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 Frederick Erroll Mr Frederick Erroll , Altrincham and Sale 12:00 am, 9th April 1959

I am sorry that hon. Members have to listen to me for a second time this evening. Apart from that accidental consequence, however, the House can be grateful to my hon. Friend the Member for Cheadle (Mr. Shepherd) for raising tonight the question of the conduct and management of building societies. It might help the House if I remind hon. Members that there are over 700 buildings societies, about 3½ million investing members, 2 million borrowers and total assets of about £2,500 million. We can all appreciate, therefore, that the way in which these societies conduct their affairs is a matter of interest to the whole community and one in which Parliament can properly feel a close concern.

Over the past century or more, the building societies have become deeply rooted in the social and economic life of the country, and they have served us well. I was glad that my hon. Friend made it clear that he was criticising neither the honesty nor the skill with which the building society movement as a whole and the vast majority of the societies are managed. He was directing his criticisms at the small fringe of societies, some of whose activities are, perhaps, more questionable, but even that is a matter of degree. While my hon. Friend would advocate some method whereby the societies could be more strictly supervised, I would like to remind him of the powers already possessed by the Registrar, which, I hope, will go some way to meeting his points.

One problem which my hon. Friend raised was the question of building societies which, for one reason or another, run themselves and their members into financial difficulties. That is essentially a marginal problem. It concerns only a small proportion of the societies, but I do not deny its importance for that reason. I agree that there are aspects of the control exercised over building societies which need careful thought, and we are giving careful thought to these matters.

Perhaps I might start at the beginning of the life of a society by dealing with the question of registration. My hon. Friend suggested that it is too easy to set up a new building society. At present, it is possible to set up a new society provided that its rules conform with the Building Societies Acts and are signed by not less than three members of the intended society and by its secretary. The registration fee is £20. These conditions are certainly not unduly onerous and could, possibly, be used as a way of cashing in on the goodwill which undoubtedly attaches to the building society movement in order to obtain capital for a purpose which is not really appropriate to be financed by a building society, examples of which my hon. Friend has given.

On the other hand, I would not like to see too stiff a set of conditions attached to the registration of new societies. The building society movement will flourish only so long as it is competitive, and there can only be effective competition if there are opportunities to set up new societies where the need exists and the business can be secured. So much for registration.

There is then the question of names. My hon. Friend referred to some grandiose names which are really much too impressive for the nature of the society, itself. The majority of building societies are named geographically after the town, county or area where they were founded or at present conduct their business. If one looks through the list, one will find a number of signs of the romantic yearnings and aspirations of our grandfathers, and some of these old-fashioned and rather grandiloquent names sound rather strangely to our modern ears. I do not think, however, that means that they do any harm. The more difficult question is where a moribund society is re-activated by a group of new people, but that is a somewhat separate matter.

A new society on registration cannot be registered in a name similar or confusingly close to that of an existing society. That is as far as the present control over names goes. I appreciate that the control is different and not so stringent as that exercised by the Board of Trade in regard to business names. All that I can do in replying to an Adjournment debate is to state the existing practice, as it would be out of order for me to suggest legislative changes.

The problem of names which seek to associate the small society with a big and well-known national institution is a very real one, but there is no power to refuse the registration of a name of that type.

The Registrar has certain powers under Section 11 of the Prevention of Fraud (Investments) Act, 1958. This provides that the Registrar may, if he considers it expedient in the interests of those who have invested or may invest in a building society and if the Treasury approves. make—or later revoke—an order forbidding the society from inviting further investments or deposits. This is a very powerful sanction, and obviously it must be used with care and discretion. For the purpose of making an order he has power to make a full investigation into the financial situation of any society. I realise that an order under Section 11 is bound, in the nature of things, to receive publicity, and, as my hon. Friend pointed out, it is almost bound to alarm existing investors in the society in question. The imposition of such an order is, therefore, a rather drastic step which should not be and certainly is not taken lightly. Nevertheless, the Registrar has not hesitated, and I am sure will not hesitate in future, to make an order wherever it is clearly essential to protect the interests of the investing public.

Under the Act, the Registrar is obliged to give notice of his intention to make an order and to receive any representations which the society may make. Why I mention this is that it provides a valuable opportunity for discussion of the society's financial position and its future conduct. In this way, in many cases, the Registrar can exercise an effective control in the interests of the investor without taking the formal step of making an order. I have mentioned this in some detail because I hope that it will go some way towards reassuring my hon. Friend on the matters which he has raised.

Grounds on which inquiries are started fall into three main categories. First, an unsatisfactory financial position may be disclosed by the society's accounts, which, as my hon. Friend knows, have to be sent to the Registrar annually. Secondly, the society may be thought to be lending funds on doubtful or inadequate security. Thirdly, as my hon. Friend said, the societies may have been used to finance undertakings in which its directors have an interest. Since 1939, 50 investigations have been completed, and as a result orders have been imposed against no less than 20 societies, three of which have since been revoked.

Looking at the more recent past, fourteen investigations have been completed by the registrar since 1956, and most of them fell into one of the three categories which I have mentioned. Four of them resulted in orders being imposed under Section 11 of the Act, while in the others appropriate action was taken by the society or undertakings were given by the society as to its future conduct. As a result of those undertakings, the Registrar did not find it necessary to make an order.

The Registrar, particularly in these cases, continues to watch the activities of such societies and he certainly would not hesitate to reopen inquiries if he considered it desirable in the interests of the investing public. There are at present four investigations in progress. As to the directors, particularly, the control resides in the fact that if there are mortgages of more than £25,000 these have to be shown in a schedule to the accounts.

The question which I think I am entitled to put is whether these powers under Section 11 are being adequately or wisely used. This is inevitably a matter of judgment. The Registrar has the task of making decisions in this important and difficult field. We have the greatest respect for his judgment and his experience, and one of the keys to the effective administration of control over building societies is that the Registrar should be a person of wide experience. According to statute, he is required to be a barrister of not less than twelve years' standing or, alternatively, to have been an Assistant Registrar for not less than five years. The Registrar's work is being carried out by the Registrar and his staff in a thoroughly efficient and competent way by people who know the building societies intimately, and by people who can make and do make a valuable contribution towards the safeguarding of investments.

This is about all I can say to my hon. Friend in reply tonight. I shall not claim that everything is perfect at present. My hon. Friend has made some very helpful and interesting points, and I will certainly undertake to consider them. What, if anything, could or should be done to alter the nature of the controls, as opposed to the application of them, is not, of course, a subject which we can properly discuss tonight as it would involve matters pertaining to future legislation, but I assure my hon. Friend that it is not absent from our minds.