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

Part of the debate – 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) 12:05 pm, 16th December 2004

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.