I beg to move amendment No. 4, in page 58, line 5, leave out paragraph (a) and insert—
'(a) the company or a subsidiary undertaking of the company acquires the whole or substantially the whole, of the business of a mutual financial institution;'.
The First Deputy Chairman:
With this, it will be convenient to discuss amendment No. 5, in page 59, line 5, at end insert—
'"mutual financial institution" means a financial institution—
The amendments deal with the principle of what is known as the five-year rule, imposed by the Building Societies Act 1986 to afford some measure of protection to converting societies.
Before 1986, the activities in which building societies could engage were severely limited. The 1986 Act was the first realistic attempt by the House to allow societies to engage in a greater number of activities. It was envisaged by that Act that, for some societies, the desire to offer an ever greater range of services might ultimately lead to their deciding to demutualise and become banks.
It was also recognised by the 1986 Act, however, that although a greater range of activities would be permitted under the Act, their number was still severely restricted. So it would not be possible for converting societies to have knowledge and experience of all the activities that banks could undertake. It was therefore felt that converting societies might be more vulnerable to predatory takeovers by the big banks, which might want to prevent competition by taking over the societies immediately they had converted. It was felt by Members on both sides of the House, therefore, that some protection should be given for a period of five years.
I suggest that, although certain things have changed since 1986—the world has moved on and many societies have become much more sophisticated, engaging in a wider range of activities than hitherto—the position has not changed completely. Societies still cannot engage in very many activities, and even under the Bill some activities will continue to be prohibited to those who call themselves building societies. It is appropriate, therefore, that some transitional protection remains.
It has been suggested that it would be wrong for converting societies to be protected yet be able to be predators. I have some sympathy with that view because we should retain diversity of lending. If we are not careful, mortgage lending in the United Kingdom may be dominated by a handful of major institutions—predominantly banks. That is a grave danger, because it would restrain competition and choice for the consumer and, ultimately, act against the national interest and the interests of depositors and borrowers. I am anxious, therefore, that we have as diverse a range of lending organisations as possible.
There should be three types of lending and deposit-taking institutions. The first tranche would consist of the big banks, which are very large, are established and are secure in their present activities. The second tranche would consist of several converted societies, competing with the banks. Few hon. Members would disagree that some banks need fresh competition, because for a long time they have had things far too much their own way. A little healthy competition would not go amiss and would improve their service. The converted societies would compete with the banks in their range of activities but retain some of the essential elements of service to the community that they had initially as mutual societies.
A third tranche would consist of the remaining mutual societies that it would be in the public interest to retain to a large extent. That is the purpose of the amendments tabled in my name and those of the hon. Member for Normanton (Mr. O'Brien) and others. There is widespread agreement in the Committee, at least on the Back Benches, that transitional protection is required for converting societies.
I accept that it would be wrong if the converting societies were enabled to be untrammelled predators on the mutual building societies. Indeed, my amendments seek to protect not only mutual building societies but all mutual institutions.
Mutuality is a very important concept. It is an almost uniquely British one. It is extremely valuable, and the Committee would be foolish if it were to enact legislation that would diminish it. I therefore propose effective protection for friendly societies and mutual insurance companies. All mutual financial institutions would be protected because, if a converting society bid for a mutual, it would lose the protection that it enjoyed under the five-year rule.
I know that the banks would say, "That is unfair because converting societies can bid and they receive some protection from predation, but we don't." I am not sure that I agree that the banks need such protection. They are big, grown-up boys and have been playing the game for a long time. They do not need the protection that the converting societies need and deserve.
Banks will say that converting societies could do all sorts of other things without losing protection. They could buy mortgage books—I am sure that many of the large banks would like to get rid of some of their duff mortgage books, following unwise lending—or chains of estate agents. All sorts of financial institutions were unwise in their acquisition of chains of estate agents and would dearly like to unload them on some of the converting societies. With respect, however, we want not that type of competition but competition in the key areas of banking and customer service, which the converting societies will seek to offer. Therefore I put it to my hon. Friend the Economic Secretary that there is a case for retaining a much greater measure of protection than she proposes under the Bill.
My hon. Friend the Economic Secretary says that we are giving those societies protection; in fact, we are giving them nothing. The Bill removes the protection that they enjoy under the 1986 Act without giving any reasons for doing so, other than the fact that times have changed. No other reason is given for the draconian removal of almost all the protection that the House—members of the Conservative party and of the Opposition—considered appropriate in 1986.
I ask my hon. Friend the Economic Secretary to think again because it would be tragic if, in pursuing such a course, we diminished the number of organisations that offer a service to the public.
Is not one of the best examples of the workings of competition in the financial sector the fact that the banks have extended their hours as a result of competition from building societies? Almost certainly, banks would still open from 10 o'clock to 3 o'clock and not open on Saturdays, were it not for their fear of competition from building societies.
As he so often does, the hon. Member for Burnley (Mr. Pike) has hit the nail on the head: only by encouraging such competition have we achieved as great an improvement in service as we have in recent years. I want that improvement to go much further. The big banks have great influence on Treasury officials; they have had a semi-incestuous relationship for decades. The big banks should not get their way on this matter; the Committee should ensure that true competition is retained.
I understand that it has been suggested in certain quarters that my amendments are defective—that they do not precisely achieve the object that I seek. If that is true, I should be very happy if, by agreement between the two Front-Bench teams, they were amended slightly, perhaps in another place, and brought back for notional approval in this place. However, I believe that what I suggest is desirable and is in the interests of the building society movement, the converting societies and society in general, so I hope that I shall receive a favourable response from my hon. Friend the Economic Secretary.
Mr. William O'Brien:
Clause 41 is entitled "Protective provisions for specially formed successors." The spirit of the amendments is to offer some protection for the successors of takeovers and mergers of mutual societies. During public consultation on the Bill, the five-year protection period was one of the most important subjects of debate. People who were involved in the consultation envisaged that there might be problems if the Bill did not afford protection.
Under the provisions of the Building Societies Act 1986, societies that convert to banks are protected from external takeover for five years after conversion. That protection was designed to protect those that converted from takeovers during the early years in what people in the business refer to as the stock exchange jungle. The organisations that converted to plc status had that protection. In an increasingly competitive environment, that protection gives a converting society a significant advantage.
During the Bill's consultation period, a strong body of opinion emerged that organisations that wanted the advantages of a stock market listing should also accept the disadvantages, such as the threat of a takeover. It is unacceptable to the continuing mutual societies that a plc bank that was once a building society should be able to mount hostile bids for other institutions—including mutual societies—and yet remain immune from takeover for five years. One can readily see that there is an imbalance: an organisation that converts to plc status is protected but the 70 mutual societies that remain are not.
The amendments would offer some protection not just to building societies but to mutual societies, and would apply to all mutual organisations. The Government accepted that point. The protection will be removed if a converting building society acquires another financial institution during the five-year period. That is the significant point of the amendments, and they would protect existing mutual building societies.
As the hon. Member for Bournemouth, West (Mr. Butterfill) pointed out, there may be anomalies in the drafting of the amendments, but the principle and spirit behind them are correct. I appeal to the Minister and other hon. Members to support them, because they would correct an existing imbalance. There is nothing wrong with the amendments; they are constructive and are designed to add strength to the Bill. I hope that the Minister will appreciate the sincerity and spirit behind the amendments and accept them.
Most hon. Members will agree with the spirit of the amendments. Many of us recognise that, since the 1986 Act, things have changed and that the societies that converted had a significant advantage over others. That was a key fact during consultation on the Bill. We all agree that organisations that wanted the advantages of a stock market listing should have to take on board other responsibilities as well. We have had most discussion about that requirement—so much so that the Halifax building society has accepted that argument and given up its protection. However, I am advised that the amendments, as drafted, may not do what we would all like them to do.
I think that every hon. Member in the Chamber nodded in agreement with the spirit of the amendments, but I hope that the Minister will look carefully to see whether there is any way in which she can deal with the problem of unfairness. Although I am with her in spirit in trying to get the Bill through, I pointed out on Second Reading that there would be a problem if we had to consider the Bill in Committee on the Floor of the House and then, without any time in between, had to complete its final stages. I hope that we can reach agreement on how we can deal with this despite the pressure that we are all under to try to ensure that mutual building societies get a fairer deal in the financial world.
I should like to take this opportunity to declare an interest, in that I have accounts with several building societies.
I suspect that I may be in a minority in fundamentally disagreeing with the proposition of my hon. Friend the Member for Bournemouth, West (Mr. Butterfill). One always feels a little uncomfortable disagreeing with my hon. Friend, because he is normally so sensible, but on this occasion I have great difficulty in accepting the arguments that he put before the Committee.
Under clause 41 as drafted, a society that converted to a bank would lose its immunity from takeover if it sought to take over any other financial institution. Under my hon. Friend's amendment, as I understand it, the loss of immunity would be triggered only if the takeover was of a mutual institution, thereby leaving the new bank—the newly converted society—able to take over any other type of organisation without triggering the loss of its immunity.
As I made clear on Second Reading, I am very doubtful about the general principle of protection, because it would create two classes of public limited company: those that enjoyed protection because of the route that they followed—as a building society converting to a bank—and those that did not have the immunity, and could not because they had been a bank or some other institution for a considerable time. Therefore, a seriously uneven playing field would be created: between the newly converted society and the other banks with which it was competing, and also between the new bank that was formerly a society and the society that had not converted. We should not seek to enshrine that unevenness in legislation.
Does my hon. Friend accept that there is already an unevenness? The converting societies have been restrained from engaging in a range of activities for the whole of their existence, whereas the organisations for which they may be bidding have not been subject to those constraints. Converting societies start off uneven. The purpose of the transitional relief is to give them a period within which they can come up to speed and be on equal terms with those that are already plcs and engaged in those activities.
I do not agree with that argument. My hon. Friend is looking at the matter from the perspective of the 1986 Act. He is not taking into account the new powers that the Bill confers on the building societies. In the course of time, the building societies will have been able to avail themselves of the additional powers that the Bill provides. Having done that, they will not be at a disadvantage compared with organisations that have been operating under the Banking Act 1987 for a long time. They will have operated under the new building societies legislation that we are discussing. That will give them the greater powers that they require and, having had those powers for as long as they consider necessary, they will be able to make the decision to convert.
I thank my hon. Friend for giving way again. I am sure that he has read the Bill. Under part I, there will still be considerable constraints on the activities in which the converting societies can engage.
I do not accept that, either. The restrictions that the Bill still places on building societies relate to activity which it would be best that they did not engage in. I do not believe that there is a popular view, for example, that building societies should engage in the derivatives market, which is known to be extremely risky. If the Bill provides, as it does, that in future building societies should still stay out of the derivatives market, it is showing sound judgment. That is what ought to happen.
I do not accept the thrust of my hon. Friend's arguments. I believe that a society that decides to convert and to become a bank should do so in the full knowledge that it is moving from the context of the building societies legislation into the context of the Banking Act 1987. Before it takes that fundamental step, it must be sure that it can manage in the new world in which it proposes to operate. If it considers that it cannot do that or if, as my hon. Friend would say, it considers that it has not had long enough to gain experience of indulging in the other activities that the 1987 Act permits, it has not yet reached the stage where it should be taking that decision.
If ever protection were afforded to mutual status, and the advantages and benefits of mutual status were recognised, that argument brings home the fact that such status should not be lightly abandoned.
My hon. Friend said that it had not been possible for societies to develop the range of activities that they believe they will need in order to be on an equal footing with banks. For that reason, I emphasise again that the Bill will give them the opportunity to develop their expertise in the areas from which they have up to now been excluded. Having developed that expertise, in a few years they will be able to convert to banks if they so choose, and there will be no need for any artificial protection such as that in the Bill or especially that in my hon. Friend's amendment.
My hon. Friend is extremely generous in giving way once more. Can he name a bank that would be subject to the constraints imposed by clause 4, under which it would have to keep 75 per cent. of its total assets secured in loans on residential property? That is what the societies are required to do under the Bill. It is nonsense to suggest that a bank that had experience in loans in a range of commercial activities would be constrained in that way.
If the society is of the view that the requirement to maintain 75 per cent. of its assets in mortgage lending is unduly inhibiting on its activities, it will have another reason for converting, if it wishes to do so. It is for the society to decide whether that is a condition under which it can operate, in which case it should remain a building society, or whether the condition is unduly onerous, in which case it can break free from the building societies legislation and operate under the Banking Act 1987.
I do not see why, in the course of the building society making that transition, special provisions should be made to compensate for what in other respects might be regarded as an unsound judgment on its part. Building societies must decide under which legislation they wish to operate.
I see no justification for special transitional arrangements, for the further reason that the potential loss of immunity from takeover is a matter over which the societies have control. The provisions of the Bill do not stop one of the newly converting societies going on the takeover trail. It may still do so. Building societies are in no way inhibited from expanding their position by acquisition if they want to do it that way. They would do it in the full knowledge that if they chose to take that route, they would trigger the loss of the immunity. The decision is entirely theirs to live with the consequences of their action. That is why I do not believe that transitional arrangements are necessary. The decision is part of an overall judgment as to whether plc status suits a business. If plc status does not suit it, it should not leave the legislative framework applicable to building societies.
I have the greatest difficulty in understanding the argument of the hon. Member for Normanton (Mr. O'Brien), who tried to argue that the amendment provided protection for existing mutuals. Exactly the opposite is the case. It does not provide protection for existing mutuals at all. If the hon. Gentleman contributes again to the debate, perhaps he will explain his views.
There seem to be some drafting defects in the amendments, which the Building Societies Association has clearly identified, particularly in relation to the question of when a mutual financial institution encompasses a company and when it does not. Even if one embraced the principle, which I hope the Committee will not, the amendments would have to be redrafted.
I have listened with interest to the views of the hon. Member for Bournemouth, West (Mr. Butterfill) and of my hon. Friend the Member for Normanton (Mr. O'Brien) about the five-year rule.
I have a great deal of sympathy with building societies such as the Alliance and Leicester and the Woolwich, which undertook conversion in the expectation of a five-year protection. Ten months after the Alliance and Leicester had made public its intention to convert, the Government suddenly announced in November for the first time that there would be a significant change to the five-year rule as a result of the consultation that had taken place. Naturally, the converting building societies were surprised and angry at that announcement, and I fully understand their surprise and anger. The question is whether the wording of the clause is an appropriate response.
The hon. Member for Bournemouth, West acknowledged that there might be technical problems with the amendment. I shall return to that, but let me say a word about the principle. Converted building societies want some protection to take over others in order to reach a critical mass during the five-year period, so that they will be less susceptible to takeover at the end of it. That is what the clause is about.
The hon. Gentleman advanced a sensible argument in support of his amendment. He argued that there is a public interest in maintaining a degree of diversity and choice in our financial institutions. He said that we would not want to see a mutual building society sector and a big banking sector, with very little in between, because building societies that had reached the end of their five-year protection period or had launched a takeover during that period and lost their protection had been the victims of takeovers.
There is an argument for retaining a degree of diversity and choice in the market, and for ensuring that some institutions, which are not big banks or mutual societies, are able to perform the same functions. I am not entirely sure that this is the right way to protect that area of the market. The Minister said—and we agree—that the Government should be neutral regarding whether conversion takes place in a particular building society. However, unamended, does not clause 41 impose an obstacle to conversion? Any converted building society will either already be at critical mass or seek to achieve that critical mass, to enable it to survive at the end of the five-year protection period. Many smaller unconverted societies know that, if they were to convert but failed to reach critical mass within five years, they would probably be taken over.
Clause 41 says, in effect, that building societies cannot convert and seek to achieve critical mass. Would not building societies that are contemplating converting look at that clause and cease to consider it, because it is unlikely that they would be able to survive a takeover after the cessation of the five-year protected period? Do the Government intend that clause 41 should deter mutuals from converting? That does not square with the Minister's comments. Perhaps she could clarify precisely how the clause would operate.
Does the hon. Gentleman accept that it is a question not just of critical mass—as I tried to explain to my hon. Friend the Member for Gloucester (Mr. French)—but of the nature of the loan book? A converting society will, of necessity—even after the Bill is passed—have a loan book comprising 75 per cent. loans secured on residential property. A high street bank has an entirely different loan book. Institutions require some transitional protection when changing from the loan books that they had as societies to the loan books that they will need as banks.
I do not deny that the hon. Gentleman makes a strong argument, and I shall be interested to hear the Minister respond to it. However, I am not convinced that the amendment will deal with that issue in a technical manner. Does he accept that there are technical deficiencies in the amendment, as worded?
In that case, I shall not outline those deficiencies. I certainly cannot support the amendment, as worded. I do not think that it achieves the hon. Gentleman's objectives, and it poses a number of potential threats to mutual societies which I am sure he does not intend.
However, I believe that there is something to be said for the broad principle that the amendment embodies. I shall be interested to hear the Minister respond to that point, and to whether the operation of clause 41, unamended, would discourage building societies from converting.
Contributions to the debate have highlighted the differences of opinion on this subject. My hon. Friend the Member for Bournemouth, West (Mr. Butterfill), who moved the amendment, believes that protection for converted building societies is a key issue. I think that the hon. Member for Normanton (Mr. O'Brien) was somewhat confused in his remarks. The amendments do nothing for mutual societies: they are about the degree of protection that a converted society may have. The hon. Member for Christchurch (Mrs. Maddock) sought more information, and my hon. Friend the Member for Gloucester (Mr. French) agreed with me about the matter.
At issue is the amount of protection that a converted society has, or needs, once it becomes a new bank. The consultation process produced the universal view that no protection should be necessary. In fact, we have chosen the middle course: if a converted building society requires time to stabilise once it becomes a new bank and needs to make the sort of changes to which my hon. Friend the Member for Bournemouth, West referred regarding 75 per cent. of its lending being on residential property, it has five protected years in which to do so. It loses that protection only if it goes on the acquisition trail.
Both banks and insurers—not just the mutual building society sector or the mutual sector—have expressed concern to us that such protection should not exist. My hon. Friend is a well-known business man who has operated in various fields. If, as a business man, his company was the subject of a hostile takeover bid and he was unable to defend it because the predator company had protection, I think that he would be justifiably angry. Parliament should not confer unfair protection on a particular sector of the financial services industry. It is true that widespread concern has been expressed, and that we have given the converters a concession in another way by allowing the removal of what is known as the priority liquidation distribution rights, which has benefited them to the tune of tens of millions of pounds. We have taken with one hand, and given with the other.
I should like to dispel three illusions that were created in the debate. The first is that converting societies are small institutions. They are not. The Woolwich and the Alliance and Leicester are of comparable size to the Royal Bank of Scotland and rather larger than that well-known insurer, the Guardian Royal Exchange. They are substantial organisations operating in a vibrant, thriving financial market.
Secondly, my hon. Friend the Member for Bournemouth, West and others said that converted building societies would not wish to acquire mortgage books and so forth. Yet that is precisely what has occurred. Some of the societies that are remaining mutual are making acquisitions in order to expand their activities as mutual societies.
My final point relates to the comments of the hon. Member for North Warwickshire (Mr. O'Brien), who said that he has some sympathy with concerns expressed in this area because I suddenly announced the Government's intention to change the five-year rule. Consultation in this area has been going on for some time, and organisations such as the Building Societies Association were concerned that protection should remain. I am informed that the Alliance and Leicester, which has raised hon. Members' awareness in this area, was represented at a meeting of the BSA council in June, when the association's response to our consultation was discussed and finalised. That response called for the removal of five-year protection. We are not talking about something new that represents a sudden change. Instead, we are talking about ensuring fairness in the mutual sector and in the banking sector, be it the new banks, the insurers or the traditional banks. On that basis, I ask the Committee to reject the amendments.
I am extremely disappointed by my hon. Friend's response. She said that there would be complaints if we were to give protection, which tells me that she is missing the fundamental point. The bodies concerned have the protection now, and have enjoyed it since 1986. To my knowledge, there have been no complaints of abuse by them of that protection or abuse by any of the societies that have already converted. My hon. Friend is raising a false hare when she speaks of abuse. The system has existed since 1986 and it has not been abused.
We are seeking to give transitional protection and no more. My hon. Friend suggests that the hon. Member for Normanton (Mr. O'Brien) is confused, but it would seem that the confusion lies with my hon. Friend. It is inevitable that converting societies that are anxious to change their businesses rapidly will go on the acquisition trail. If the amendments are accepted, they will not go on that trail for mutual building societies, friendly societies or mutual insurance companies. They will confine their activities to businesses that will not lead them to the risk of losing the limited protection that is proposed.
I am sorry that my hon. Friend the Minister does not accept the amendment. Those in another place may take a different view. In the meantime, as I accept that there may be drafting defects, I beg to ask leave to withdraw the amendment.