Building Societies (Distributions)

– in the House of Commons at 4:22 pm on 22nd January 1997.

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Photo of Mr Douglas French Mr Douglas French , Gloucester 4:22 pm, 22nd January 1997

I beg to move, That leave be given to bring in a Bill to amend the law in respect of distribution of assets on the take-over or conversion of a building society. The Bill's aim is to remove a serious injustice being done to tens of thousands of building society customers by the way in which building societies choose to allocate shares as they abandon mutual status and convert to public companies. The House will be aware of recent announcements by the Halifax, the Alliance and Leicester and the Woolwich building societies, each setting out a slightly different methodology, and of the preparations being made for flotation by the Northern Rock.

Under section 100 of the Building Societies Act 1986, building societies have considerable discretion as to who may qualify for shares and to what extent. The Act is more prescriptive when it comes to cash bonuses arising from the takeover of a building society but the same injustice arises and the Bill covers both circumstances.

The broad principle adopted, with variations, by the societies is that the first-named person on the account is the member, and members may qualify once only as saver and as borrower, irrespective of the number of accounts held.

The problem arises with joint accounts and trustee accounts, where the trustee is the first name on the account and the underlying beneficiary is the second or subsequent name. In some cases the trust is a formal relationship, as between a solicitor and a client. In most cases, it is an informal relationship where, in order to help an elderly, disabled or handicapped person who cannot look after his or her own account, a relative or carer becomes the trustee with the responsibility to sign the account.

If the carer as trustee has only one account, he or she will have a fiduciary duty to ensure that the beneficiary receives the share allocation. If the carer as trustee is the first-named person and has more than one account, even though those accounts may be entirely unconnected, only one share allocation will be made.

The problem is most acute in cases of multiple trusteeship. The matron of a nursing home, for example, may have been asked to look after the accounts of, say, 20 elderly patients. She will find that there will be only one allocation of shares to be divided up between all the patients. The same applies to the warden of a hospice, the manager of an old people's home, or a solicitor or accountant who is a trustee for a number of clients. Charities, associations and youth clubs can all be placed at a disadvantage.

Under the terms of the Halifax conversion, some recognition is given to the aggregate balance of the accounts, but no such provision is made by the Alliance and Leicester.

Sometimes anomalous situations arise from a detail as elementary as the design of the form completed by the customers when opening their building society accounts. That applies particularly to accounts opened for children. Some of those accounts are adversely affected, but others are not.

Unfortunately, second-named account holders cannot risk taking the obvious step of changing the order of names on their account in anticipation of future flotations. If they do that, they may break the continuity of the account and render it ineligible anyway.

To tackle the problem, my Bill requires building societies to recognise the legitimate entitlement of underlying beneficiaries to receive the same allocation of shares as every other customer, where it can be shown that they would have been the first-named account holder and qualified in their own right, but for the presence of a trustee. The Bill requires converting and merging building societies to establish a reserve or suspense account charged against assets, from which to meet legitimate claims from underlying beneficiaries of trustee accounts.

No onus at all is placed upon the societies to track down those who may be eligible. That would be an impossible task and a daunting prospect, and may well explain why societies have been unwilling to face up to the problem, of which they have been only too well aware.

Instead, the Bill requires societies in the course of normal notification to their members to tell them that claims within the specific definition will be considered, and that claimants should submit details of their circumstances and allow time for the society to satisfy itself that the criteria have been met. The society can then make a payment of equivalent value out of the fund set aside for the purpose. It will not cost the society anything extra. The society will, after all, only be returning to its mutual members the fruits of mutuality.

The most significant although not the only category of people to benefit from the Bill will be the disabled, the handicapped, the sick, the elderly and those who, through misfortune, are unable to look after themselves. That is why leading charities, such as Mencap, SENSE, and the Royal National Institute for the Blind, are strong supporters of the Bill.

One must ask how the building societies could have felt comfortable producing a share distribution formula that they knew was likely to exclude those most needing to benefit. We might also ask why at least one society, with expensive advice at its disposal, should have told its members that they were constrained by legislation from addressing the problem. In fact, nothing in current legislation prevents converting building societies from including in their share distributions the second-named account holder or beneficiary in circumstances where they would have qualified if they had been named first.

For share distributions, my Bill requires building societies to do what the law already permits them to do. For bonus distributions, my Bill amends the 1986 Act to make it possible and then requires building societies to act. Such a procedure will prevent building societies from attracting a great deal of unwelcome and unnecessary criticism of the type that so marred the Lloyds bank takeover of the Cheltenham and Gloucester. It will help to preserve the high esteem in which the building society movement has been held for so long but which has been severely tested in recent times.

The procedure outlined in my Bill could have been adopted voluntarily by the Woolwich, the Halifax and the Alliance and Leicester. With the benefit of hindsight, I am sure they would now acknowledge that they underestimated the public's strong belief in fair play. Fortunately, the Alliance and Leicester is showing clear signs of a change of heart, but the Halifax still perceives technical obstacles. Even though those societies have already sent out their conversion documents, I hope that—within the constraints of company law—they will make every effort to find a formula that enables them to follow the requirements of my Bill.

There is an opportunity for a go-ahead society to blaze a trail and set an example of best practice. I hope very much that that will happen. However, once the Bill is passed, societies that convert or merge in future will have no choice: they will have to recognise the rights of underlying beneficiaries, and a massive injustice will have been corrected. I commend the Bill to the House.

Question put and agreed to.

Bill ordered to be brought in by Mr. Douglas French, Sir Andrew Bowden, Mr. John Butterfill, Mr. David Evennett, Mr. John Greenway, Sir John Hannam, Mr. Hartley Booth, Mr. David Hunt, Mr. Peter Luff, Sir Geoffrey Pattie, Mr. James Pawsey and Mr. Michael Stephen.