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

– in the House of Lords at 7:41 pm on 10th July 2007.

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Photo of Lord Naseby Lord Naseby Conservative 7:41 pm, 10th July 2007

My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.

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

House in Committee accordingly.

[The CHAIRMAN OF COMMITTEES in the Chair.]

Clauses 1 and 2 agreed to.

Clause 3 [Transfers to subsidiaries of other mutuals]:

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

moved Amendment No. 1:

Clause 3, page 3, line 36, at end insert—

"( ) If a draft of an order mentioned in subsection (6) would, apart from this subsection, be treated for the purposes of the Standing Orders of either House of Parliament as a hybrid instrument it must proceed in that House as if it were not such an instrument."

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

We are grateful to the noble Lord, Lord Naseby, for taking forward this Bill, which started out as a Private Member's Bill in the other place in the name of the honourable member for Bournemouth West. We are also grateful for the continuing assistance of the noble Lord and his advisers in helping to develop the amendments that I am putting forward today.

The Government are introducing the amendments to fulfil a commitment given in the other place to extend the Bill to mutual insurers. That in turn has given rise to other issues, such as mutuals in other EEA states, hybridity and the charging powers of the Financial Services Authority, which the amendments also deal with. Finally, the amendments allow the Bill to be extended to the Channel Islands and the Isle of Man. There was insufficient time to consult the islands' authorities on that during proceedings in the other place.

Before moving on to the substantive issues raised by the amendments to Clause 3, I shall briefly remind the Committee about the overall purpose of the Bill. It introduces helpful amendments to building societies legislation in relation to the wholesale funding limit and the position of their members in the event of an insolvency. With regard to today's debate, the Bill will also make it easier for one type of mutual society to transfer to the ownership of another type of mutual society as a subsidiary company, while retaining important elements of mutuality. Mutual insurance companies and equivalent European mutuals will be included as a result of the proposed amendments.

The Government welcome this opportunity to update the legislation on building societies and other mutual societies. We are sympathetic to the reforms that are being introduced, particularly as they have the potential to significantly benefit members of mutuals. The Treasury will consult publicly on the secondary legislation that will implement the Bill.

I turn to the detail. Clause 3 gives the Treasury the power to modify legislation relating to transfer of business of building societies, friendly societies and industrial and provident societies. I will refer to these together as "mutual societies". The clause will allow the Treasury to modify the statutory provisions that apply to such transfers, to make them less onerous. That is intended to make it easier for mutual societies to acquire other mutuals and develop group structures. Certain safeguards, such as members' rights and safeguards against demutualisation, will remain in place.

In Committee in the other place, the Government gave a commitment to try to extend Clause 3 to mutual insurers by introducing amendments at Third Reading. A mutual insurer could be one of the three types of mutual society, or it could be a Companies Act company or have another legal form. The effect would be that a mutual society could transfer to a subsidiary of a mutual insurer under the new provisions on the same terms as it could transfer to a subsidiary of another mutual society.

In the event, it was not possible to introduce amendments at Third Reading, which was held two days after Committee, on 27 April. However, at Third Reading the Government gave a further commitment to consider amendments and, if possible, to table them in your Lordships' House. The second and third amendments fulfil that commitment and I will explain those amendments first.

Amendment No. 2 widens the definition of "mutual society" in Clause 3 to include EEA mutual societies. Amendment No. 3 defines "EEA mutual society", which can be a European co-operative society, a co-operative society in any EEA state or any other type of body specified by the Treasury by order. That definition is wide enough to encompass mutual insurers and, by permitting transfers under the new provisions to a mutual society established in any EEA state, it ensures that there will be no breach of EC law. The power to specify other types of body will be exercised by the affirmative resolution procedure if made in the main order amending the transfer provisions for mutuals, or by the negative resolution procedure if made independently of that order.

The effect of the amendments is that modifications made by an order under Clause 3 to the legislation governing transfers of mutual societies will apply in two cases: first, where the transfer is to a subsidiary of one of the three types of domestic mutual society; secondly, where the transfer is to a subsidiary of an EEA mutual society. The wide definition of "EEA mutual society" ensures that mutual insurers and other mutual societies in any EEA state wishing to acquire other mutual societies as subsidiaries will be able to benefit from the changes in the same measure as domestic mutual societies. The additional power gives the Treasury the flexibility to specify particular types of mutual society as and when the need arises, which it would not be possible to do in primary legislation.

The first amendment standing in my name concerns the procedures applying to an order made under Clause 3, which will amend the provisions in legislation dealing with transfers by the various types of mutual society. As Clause 3 will be extended to EEA mutual societies, an order made under that clause may have effects that are peculiar to a particular mutual and so would, potentially at least, fall to be treated as hybrid under Standing Orders but for this provision. In particular, the order may make provisions as to the rights of members under subsection (2) in consequence of a transfer. Those provisions could include giving members of the transferring mutual membership rights in the holding mutual society, which could affect the constitution of that society. I remind noble Lords that the Clause 3 power uses the affirmative resolution procedure. I beg to move.

Photo of Lord Naseby Lord Naseby Conservative 7:45 pm, 10th July 2007

I am grateful to the Minister for making time to take this Committee stage and, more important, for having listened to the representations made in another place to see whether it was possible, given that we had already made considerable progress in helping the mutual movement, to go a little wider and look at the situation of mutuals in Europe. I would also like to place on record the appreciation of both Houses for Sir John Butterfill, who was primarily responsible for the Bill, although I should also mention the All-Party Building Societies and Financial Mutuals Group, which is one of the largest all-party groups in Parliament—I have the pleasure of being one of the founder members. We should not forget that 19 million people belong to mutuals throughout the United Kingdom. That is a huge number of people and it demonstrates the importance of the Bill.

I have only two small questions. First, will the Minister, when he responds, confirm that the Treasury will consult on all secondary legislation that flows from the Bill? That is fundamental when there are some pretty open provisions on secondary legislation.

My second question involves dipping into my memory bank—it is nice to see the noble Baroness here, with her experience of Europe. Hybridity is a sensitive area. I remember once, as Chairman of Ways and Means, being in charge of determining whether a Bill was a hybrid. Am I right in assuming that Amendment No. 1 has been included because we are dealing with EEA mutuals? If the Minister is not able to answer me this evening, perhaps he would be kind enough to write to me and place a copy of the letter in the Library. I understand that there might have to be provision to remove any question of hybridity in relation to an EEA mutual society, because that opens the door in relation to a UK society. Otherwise, we will be in a situation where others may cite this Bill as opening a Pandora's box in relation to hybridity. I accept that this is rather a technical area and it may be specific to mutuals, but it relates to an important part of parliamentary procedure.

Having said that, I greatly welcome the amendments. This is possibly one of the most dynamic things to have happened in the financial services world, because we are opening up the possibility of linkage between financial mutuals in the UK and their sister bodies throughout the whole of the EEA. That is greatly to be welcomed.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury

I join my noble friend in paying tribute to Sir John Butterfill for introducing this Bill; we dealt with that at Second Reading but I would like to repeat it. I said to the Minister just before we started our proceedings that my only question was how the insurance provisions would be dealt with, so I was glad that he answered that in his introductory remarks. When I read the amendments, I could not see how insurance companies were being brought within the provisions.

Following my noble friend's comments, I have one question about hybridity. Is there any precedent for the new subsection contained in Amendment No. 1? Like my noble friend, I am concerned that we are creating a precedent with this Bill for disregarding hybridity, which is one of the lesser known but important areas of how we regulate our business.

Photo of Lord Newby Lord Newby Spokesperson in the Lords, Treasury

I join other noble Lords in congratulating Sir John Butterfill on getting the Bill to this stage and the Minister on setting out so clearly an extremely technical set of amendments. One of the interesting and positive things about this Bill is that it seeks to deal with future developments rather than past wrongs. The amendments today deal with mergers within the EEA. That is a positive and potentially dynamic development and we on these Benches are extremely supportive of the amendments.

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

I am extremely grateful to noble Lords who have commented on the amendments. Given the sheaf of notes that I have on hybridity, I will take advantage of the offer of the noble Lord, Lord Naseby, and write a full letter to him and other noble Lords who have taken part.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury

I am grateful to the Minister for saying that, but we will be invited to pass these amendments. Passing them would rule out any possibility of our considering whether this is so unique and unprecedented that we may wish to think again.

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

In that case, I will spend the next 20 minutes going through the question that the noble Lord asked.

The Government think that the amendment is necessary because an order under Clause 3 could make provisions giving members of a transferring mutual membership and other rights in the holding mutual. That could require changes to the constitution of the holding mutual. Where the holding mutual has a unique legal form—a private Act of Parliament, for example—that could raise an issue of hybridity. The amendment excludes the hybrid investment procedure so avoiding unnecessary delay and complications in making the instrument. It could also affect domestic mutuals—the Wesleyan Assurance Society, for example. I hope that that short answer satisfies the noble Baroness. I will be able to write with more detail within the next day or so.

On the noble Lord's first question, yes, the Treasury will publicly consult on the provisions before they come into effect. With the commitment that a letter will be written to all noble Lords who have taken part in this debate and put in the Library, I hope that the amendments will be agreed to.

On Question, amendment agreed to.

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

moved Amendments Nos. 2 and 3:

Clause 3, page 3, line 44, at end insert—

"( ) an EEA mutual society."

Clause 3, page 4, line 9, at end insert—

"( ) An EEA mutual society is—

(a) a body which is a European Cooperative Society for the purposes of Council Regulation (EC) No 1435/2003 (statute for a European Cooperative Society);(b) a body which is established as a cooperative under the law of an EEA state as mentioned in that Regulation;(c) a body which is a cooperative or mutual undertaking of such description as the Treasury specify by order and which is established or operates in accordance with the laws of an EEA state or any of the Channel Islands or the Isle of Man."

On Question, amendments agreed to.

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

moved Amendment No. 4:

Clause 3, page 4, line 10, leave out from second "a" to end of line 13 and insert "relevant company—"

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

The fourth and fifth amendments introduce the term "relevant company" in Clause 3 and define this term. The effect is that a transfer of a mutual society's business under the modified procedures could be to a UK company or to a body corporate incorporated in any other EEA state, provided that that company or body is controlled by another mutual society. Again, this is intended to reduce the risk of breaching EC law. Under Clause 3 as it stands, a mutual in another EEA state would have to establish a UK company subsidiary in order to benefit from the changes. That could put it at a disadvantage, as it might face more practical difficulties establishing and running a UK company subsidiary than a UK mutual would. The changes ensure that UK and EEA mutual societies wishing to acquire other mutual societies are treated equally on a level playing field. I beg to move.

Photo of Lord Naseby Lord Naseby Conservative

This is helpful. It clarifies the position, and I support the amendment.

On Question, amendment agreed to.

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

moved Amendment No. 5:

Clause 3, page 4, line 20, at end insert—

"( ) A relevant company is—

(a) a company within the meaning of the Companies Act 2006 (or, before the commencement of Part 1 of that Act, the Companies Act 1985);(b) a company within the meaning of the Companies (Northern Ireland) Order 1986 (S.I. 1986/1032 (N.I. 6));(c) a body corporate which is incorporated in an EEA state other than the United Kingdom."

On Question, amendment agreed to.

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

moved Amendment No. 6:

Clause 3, page 4, line 20, at end insert—

"( ) For the purposes of paragraph 17 of Schedule 1 to the Financial Services and Markets Act 2000 (c.8) (power to charge fees) a function conferred on the Financial Services Authority by an order under this section is to be treated as a function conferred under or as a result of that Act."

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

This amendment ensures that the FSA has powers to charge fees for any functions conferred on it under the Bill. It extends the FSA's existing powers to charge fees under the Financial Services and Markets Act 2000. This is a consequence of extending Clause 3 to mutual insurers and to other EEA mutuals. It will be a precondition of a transfer to a subsidiary of an EEA mutual that safeguards equivalent to those applicable to UK mutuals are in place. Those safeguards will, first, give members of the transferring mutual membership rights in the holding mutual and, secondly, restrict demutualisation of the holding mutual and further transfers of the transferring mutual's business. In most cases, transfers of business by mutual societies require FSA approval, and transferring mutuals will have to satisfy the FSA that these safeguards are in place. This could be more complex and difficult to demonstrate when the transfer is to a subsidiary of an EEA mutual. As this would result in additional work and, therefore, costs for the FSA, we and the FSA consider it appropriate that its fee-charging powers should be extended. I beg to move.

Photo of Lord Naseby Lord Naseby Conservative 8:00 pm, 10th July 2007

I understand why the amendment is here, and of course we accept it. However, one notes that the FSA is currently running a surplus on its income, all of which has arisen from fees charged from varying transactions. Secondly, many of the mutuals are very small organisations and one encouraging feature of the Bill is that it will allow small and medium-sized mutuals to work together and amalgamate in one way or the other in the UK or across the UK and the EEA. I hope, therefore, that when the FSA comes to provide its fee structure, it will recognise that these are small mutuals, entirely there for the benefit of the membership that has joined together, and that it will not provide for—as it attempted when the Financial Services and Markets Act 2000 was passed—a de minimis fee structure. I hope that the Government and the Minister speaking for the Treasury will recognise that this is a different kettle of fish and that while there is to be a fee structure—and it is understood that there has to be one—nevertheless the message will go to the FSA that normal fee structures are not always appropriate to small mutuals.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury

I completely understand where my noble friend is coming from, but I am a firm believer in fee structures being reflective of costs so that there are not cross-subsidies between different parts of the sector that is regulated by the Financial Services Authority. I understand that there may in some cases be public policy reasons for cross-subsidy, but I do not think that we should offer a blanket encouragement at this stage of our proceedings for such cross-subsidy.

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

I am most grateful to the noble Baroness, Lady Noakes, for helping me out. I completely agree with everything that she said. At the same time, the noble Lord, Lord Naseby, made two valuable points. He has them on the record and I am sure that the FSA will read Hansard and take note.

On Question, amendment agreed to.

Clause 3, as amended, agreed to.

Clause 4 agreed to.

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

moved Amendment No. 7:

After Clause 4, insert the following new Clause—

"Channel Islands and Isle of Man

Her Majesty may by Order in Council provide for any of the provisions of this Act to extend, with or without modifications, to any of the Channel Islands or to the Isle of Man."

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

The final amendment allows the provisions of the Bill to be extended to the Channel Islands and the Isle of Man, with modifications if appropriate. Although not all the current mutuals legislation is so extended, it has the capacity to be so, and it makes sense that this Bill should have the same powers. The authorities in the islands have been consulted and agree with this approach. It was not possible to introduce this clause in the other place as there was insufficient time to consult the islands. I beg to move.

Photo of Lord Naseby Lord Naseby Conservative

I totally agree with the amendment, but I should be grateful if the Minister would put on record the answer to the question that I asked him right at the beginning, on the commitment from the Treasury that there will be consultation on all secondary legislation in relation to this and the other clauses.

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

I can confirm that that is the case.

On Question, amendment agreed to.

Clause 5 agreed to.

House resumed: Bill reported with amendments.

Photo of Lord Bassam of Brighton Lord Bassam of Brighton Government Whip, Government Whip

My Lords, I beg to move that the House do now adjourn during pleasure until 8.40 pm.

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

[The Sitting was suspended from 8.06 to 8.40 pm.]