Building Societies (Funding) and Mutual Societies (Transfers) Bill

– in the House of Lords at 4:36 pm on 14th June 2007.

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Photo of Lord Naseby Lord Naseby Conservative 4:36 pm, 14th June 2007

My Lords, I beg to move that this Bill be now read a second time. I start by paying tribute to Sir John Butterfill, Member of Parliament for Bournemouth, West, whose Bill this is, to the All-Party Building Societies and Financial Mutuals Group across both Houses, of which I was a founder member, and in particular the honourable Member for West Bromwich, West, who is an excellent chairman, to Mutuo, which in a sense is the think tank for the mutual movement, and not least to Her Majesty's Treasury team in general and the Financial Secretary in particular.

My own involvement in matters mutual goes back to my days as the leader of the London Borough of Islington. I think that last century I was its only Conservative leader. I was the director of a co-operative housing association, then, in another place, in the 1980s I took a particular interest in the friendly society movement and was one of the main activists for the Bill in 1992, and the significant changes that were brought about for the friendly society movement. Then later, after serving in that House, I became chairman of the Tunbridge Wells Equitable Friendly Society, now trading as the Children's Mutual.

Mutuality and the mutual movement are big business in this country. More than 19 million British individuals are members of one or more mutual societies; that is one in three of our population. There are 9,000 industrial and provident societies with assets of £65 billion, 60 building societies with assets of £300 billion, and 57 larger friendly societies with £15 billion of assets.

The contrast between a mutual company and other companies is how the profits are distributed. Mutuals do not pay any dividends to shareholders, so they are able to operate on much lower margins than plcs. That means, all other things being equal, they can deliver better value for money to their customers. Every year we see that they do so in the annual tables on financial performance of all life companies and in the tables we see regularly for best-buy across a whole raft of financial instruments. More recently, pressure from building societies was the main factor which prevented banks charging for access to cash machines.

However, inevitably, markets develop, society changes and, since the companies involved in the mutual movement want to compete, certain changes in legislation are required every now and again. Now is such a time and this Bill addresses three key needs. It is only an enabling Bill, with the detail to be done by regulation. That is not a format I normally like very much, but for these types of problems and opportunities it is a sound format.

There are four primary clauses in the Bill, two of which deal with building societies and two of which deal with the whole mutual movement. The fifth clause is a title clause. Clauses 1 and 2 concern building societies alone. They arise out of the period in 1986 when building societies were deregulated and when there was concern to protect the financial situation of members. At that time, it was thought correct to set for building societies a maximum gearing level, borrowing against the assets that they had deposited by their members. That level was set at 50 per cent. Over the years, that has worked fairly well. Until now, it has been possible for building societies to operate reasonably adequately within these constraints. However, the time has now come to free them and to change that percentage. This Bill raises the 1986 limits. The level will be dictated by regulation, but it is fairly common knowledge in the trade that we are talking about increasing the level to 75 per cent, which should be more than adequate. As far as I know, every building society is in favour of the change.

In addition, it is right that this Bill should take cognisance of the Miles review which was set up by the Treasury and concerned the changing nature of the mortgage market. For most of us in your Lordships' House who had mortgages, the mortgage market used to be of a particular nature. That has changed and is changing all the time. It is changing because of the change in house prices and a change in the ability of people to finance. It seemed obvious to a number of us that building societies may now wish to embrace the new fixed-rate policies that have emerged in the current market. We do not believe that it is necessary to continually seek from Her Majesty's Government primary legislation to meet up with any difficulties that may arise. The removal of the constraint—the switch from 50 per cent to 75 per cent—means 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 to respond to market changes constrained by legislation that might by then appear to be out of date.

Clause 2 concerns safeguarding the position of building society members, in particular their relationship with the capital markets from which money may be raised. In response to the increased limits that I have described, through the Bill we want 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 other creditors. The reason for what may seem to be slightly preferential treatment 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.

All building societies are covered by the regulations issued by the Financial Services Authority and the Financial Services Compensation Scheme, so therefore Part 2 is applicable to those regulations and the compensation that arises out of them. It is fair to say, however, that in recent times no building society has collapsed and we certainly do not anticipate any collapses in the future.

Clause 3 is one of the two clauses dealing with the whole of the mutual movement, in particular outside the building societies. It 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 a mini-sector, as co-operatives, building societies or friendly societies. More recently, they have become involved in what we would call in toto the mutual sector. Indeed, that was reflected in the other place when the original all-party group on building societies expanded its scope and title to become the All-Party Group on Building Societies and Financial Mutuals.

It is true that membership overall of the mini-sectors within the mutual movement has declined somewhat. That is partly because of demutualisation and partly because of business consolidation. Consequently, at this point mutuality might be seen as a declining business form, despite its great appeal and its value to consumers and customers. As things stand, it is not possible for one company in one of the mini-sectors to amalgamate with a member of another mini-sector without one of them demutualising, which of course defeats the whole purpose of the exercise. We want to enable those sectors to merge without losing mutuality and thus benefit from the great cross-fertilisation that would come about from such a joining together. That will allow stronger companies to arise, and perhaps by merger they will produce something really interesting in the friendly society/mutual insurance sector or whatever decides to combine. That is the whole purpose of Clause 3. To be frank, in comparison with the rest of the world, the UK environment at the moment is a little restrictive, or at least it does not encourage new corporate options for mutuals. We believe that that needs to be addressed.

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 will allow the Treasury to treat the transfer of mutuals to other mutuals or their subsidiaries as if they were transfers between the same category of mutual. The only exception from this provision will be the credit unions, where the nature of their business would preclude them from participating in this type of transfer. In overall terms, Clause 3 is probably the most important in the Bill, certainly in terms of what we can do to strengthen the mutual movement as a whole. It will ensure that it is not gobbled up so that the advantages of mutuality and the mutual sector's increasingly competitive edge over the incorporated sector can continue.

I believe that the Bill will help to empower savers. As I said at the start, we should remember that 19 million people are in this sector, which is about a third of the nation. The values that those people have as members and as savers support much that all noble Lords respond to. Saving, in its fundamental sense of investing, of providing for a secure future, is a crucial component to prudence. As such, it encompasses the wise provision of a home and of education and health services, as well as putting aside money for economic resources for investment and research and development. Put simply, savers benefit society because they think and act for the long term. Their values include sustainability, faith in the future and responsibility. I very much hope that your Lordships will give the Bill a fair wind. I commend the Bill to the House.

Moved, That the Bill be now read a second time.—(Lord Naseby.)

Photo of Lord Newby Lord Newby Spokesperson in the Lords, Treasury 4:50 pm, 14th June 2007

My Lords, I congratulate the noble Lord, Lord Naseby, on introducing the Bill and on setting out its provisions so clearly. We on these Benches support the Bill and share his view about the value of mutuals.

As the noble Lord said, the Bill has three principal provisions, the first of which relates to the funding limit. It is a slightly odd provision in that no one seems to be applying great pressure to increase the funding limit in this way, although it is thought that it might be necessary. It is slightly unusual for legislation to anticipate change; it is normally some way behind the curve. Equally, it is slightly odd to have a formulation in these terms. Everyone knows that the plan is that the limit will go up to 75 per cent. Why you cannot put 75 per cent on the face of the Bill and have done with it I am not absolutely sure. But there it is. I am sure the parliamentary draftsmen have very good reasons for it and we will see that that figure is introduced in due course. Equally in due course, it will be interesting to see whether the building societies take up the expanded headroom, as it were, that they have for borrowing.

The second power giving shareholders greater rights equivalent to other creditors is quite straightforward. Again, it is a provision that anticipates a situation which has not arisen in that no building society has collapsed, if not in living memory, certainly not in recent memory. The provision is welcome and unexceptional.

I agree with the noble Lord that the third provision about making transfers easier is the most substantial and will be called into use more often. One of the problems I always have in debates in this area is that "mutuals" is a relatively new word in law. We find ourselves sometimes grappling with building societies, sometimes grappling with friendly societies—which is a marvellous phrase—and sometimes grappling with industrial and provident societies. In an ideal world, in this day and age, one would bundle them all together and establish a legislative framework that dealt with them all in a more common way, rather than having a set of separate legislative frameworks for what are essentially similar types of institutions.

However, we are where we are. The Bill is a step towards making it easier for these bodies, which have the same ethos, to merge and transfer their operations, where that makes best sense, and to work more efficiently.

I had one mischievous thought in my mind when I read the week-end papers which stated that responsibility for the control of the financial sector within government may pass from the Treasury to an expanded Department of Trade and Industry. The Bill requires the Treasury to act in this policy area and by the time it has passed it might be that the bird has flown elsewhere. I am sure that will be dealt with by the usual sophistication of the Civil Service. I agree with the noble Lord, Lord Naseby, that in an ideal world the Bill would not give so much power in terms of substance to secondary legislation. Every clause states, "The Treasury shall, by order". As a general principle, I think all noble Lords will agree that is less than ideal. However, given the nature of these provisions, which are non-contentious and technical, we are prepared to accept it. As I said at the start, we are happy to support the Bill.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury 4:55 pm, 14th June 2007

My Lords, the Bill was introduced by my honourable friend Sir John Butterfill in another place, gained the support of the Government there—a rare accolade—and is now introduced in your Lordships' House by my noble friend Lord Naseby. That makes a proposition so compelling that I need say little more than that the official position of these Benches is to offer 100 per cent support. My noble friend has introduced his Bill with admirable clarity and I have nothing to add to the substance of what he has said.

I think I shall be a little unpopular with my noble friend because I have a confession: I have always been something of a sceptic about mutuals, because I have never believed that soft ownership structures exert sufficiently strong pressures on management to maximise economic performance. By "soft economic structure" I mean where ownership is widely dispersed and at the same time not associated with financial, economic or commercial skills. Perhaps that is a debate for another day. I should also stress that it is a personal view.

I completely accept that financial mutuals help to offer greater consumer choice and are a firm part of our diverse and successful financial services industry. Since diversity and choice are a part of effective competition which should in turn deliver value for consumers, they have to be supported. As the party that believes in competition, we welcome measures that maintain the competitiveness of our financial services industry.

I have two points that I hope the Minister might be able to assist on. I was interested to read the remarks of the Liberal Democrat spokesman in the other place when he talked of the lack of information about the scale and impact of mutuals in financial services. We know the raw data—my noble friend has outlined the numbers today—but we do not know their market impact or their impact on competition. I rather agree with Mr Vince Cable that there appears to be an important gap in information. The Minister in another place said that he would seek to facilitate that analysis. What is the status of that work?

The second point also arises out of proceedings in another place. The Bill was rewritten in Committee, effectively by the Treasury, and at that stage insurance mutuals were deliberately excluded because of issues that seemed to derive from European legislation—as of course do most of the problems in the UK. Do the Government intend to bring forward amendments to the Bill to deal with insurance mutuals? That was the impression left at the end of the proceedings in another place. If not, how will those aspects be dealt with, going forward? I am pleased to support my noble friend's Bill.

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) 4:58 pm, 14th June 2007

My Lords, I congratulate the noble Lord, Lord Naseby, on his introduction to the Bill. He speaks with vast experience in this area, and the House benefited from that in the way in which he outlined the measure. I thought he had achieved the almost unparalleled feat of persuading the noble Baroness, Lady Noakes, that the Government had got things just about right, but to my great consolation the noble Baroness sought to disprove that by indicating that there were areas about which she had anxieties that needed to be resolved by the Government. I shall set out to do that in a moment. Nevertheless, it is encouraging that the Bill has widespread support, and I noted the positive response of the noble Lord, Lord Newby, to it. I will also pass on the thanks of the noble Lord, Lord Naseby, to the Financial Secretary, who has certainly worked hard to assist with the Bill in ways that we hope will improve it.

The House will be aware that significant changes were made for the benefit of the industrial and provident societies by the Industrial and Provident Societies Act 2002 and the Co-operatives and Community Benefit Societies Act 2003. The Bill introduces helpful amendments to the Building Societies Act, and for the benefit of other financial mutuals in line with government policy for the sector. I must attest to the fact that the Government have rather more enthusiasm about the sector than the noble Baroness, Lady Noakes, managed to evince in her contribution. I recognise her reservations on this occasion and am happy to identify that although the Chamber is thinly attended this afternoon, she is in a minority of one. The rest of us will glory in the achievement which the Bill represents. However, there is considerable work to be done.

The Government are committed to the mutuals sectors. We are keen that building societies should be seen as an effective competitor within financial services. They have more than £300 billion in assets, £200 billion in mortgage assets and members' savings of £190 billion. The potential for building societies which offer competitive services to their members will be significantly increased by the important changes made in the first two clauses.

On Clause 1, it is clear that raising the level of wholesale funding would impact on members' rights on the winding up or liquidation of the society because members' shares are subordinate on a winding up. For that reason, the Bill introduces Clause 2 as it is clear that without it, Clause 1 could not be commenced. The new powers will be subject to the affirmative resolution procedure. We recognise that, as the noble Lord said, secondary legislation will play its part in implementing the measures in the Bill. The Government recognise that they will be sufficiently significant to require the affirmative procedure for that legislation. We welcome this opportunity to update the building societies legislation.

Clause 3 and the associated Clause 4 are different from the other two, being of a far broader scope, as the noble Lord said. The aim, in attempting to facilitate transfers within the financial mutuals sector, is admirable. As many will be aware, the mutuals legislation is complex. The different Acts are not necessarily compatible with each other and there are issues in making the changes to law available to mutual insurers. The Government have been working with the promoters of the Bill to clarify the issues and introduce appropriate amendments in Committee. We hope that the Bill will go into Committee so that we can put forward amendments to strengthen it.

A significant concern is that the clause should not provide an opportunity for demutualising by the back door. Measures were introduced in the Industrial and Provident Societies Act 2002 to align the rules on demutualisation for industrial and provident societies with those for building societies. It is important that that principle is maintained—we do not want any loophole created.

I am sympathetic to the changes the Bill seeks to introduce. It has clearly been motivated by a recognition of the need to keep building societies in particular and the mutuals sector as a whole competitive. I note the noble Baroness's reservations on this point; no doubt we will have the chance to debate them within the framework of this Bill and on other more significant occasions. The Government agree with the noble Lord that mutuals play an important part and should be encouraged, which is what the Bill does.

We are sympathetic to the changes and reforms that the Bill hopes to deliver. They are consistent with our policy for the sector and our defined need to strengthen such societies' contribution to the financial welfare of their members. The Government are very much behind the Bill's broad objectives.

I should like to examine one or two points in a little more detail. Clause 2 relates to the consequential rights of building society members on a winding up or liquidation. The intention is to place members on a par with other creditors, including wholesale creditors, in the case of liquidation or winding up. Currently, members' funds would rank below those of other creditors. The position of such members' funds has been a cause of concern to regulators for a considerable time, because, on the winding-up or liquidation of a building society, members could stand to lose more than the equivalent bank customers, although up to the statutory limits they would most likely have recourse to the financial services compensation scheme.

This measure has the Government's support on the basis that for Clause 1to come into effectClause 2must also be in place. Clause 2 gives the Treasury power to amend the Building Societies Act 1986 to ensure that, in the event of a building society insolvency, any assets available are applied equally to satisfy creditors' and members' liabilities. The power may also be used to make transitional provisions, to cover, for example, the position on debts entered into before the changes take effect.

The current position puts members at a disadvantage. In the event of insolvency, they are only entitled to their deposits in savings accounts, once all creditors have already been paid in full. That contrasts with bank customers who, because they are creditors of the bank, rank equally with other creditors. The power to exclude categories of special liabilities enables the Treasury to deal with these individually, which it was not practical to do in the Bill. It will be important that transitional provisions ensure that the rights of creditors in respect of debts entered into before commencement of the order are unaffected by the change.

Clause 3gives the Treasury powers to modify the law on the transfer of engagements from one type of mutual society to the subsidiary of another. There are currently legal limits on the permissible types of transfers between different mutual bodies. For companies operating in the listed markets, there are no such restrictions on the transfer of ownership. This measure seeks to level the playing field. It will also encourage cross-fertilisation in the mutuals sector and strengthen individual mutuals, as well as retaining the framework of mutuality to the benefit of the members who own the organisations.

The Treasury will, of course, consult on the appropriate means of restriction of further transfers of ownership outside the mutuals sector, so that this procedure does not become a back door means of demutualisation. This is likely to be achieved by placing a time bar on future transfers of ownership. It will also consult on that important provision of the extension—possibly to as far as 75 per cent—to which the noble Lord referred in his introduction. That is an important part of the Bill. The precise percentage is open to consideration, and we will consult on that before decisions have to be made.

We will table amendments in Committee to include mutual insurers in the scope of the Bill. That question was addressed specifically to me. We will also discuss the position with the Financial Services Authority, the regulator for the sector, and have the available information on reporting on mutuals.

All in all, the Bill has passed through the Commons with widespread support. It has been introduced ably today by the noble Lord, Lord Naseby, and I am sure that he will pilot the Bill through its remaining stages, should it be successful today, with similar success. Certainly, the Government will propose amendments where we think they will strengthen the Bill in the objectives identified by the noble Lord in his opening speech. Accordingly, I am happy to give our broad support.

Photo of Lord Naseby Lord Naseby Conservative 5:09 pm, 14th June 2007

My Lords, I shall be brief, but I want to say how grateful I am to the Government's business managers for making time for a Private Member's Bill; it is much appreciated. I also thank all noble Lords who have contributed this afternoon and unanimously supported the Bill.

Just as a reflection on a soft sector, I point out to my noble friend Lady Noakes that the child trust fund was open to all financial companies throughout the United Kingdom. At the last check that I made on it, well over 60 per cent of the businesses were taken up by the mutual movement, which has frankly thrashed the other sector in terms of performance. Perhaps in a modern environment with a new product it is the soft mutuals that provide the successful company format. Nevertheless, I thank all those who have contributed this afternoon. My colleagues and I who are involved in the Bill will read all the contributions very carefully and will try to take them on board.

On Question, Bill read a second time, and committed to a Committee of the Whole House.

Photo of Lord Evans of Temple Guiting Lord Evans of Temple Guiting Government Whip, Government Whip

My Lords, I beg to move that the House do now adjourn during pleasure to await the arrival of three Bills from the Commons. The Commons message is expected to arrive at around 6.30 pm but, as usual, the exact time for the Sitting to resume will be shown on the annunciators.

Moved accordingly, and, on Question, Motion agreed to.

[The Sitting was suspended from 5.11 to 6.30 pm.]