Building Societies (Conduct)

Part of the debate – in the House of Commons at 12:00 am on 9th April 1959.

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Photo of Mr William Shepherd Mr William Shepherd , Cheadle 12:00 am, 9th April 1959

I suppose that I should apologies to my hon. Friend the Economic Secretary for causing him to make two speeches in rapid succession. In my defense, I can only plead that I fixed neither the date of the Budget nor the date of this Adjournment debate.

I want briefly to talk about the conduct of some building societies. I emphasise the word "some", because I would not like it to be thought that I was in any way critical of more than a minority of them. On the contrary, I have a very great admiration for the work that they have done for such a very long time. We started the building society movement as long ago as 1797—the date of the establishment of the first society—and we have given a very useful lead to the world in establishing organisations that have done so much for personal house ownership. It is, therefore, in the interests of the societies themselves that I speak tonight, and not in any general sense of criticism of their activities.

The societies have a very difficult task and, on the whole, that task is fulfilled by public-spirited men who get very little out of the work they do. That fact is insufficiently appreciated by many of their critics—and in the last year the building societies have had a great many critics. However, I do not want to add the voice of criticism myself, because I know that the maintenance by the National Savings Movement of its present high tax-free yield is one of the societies' main difficulties.

In general terms, the task of running a society successfully, with the principle of lending very long —twenty, twenty-five or even thirty years —and borrowing short, often very short, is an exceedingly hard One, and the extent to which the societies have weathered these essential difficulties, and have established themselves as well developed and respected financial mechanisms is a great tribute to the men who work, and have worked, in them.

Despite the undoubted merits both of management and of purpose of the societies, there has grown up in the last few years some concern over the activities of some of them. This concern has been shown by one or two prosecutions, and particularly by the fact that, as stated in replies to Questions in the House, the Registrar of Building Societies has had to put a number of them under his investigation. In some cases he has had to issue stop orders preventing the soliciting of public subscriptions.

I do not quarrel with the Registrar's action in stopping the public soliciting of investment when a society is clearly not a fit and proper body, but it is an extremely harsh prescription and results in hardship for the depositors. As soon as the Registrar publishes his notice in the London Gazette, everybody wants to draw his subscriptions out, and, clearly, that cannot be done because the money is on long loan.

As a preliminary to my criticism of certain societies, I suggest that we ought to take all the action we can to prevent the registrar being placed in a position where he has to issue this extremely harsh order which causes a great deal of trouble not only to the society itself, but to the people who deposit their money in it. I am actively engaged in the property business and occasionally have relations with building societies, but in a very modest way, and I am not, therefore, seriously interested in their activities.

The first complaint that I have is the extent to which it appears possible nowadays to resuscitate moribund societies. A society which, perhaps, was formed in 1802 is bought up by some individuals and they are then able to say that this society, which may really have been defunct for a good many years, was established in 1802. This gives a semblance of security and substance to the society. Often, after a moribund society is bought, its name is changed. I cannot understand why the Registrar allows these companies to change their names. Such a procedure is obviously against the public interest. For example, there may be a society called the XYZ Building Society. The sound of that name is not sufficiently enticing to the investor, so it is changed to a well-known institution.

Let me give some recent examples. One society is called the Eagle. This was recently established, the intention, obviously, being to persuade people that this society has something to do with Eagle Star. Worse still, one is called Lloyds, and there is no doubt what the intention of Lloyds is in this case. A third one is the City Prudential; and there are others. These organisations ought not to be allowed to take these pretentious and misleading names when their object is to get savings and money deposits out of the public.

It is very hard to compare the treatment which is meted out to these building societies with that which the Registrar of Business Names metes out to ordinary business people. If one sends in a business name which is misleading or pretentious, the Registrar writes back saying that name cannot be used. However, when it comes to using misleading and pretentious names to induce investment, apparently it is allowed without let or hindrance. This is an extraordinary way of conducting the nation's business.

I cannot understand how it is that a society is started so easily. I am told that if one runs along to the Registrar with three names and a set of printed rules according to the schedule one is immediately established as a building society. If one wants to set up a modest "pub" in the country to sell four or five barrels of beer a week inquiries are made as to one's antecedents, where one has been and what one has been doing. Plenty of references are required. That is a reasonable precaution to take, but if one is setting out on the job of inviting subscriptions from the public on a wide scale one can start a building society without being vetted as to one's suitability for operating such an organisation. It seems to be a most remarkable state of affairs which urgently needs more rigorous attention by the Registrar.

Another matter which I regard as serious is the grave extent to which building societies are used for property speculation. We all know that the fundamental purpose of a building society is to help people to provide homes for themselves. There are many who will argue—I should not disagree—that this is not necessarily the only function which the societies ought to perform. It may well be that some measure of lending for investment property is permissible. But this kind of lending is going on today on a quite considerable scale in some building societies.

I understand that loans of about £100,000 or £150,000 or more are given to property speculators to finance their speculations. I am very well aware, because I happen to be in the business myself, that the property business today is a quite agreeable business to be in; but it will not necessarily always be so. It may well be that one of these societies lending money in this way on a large scale for property speculation will lose a substantial amount of its depositors' money. This will react very unfavourably on the standing of building societies.

This is a matter which I cannot discuss now, because it might well involve legislation. I merely say that if the Registrar could make it necessary for building societies to declare all loans over £5,000 and itemise them in their annual reports, not merely showing them in a general sense as they now do, that would be some safeguard for the depositors against !lie risk which is obviously run.

A worse aspect of the risk arises when societies lend substantial moneys for property speculations indulged in by the societies directly. In other words, they are receiving money from the public for the purpose of financing their own property speculations. This is going on in a fairly substantial way, and something ought to be done to stop it. Clearly, if a man can have access to very substantial sums of money his judgment and criticism of a particular proposition will be much more easy and optimistic than it would be if he had to satisfy an independent authority that the proposition was a good one. If we permit the directors of building societies to use substantial sums of money from the societies' funds for their own property speculation, we risk the depositors' money.

Those are, in the main, the ways in which some building societies are, I believe, acting wrongly today. I am very anxious that we should not have a succession of troubles in building societies which will damage the deservedly high reputation which the majority of them enjoy. If we continue what I can only castigate as the present lax administration of building societies, there will be a real risk of societies running into trouble on a substantial scale and losing the attraction which they have for members of the public.

We have grown up to believe that investment in a building society is a safe form of investment. By and large, small investors who cannot afford to lose their money are the ones who invest in building societies. In my view, it is most important that the Government take steps, albeit administratively, to ensure that the control of these societies is such that any chance of any substantial damage to the prestige of the organisations is eliminated. We ought not to go on at the present rate of risk. It is unfair to the depositors, unfair to the great majority of building societies who conduct their affairs properly, and it is unfair to those who have to borrow from the societies.

I hope, therefore, that my hon. Friend the Economic Secretary to the Treasury will say that, having let this matter run on rather longer than they ought to have done, the Government are now prepared to have a more tight administration of this most important movement.