the particular floating charge provisions before the Committee today.
At the time, he said that in light of further consideration on the floating charge proposition, he had decided to make a more limited order that would enable building societies to do certain things, but would not allow the floating charge arrangement to be implemented. He felt that a wider order might result in floating charge arrangements being made in a way that would not necessarily relate to financial assistance. He said that it
“would have given a general and indefinite permission to building societies to grant floating charges so that they could access settlement and payment and settlement systems directly. To do that would increase risk in the sector, and goes beyond the intention of the policy”.—[Official Report, House of Lords, 18 March 2010; Vol. 718, c. GC282.]
The orders at that time only enacted a couple of provisions, and not the one in the clause. The crux of the issue is why the Government feel now—but not then—the need to implement the provision, and why those risks have apparently disappeared in the intervening period.