Building Societies Act 1986 (International Accounting Standards and Other Accounting Amendments) Order 2004

– in the House of Lords at 12:05 pm on 16th December 2004.

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Photo of Lord Davies of Oldham Lord Davies of Oldham Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

My Lords, I beg to move that the draft order be approved. Three pieces of accounting legislation have originated from the European Commission in recent years which require implementation for building societies. This order gives effect to two of them: the EU Regulation on International Accounting Standards (the IAS regulation) and the Modernisation of Accounts Directive.

The Fair Value Directive and other parts of the Modernisation of Accounts Directive are being implemented in a separate Statutory Instrument: the Building Societies (Accounts and Related Provisions) Regulations 2004. Those separate regulations use the negative resolution procedure and were laid before Parliament last week, on 6 December. Those accounting changes have been implemented across two different statutory instruments, because the powers available in current legislation require different parliamentary procedures to be followed.

The DTI Minister of State for Industry and the Regions recently introduced in the other place similar regulations for companies, and my noble friend Lord Triesman introduced those same regulations for companies in the House of Lords on 5 November.

Her Majesty's Treasury and the DTI have worked together closely on these accounting changes. A joint consultation document on the IAS regulation and the Modernisation of Accounts Directive was published in March this year. A co-ordinated and coherent approach is important, not just because the accounting changes are similar for both companies and building societies, but also because of the need, which will be recognised in all parts of the House, to ensure a level playing field between companies and building societies, where appropriate.

A level playing field is important. Having a diversity of legal forms and providers of financial services is of benefit to consumers in encouraging more choice and competition. It also has wider benefits for the financial services sector. Having different forms of ownership structure provides for greater diversity and stability. To ensure that building societies can continue to play a valuable role in financial services, it is important that changes such as those in accounting do not significantly favour or disadvantage building societies in relation to other types of undertakings. For those reasons, the draft order seeks to ensure that implementation of those accounting changes for building societies mirrors implementation for companies as closely as possible.

My noble friend Lord Triesman outlined much of the background and detail of these accounting changes when he introduced the regulations for companies. However, I shall briefly reiterate the reasons for, and substance of, the changes.

The Financial Services Action Plan, which was published by the European Commission in May 1999, aims to facilitate a single market across the European Union. One way that it seeks to do so is by harmonising financial reporting across the European Union on the basis of globally agreed accounting standards. The IAS regulation of July 2002 is an important measure towards that goal. Another key measure is the Modernisation of Accounts Directive of July 2003.

The IAS regulation is directly applicable to companies that are governed by the laws of an EU member state. Companies whose securities are admitted to trading on a regulated market in any member state will be required to prepare their consolidated accounts in accordance with IAS, as adopted by the European Commission, for financial years beginning on or after 1 January 2005.

The definition of "company" used in the IAS regulation includes building societies. Therefore, building societies whose securities are traded on a regulated market in any member state will be caught by the same requirements as publicly traded companies.

The IAS regulation also contains options allowing member states to permit companies to use IAS, where they are not required to do so, for their individual and consolidated accounts. The Government have adopted a permissive approach to this. For now, we have decided against mandatory extension due to the burdens that that would impose. Instead, building societies that are not required to switch to IAS by the regulation will be able to choose whether or not to switch to IAS when they themselves judge that the benefits of so doing outweigh the costs and at a time which suits them. That is a flexible, market-friendly approach which has been strongly supported by the sector.

The IAS regulation is a large step towards the goal of globally agreed accounting standards. It will allow for more comparability of accounts and will encourage cross-border investment. It is an important contribution to stronger financial markets.

It is inevitable that the regulation has thrown up some technical problems. For example, the building society sector approached us last year to discuss its concerns about how IAS would affect the ability of building societies to securitise their assets under IAS while still remaining compliant with the statutory restrictions on the funding and lending activities for building societies. In the interests of allowing building societies to securitise in the same way as companies are able to do, I am pleased to say that earlier this week we laid a statutory instrument to resolve that problem.

Some building societies will be required to use IAS and others may choose to do so. For those that do not use IAS, building societies will continue to be required to comply with European accounting law. The Modernisation of Accounts Directive amends existing European accounting law with the aim of bringing European accounting requirements into line with modern accounting practices. It requires member states to make certain changes to national law and gives them options in other areas.

Most of those changes are relatively minor and technical amendments. The most significant of the provisions are the new reporting requirements relating to the directors' report. The directors' report must now contain a fair review of the building society's position. That fair review must include a comprehensive analysis of the development and performance of the business and a description of the principal risks facing individual building societies.

I shall now outline the structure of the draft order that I have introduced today. It amends the Building Societies Act 1986 and is split into four main parts. Parts 1 and 2 give full effect to the IAS regulation and the member state options in it. It does that by inserting into the Act provisions which permit building societies to choose to prepare their accounts using IAS. These parts also specify that the order applies to financial years starting on or after 1 January 2005; they set out the provisions on consistency of accounting frameworks within a group; and they set out the circumstances in which a society may switch back to using UK accounting standards once it has chosen to use IAS to prepare its accounts. Parts 3 and 4 of the order implement those parts of the Modernisation of Accounts Directive that require amendments to the 1986 Act. They also make transitional provisions.

The schedule to the order makes consequential amendments, the most substantial of which are the insertion of two new schedules into the 1986 Act. Those new schedules require building societies to make disclosures in the notes to their accounts about directors, employees and associated undertakings of the society. These requirements were previously in secondary legislation and have been moved to the 1986 Act so that they will continue to apply to all building societies, including those that prepare their accounts using IAS.

As I indicated earlier, we have consulted widely on the IAS regulation and the Modernisation of Accounts Directive. A joint DTI/HM Treasury consultation document was published earlier this year. Our policy of a level playing field between companies and building societies was strongly supported. We are thankful to those who took the time to respond to this consultation. We have worked closely with the building society sector over these changes. The Government would particularly like to thank the Building Societies Association for the views and assistance that it has provided during and since the consultation.

These proposals are an important step forward for building societies. They will allow building societies to follow modern, more transparent accounting practices and to operate on a level playing field with companies. There is much support for mutuality. I hope that those who are concerned about mutuality and the success of building societies will welcome these proposals which I commend to the House.

Photo of Lord Stewartby Lord Stewartby Conservative

My Lords, before the noble Lord sits down, will he explain why the sale value issue is being dealt with separately?

Photo of Lord Davies of Oldham Lord Davies of Oldham Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

My Lords, as I indicated earlier, of the two procedures operated here, this one is the approval procedure and does not include the fair value one because that is included in the other instrument that we are bringing forward under the negative procedures that we have also tabled.

Moved, That the draft order laid before the House on 11 October be approved [33rd Report from the Joint Committee, Session 2003–04].—(Lord Davies of Oldham.)

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Economic Affairs

My Lords, I thank the Minister for introducing this complex order. The House will remember, from our debate on the equivalent Companies Act regulations in November, that I said that we on these Benches are enthusiastically in favour of International Accounting Standards because we believe that global capital markets will benefit from common accounting standards.

We had some concerns, which we outlined, on 5 November. In particular, I asked the noble Lord, Lord Triesman, whom I appear to have frightened off, what the Government intend to do about IAS 39. He replied:

"On IAS 39, the UK would have unquestionably preferred full endorsement, but it has not proved possible. The key short-term priority was to provide companies with clear guidance on the implications of the partial endorsement decision. We are working with the ASB on this guidance".—[Hansard, 5/11/04; col. 575.]

I ask the Minister what progress the Government have made on producing guidance with the Accounting Standards Board on IAS 39, which is a matter of some concern to everyone who intends to apply international accounting standards.

Of course, this particular order has a very narrow scope, applying only to the building society sector, which now has only 63 building societies in it, ranging from the very large, with over £100 billion worth of assets, down to the extremely small, with £18 million in assets.

At first sight, the optional nature of International Accounting Standards seems appropriate for this sector, given the diversity within the sector. On the other hand, it may seem strange to have such a small sector being accounted for on different bases, given that they are all subject to prudential supervision. My question to the Minister is whether the FSA is content for the adoption of international accounting standards to be left to the building societies themselves or whether it would have preferred to see common use of accounting standards.

The main point I want to raise with the Minister today concerns not the international accounting standards but the implementation of the modernisation directive. To that extent, what is happening in this order goes beyond what has already been done for companies. Paragraph 4 of the order adds a new Section 75A to the Building Societies Act 1986 to create the requirement for a business review; and the noble Lord outlined what should be in that business review. I am sure that the Minister will be aware that for companies this particular review was included in the draft order implementing and operating a financial review.

That draft order, which was issued by the DTI earlier this year, was roundly and rightly criticised by both business and the accounting profession. The Government climbed down on the matter in a Written Statement on 25 November. We have yet to see a revised order. Indeed, the Government have not yet had the courage to publish the results of the consultation they promised. The DTI's website makes no reference yet to the U-turn.

So, for companies there was a draft order implementing the business review but there is not one at the moment. I have a few questions for the Minister arising out of that. First, I should be grateful if the Minister could explain why the Government are pressing ahead with this requirement for building societies when it is not doing so at the moment for companies.

Secondly, will the Minister explain why the business requirements for building societies do not have any exemptions for small or medium-sized building societies? The equivalent companies order which we had in draft provided for the usual small company exemption.

Thirdly, the original draft companies order provided for auditors to report on the consistency of the business review with the accounts, but I could not find any equivalent reference to that in the building society order.

Lastly, the DTI's announcement effectively said that implementation certainly of the operating finance review, and I assume also the business review, is to be deferred for companies until 1 January 2005, which in practical terms means an extra 12-month leeway for those with a December year end. I hesitate to say that the right hand of government does not know what the left hand of government is doing because we know that the Treasury likes to believe that it is omniscient as well as omnipotent. But if the Treasury do know what is going on in the DTI, perhaps the Minister could explain why the Treasury has a different policy agenda for building societies to that for companies, because the main justification for these orders was to stay in step with companies.

Photo of Lord Newby Lord Newby Shadow Minister, Treasury

My Lords, this order seems to be a sensible, useful and technical piece of work to which we could not conceivably want to object. Indeed, it helps consolidate the workings of the single market, which I think we all endorse, despite our other differences about matters European. We therefore support it.

Photo of Lord Davies of Oldham Lord Davies of Oldham Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

My Lords, I am grateful to noble Lords who have contributed to this short debate, although I am more grateful to those who have been exceedingly brief than those who have been brief but pertinent with their questions. I shall do my best to answer the issues which the noble Baroness addressed, particularly in comparing the provisions for building societies with the state of play with regard to companies.

The noble Baroness asked about progress with regard to the issuing of guidance. The Financial Accounting Standards Board has issued guidance on International Accounting Standard 39. It did so on 15 December and the guidance is on the FASB website. She asked whether progress had been made on that and I can be reasonably definitive in my reply.

I understand what the noble Baroness says about the business review. She will recognise that further consultations were developed with regard to those other companies. It is not a question of the Government's right hand not knowing what the left hand is doing; it is a reflection of the fact that the position for companies is a little different from that of building societies.

The noble Baroness asked in particular about aspects of the fair value directive. We implemented it last week in the separate statutory instrument to which I referred in my response to the intervention by the noble Lord. We have just adopted with building societies the broad, flexible approach that we have adopted with companies. Building societies will be able to use fair value accounting, if they wish to do so. In the consultation on the issues, we received strong support for our approach to the fair value directive. In that area, I can give assurances that progress is being made and that it is broadly acceptable to the interests outside.

With regard to exemptions for small companies, I must point out that there is no formal method of distinguishing between small and large building societies in the same way as one can distinguish between companies. They prepare accounts on the same basis, while companies vary. The review must be only as extensive as is appropriate to the size of the society. It is not a case of one-size-fits-all. We cannot specify different requirements because we cannot separate building societies in the same way as we can with companies. That is why the issue of exemptions does not really apply.

We intend to publish our revised OFR regulations in the near future. We are making rapid progress on effective communication as a result of this order, which is itself the product of considerable consultation. As the noble Lord, Lord Newby, was generous enough to indicate, it is a step towards the implementation of a single market that is broadly accepted throughout British society and British business as being of great benefit.

I realise that this issue will be of limited interest to the wider public, but it is important for the wider financial services sector to be able to operate on the same level playing field as companies. That is the point that I have sought to stress as the basis of the order. The order provides for societies to employ high-quality modern accounting practices. That will result in greater transparency in accounts and will enable greater access to global markets and global investments. Building societies have an important role to play in the financial services market, and the order recognises that role by increasing opportunities for them and ensuring that, against the background of the developing European perspective, they are four-square with the developments that we have already set in train for companies.

If there are points of detail that I have not covered sufficiently for the noble Baroness, Lady Noakes, who asked some pertinent and precise questions, I will, of course, write to her.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Economic Affairs

My Lords, I am grateful to the noble Lord for saying that. I ask him, in particular, to ask his officials why there is no audit assurance on the business review for building societies. It is regarded as a helpful feature of the equivalent provision for companies.

On Question, Motion agreed to.