I beg to move, That the Bill be now read a Second time.
It is a very great honour and privilege to be able to present the Bill to the House. As hon. Members will be aware, I am deputy chairman of the all-party group on building societies and financial mutuals. I am pleased that our chairman, Mr. Bailey is in the Chamber this morning, and I pay tribute to what he has done to promote the well-being of the sector and to the work of the all-party group, which recently commissioned a detailed survey of the benefits of mutuality for the British economy. There is no doubt that those benefits are considerable. The mutual sector as a whole plays a vital role in British society, and more than 19 million British individuals—one in three of the population—are members of one or more mutual societies. That is a considerable number, and it compares favourably with other forms of economic participation and mass membership. For example, there are 8 million more members of mutuals than there are listed owners of shares. Mutual organisations have more than three times as many members as trade unions, and 20 times more than political parties—although nowadays that is not terribly difficult.
There are about 9,000 industrial and provident societies—a term that covers all organisations registered as co-operatives, community benefit societies and credit unions. They range from the Co-operative Group, which employs more than 60,000 people, to football supporters trusts, which may not employ anyone. In total they hold assets of over £65 billion, have almost 10 million members and employ about 100,000 people. There are 60 building societies in the United Kingdom, and collectively they have more than £300 billion worth of assets and employ around 50,000 members of staff. They have about 2,150 branches, 22 million individual investors—although some investors have accounts with more than one building society—and almost 3 million borrowers.
Friendly societies are the longest established and most numerous type of mutual insurance providers. The larger societies are members of the Association of Friendly Societies, which has 57 societies that hold funds of £15 billion for 5 million members. Not all mutual insurers are registered as friendly societies. Some of the largest mutual insurers are registered as companies, but all have a strong democratic mutual structure dedicated to offering the best deal to their members, rather than external shareholders. These societies collectively represent £8 billion in premiums, which accounts for 6.8 per cent. of the non-life market and 6.4 per cent. of the life market.
The contrast between a mutual and a company can immediately be seen when we look at how mutuals distribute the profits of their business. They do not pay dividends to shareholders, so they are able to operate on much narrower margins than plcs. That means that, all things being equal, they can deliver better value for their customers. They can also influence quite considerably the pricing policy of their competitors. For example, pressure from building societies was the main factor preventing banks from charging for access to cash machines, and a very creditable and successful campaign that was.
A PA Consulting international study in 2003 showed that the size of the mutual sector in most countries has had a direct influence on the size of bank profits, finding that the
"profitability of the banking sector is inversely proportional to the market share of mutuals within the banking sector."
The reputation of the mutual sector is such that one of its leading lights, the Co-operative Group, is the most trusted brand in the UK in the eyes of consumers. That was established in the 2006 research undertaken by the National Consumer Council and AccountAbility, which showed that that group was more trusted than any other high street operator.
Does the hon. Gentleman agree that mutuals are always at the top of the best buy tables for financial services, such as the cost of mortgages or the rate for savings? Is that not why the public trust them so much?
Indeed. We are presenting the Bill with a view to strengthening the mutual sector and removing some of the disadvantages that it faces under present legislation. It is extremely important that we recognise the value that the mutual sector gives to its customers and to the economy as a whole, and the fact that because of historical circumstances it is rather inhibited in what it can do.
I am fortunate that in my constituency, Bournemouth, West, we have some of the leading financial mutuals. We have the UK headquarters of the Liverpool Victoria friendly society, the largest of all the friendly societies. We also have the Portman building society's headquarters, which is at present the fourth largest, although it is about to merge, if its members agree, with the Nationwide building society. That will become by far the largest building society in the United Kingdom. Indeed, the merger will make it big enough to be extremely competitive with all the major plcs in the banking and lending sector.
The building society movement has come of age. I remember that back in 1986, not long after I was first elected to this place, we deregulated the building society movement. We had a good debate on that deregulation, which I keenly supported, and it did a great deal to set the building society movement on the right course. We were also right at that time to consider that building societies as financial institutions did not have experience in the capital markets, did not have experience in unsecured lending and did not generally have the sort of banking experience that the clearing banks had. Therefore it was right, for the protection of members of building societies and the public as a whole, that some constraints were imposed on the degree of access that building societies could have to the financial markets.
That is precisely what we did. We set for building societies a maximum gearing level—borrowing against the assets that they had, deposited by their members—of 50 per cent. Over the years that has worked pretty well. Indeed, until now it has been possible for building societies to operate reasonably adequately within the constraints imposed in 1986. However, the time has come when we need to free them up somewhat more.
One of the things that my Bill will do is change those 1986 limits and take them up to higher levels of permitted access to the capital markets. That will be dealt with by means of regulations brought forward from time to time by the Treasury. It is no secret that we are talking of 75 per cent., with which all the building societies have said, through their trade body, that they will be entirely happy; I do not think there is a single dissenting building society.
Will my hon. Friend explain how the figure of 75 per cent. was reached, and whether he thinks that the Financial Services Authority and the Treasury will increase that amount in the longer term?
It is not foreseen that the level will need to go beyond 75 per cent., which is probably the maximum prudent level envisaged. The Bill will enable the regulations to be made by the Treasury from time to time.
Hon. Members will see that the Bill is somewhat complex. It is an enabling Bill, allowing the Treasury from time to time to make changes, as it thinks conditions demand and as it considers prudent. The role of the FSA is important in that. In general, the fact that the Bill is enabling, allowing the Treasury to make from time to time orders that can be dealt with by negative resolution, means that it will be flexible legislation, and we should not have to revisit these matters in future through primary legislation. That is extremely helpful for the sector, and this is the right way forward.
As I said, the legislative position is not currently a constraint on most building societies, but there are concerns that as the markets change and things go forward in future, it may become a constraint. It is therefore advisable to take action now that will give freedom of regulation for the future.
The hon. Gentleman will be aware of the Miles report of 2004, which investigated the movement into longer-term fixed rate mortgages and highlighted some of the real concerns for the funding of organisations, such as building societies, that are based on members' capital. The move to more wholesale funding would be one appropriate way in which that difficulty could be resolved should we move in that direction.
The hon. Gentleman, with his usual perspicacity, has anticipated my next point. The Miles review, which was commissioned by the Treasury in 2004, raised that very issue. The prospect of an increased demand for long-term fixed rate mortgages, which we are now seeing—because of the increase in house prices, the much more difficult affordability with traditional short-term interest rates and the longer terms of mortgages now coming through into the market—makes it important that the current constraints should not adversely affect the market. The building societies that may wish to embrace the new fixed-rate policies have emerged, and if we do not have primary legislation now, it could inhibit the entire operation of the mortgage market.
The removal of the constraint means, as I say, that the building societies would be in a position to meet whatever changes emerge in the marketplace over the next few years, rather than having their response to market changes constrained by legislation that might by then appear out of date and unnecessarily restrictive. This in no way forces building societies to move in the direction of non-retail funding, and many may choose not to do so, but it gives them the opportunity to do it in the most cost-effective way, funding possible mortgages for their borrowing members. There is no doubt that if building societies were not able to meet the demand, other institutions would take that opportunity.
If the Bill receives its Second Reading today, it may be necessary to move an amendment in Committee to provide the Treasury with an order-making power, to move the non-member funding limit into secondary legislation, and for the non-member funding ratio to be increased to a fixed level of 75 per cent. That is a matter for the Committee, but I thought that I should mention it now. It is not likely to be a significant constraint for the future.
Another consideration is the position of the members of a building society and their relationship with the capital markets from which money may be raised. In response to the increased limits, we want through the Bill to help and give reassurance to the members of the societies, so that in the event of a winding up they will rank pari passu with the other creditors. The reason for that is that people who put money into building societies tend to be relatively small investors, not particularly sophisticated in these markets, and who regard a building society as probably the safest and most convenient place for their money. It is therefore appropriate that, because they are not as sophisticated as people who buy shares in banks, for example, they should have an extra degree of protection.
As I understand it, the Treasury is perfectly happy that that should occur, the societies are very pleased about it, and, interestingly, the capital markets have said that they do not think that this will affect the rate of interest that they charge building societies. I had thought that they might want one or two extra basis points in order to agree to this, but all the indications are that they regard the building societies as so safe and so well run at the moment that they are not likely to increase the charge. One of the main purposes of the legislation is to allow very cheap mortgages to be offered, and that will not be affected by this alteration of priorities, which is entirely desirable. Again, it will be dealt with by means of a Treasury order from time to time, but that is the right way forward and an entirely appropriate safeguard for rather less sophisticated savers.
That is all dealt with in the second part of the Bill. No investor in any building society, since at least 1945 and probably well before that, has ever failed to get their money back before a distribution is made to others. Over the last 60 or so years, building societies have been among the safest of institutions in which to invest.
All the building societies are covered, along with other institutions, by regulations issued by the Financial Services Authority and by the financial services compensation scheme. Under the scheme, savers are entitled to 100 per cent. compensation for the first £2,000 invested, and above that, they can claim 90 per cent. for the next £33,000, making a maximum claim of £31,700. No building society has ever been in a position requiring the FSCS arrangements to be invoked, and the predecessor arrangements that existed before the Financial Services and Markets Act 2000 were never invoked for building societies, either. Part 2 of the Bill therefore covers a highly unlikely circumstance.
None the less, it is necessary to describe the two different types of investor in building societies—the depositor and the investing member or shareholder. Depositors, which are usually financial institutions, are not members of the society and are mostly institutions that operate in the wholesale markets that we talked about earlier. They have no say in the running of the building society. However, the ordinary man-in-the-street investor in a building society does become a shareholder, and, as members, such people have the right to receive information about the activity of the society, including the summary financial statement, notification of the annual general meeting and any special general meeting. They can also vote in elections for the board of directors, and frequently have done so, partly because of the activities—undesirable activities in my view—of carpetbaggers in the recent past. Provided that correct procedures are followed, they can propose motions or even stand for election themselves. Again, some of them have succeeded in that objective.
The depositors are not members of the society and have few of the rights of shareholders. They need not be notified of the annual general meeting, as they are not entitled to attend or vote at that meeting, and they are not automatically sent a copy of the summary financial statement, although generally copies of the document are available from the societies if they ask for them.
In theory, depositors have more security than shareholders, but in practical terms the distinction is largely irrelevant. Under current arrangements, the depositors would get all their money back, but under the Bill, if there were a shortfall the shareholders would not suffer in comparison with the others.
The Building Societies Act 1997 imposes restrictions on the categories of deposit accounts that an individual may hold with a building society and, apart from a number of exceptions, individual investors may have only share accounts with societies. Those exceptions, where customers may still open deposit accounts, include current accounts; client or trustee accounts; qualifying time deposits; deposits at overseas branches; and where the society has announced publicly that it intends to transfer its business to a company. Currently, as I said, most depositors are the big wholesale investors.
The proposals in clauses 1 and 2 will strengthen building societies and enhance the operation of the mutual movement. Clause 3 addresses the transfer of engagement rules. This is a huge opportunity to strengthen the mutual sector. For many years, mutuals in the UK saw themselves as part of their own mini-sector, such as co-operatives, building societies or friendly societies. More recently, they have been seen as part of a larger reality called the mutual sector. Indeed, that was reflected in this House when the original all-party group on building societies expanded its scope, and its title, to become the all-party group on building societies and financial mutuals. That was because we identified the fact that the mutual sector was a movement in itself, with levels of ethics that were greatly appreciated by the general public and levels of performance that were generally better than the performance of the incorporated sector.
Sadly, membership of the mini-sectors within the mutual movement has continued to shrink, through a combination of demutualisation and business consolidation. Consequently, mutuality is seen as a declining business form, despite its great appeal and its value to consumers and customers. The Bill seeks to increase the strength of the mutual sector.
Does the hon. Gentleman agree that it is palpably unfair that any type of mutual can convert into a company format, but a mutual cannot convert into another type of mutual? That simply cannot be right. We ought to create a level playing field, so that if people want to choose another mutual format, it will be as easily available as the corporate format.
As always, the hon. Gentleman is absolutely right. That is the whole purpose of clause 3. As we stand at the moment, it is not possible for a member of one mini-sector to amalgamate with a member of another mini-sector without one of them demutualising, which defeats the point of the exercise. We want to enable those sectors to merge, provided that they are all mutuals as defined in the Bill, and to do so without losing the mutuality of each of the members. That would create cross-fertilisation between the mini-sectors and help to allow the boards of mutuals that are considering their future status to offer their members alternatives to demutualisation. The capacity to grow, perhaps by merger, is at the heart of clause 3.
At the moment, the situation is ridiculous. It emerges not out of any devious means of trying to restrict building societies and other mutuals, but out of the original legislation that set them up. The Bill will deregulate the sector and the various pieces of legislation that apply to it so that mergers can take place across the boundaries. For example, it is not currently possible for a building society and a friendly society to merge. One could take the other over only through the demutualisation of the other, which would be crazy. If the Liverpool Victoria friendly society in my constituency wanted to merge with a building society, it could not now do so. Similarly, a co-operative society could not merge with a mutual insurer. Those restrictions are petty, and restrict and restrain the growth and strength of the mutual sector, which is why the Bill seeks to eliminate them.
The technical term used in the Bill is "engagements", which has nothing to do with putting rings on fingers. At the moment, engagements can be transferred only if the two bodies involved are in the same category. Such events are dealt with under the Building Societies Act 1997 and the Industrial and Provident Societies Act 1965. There are different voting thresholds for transfers between societies and for those who want to demutualise. In some cases—for example, industrial and provident societies—the thresholds are higher. The threshold under the Friendly Societies Act 1992 is the same for any transfer. The Bill would rationalise that situation, largely through the power to make regulations in the future.
In comparison with the rest of the world, the UK environment currently restricts, or at least does not encourage, new corporate options for mutuals, which compares unfavourably with external competitors. For example, there are huge mutual businesses that operate group structures elsewhere: in France Crédit Agricole is a huge mutual, in the Netherlands there is Rabobank, and in Germany there is DZ bank. Seeing the mutual sector as a series of ring-fenced mini-sectors is too restrictive for the remaining businesses, and it militates against consolidation and strong mutuals.
Apart from the damage that that restriction does to the continuance of mutuality, the higher voting thresholds can also lead to higher windfall payments being paid to members in order to secure their votes. That involves the bribery of the members—the carpetbagger syndrome—which can happen only through the higher thresholds. That ultimately reduces the capital value of the business, and it is against the long-term interests of members who want to stay with the business post-transfer and continue to enjoy the benefits of mutuality.
The Bill will give the Treasury a power to make orders to allow different categories of mutuals that want to do so to receive transfers from other categories of mutual society. It would allow Her Majesty's Treasury to treat the transfer of mutuals to other mutuals, or their subsidiaries, as if they were transfers between the same category of mutual. Under the Bill, a building society could be transferred to a subsidiary of an industrial provident society that is qualified to take deposits under the same rules that allow thresholds that pertain to transfers from building society to building society. The same principle could be established for transfers from building societies, industrial and provident societies, friendly societies and mutual insurers. The only exception to that rule is, of course, credit unions, where the nature of their business would preclude them from participating in this type of transfer.
I believe that that would be an important amendment of the law, which would assist in the cross-fertilisation of mutuals and strengthen the sector with very little legislative change. With the order-making power established, we can envisage Her Majesty's Treasury consulting either separately or collectively on changes.
I thank the hon. Gentleman for being so generous this morning. With consolidation taking place across the whole financial services sector, if the mutual part of that sector of the economy is to compete with those consolidated businesses, it needs clause 3 to be able to achieve that effectively. Is that not one of the main reasons clause 3 is so important to the Bill?
Again, I entirely agree with the hon. Gentleman.
Overall, the proposal in clause 3 is probably the most important thing that we could do to strengthen the mutual movement as a whole and ensure that it is not gobbled up by the private sector for profit, but continues to be able to offer to British citizens all the advantages of mutuality and the mutual sector's increasingly competitive edge over the incorporated sector. I very much hope that hon. Members will give the Bill a fair wind and allow it to pass through to the Committee stage.
Let me start by congratulating Sir John Butterfill on securing his position in the private Members' ballot. From the perspective of the chair of the all-party group on building societies and financial mutuals, I am very pleased that he took up this issue, for two reasons in particular. First, it is recognised across the House that he has unparalleled expertise and experience in this area, so the Bill could not be in better hands. Secondly, although he was too modest to say so, he has had previous experience of navigating private Members' Bills through the House. We therefore have the benefit of somebody with considerable financial expertise allied to a certain navigational skill, which, as we all know, is most necessary to guide private Members' Bills through the rocks and obstacles that lie ahead of them.
The hon. Gentleman made several kind comments about me. Perhaps I should make it clear that prior to coming to this House I had 18 years' experience in the co-operative movement. The values that underpin it are somewhat akin to those that underpin the mutual movement. The Co-operative party has had long-standing political representation, and I am one of those representatives.
The mutual movement has always been slightly different. When it hit the problem of privatisation 20 years ago, one of the reasons it had such difficulties was that its unique ethos, structure and value system, and its worth in the marketplace, were under-recognised. The public perceived it to be little different from the banks, and its members could not see why they should not go along the privatisation route. As a result, a lot of mutuals privatised and became banks. Happily, what remained of the mutual sector responded positively by clarifying the benefits of mutuality in the provision of financial services. Since then, there has been, if not a renaissance of mutuals, then certainly a consolidation of their position in the market and an increased recognition by the financial press and consumers of the unique role that they play in the provision of financial services.
Arising out of that experience, we have the all-party group, which has about 170 Members from both Houses and, obviously, from all parties. It is one of the largest all-party groups, which reflects the esteem that the movement enjoys within the House.
The genesis of the Bill lies in two inquiries that were held by the all-party group and in the Miles report, which has already been mentioned. The all-party group carried out its first inquiry in 2004. Its purpose was to explore and demonstrate the role of the mutual sector in the provision of financial services. It had a Select Committee structure whereby the group interviewed representatives of the movement and of other financial services sectors, as well as commentators.
The inquiry reached two key conclusions. First, institutions in the mutually owned corporate structure, being owned by the customers rather than the shareholders, offer certain natural advantages over other financial institutions. The crucial advantage is that they do not have to pay dividends to shareholders. An estimate by the Building Societies Association has put the cost savings derived from that advantage at as much as 35 per cent. One can have a cost advantage but still not be efficient. Happily, however, one of the other key indicators of efficiency demonstrated that in providing services to customers the margin between mortgage and savings rates in the past year was typically 1.09 per cent. for mutuals and 1.5 per cent. for plc banks. That is a clear indication that the cost advantage is reflected in the value of service provided for the customer.
Secondly, the mutual sector, merely by having a presence in the financial marketplace, provides competition that prevents the plc banks from becoming too shareholder-focused, which means not only that it provides better value for its customers but that the non-mutual sector has to pay more regard to its customers and to compete. The mutual sector benefits not only its own customers but consumers requiring services across the whole sector.
After the first inquiry, it was decided that it would be logical to hold another to assess whether members of the former mutuals that had demutualised had been better served by that process and whether the value of the windfalls that they received after privatisation had subsequently been outweighed by higher costs or lower returns on investment. Again, the group carried out the inquiry in a Select Committee style, interviewing representatives from the mutual sector, from companies that had not demutualised, and from other interest groups, including campaigners for privatisation. The second report, entitled "Windfalls or Shortfalls", was written independently by the Association of Chartered Certified Accountants. It demonstrated that the mutual sector, including building societies and life assurance companies, performed better than their plc rivals in a variety of performance indicators.
As my hon. Friend Mr. Love said, mutuals are consistently placed higher than plcs in the "best buy" tables on a variety of criteria, ranging from savings and mortgage rates on the one hand to annual premium-with-profits policies for insurers on the other.
In comparing the average standard variable rate mortgage of the top 10 mutual building societies with nine converted societies assessed in September 2005, it was found that the average rate was 6.58 per cent. for former mutuals and 6.37 per cent. for building societies. Again, that is a clear statistical demonstration of the added benefit that mutuality brings.
Before my hon. Friend leaves that point, did not the investigation show an even deeper malaise in that all the former building societies that demutualised had set themselves various objectives on demutualisation but had in almost all cases failed to achieve them? Indeed, some had been gobbled up by other companies in the marketplace, and few had shown genuine positive signs of growth and success as a result of their demutualisation.
My hon. Friend makes a valuable point. I do not wish to indulge in the grief of the experience of one or two of the companies that demutualised, but it is worth underlining that, in many cases, members of building societies that demutualised have subsequently lost out on the value of the products that they had with those companies.
Since mutuals have an obvious cost advantage, one would think that they commanded a higher proportion of both the savings and the mortgage markets. However, obstacles have stood in the way of their expansion. One is the wholesale funding restraint, which the hon. Member for Bournemouth, West mentioned. The Bill tackles that. To hark back to the Miles report, which the Treasury commissioned in 2004 to make recommendations for improving funding provision for long-term mortgages, recommendation 19 advocated modifying the wholesale funding restraint to enable building societies to take up to 70 or 75 per cent. of their funds from the wholesale funding market. The issue has lain fallow until the hon. Member for Bournemouth, West took it up. That restraint acted as a considerable brake on the potential for building societies to expand.
The history of building societies shows that they grew out of small, often deprived communities, and their savings products reflect that. By their nature, building societies found it proportionately more difficult than the plc banks to obtain the savings that would have enabled them to get greater wholesale funding. The difficulty has been exacerbated by the fact that, for good community reasons, building societies have maintained their branch networks and their roots in local communities in a way that plc banks have not.
In my area, the successful West Bromwich building society has done well historically in providing low-cost financial services for the local housing market, and plays an active part in promoting community causes. We also have two much smaller societies that do the same in very local areas. They are the Tipton and Coseley building society, which operates in one of the most deprived communities historically in the black country, and the Dudley building society. They provide access to financial services that the major plc banks do not. However, the nature of the customers with whom they engage means that there is not the same intake of funds that there might be in other areas. By removing the wholesale funding restraint or modifying it to the point where mutual societies can borrow more on the wholesale funding market, the Bill takes away one of the obstacles that prevents them from undertaking their activities more effectively.
The hon. Member for Bournemouth, West mentioned the Bill's provisions on pari passu, which effectively give members equal rights with wholesale funders in the event of a dissolution of a society. As he said, dissolution is highly unlikely and the provision is not likely to be used, but it is necessary to include it. It makes it clear that, in the unlikely event of a dissolution, existing members will not be disadvantaged if the building society had expanded its wholesale funding, so the provision is welcome, logical and necessary.
The Bill also deals with transfer of engagement. Again, that has an undeniable logic. Let us consider the co-operative movement. A hundred years ago, there were literally thousands of co-op retail societies. Even as recently as 20 years ago, there were well over 100. However, a process of transfer of engagement, which was allowed under the Industrial and Provident Societies Act 2002, means that those societies have merged to become, in many cases, major societies with huge turnovers. That has happened in response to market conditions and the need to adapt to changes in consumer behaviour. It is therefore illogical that the mutual sector does not have the same flexibility. I understand that some technical problems exist, but I hope that the Treasury ensures that they are ironed out to give the mutual sector the same flexibility that has existed for the plc and co-operative retail sectors for many years.
Is not one of the primary reasons for clause 3 an attempt to sponsor transfers of engagement from positions of strength and not, as has happened in the mutual movement of the past, from positions of weakness? Only through coming together when in a strong position can we grow the mutual movement and compete effectively with the rest of the sector.
My hon. Friend makes a valuable point. Looking at the co-operative retail sector, I would like to think that not all the transfers of engagement came from positions of weakness, but certainly a fair proportion of them did. In the mutual sector, companies are much stronger and this process is likely to be used as part and parcel of a process designed to strengthen their position even more. It is certainly a way of promoting as opposed to just defending the mutual sector. As I say, I believe that it has a compelling logic and I hope that any technical obstacles will be overcome in Committee.
To conclude, over the last 100-plus years, the building societies movement has played a huge and valuable role in the purchase of housing for lower-income people. It has been of enormous and significant social benefit. Even today, in a very highly sophisticated financial market, the mutual sector has proved that it can deliver in a way that the plcs have not.
Does the hon. Gentleman agree that when the banks, for example, want to improve their expertise in mortgage lending, the route that most have taken is not to get their own department to do it, but to seek to take over a building society to perform that function under their jurisdiction?
The hon. Gentleman makes a valuable point again, no doubt rooted in his deep knowledge of the industry. It is fair to say that the expertise built up in the portfolios that building societies have is much coveted by the plc banking sector, so we could say that they are prime targets. That underlines the rationale for the Bill, as it clearly demonstrates that if we want building societies to thrive and sustain their value in the market, we must give them the legislative and regulatory framework to enable them to do so.
In removing this obstacle, the Bill may seem to be a fairly arcane piece of financial regulation, but it none the less has potentially profound and significant implications for how the movement can develop and continue its historic role in a highly difficult and sophisticated financial setting.
I support the Bill and I am particularly grateful to the big hitters on the two Front Benches for being here to listen to my modest contribution.
It is a pleasure to follow the symmetrically named hon. Member for West Bromwich, West (Mr. Bailey) and I would like to congratulate my hon. Friend Sir John Butterfill on securing a place in the ballot. As those who have not been successful often point out, it is simply a lottery. The real skill is in introducing legislation. In that respect, my hon. Friend has been characteristically modest in not mentioning that he has brought three private Members' Bills before the House and that, if this goes through, it will be his fourth—a record for this House of Commons. I am sure that the House would want to congratulate my hon. Friend on that. Members will want to speak to him later about his skill.
Today's debate is about the building society sector and I would like to commend the Minister, whose speech to the Building Societies Association I read this morning. He referred not just to 200 years of British history, but went back even to Roman history. I hesitate before complimenting him, however, given that politicians sometimes rise to make speeches written by others—as I am sure he in particular will know.
The Bill's removal of funding limits is certainly a very welcome step. I probed in an earlier intervention on my hon. Friend the Member for Bournemouth, West the level to which he thought it would rise through the Financial Services Authority and the Treasury. It was interesting that a broad consensus seemed to arise around 75 per cent.
A second aspect of the Bill—dealing with the transfer between mutuals and other structures—is incredibly sensible. It made no sense whatever that the only exit route for a building society was to merge with its exact mirror, or indeed with a plc. Most mergers nowadays are more mature and they take place not for size reasons but for specialism reasons. It makes more sense for a small building society to merge with a friendly mutual that might typically offer insurance products rather than just lend for mortgages. The Building Societies Act 1986 was a major step forward, but it became evident over subsequent years that some areas needed changing. The Bill certainly brings forward most of those changes.
I spent a little time in retail banking in the UK and Africa, but I am not an accountant, so I am a little confused about the issue of pari passu—people who deposit money in building societies being placed on an equal footing with creditors. Will the Minister confirm that those people are on an equal footing with people who deposit at banks? My hon. Friend the Member for Bournemouth, West made a comparison in respect of investing in banking shares, but I am not sure that that is the exact comparison that we need. Perhaps the Minister will look further into it.
I support the Bill, but I was a little concerned when my hon. Friend the Member for Bournemouth, West started talking about it becoming an enabling Bill, allowing the Treasury to introduce changes through negative rather than affirmative resolution. I am not making a party political point, but I have considerable distrust in the idea of handing over more power to the Treasury and the FSA. It will be interesting to explore further in Committee what checks and balances are in place to ensure that the power is discharged reasonably and sensibly.
I am interested to hear the hon. Gentleman's comments, but it seems to me that one of the advantages of the Bill's crafting is that it does not require primary legislation. If the hon. Gentleman does not want powers put in the hands of the Financial Services Authority, what is his alternative suggestion?
When it comes to what appears directly in the Bill, I would be more inclined to see a better balance in the light of the complexities. We do not want to see too much detail, which would mean drafting a new Bill every time we wanted change. It is a balancing act. I am simply flagging up the fact that I would like to see the problem explored further in Committee. I am certainly not saying that the FSA should not have authority to propose changes, with the double lock that they must be supported by the Treasury.
I was about to conclude. I view this as a welcome deregulatory Bill, and the House should support it.
I congratulate Sir John Butterfill on securing the debate and on his well-crafted Bill. Speaking as a new Member, elected only in 2005, I often come to the Chamber to watch and learn. We can see the advantages of a well-crafted Bill that does what it needs to do without pushing the boundaries so much that it makes it difficult to legislate on a complex issue. I therefore congratulate the hon. Gentleman and hope that, one day, I might reach his record for private Members' Bills, as so far I have not been lucky in the ballot.
I am proud to stand here today as a Labour and Co-operative MP—one of many in one of the largest groups in Parliament. The fact that the Bill has cross-party support and the fact that the all-party group is one of the largest shows how mutual endeavour and co-operative values transcend party politics. They genuinely benefit the consumer, and it is important that we MPs recognise that.
As I said in my intervention on the hon. Member for Bournemouth, West, it seems sensible to allow the Financial Services Authority flexibility over the percentage of funds that can be raised from the markets. I am sure that the issue will be explored in greater detail in Committee, and I understand that discussions are being held about whether the percentage should be set at 75 per cent. It is sensible not to put a figure on the face of the Bill, because this relates to market sensitivity. The FSA, in its role as protector of the consumer, should make such decisions. Clearly, it would require Treasury support, but I hope that the Economic Secretary to the Treasury agrees that it would be inappropriate for the Treasury to be too heavy-handed or to go into too much detail, and that it should leave the FSA to do its work. The Treasury should then rubber-stamp the FSA's decision.
The provisions in the Bill that put members on an equal footing are critical. If we really believe in mutuals and in the co-operative sector, we must also believe in the members of those mutuals. This measure is long overdue, and it should be introduced as quickly as possible. It is also common sense to make it easier for a financial mutual to transfer to another mutual outside the financial sector. I appreciate that there are problems with that measure, but I hope that they can be resolved.
I have experience in the housing association sector. Over the years, housing associations have grown and developed, and many have taken on other responsibilities. At first, they used to renovate street properties and, when they got the money to do so in the 1970s, build a small amount of housing. They then expanded to provide care packages, care homes, regeneration packages and building services. Sometimes, they also provided private housing for sale to cross-subsidise their other work.
The housing association sector and, in particular, the National Housing Federation have done a great deal over the years to ensure that all those different interests can co-exist within one group structure. Some have merged and come together under one umbrella, while others have diversified from their original base under one umbrella. That has allowed multiple businesses to exist within one organisation. The governance of the housing association sector has developed to tackle the challenges of the modern world, and I hope that lessons can be learned from that and applied to the issue of the transfer of engagements, so that multiple co-operative and mutual businesses can co-exist under one umbrella.
It is appropriate that my hon. Friend the Economic Secretary is going to respond to the debate. He is the first Co-operative Treasury Minister to deal with legislation on the financial mutual sector, and we are delighted to have him as a member of our Co-operative group in Parliament. I hope that augurs well for the passage of the Bill. We shall certainly have some interesting discussions in our private meetings if he proves unwilling to support certain aspects of it. I feel confident, however, that he and his colleagues in the Treasury will give the Bill a fair wind, because it tidies up aspects of the Building Societies Act that need tidying up, and puts members at the heart of the business.
I should like to use this opportunity to talk about the history of the co-operative and mutual sector, in which the Bill represents a staging post. The sector is made up of a complex and diverse range of organisations, but they have one common feature: they belong to their members. They do not belong to shareholders and they are not owned by an individual or a few individuals. They are a group of organisations with a long history of providing mutual self-help and of strengthening community bonds. Throughout our history, the mutual sector has not only acted to provide services on which working people relied, but strengthened the bonds that are so important in the communities that we represent.
The earliest mutuals were societies or self-help organisations that provided a means of mutual insurance through regular member contributions. Members of these friendly societies were bonded to each other, perhaps by locality or trade, and their regular contributions ensured benefits for them and their families in the event of sickness or death. Happily, the days are long gone when we had only each other to rely on. Now, we have a welfare state that protects people at difficult times, but in the early days of the mutual sector, the friendly societies were vital for preserving family life and people's actual lives.
Earlier in the debate, Sir John Butterfill talked about opinion polling showing that trust in mutual organisations was significantly higher than trust in other organisations. Does my hon. Friend agree that that trust is based on the movement's history of representing ordinary people and of the institutions being owned and controlled by their members?
I could not agree more. These organisations belong to the people who benefit from them and run them for each other. When I am with my children on the 349 bus in Hackney, I point out to them that the people working on the bus own the company that runs it, Hackney Community Transport, and that we can therefore expect a better service. The company is owned and run by its employees for its passengers. That thread runs through every aspect of the mutual sector. When I was much younger, we saw the effect of carpetbagging and the loss of many building societies. I remember regretting that we were losing that crucial membership because people were selling their long-term benefit for a short-term gain.
That is an important point. The assets of a building society have been built up by all who have contributed to it in the past, and they are held on trust by the members for all who will come after them. The activities of carpetbaggers have robbed future generations of what should have been their inheritance.
The hon. Gentleman makes his point eloquently and passionately, and I absolutely agree with him. My own children will have fewer choices in the marketplace, thanks to that sad and unfortunate period in the history of mutuals, but I hope that the Bill will help to strengthen the role of members, and I congratulate the hon. Gentleman again on that.
By the end of the 19th( )century there were about 30,000 registered friendly societies with around 4.5 million members. Building societies emerged from the friendly society movement, and the first was established in the late 1700s. There had previously been temporary societies, which were wound up as soon as they had provided housing for their members. The garden suburbs in London were formed through mutual housing set-ups, which people paid into and borrowed from while their houses were built, and which ceased to exist in that format thereafter. So the long history of mutuals has even had an impact on our city of London.
The first building societies in a form that we recognise can be dated to 1845. Funds for building houses were supplemented by funds from people wanting to save, but not necessarily wanting a house, thereby addressing some of the problems with the earlier form of building society. This left them able to borrow money from investors to build houses more quickly, and able to create reserve funds across generations of members.
We cannot mention building societies without mentioning the co-operative movement and its birth in Rochdale in December 1844, with the establishment of the Rochdale Equitable Pioneers Society, a consumer co-operative, founded by just 28 members. That is just one fewer than the number of Co-operative Members of Parliament—perhaps there is a lesson for us there. They registered their society with the registrar of friendly societies on
"selling pure food at fair prices and with honest weights and measures".
That commitment to consumers was crucial to its success, although I gather it had some early problems that it overcame. It went on to be very successful at a time when many private shop owners were suspected of cheating their customers by adding impurities to sugar and flour and tampering with weights and consumers could not be sure that they were getting what they should. Those people in Rochdale were pioneers, because over 150 years later we are still talking about the origin of food and wanting to know what is on our plate. In a way, we have come full circle, of which the co-operative moment should be proud.
From that moment, the co-operative movement took off. It was strengthened in 1863 by the establishment of the Co-operative Wholesale Society, which rapidly expanded into other activities such as banking and insurance, and diversified beyond food into other areas of retailing. Those organisations grew out of the needs of working-class families in conditions imposed by the industrial revolution, including the uneven distribution of economic resources, the exploitation of labour, the difficult living conditions in overcrowded urban areas, and the particular vulnerability of families to the loss of a single wage earner. At that time, the dependency ratio—the number of people depending on that wage earner—rose in most parts of England.
It is possible to identify the origins and development of each type of enterprise in the mutual sector as responses to different types of hardship imposed in that era, but I will not go into all that history now. The key features common to each form of self-help are a harnessing of the economic resources of those in work and an adherence to a set of governance values founded on important social ideals. Again, it is membership that is key to the co-operative movement. I must commend the hon. Member for Bournemouth, West again for his proposal to give members parity with other investors.
The strength of mutuals and the movement came from their functional purpose. They were a way for working-class people to gain some power over their living conditions and productive output. We see that today in local farming co-operatives in developing countries, where people want control over their lives. Exclusion and marginalisation from the political process—adult suffrage was not universal in the early stages of the co-operative movement—left people with no alternative but to work their way out of poverty through other means. The core values of that era remain. While the organisations, along with the country, have moved on a great deal from their roots in the past two centuries, they remain the same in one crucial respect: they exist to provide mutual self-help for their members, rather than to generate profit for investors. Those core values drive high standards of ethical behaviour throughout the sector. The absence of external shareholders means that there are no conflicts of interest between the claims of consumers and owners, leaving mutuals no incentive to exploit their customers for short-term gain. As others have said, that has led to greater trust among consumers for the products offered by the mutual sector.
Crucially, the ethical emphasis in the co-operative moment has led to a greater emphasis on ethical practice by non-mutuals, and I pay tribute to the work of several colleagues, including the work of my hon. Friend Sarah McCarthy-Fry, on corporate social responsibility. That desire for businesses to have wider social responsibility stems from the important values laid out by the co-operative movement.
In a wider sense, the membership base also enables co-operatives and mutuals to take a broader view of the interests that they aim to serve, to pursue values that are not purely financial, and to take a long-term view of their members' interests. It also gives them space to pursue social and ethical goals and support members' communities.
Perhaps the best, iconic example is that of the Co-operative bank in the 1990s, which, under its chief executive Terry Thomas, now Lord Thomas, pioneered ethical banking before it was flavour of the month. That approach to investment is now being taken up across the banking sector, and consumers are getting savvier about what they should be asking for. In the same way, the Co-operative bank pioneered the recognition of the importance to business of environmental concerns. It sponsors and supported the first environmental business centre, which opened in Manchester in the mid-1990s, showing that business, too, had a responsibility to the environment, and that responsibility could be met in giving economic benefits to banking, business and the community.
Retail co-operatives were the first major retailers of fair trade products, which we now see on supermarket and shop shelves up and down the country. The success of the Co-op in selling fair trade products no doubt encouraged other businesses to sell them too. Fair trade product sales have risen from £32 million in 2000 to over £290 million last year. My borough of Hackney is attempting to become a fair trade borough. By doing so, it will also support co-operatives in the developing world, which is entirely appropriate given the make-up of Hackney's population: about 13 per cent. of my constituents come from parts of Africa.
Mutuality has not only fostered organisations with a strong moral purpose and ethical function but has driven other organisations to follow suit. The initiatives first taken by mutual organisations have subsequently been taken up by multiple plcs. That would not have happened in the absence of the mutual sector.
Today is a small but significant moment in the history of the mutual sector. Through the Bill, we hope to put power and rights back into the hands of members, and to give mutuals a level playing field alongside other key financial institutions. I hope that the Bill gets a fair wind in Committee, and I look forward to seeing it return for its Third Reading.
I also congratulate Sir John Butterfill on introducing the Bill. I was not aware that he had been so successful not only in getting private Members' Bills on to the Floor of the House, but in piloting them to fruition, on which I also congratulate him. I congratulate him, too, on choosing this subject for his Bill, which is appropriate. As we see in the Chamber, it has a wide range of support across all sections of the House.
I do not want to go into great detail about different parts of the mutual movement. Other Members have already done that. Mutuals compete in the marketplace, and many are successful in doing so: there are mutuals that are not successful, and they must take the necessary action to ensure that they become more successful. In many ways, however, the mutual movement, and certainly those parts that will be affected by the Bill, have been and are successful. We hope that the Bill will help them to become more successful.
Mutuals thrive in the marketplace, but this is not the first Bill to reflect that they face some disadvantage. That disadvantage does not relate to how they compete in the marketplace, but to the legislative framework in which they must operate. In the limited time that I have been a Member of Parliament, significant new measures on company law and the framework for the private sector have been passed by the House, but little has been introduced to reflect the needs of the mutual sector, apart from some private Members' Bills. I hope that, in some small measure, the Bill will begin to create a more level legislative playing field, so that the many successful mutuals can compete even more successfully than they have done up to now.
My starting point is that we need a mixed economy, not only in financial services but in other sectors. A mixed economy brings real benefits to consumers. Worker co-operatives, mutual insurers and building societies confer many benefits not only on their members but on other stakeholders. The financial services sector of the mutual movement has perhaps been the most successful. As was pointed out by the hon. Member for Bournemouth, West, mutuals are successful not just in this country but internationally. Many mutual financial services organisations look to organisations such as the Rabobank in the Netherlands, which is one of the great success stories showing how mutuality can deliver for both customers and members.
As many have pointed out today, mutuals also provide a competitive spark in the wider marketplace. For mortgages and mortgage rates as well as for savings rates, mutuals are at the top of the best-buy tables. That benefits not only their own members, but those in other organisations who must compete with the best—and when it comes to those basic services, mutuals and building societies are the best.
The same applies to policyholders in mutual insurance companies. Organisations such as Royal Liver Assurance, Liverpool Victoria and Royal London are doing a tremendous job on behalf of both their members and the wider marketplace. If I had to single out one organisation, though, it would probably be the Nationwide building society, which goes from strength to strength. At this point I should declare an interest, as a former member of the Lambeth building society who has since become a member of the Portman building society and in the next few weeks will become a member of the Nationwide—of which, in fact, I am already a member.
My reason for being a member of the Nationwide is the service that it delivers. It employs 16,500 people, mainly in Northampton and Swindon, and it has 1 million customers. Perhaps most important of all, over the last 10 years it has delivered £4 billion of benefits to its members and customers, an enviable record for any organisation, mutual or otherwise.
But the Nationwide goes much further. It has campaigned on behalf of not just its own consumers and members, but the wider public interest. It conducted a campaign at some cost to itself, pointing out the dangers of taking up attractive short-term fixed-interest mortgages only to pay for them later, and trying to set a standard by which others—including those attempting to compete with it—should operate in the marketplace. It suffered significantly in the early stages of its campaign, but continued its pioneering work in the mortgage market.
We ought to have known that the Nationwide would act in that way given its former name, the Co-operative Permanent building society, which made it clear that its ethics were unquestionable.
Indeed. The origins of the Co-operative Permanent building society lay with the employees of the co-operative movement. The society was set up specifically to help co-operative employees to become owner-occupiers. It grew, became independent, and through merger eventually became the Nationwide that we know today. I believe that the Nationwide is so widely trusted partly because of its history of representing its member-owners and trying to reflect not just their limited interest but the much wider interest of consumers generally, which lies at the heart of the consumer co-operative movement.
I know that the subject of cash machines is close to the heart of the Economic Secretary, who has taken a leading role in this regard. The Nationwide has argued consistently that its members should have free access to cash machines, and that not just building societies and mutual organisations but all organisations in the financial services sector should offer that service.
There are problems and dangers at present. Last year, for every free cash machine that opened 67 charging machines opened. I am very taken with the innovative scheme that my right hon. Friend John McFall—the Chairman of the Treasury Committee, of which I am a member—has developed with the Economic Secretary to pilot 600 new free cash machines throughout the country. I say that as one whose constituency is likely to benefit from seven of them. I am consulting the organisation involved to decide where they would best be placed.
I agree with my hon. Friend that cash machines are an important issue. Many of my constituents are among the poorest, and are not easily able even to open bank accounts. That is where credit unions come in useful. Does my hon. Friend not agree, however, that taking away free cash machines is a reprehensible act on the part of some of our larger financial institutions, which seem to care only about people who can afford to open bank accounts?
I agree very strongly. Those on lower incomes—those who can least afford to pay charges—are affected particularly adversely, because a £1 or £1.50 charge is much higher for someone who is taking out £10 than someone who is taking out £100. Moreover, most charging machines are located in low-income areas, while free machines are not easily accessible to those on low incomes.
I believe that my hon. Friend signed my early-day motion, which congratulates my right hon. Friend John McFall on his initiative in promoting free cash machines. Is it not important that as many Members as possible point out that some of the most deprived parts of their constituencies lack free machines, and that we do all we can to lobby for them to be located in such areas?
I congratulate my hon. Friend on her early-day motion, which is an excellent way of drawing attention to an issue to which we will return. The Nationwide has played a central role in this respect as well, not just in providing free cash machines itself but in recognising the wider consumer interest in ensuring that they are easily accessible, especially to the less well off.
While many banks pay lip service to the problems of financial exclusion, do not those that impose charges on those who draw money from cash machines reinforce the reluctance and fear of those who are shy of opening bank accounts?
I agree. That is a very important point, because the thrust of our efforts is to try to eliminate financial exclusion. When we look into why many people do not take up the opportunities that are now available in this modern consumer society, we discover that the reason is their resistance to what they perceive to be the motivation of the organisations concerned. Charging people for gaining access to their cash reinforces those negative stereotypes. If the financial institutions were to eliminate such negative stereotypes and give a more positive image to those who currently do not make use of the financial services sector, that would benefit them in terms not only of their public reputation, but of their bottom line.
My hon. Friend has rightly sung the praises of the Nationwide building society for its initiatives on free cash machines. Does he agree that the Nationwide should also be congratulated on its promotion of basic bank accounts? Some of the other high street banks have not been quite as enthusiastic about making such bank accounts available to the most financially excluded people. Does my hon. Friend agree that they should take a leaf out of the Nationwide's book by doing more to promote such accounts?
Yes, I do agree. All the evidence shows that a bank account is the gateway to financial services in this country. Clearly, an ordinary cheque account might not be entirely appropriate for low-income consumers for all sorts of reasons, which I shall not go into at present. The basic bank account has been constructed to be an attractive option for people on low incomes. The financial services sector should help to ensure that anyone who wishes to open an account opens the appropriate one, and for those who prefer a basic bank account that option should be available. My hon. Friend is right that, sadly, the evidence is that many organisations in that sector are not doing that with as much enthusiasm as we would expect.
In terms of other financial institutions, I especially wanted to mention the friendly societies. The hon. Member for Bournemouth, West mentioned the Liverpool Victoria which is based in Bournemouth. It is the largest friendly society. There are 57 such societies in total, with a turnover of about £15 billion, and with about 5 million members. We should not lose our sense of history in respect of the friendly societies. In the pre-war period, the Beveridge report was produced, and its aim was to address the five great wants, as he called them. It led to the creation of the welfare state, but Beveridge did not suggest that the state should lie at the centre of the provision of welfare. He suggested that there should be a major role for what he called voluntarism, which at that time was primarily represented by the friendly societies. They had an enormous membership—in the region of 12 million or 13 million people. The creation of the welfare state—and the delivery of welfare through state mechanisms—contributed to the decline of the friendly societies. However, such societies offered a specific and targeted service to low income consumers, and that has persisted through their period of decline. The friendly societies could greatly help us to achieve our goals, especially that of engendering the saving habit among those who do not save very much. The child trust fund is among the measures already taken to address that.
All mutuals in this country share a few fundamental principles. First, they share a community purpose. My hon. Friend Meg Hillier talked about the housing association movement, which consists of industrial and provident societies established for community benefit. The principle of community benefit is a central purpose of all mutual organisations. It inspires the Nationwide and other such organisations to offer a service not only to their members but to the wider community.
As has been mentioned, the mutuals are owned by their members. There can be confusion about who is an owner or a shareholder and who is simply a depositer. That distinction can be complex, but the reality is that all such organisations are owned by their members, rather than by a separate group of shareholders.
They also have a democratic voting system. That has not been talked about, but the principle of one member one vote lies at the heart of mutual organisations. It is an important principle that we should try to uphold because what such organisations have tried to achieve for their members and society in general is based on that principle.
There has been much change. Members have mentioned the changes brought about by the Building Societies Act 1986 and the movement towards deregulation. In the early 1980s we got rid of exchange controls, and in the mid-1980s we had the big bang in the City of London, and it was almost inevitable that that would feed through and have an impact on the building societies and the housing association movement. The result was the 1986 Act, which introduced the opportunity to demutualise. We have had many arguments subsequently about whether demutualisation gave the members of that generation a short-term benefit but at the cost in the longer term of the society and future generations of its members. I do not wish to rehearse those arguments with the hon. Member for Bournemouth, West, but I think that we both agree that many people lost out because of the blandishments offered in respect of what was a short-term benefit. The current members of demutualised societies are living with the consequences of that.
The Abbey National demutualised in 1989, and the Cheltenham and Gloucester followed in 1995. The big year for demutualisation was 1997—that was the year of the demutualisation big bang. The Woolwich, the Halifax, the Alliance and Leicester and Northern Rock all demutualised in that year. Bradford and Bingley demutualised in 2000. That was the last demutualisation; seven years have now past without one.
What has happened to all the societies that demutualised? First, a number of them have disappeared from the high street—they have been taken over and consolidated into other organisations. As the hon. Member for Bournemouth, West said, many banks found it convenient to buy a building society or a demutualised mortgage bank in order to gain their expertise and to be able to deliver new services in the marketplace, and that was sensible. Some societies have gone from strength to strength; that is the case in respect of the Halifax, because it was a large organisation. The one major success in the demutualised sector has been Northern Rock, and I shall return to that point shortly.
It is worth repeating that the organisations that demutualised produced a great stream of statements about what they were going to achieve by demutualisation, but, disappointingly, almost none of that has been achieved. Most organisations still provide the basic financial services that mutuals provide. They have not got into the broader areas of financial services—the more sophisticated high risk areas, which some of them have tried and failed to get into. If such organisations continue to provide those basic financial services rather than provide more sophisticated services, by far the most appropriate structure for them to have is a mutual one because in that case they do not pay shareholders and they can deliver the benefit to the people they represent.
Demutualisation has been a disappointing experience: not an entirely negative one, but, generally, the demutualised societies have not achieved what they set out to achieve. One cannot escape coming to the possible conclusion that demutualisation was undertaken for the benefit of senior employees and that it has been of very limited benefit for some of the members. That was done in accordance with the spirit of the age, and we may well now be living with the consequences of that.
Nothing has happened since 2000. Has demutualisation run its course? Only time will tell. Interestingly, in 2005 a part of the old Bristol & West was re-mutualised, so we are beginning to see the reverse process. Someone said to me, "Was that the first remutualisation?" It may have been, but it was not the first conversion from company to mutual. If one goes back through the aeons, one discovers that Standard Life was originally a company that became a mutual, only to demutualise in the past few years. It will be interesting to see whether in 20 years' time, Standard Life may consider it advantageous to it, and to its policyholders, to become a mutual again.
Although there has been consolidation within the building society movement in the past five or six years, the number of societies has decreased from 65 to 63. However, as several Members have said, the expectation is that the consolidation process will speed up, and we hope that the Bill will give that process impetus. The level of consolidation so far has been small, but interestingly, between 2001 and 2005 the number of full-time employees increased from 28,000 to 35,000. In 2001 there were 9,000 part-time employees; now there are 12,000. Moreover, funds from mortgage advances have risen from £31 billion to £59 billion, so we can say with some certainty that although the number of societies in the movement may be decreasing, the number of employees—and, more importantly, the number of customers and member mortgages—is growing very quickly. Indeed, the Nationwide is a very good example in that regard.
Can the Bill help that process? I certainly think it can, and that it will create a stronger and much better mutual movement. As others have said, the Bill has three important clauses. Clause 1, which everyone has discussed, deals with the relaxation of non-member funding limits for building societies. The Building Societies Act 1997 resolved this issue by creating the 50 per cent. limit. In a sense, it was a mopping-up measure that tried to create a level playing field for a building society movement that had been under severe attack since 1986 from carpetbaggers and others, who I think we can say were not primarily concerned with the best interests of the movement. The Act was meant to address that issue, and it created a permissive regime and increased the regulator's powers to ensure that everything was done properly and transparently. It increased accountability to society members. Numerous societies rarely contacted their members or had any conversation with them, and the Act corrected that.
The 1997 Act also introduced the 50 per cent. member funding limit, and since then, there have been occasions when people—and, indeed, the movement itself— thought that an inappropriate constraint. The Miles report comments on that issue in several different ways. That provision can limit the amount of mortgage business that a society can do, which can therefore have an effect on the competitive pricing of their mortgages. It must be stated clearly that on occasion it can be cheaper to go to the wholesale market than to raise the money from one's own members.
That brings me back to the one demutualisation success story: the Northern Rock. As part of its demutualising strategy, it took in enormous funds from the wholesale market, created a much more efficient organisation and leant those moneys back to mortgage holders. The strategy was successful for the Northern Rock, and my strongly held view is that if building societies are given the flexibility that clause 1 provides, it will be successful for them, too.
The other reason for clause 1 is the growing trend towards fixed-rate mortgages, which at the moment are relatively short-term. People have a three or five-year fixed-rate mortgage, and then go on to something different. As I said earlier in discussing Nationwide, people must consider carefully what are their best interests. However, there is a trend for moving to long-term fixed-rate mortgages, which the Government would like to foster. One can see many benefits to mortgage holders in having a fixed rate and knowing how much they will pay in future, and if we go in that direction, it will have implications for societies based mainly on short-term members' funds.
The Miles report goes into that subject in great detail, and if the Government want to sponsor a move in that direction, we must create the conditions for building societies to compete in those circumstances. Clause 1 offers that opportunity, and it will deliver a competitive building society movement. It will also allow them to issue more mortgages—to follow the Northern Rock strategy of building the business, and by doing so, creating a more competitive business. I therefore strongly support the clause. It is a very important step in the creation of a level playing field for mutuals and the rest of the financial services sector.
Clause 2 would rebalance the relationship between members—those who own the business and who, in many cases, will be depositors—and non-members. The issue is not just wholesale funds, however. One need only speak to someone at the Nationwide building society to realise the full complexity of the situation, in that some depositors are members and therefore shareholders, and others are not. The reality is that taking in a large group of new depositors—in others words, wholesale funds—changes markedly the relationship between those depositors and the people who are also members and shareholders, and who, in normal circumstances, therefore come last in the pecking order should the society be dissolved.
Everybody has made this point, but let me make it again. No member of a society has lost out in any transfer of engagements or in any building society dissolution since the second world war. It is one of the safest investments that anybody can undertake, so we are discussing only a theoretical possibility—but of course, theory sometimes becomes reality. If it did, it would be inappropriate for members, who in many cases are depositors, not to stand on a level playing field with those who deliver wholesale funds. Otherwise they would almost certainly lose their capital in a dissolution, because they would come last. That would not be right, and by saying that the consumer will be protected, we are standing up for the consumer.
The hon. Member for Bournemouth, West has already made the point, which others have confirmed to me, that the wholesale markets will not look negatively on allowing such a privilege. They will still deliver wholesale funds at a competitive rate and in a way that allows building societies to continue to compete with the rest of the financial services sector, because building societies are such a blue-chip investment.
I now come to clause 3. I know that many people see clause 1 as the most important, but clause 3 is at the core of what we are trying to achieve. I mentioned earlier that we have an anomalous situation in law in this country, in that any mutual from any part of the mutual sector may demutualise and become a private company, but may not transfer its engagements to another part of the mutual sector. It makes no sense that a building society may not join with a co-operative or a mutual insurer. The legislative playing field should be level so that organisations owned and controlled by their own members may take the decisions that they believe to be most appropriate for them.
If any such organisation said to its members, "You have a choice: you can either demutualise and join with an ordinary bank or other financial institution, or you can remain mutual and join another mutual in a different part of the financial services sector," I cannot imagine that people who have owned and controlled that society for generations would not prefer to remain mutual. That is what I mean when I say that there should be a level playing field, which would increase the options available to members when they decide such matters and would help to maintain and strengthen the mutual sector. That is what the Bill is about: strengthening mutuality in this country.
The mutual sector has gone through a pretty torrid time since 1986, and not of its own making. I assume that the crafters of the 1986 Act never dreamt that what actually did occur would occur. They thought that there would be a sensible, rational deregulation of the sector that would benefit consumers. They did not think that out of the proposal for demutualisation would come all that happened in the heady 10 years of carpetbagging, but it did. We have gone through that difficult time and are beginning to rebuild the sector. The Nationwide and other building societies are competing the pants off the rest of the sector, and mutual insurers are showing the rest of the insurance sector how to do it. We need to give them this Bill, and let them do it even better in the future.
I shall be even briefer now that I have received that response. We have had a full and comprehensive debate, although there are only a few Members in the Chamber. I am sure that Sir John Butterfill is keen to hear what the Minister and the Conservative Front-Bench spokesman have to say about his Bill, which I congratulate him on promoting. This is only the second time that I have attended the Chamber on a Friday to debate a private Member's Bill. Last time, the Bill's promoter received something of a mauling, so it is a tribute to the hon. Gentleman's experience in this field that there has been such a degree of consensus on the Bill. Congratulations to him, for putting forward such a coherent measure.
Like my hon. Friend Meg Hillier and the Economic Secretary, I speak not only as a Labour MP but a member of the Co-operative party. I used to be a director of a co-operative development agency, and am now a proud member of Money-Go-Round, Bristol's credit union, so I very much support the mutual sector—as much for what it represents as for the important role that it plays.
I support the idea that the financial sector is there to serve the needs of its community. As we have heard from various speakers, that was the origin of the building and friendly societies movement through the self-help initiatives of the 18th century. When I went on a Treasury Committee trip to the United States last year, it was obvious from the community development financial institutions and legislation such as the Community Reinvestment Act that the US still has the ethos that financial institutions should be made to play a role in their communities. We have drifted away from that in this country—a point to which I shall return. It is important to protect mutuals, but we will not do that by preserving in aspic the way in which they operate now. We should do it by introducing incremental changes as necessary, to allow them to survive and flourish in an ever-changing and often challenging marketplace.
As we have already heard, previous legislation, including the deregulation of the 1980s, has allowed diversification, but—unfortunately, some would say—it led to demutualisation. We have already heard from my hon. Friend Mr. Love about some of the organisations that chose to demutualise. I worked for one of them—Abbey National—shortly after it floated and became a plc. It was very successful as a result, and was the biggest bond issuer in the country at one point. It has had its ups and downs in more recent years, but as an institution it benefited from demutualisation. None the less, it is sad that so many such institutions went down that path.
When customers of mutuals have been surveyed, it is clear what they perceive as the advantages. They believe that mutuals are much more democratic, in that members have a direct say in decision making and are able to exercise their voting rights. Above all, they are thought to work in the interests of the members, not of the shareholders. In 2001 a survey was carried out by the Consumers Association, which said:
"Building societies deliver better value for one simple, crucial reason. The priority of the shareholder-owned banks is to keep their shareholders happy by paying large dividends, and increasing profits...we calculate that for every £100 in after tax profit the banks make, about £30-40 of that goes to shareholders as dividends."
The Centre for Business Research at the University of Cambridge has undertaken an ongoing programme of research into the benefits of mutuals. When it spoke to customers and asked them their reasons for choosing a building society, it was clear that the feeling of ownership was very important to them. The No. 1 reason they gave was the lack of shareholders, which creates a feeling of trust. Customers feel part of the institution to which they entrust their money or from which they borrow money. The CBR survey of the mutuals says:
"The essential point is that a PLC owes its duties to its shareholders; we owe our duties to our members. It is easy for a PLC to make attempts to blur that distinction...But at the end of the day they are presented with an inescapable fact: the interests (that is, the interests of shareholders and customers) conflict...We only have to consider the interests of members present and future."
Another point about the mutual sector, the survey said, is that
"The whole tone, the whole motivation, the whole aspiration is different."
One point that has not been made so far today is the extent to which credit unions are now filling in the gap left by the mutuals merging or demutualising. My constituency has several credit unions, but most have now merged to form one big credit union, which gives it added strength. In some ways, the credit unions have picked up the mantle of the early mutuals, harking back to their origins, when communities came together to make their own provision and fill in some of the gaps for the financially excluded communities, about which my hon. Friend spoke.
We learned earlier this month that high street banks' profits have now hit $40 billion. I have no objection to them making such profits, but more should be done to encourage them to reinvest some of those profits in communities through, for instance, promoting basic bank accounts and the free cash machines that other hon. Members have mentioned.
Earlier this month, Save the Children and the Family Welfare Association published an important piece of research illustrating what they call the poverty premium or the price of being poor in the UK. For example, if people do not have a bank account, they cannot pay by direct debit, so their utility bills are likely to be higher. It was estimated that poor families pay 150 per cent. more for basic household goods bought on credit, more than 50 per cent. more on credit and loans, and 10 per cent. more on gas bills paid through pre-payment meters. The poverty premium for a family of four, with one adult earning £250 a week, was estimated at 9 per cent. of their income. In effect, being poor makes people poorer, because they do not have access to financial products at the same rates as other people. Support for the credit union movement is an important step in tackling some of those issues.
In my constituency, the credit union benefits from capital and revenue from the Department of Work and Pensions growth fund, which means that it can make loans to people who cannot access them from mainstream financial institutions. Eighty per cent. of those loans have gone to women, 60 per cent. of whom were lone parents. The credit union made a comparison of the costs of a loan from the credit union and a doorstep lender. It was estimated that someone borrowing £500 from Provident Personal Credit—the country's largest doorstep lender—would have had to pay £825 over a year, at an annual percentage rate of 177 per cent., but borrowing from the credit union would cost about £65 in interest over a year. That shows the difference that a small organisation can make in a poor area in my constituency.
I thoroughly agree with everything the hon. Lady says about credit unions. I was one of the earlier members of the Bournemouth credit union, and am still a member. We are merging with two other local credit unions, and the hon. Lady said that the same was happening in her constituency. I have no doubt that credit unions give a wonderful service in the community I represent. However, I hope that she understands that it was not technically possible to include credit unions in the scope of the arrangements set out in part 3.
I thank the hon. Gentleman for that intervention.
The Government last looked at credit union legislation in the very last measure passed by the Labour Government before we lost the 1979 election. Some steps have been taken since then—for example, doubling the interest rates that credit unions are allowed to charge—and I think that my hon. Friend the Economic Secretary is looking into the possibility of introducing more legislation, and I hope that will be done.
We need to look at the role that financial institutions—whether community development financial institutions or others—can play in lending to the voluntary sector and new businesses in deprived areas. There is a gap in the market that the high street banks are not really meeting. On that note I shall conclude my remarks, as I think it is time for Front Bench to have their say.
It is a pleasure to follow Kerry McCarthy. She spoke eloquently about the benefits that credit unions bring. As a member of the Portsmouth Savers credit union, which serves not just Portsmouth but neighbouring boroughs, I agree with many of her comments about the success of new forms of financial mutual—although I realise that they are outside the scope of the Bill—in meeting the needs of people in many different communities. The credit union movement is excellent and demonstrates that financial mutuals can innovate, and refresh and renew themselves in a way that underpins the purpose of the Bill.
I congratulate my hon. Friend Sir John Butterfill not only on securing a place in the private Members' ballot but on choosing to steer this Bill through the House. I hope he will be successful. Given his tremendous track record, I have no doubt whatever in his ability to see his fourth private Member's Bill on to the statute book—a record to which we should all aspire over the course of our parliamentary career.
Mr. Bailey, one of the Labour and Co-operative Members taking part in the debate, spoke knowledgeably of the importance of the building society and financial mutual sector. I was delighted that my hon. Friend James Duddridge volunteered to serve on the Bill's Committee. I am sure that he will add expertise and insight to its proceedings.
I fear that may not always be the case in the debates we are holding on either side of today's private Members' business.
Mr. Love gave a knowledgeable and thoughtful speech. Thinking about some of his comments about the role of friendly societies before the Beveridge report, I realised that that sense of providing benevolence and support runs through the remaining friendly societies. They play an important role in meeting the needs of some of our communities.
The Bill deals with an important sector. Financial mutuals have roots in communities up and down the country. As the hon. Member for Edmonton said, historically they tackled financial exclusion by providing benefits to their members—that mission was as important then as it is today. Typically, those organisations were run by and for the benefit of their members, but mutuals nowadays cover a wide range—from the Nationwide building society to the Catholic building society and from Liverpool Victoria to the Ancient Order of Foresters. The assets of mutuals range from a few millions to many hundreds of millions of pounds.
The Bill helps us to recognise the diversity of financial mutuals and provides the means to facilitate change in the sector. If mutuals are to continue to succeed they need not only to take best practice from the commercial sector but constantly to focus on the benefits to their members that come from their mutuality. A mutual that loses sight of its key role in providing benefits to its members is a mutual that has lost its way.
Labour Members have spoken graphically about their connections with the co-operative movement. I was born and brought up in the north-east, and the physical embodiment of mutuality—the local Co-op—was a common sight in streets all over the region. The Co-op was, and to a lesser extent still is, part of the fabric of life in the north-east. The divi was a reward to members of the Co-op for shopping there—a forerunner of the customer loyalty cards of today; but it was also a sign of ownership of the business and of the rewards that come from that.
People often link the co-operative movement to the Labour party, but even in my own constituency, which is a Conservative heartland, the flagship store in the local shopping centre is a Co-op. The Co-op provides many of the convenience stores across my constituency. I have never really delved into the history so I am not entirely sure what the link is between Co-op stores, the co-operative movement and Labour and Co-operative Members. Next time I shop in my local Co-op, I shall think about Labour and Co-op Members and about the benefits of my shopping to the co-operative movement as a whole.
Because of the strong links to the co-operative movement that I have indicated and also to credit unions, I am delighted to take part in the debate. The Bill will strengthen the financial mutual sector in the future. Members have talked about the three key parts of the Bill: to amend the building societies legislation to enable the relaxation of prescribed non-member funding limits; to establish the interests of members so that they rank equally with non-member funders; and to widen the opportunities for societies to merge across different financial mutual sectors.
I want to talk about each of those three aspects, but first I want to remind the House of the background. The starting point of legislation governing building societies is the Building Societies Act 1986. At the time it was seen as giving societies greater market freedoms. It set limits on the classes of asset that building societies could invest in and also, as Members have said, provided the paving legislation that allowed building societies to convert to companies. Of the six largest building societies at the time the Act was passed only one, the Nationwide, has preserved its mutual status.
The next significant change in legislation was the Building Societies Act 1997, the culmination of a lengthy process of review and consultation on reform of the 1986 Act. It replaced the prescriptive regulatory regime of the 1986 Act with a more flexible regime and made changes to the powers of the sector's regulator, the Building Societies Commission. Measures were introduced to improve the accountability of societies to their members, but also to protect the remaining mutual building societies from the pressure to change status. Then we had the Financial Services and Markets Act 2000, which again changed the governance of the sector and brought building societies within the remit of the Financial Services Authority.
As the hon. Member for Edmonton said earlier, there have been no building society demutualisations since 2000. He identified that the savings business of Bristol and West was re-mutualised in 2006, with the acquisition of that business by the Britannia building society. There are about 60 building societies in the UK, with over £300 billion of assets. They employ about 50,000 members of staff and have over 2,000 branches, about 22 million individual investors—although some people will have accounts with more than one company—and almost 3 million borrowers. Added to that, building societies have sought to increase the range of products that they sell. They hold the majority of the cash-based child trust fund accounts—about 440,000 in total. It is not just building societies that are involved in the child trust fund business. A number of friendly societies and other financial mutuals are also key players in that market.
In broad terms—this is reflected in the Bill—building societies are defined as institutions that must have as their main business raising money from investors in order to lend on the security of residential property. Following the 1997 Act, there are few restraints on the other activities that they are allowed to undertake. The principal restrictions are to prohibit them from speculating in derivatives, commodities and foreign exchange markets, although they can hedge their risks, when looking at the risks that arise from lending in fixed-rate markets.
There are two principal issues that building societies need to think about in the context of their activities. The first is the topic of the first part of the Bill. Building societies must raise at least 50 per cent. of their funds from members—essentially, the retail markets—and the balance can be raised from the wholesale financial markets. The second is that 75 per cent. of their lending must be lent on the security of residential property. The Bill addresses the first restriction in particular. It is worth noting that not only does the Bill have support from all the relevant stakeholders in the sector but it has cross-party support in the House.
I am grateful to my hon. Friend for pointing that out. I am sure that that has not been lost on the House. However, the Bill does have cross-party support and support from stakeholders across the sector.
I am grateful to my hon. Friend for pointing that out. [ Interruption. ] The Economic Secretary suggests that my hon. Friend may have been overly generous in his remarks. I would not be quite as churlish as to say that myself, but I recognise the comments that have been made on both sides.
It is important to look at the impact that the existing limit on borrowing from wholesale markets has. It is recognised that it is, on the whole, cheaper to borrow from those wholesale markets, rather than to rely on retail funds. The hon. Member for Edmonton talked about Northern Rock. It is interesting to look at the evidence that it gave to the all-party group on building societies and financial mutuals. Its report on demutualisation said that Northern Rock
"insisted that its success over the past eight years would not have been possible under the old mutual model. By being able to access external capital (75 per cent. of which is now raised abroad) it could grow quickly and therefore keep unit costs down."
That is an important factor to recognise. Clearly, the benefits that will accrue to building societies from the relaxation of the limits will, I hope, flow through to borrowers. The hon. Gentleman talked about some of the issues around demutualisation. It is important to recognise that, when Northern Rock demutualised, it set up the Northern Rock Foundation, which continues to support community activities across the north-east and plays an important role in providing support to community organisations across the region.
Commenting on the Bill, the Building Societies Association said:
"The removal of the constraint means that building societies would be in a position to meet whatever changes emerge in the marketplace over the next few years, rather than having their response to market changes constrained by legislation that might, in the future, appear out of date and unnecessarily restrictive."
That is an important point to make. The measure facilitates the development of the building societies sector in the future. That point was also made by Professor David Miles in his report in 2004. In the context of funds being raised from members of a building society, the report pointed out:
"If there were a significant increase in long-term, fixed-rate lending, this requirement could place building societies at a disadvantage to other mortgage lenders if tapping wholesale markets turned out to be the most effective way of funding fixed-rate lending."
Again, that shows the commercial need and the need to continue to provide good value for money to borrowers by accessing the funds that are available in the wholesale markets.
"we do not think there is any immediate need for an increase in the building society funding limit, we do think it is sensible to build in flexibility for the future: ie to permit" the Treasury
"to raise the limit if circumstances in future make that desirable."
That is an important signal from the FSA about the way in which the powers can be used in the future.
The second matter that the Bill deals with is establishing that the interests of members are to rank pari passu with non-member funders. That point has been discussed at some length already in the debate and I do not wish to comment much more on it. I took heed of the comments made by my hon. Friend the Member for Bournemouth, West about the acceptance of that by wholesale markets. That is an important factor as well. It would weaken the purpose of the Bill if wholesale markets took an adverse view of that change in priorities. I am glad to hear that they do not and that they support the change in priorities.
The third objective of the Bill is to widen the opportunities for societies of different types to merge. At a time when the commercial sector is combining different types of activities—the bank assurance model—it is important to reflect that different types of financial mutuals themselves should be able to join together without losing the benefits of mutuality.
It is important to remember why mutuals are so important today. They often service markets that many listed companies or larger businesses would not service. Because they collect relatively low premiums and use a different distribution method, they can reach out to members in a way that larger commercial organisations cannot. We need to bear in mind the diversity in the financial mutual sector, too. When I attended the conference of the Association of Friendly Societies last October, I was impressed by the variety and diversity of the organisations there, and by the different ways in which they had developed, whether they represented specific geographic communities, people in particular types of employment, or trade unions.
If we are to encourage the sector to develop, so that it remains viable and continues to meet the needs of its members, we need it to be much more flexible in the way in which it can organise itself. Of course, we must not forget the tremendous work that it does in supporting the needs of members and in going beyond contractual requirements. When I met Mark Rothery from the Ancient Order of Foresters friendly society, he emphasised the importance of the benevolent activities of friendly societies, and of going beyond a strict, contractual relationship with members. If the Bill is able to renew, revitalise and refresh the financial mutual sector, we should welcome it.
I am conscious that a lot has been said, and the Minister is keen to speak, too, so I conclude by welcoming the Bill on behalf of the official Opposition. My hon. Friend the Member for Bournemouth, West, has identified an important way in which we can help the financial mutual sector to develop, and to strengthen and renew itself. We look forward to debating the Bill in Committee, and we wish it success in its remaining stages.
May I start by joining Mr. Hoban in praising the series of powerful speeches made in support of the principle of mutuality and the principles behind the Bill? I join him and everyone else who has spoken in praising Sir John Butterfill for his leadership on the issue. His speech set out clearly and in depth the case for action and for his Bill. It demonstrated a thorough understanding of the issues, and a commitment to the values that underpin the legislation. I am happy to confirm today that, in principle, the Government support the objectives of the Bill. We shall seek the support of hon. Members on both sides of the House in ensuring its smooth passage. I look forward to continuing our fruitful discussions, for which we are grateful, with all interested parties, so that we can ensure that the Bill reaches the statute book.
It is clear from today's speeches that although commentators in the financial press and more widely are sometimes tempted to talk about the mutual sector's declining role in financial services, the sector is in fact in robust health, and has broad-based support in the House and more widely. Indeed, it is set to expand further in the months and years to come. We have heard excellent speeches from Labour Members, including my hon. Friends the Members for Edmonton (Mr. Love), for Bristol, East (Kerry McCarthy), for West Bromwich, West (Mr. Bailey) and for Hackney, South and Shoreditch (Meg Hillier), who set out the case for mutualism and for the Bill.
There was support, and detailed questions, from James Duddridge, whose points I shall respond to later, and the hon. Member for Fareham, who pointed out that he has a Co-op in his constituency. That pleased me, and even in his constituency the odd Labour voter might pop in from time to time for a packet of tea or whatever. One of the most important roles that the Co-op plays in my constituency is in providing a welcome shelter from the elements on rainy days in the run-up to elections. It also offers wider support, but we will not go too far into that issue today, because this is a Bill with cross-party support. By cross-party, I do not simply mean the Labour party and the Co-operative party; I also mean the Conservative party, and we are told that there is Liberal party support, too.
I want to discuss the details of the Bill, but let me start by making a few general references to the strength of the sector. My hon. Friend the Member for Edmonton pointed out the success of the mutual sector in recent years, and he is right; at last year's Moneyfacts awards, mutuals took almost 75 per cent. of the top three places in the nine mortgage categories. The best available rate for five-year fixed mortgages, for instant mini cash individual savings accounts, and for instant access accounts were all offered by building societies, according to a 2005 study. On a subject that is particularly closely related to my responsibilities, child trust fund accounts have been predominantly provided by children's mutual and friendly societies.
The sector is vibrant, and vital to the British economy and to the daily well-being of literally millions of people in our society. As we have heard today, the sector has a proud history. It is sometimes thought that its origins lie in the self-help tradition of the Victorian era, and people look back to the early years and the work of the Rochdale pioneers—28 men and women who came together from a sense of community and a commitment to solidarity to begin the co-operative movement in Britain in 1844. In fact, history shows that the Romans got there first. It was, in fact, the Romans who first set up mutual insurance societies to provide for death and retirement as early as AD203, so there is a 2000-year history of mutualism. That history continued in mediaeval times with the establishment of craft guilds. The hon. Member for Rochford and Southend, East asked whether my speech to the Building Societies Association was my work. The answer is that it was in part, but it was also a co-operative effort, and I am grateful to the people who provided me with some of the details.
One of the earliest records of the Treasury's involvement with the mutual sector came in 1829 when, in response to cases of fraud, the Treasury appointed John Tidd Pratt as the first registrar of friendly societies, and tasked him with ensuring both that societies complied with legal requirements and that members' interests were best served. He remained in post from 1829 until 1870, and while the Treasury has not managed quite such dedicated individual service since then, our relationship with the mutual sector has remained strong to this day. As hon. Members have pointed out, I am the first Treasury Minister with responsibility for the financial sector to be a Co-operative party Member of Parliament. I see it very much as my task, working with my fellow Co-operative and Labour colleagues, and with co-operative supporters across the House, to continue the long tradition of mutualism in society.
Mutualism flourished, particularly in the late 18th and 19th centuries, in the run-up to the establishment of the co-operative movement in the early 20th century. A number of hon. Members have referred to what seemed to be a period of decline in the 1980s and 1990s, and the demutualisation of Abbey National appeared to confirm the view that mutual building societies would be unable to compete with the commercial banking sector. Between 1989 and 2000, nine societies converted into banks, and as we have heard from a number of Members on both sides of the House, carpetbagging became a growing concern. We have tried to respond to some of the concerns in the building society movement about the pressures of carpetbagging by introducing measures, starting with the passage of the Building Societies Act 1997, which amended the Building Societies Act 1986, to increase societies' commercial freedom, to improve accountability and to try to put mutuals on a more equal footing with proprietary companies.
Over a decade, the Government have introduced nearly a dozen legislative changes covering issues from accounting requirements to electronic communications, including amendments to the law affecting conversion. Before the Bill was introduced, we were pleased to support the three private Members' Bills that updated co-operative legislation. Our aim is not to give mutuality a privileged position but to allow building societies and mutuals to compete on a level playing field. For example, the 1997 Act withdrew the tortuous list of permitted building society investments, which undoubtedly hampered building societies' ability to compete fairly in the marketplace. There were some unwelcome changes in the 1980s and 1990s, but one can argue, too, that the building society sector emerged stronger from that period, rather than weaker. In an improved legislative framework, societies have had to strengthen long-term relationships with their members. Annual general meeting attendance is up and members are being more closely engaged. Building societies have recognised that they have to be businesses and compete in an increasingly sophisticated global market.
The building society model of the annotated combined code was praised by Paul Myners in his review, and other mutuals have been following the building societies' lead in corporate governance reform. The remutualisation of Bristol & West branches following take-over by Britannia Building Society is just one sign of greater confidence in the sector, demonstrating that it is succeeding and can grow. These trends suggest that the role played by mutuals is not just an accident of history, and that in the face of intense and growing competition mutual financial services providers have proved that they can compete and indeed have some advantages, compared with the profit-making sector.
First, as my hon. Friends the Members for West Bromwich, West and for Hackney, South and Shoreditch noted, as mutual institutions owned collectively by their members, without external shareholders in the conventional sense, building societies can achieve advantages in efficiency and innovation and operate with lower cost ratios than plcs. Secondly, some mutuals, particularly small mutuals, including small building societies, serve markets that are often ignored by plcs, and can therefore develop local knowledge and engagement that is hard for larger organisations to achieve.
That can lead to a third advantage, building local loyalty and making a special contribution to local and community life. In the consultation that we are undertaking on the use of unclaimed assets in bank and building society accounts, we have responded sensitively to a particular issue in the building society world by making sure that local and small building societies can use unclaimed assets to continue those links and make a local contribution to community life.
At a time of rapid change and growing complexity in financial services, and given some of the difficulties that have occurred in the past 10 or 20 years in some aspects of retail financial services, there is a unique trust in mutuals, and they have maintained the reputation that they have historically had. That places them in a strong position to respond to consumers' need for transparency, fairness and the knowledge that they can trust their providers. Members know that across the vast range of mutual societies that exist, they can expect public service and local commitment. Trust is an increasingly valuable commodity in a complex financial environment.
As more financial responsibility is expected of individuals for personal finance and pensions, the mutual sector can continue to grow in size and capability. For it to do so, we need to ensure that the legal framework within which it operates is fit for purpose. Over decades the legislative framework has not properly kept pace. Co-operatives and credit unions are operating in a framework that dates back many years. The Industrial and Provident Societies Act 1965, which consisted of nine Acts covering the sector, was a consolidation of 19th century legislation. The Credit Unions Act 1979 is almost 30 years old.
Starting with the Building Societies Act 1997, we have tried to put mutuals on a better footing. Significant changes were made for the benefit of the industrial and provident societies by the Industrial and Provident Societies Act 2002. The Co-operatives and Community Benefit Societies Act 2003 introduced further change. In the last year, the Government have introduced measures to increase the maximum interest rate that a credit union may charge its members. Most recently, last week to the day, we laid before Parliament two statutory instruments proposing amendments to building societies legislation. The first of these deals with the treatment of building societies' offshore deposits and changes to their treatment for the purposes of the funding limit, allowing such deposits to be treated the same as members' shares, up to a limit not exceeding 10 per cent. of the value of total shares in the society. The second enables societies to present their summary financial statements in a form consistent with international accounting standards. Our aim, as I said, has not been to give mutuality a privileged position, but to allow a level playing field.
To build on the progress that we have made, in November last year I announced that the Treasury would review all co-operatives and credit union legislation. Since then, I have been grateful to all the individuals, societies and trade associations, as well as hon. Members, who have provided valuable advice and constructive ideas to the review, which will lead to a consultation document to be published this spring. Following publication, there will be a 12-week period for formal responses, and we hope to be clear on the final recommendations by autumn this year. I know from the discussions that I have had that the mutual sector attaches high importance to the outcome of that review.
We do not know whether we will be able to come forward with an omnibus Bill. We will need to ensure that we take advantage of every opportunity that arises to implement the findings of the review, whether through regulatory reform orders or when private Members' Bills present opportunities such as today. That is why the Treasury was pleased to see the hon. Member for Bournemouth, West so high up in the ballot, and in particular that he chose to devote his slot to helping in this comprehensive effort to improve building society and wider mutual legislation. We agree with him and with Members on both sides of the House who have spoken today that this provides an opportunity to improve the competitive position of building societies and to allow them to respond effectively to the needs of their members.
With regard to clause 1, as hon. Members have already pointed, in particular my hon. Friend the Member for Edmonton, the Miles review on the UK mortgage market identified a need for building societies to be able to access higher levels of wholesale funding. I refer particularly to recommendation 19 of that report, which advised
"that Government consider lowering the minimum funding limit by members from the current 50 per cent. 25 or 30 per cent. of building societies' funds coming from members would still represent a substantial source of funding."
It is clear, as hon. Members have said, that raising the level of wholesale funding would impact on members' rights on the winding up or liquidation of a society, because members' shares are subordinate on a winding up. It is for that reason that the Bill includes clause 2. It is clear, certainly to those on the Treasury Bench, that clause 1 should not be commenced in the absence of clause 2. They stand together.
Clause 3 is different from the other two clauses, being of a far broader scope. Its aim in attempting to facilitate transfers within the financial mutuals sector is admirable. However, as I have already said, mutuals legislation is complex. The different Acts are not necessarily compatible with each other. Therefore we have been working and continue to work closely with the hon. Member for Bournemouth, West to clarify the issues, which we will seek to address in Committee.
I shall respond to each clause in detail. Clause 1 proposes to remove the funding limit for building societies. Building societies are constrained in their business operations by the statutory requirement that they raise at least 50 per cent. of their funds in the form of shares held by individual members of the society. The measure proposes abolishing that requirement, which currently restricts the amount of wholesale funding that a building society is permitted to have. Although we fully agree with the need for greater flexibility, we do not consider that removing the limit entirely is consistent with the nature of building societies. That is why we have agreed to discuss with the hon. Member for Bournemouth, West and his advisers an appropriate amendment that substantially increases the level of wholesale funding that building societies are permitted to have, while retaining a requirement for member funding, too. We have discussed the measure at length, and in our view the objective will be best achieved by giving the Treasury, and not the Financial Services Authority as stated in the current long title, the power to increase the permitted amount of wholesale funding to a maximum of 75 per cent.
Will my hon. Friend explain why the Treasury has made that decision, because it seems to make sense to leave the matter in the hands of the FSA? Will he expand on that point a little more for our benefit?
We have looked carefully at the legislation and where the responsibility lies. We have consulted the hon. Member for Bournemouth, West and the FSA. The FSA is the regulator of individual institutions, but responsibility to this House for setting the overall framework, and therefore the accountability for that framework in legislation, lies properly with the Treasury. I assure my hon. Friend that we will make decisions in full consultation with the FSA. This House will always have the opportunity to scrutinise the decisions that we take. As has been said, the limit will give the building societies substantial room for manoeuvre, but the appropriate decision maker to be accountable to this House should be the responsible Minister. In discussion, we therefore concluded that it should be for Treasury Ministers to make those decisions and to be directly accountable to this House for them.
Clause 2 relates to the consequential rights of building society members on a winding-up or a liquidation. The intention of the clause is to place members on a par with other creditors in the case of a winding up. Currently, members' funds would rank below those of other creditors. The clause would put members' funds on an equal footing with wholesale debt in the event of a building society being wound up. The position of members' funds has been a cause for concern for regulators for some time, because following the winding up of a building society, members could stand to lose more than the equivalent bank customers, although up to certain statutory limits they would most likely have recourse to the financial services compensation scheme. As my hon. Friend the Member for Edmonton has said, that is an academic concern, rather than a real concern, in today's environment.
For many decades, no building society has been in difficulty, because of the soundness of the sector and the cautious way in which it operates. We agree with the hon. Member for Bournemouth, West that we should take this opportunity to make the position clear. I assure the hon. Member for Rochford and Southend, East that the Bill provides an equal ranking with creditors, including wholesale depositors. The financial compensation scheme applies exactly the same as it would to bank deposits. We will introduce minor amendments to clause 2 in Committee, but only to ensure that we can give proper effect to the intention of the clause. As I have said, we believe that clauses 1 and 2 stand together.
Clause 3 would give the Treasury the power to make regulations to facilitate transfers of business from one type of mutual to another. There are currently legal limits on the permissible types of transfer between different mutual bodies, whereas companies have no such restrictions on the transfer of ownership. The clause would make it easier for a financial mutual to transfer its business to another mutual or to its subsidiary. It would give the Treasury the power to treat transfers between mutuals as if they were transfers between the same category of mutual. For example, a building society could be transferred to a subsidiary of an industrial and provident society or a friendly society under simplified rules and thresholds.
In principle, we support the intention behind the clause, but it is undoubtedly the most challenging part of the Bill. There are still important legal and technical issues to be resolved. A key risk is that it could, if we get it wrong, inadvertently remove certain safeguards that are in place to protect mutuals from carpetbaggers converting them into non-mutual companies. For that reason, we will propose, and I believe that the hon. Gentleman will accept, amendments in Committee whereby the provisions should be subject not to the negative but the affirmative resolution procedure. That means that not only will the Treasury consult on the detail of the proposed measures but that Parliament will have the opportunity for further debate to ensure that the principles of mutuality are not compromised. I hope that all hon. Members will recognise that that extra safeguard is right and proper in order to ensure that the strengths of the mutual sector, which I and many other hon. Members have set out today, are preserved and not inadvertently undermined.
We are concerned about three particular issues. First, there is the question of how a mutual transferring its business to a subsidiary of another mutual would work. Most subsidiaries are companies, and we need to ensure that a mutual transferring business to a company subsidiary would not inadvertently make demutualisation easier. Secondly, the Bill seeks to make transfers to mutual insurers easier, but, again, some mutual insurers are companies, and we want to ensure that the procedure does not inadvertently lead to more demutualisation. Thirdly, some mergers or transfers are not possible because of European legislation—for example, it is not possible to be an insurer and a bank at the same time. We need to ensure that we get that technical issue right in the final drafting of the clause.
As I say, we will need to table further amendments to clause 3 in Committee to ensure that we get the detail right. I cannot, at this stage, give an absolute guarantee that we will succeed, although the indications from our discussions with the hon. Gentleman and his advisers is that we are making good progress, and we are confident that it can be done.
In conclusion, the Government are committed to the continued success of the mutual sector and to playing a role in supporting it. We are sympathetic to the principles that underpin the Bill and wholly support the values that it seeks to entrench in legislation. We need to keep the building society and mutual sector competitive, and if we get the Bill right, we will succeed in that objective. We congratulate all those who have been involved in its preparation, particularly the hon. Member for Bournemouth, West on his leadership, and look forward to assisting with its progress through Parliament.
I thank the Economic Secretary for his comments and the helpful way in which he and the Department assisted us in preparing the Bill and getting it to its present stage.
We accept that it may be necessary to table amendments in Committee. Indeed, we have already agreed some of them in principle. I hope that we do not need to revert to affirmative resolution procedure in all cases, but we can debate that at the relevant time. If we need to give the Treasury a longer period in which to consider some of the more detailed aspects that the Economic Secretary outlined in relation to clause 3, there will probably be happy agreement in Committee that we shall do whatever is necessary to get the Bill on to the statute book.
We have had an excellent debate, with wonderful contributions from all parties, for which I am grateful. Meg Hillier made a splendid speech. I say to her that, although the co-operative movement arose from the needs of many poor people, other stakeholders also supported it. My mother, who was born in 1898, the daughter of a successful Victorian industrialist and became a civil servant at the Bank of England, was a keen supporter of the co-operative movement and a member of the Co-operative Wholesale Society for as long as I can remember. However, she always voted Conservative, as far as I know.
I should like to take the opportunity of thanking a few others. First, I thank the Building Societies Association for its tremendous co-operation and that of its individual members on the Bill. I thank the Association of Friendly Societies and all the other mutual organisations that have been so supportive in getting the Bill this far. It is invidious to single out individual ones, but I must say that the Portman building society in my constituency has been very helpful, as has the Liverpool Victoria friendly society. They put a tremendous amount back into my local community. I have twisted the arm of the Liverpool Victoria to give significant funding to the Youth Cancer Trust, which is a major charity that provides palliative care to young people in my constituency. The Liverpool Victoria has given us a big sponsorship, so I offer it special thanks. However, that is typical of what mutuals do in constituencies throughout the country.
I give my sincere thanks to Mutuo, whose members are listening to our discussion. Without that organisation, it would not have been possible to get the Bill to this stage. It is a great supporter of everything that we do and of the all-party group. I am extremely grateful to it. With its aid, we may get the measure on the statute book.
Question put and agreed to.
Bill accordingly read a Second time , and committed to a Public Bill Committee.