Clause 1

Financial Mutuals Arrangements Bill – in a Public Bill Committee at 9:30 am on 25 April 2007.

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Removal of the funding limit for building societies

Question proposed, That the clause stand part of the Bill.

Photo of David Taylor David Taylor Labour, North West Leicestershire

With this it will be convenient to consider Government amendments Nos. 7 and 8, and Government new clause 1.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

First, may I say what a great pleasure it is to serve under your wise chairmanship, Mr. Taylor? We are looking forward to an interesting debate. Secondly, I wish to express my personal thanks for the co-operation that we received in the drafting and, indeed, extensive redrafting of the Bill from Treasury officials, who have been most helpful throughout. I thank also those lawyers representing the Building Societies Association, and Mutuo. Without their combined effort, we would not be where we are today.

When I first presented the Bill, I little appreciated how legally complex it was likely to be given the large number of interactive former measures that it will affect. At the moment, we have a slight problem in that one particular group of mutuals—the mutual insurance companies—is effectively excluded from the provisions of the Bill. However, I am hopeful that we may find a way to overcome that problem in the future. Everyone concerned has made a splendid effort and I am very grateful to all of them for their help.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

It is a pleasure to serve once again under your chairmanship, Mr. Taylor, although for the first time in a Committee of this nature. I also thank Treasury officials, the staff and experts from Mutuo and the Building Societies Association, and particularly the hon. Member for Bournemouth, West, whose leadership and determination to see such important reforms through to the statute book have been demonstrated in recent months.

We had a full and substantial debate on Second Reading when we aired the wider issues surrounding  the important role that the mutuals sector plays in our economy and the reason why such flexibilities are needed in order to allow building societies and wider mutuals to operate on a level playing field. I repeat what I said on Second Reading in paying particular tribute to the hon. Gentleman’s work. The Government support the principles that underpin the Bill, and we will endeavour to do everything that we can to see it through to the statute book.

There is no deviation from the principles that underpin the Bill, but since Second Reading, extensive and detailed discussions have taken place to ensure that it can be made operational and effective, given the corporate company and wider European legislative framework in which it is necessary for the clauses to operate when they become law. The Bill introduces amendments to building societies legislation on the wholesale funding limit and the position of members in the event of an insolvency. It also updates other mutuals’ legislation to transfer the ownership of a different type of mutual society as a subsidiary company. As I have said, taken together the measures will strengthen the competitive position of mutuals and benefit their members.

New clause 1 amends section 7 of the Building Societies Act 1986 to give the Treasury the power to increase the limit to the proportion of funds that may be raised from sources other than individuals’ shares. As I said on Second Reading, that power should reside with the Treasury and would be operated with full consultation with the Financial Services Authority.

Currently, societies must raise at least half their funds from shares held by their individual members. The remainder can be raised from other sources—generally wholesale funding. The power will allow the Treasury to increase the external funding limit up to 75 per cent. However, the Treasury will be able to use that power only if it also makes an order under new clause 2, which I will come to in a moment. The new power will be subject to affirmative resolution.

New clause 1 also amends section 5 of the Building Societies Act 1986, which defines the “principal purpose” of a building society to be making loans secured on residential property which are funded substantially by its members. The new clause gives the Treasury a power to amend that principal purpose requirement to reduce the extent to which loans are required to be funded by the society’s members. That is to bring the requirement in line with changes to the funding limit. Again, that power is subject to affirmative resolution. Government amendments Nos. 7 and 8 make appropriate changes to the long title.

Increasing the funding limit will increase the amount of “wholesale” funding that societies may use, giving access to cheaper funding and creating a more level playing field with banks. That change was recommended by the 2004 Miles review of the UK mortgage market. The figure of 75 per cent. leaves a significant element of member funding.

On Second Reading, the hon. Member for Bournemouth, West made it clear that he was in favour of using the negative resolution procedure for the various orders that will be necessary to implement the Bill. We have considered that point carefully during the drafting of amendments, and I have discussed the matter with him  personally. We believe that all the main implementing orders for the Bill should be made under the affirmative resolution procedure, in line with the usual procedure for Henry VIII powers.

The powers conferred by the Bill allow the Treasury to make significant amendments to the primary legislation governing building societies and other mutual societies. Having considered those matters carefully, we believe that Parliament should have the opportunity to debate the changes in the light of consultation on the detail of the policy.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

I am happy with the new clause with one possible exception: the affirmative resolution procedure. The way in which building societies and others will be affected is sufficiently well established by the Bill that it will not necessarily require the affirmative procedure, which will delay the implementation of various parts of the Bill and involve much greater parliamentary work. I do not think that the provisions deal with matters that necessarily require the further scrutiny that one would normally ascribe to the affirmative procedure. Nevertheless, it has been very encouraging that any differences between us have been on a procedural matter rather than on the principles behind the Bill. Those on both sides of the House, and indeed all parties in the House, feel that we should try to get the Bill on to the statute book and implemented as soon as possible. The amendments are self-explanatory and sensible. I have no difficulties at all with the new clause.

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

I welcome you to the Chair, Mr. Taylor. I apologise to the hon. Member for Bournemouth, West for not being present when he introduced his Bill, which I strongly support. It seems to be a very important piece of work. It has been endorsed by the relevant bodies, particularly the Building Societies Association. I wish it well, and again apologise for not having been here to make the more general points about it.

Although the Government amendments are fully in sympathy with the Bill, they are very substantial, and I should like to raise one broad question: how important and pressing are the funding limitations? That is an important question, because it determines whether we need to make explicit the raising of the limit from 50 to 75 per cent., or to make it open-ended, and whether the legislative provisions need to be rapid, easy or more leisurely.

I got two different interpretations or answers from my background reading on the Bill. On the one hand, Northern Rock gave evidence to the all-party group and argued that its ability to transcend the funding limitations by demutualisation had been a critical factor in its success as a commercial organisation. It had been able to grow rapidly and therefore to cut the spread between its borrowing and lending rates, which were originally the key attractions for mutuals because they do not have to pay dividends. Northern Rock made the point that the funding limitations had been a crucial part of its thinking about the business model that it adopted.

On the other hand, as I understand the evidence, few if any mutuals—we are talking primarily about building societies—have taken advantage of the 50 per cent. that  they are currently allowed. Why have they not done so if it is a binding constraint? I raise that question for the reasons that I mentioned; the answer determines precisely how urgent the process needs to be.

I also wish to refer to the procedure set out in the Treasury’s new clauses, which make it clear that the Treasury rather than the FSA will be the point of determination. Perhaps the Minister will spell out the reasoning behind that decision. As someone who has dealt with both bodies, I can understand that it is probably a sensible decision in this context. I have never found the FSA to be sympathetic to the problems of mutuals. I dealt with the FSA extensively on insurance matters, and it clearly regarded mutuals as an irritating detour from their preoccupations with the City—it was not interested in the idiosyncrasies of the mutual movement. Perhaps that is the reason why the approach has been taken, and the Treasury is too polite it out. There might be some value, however, in the Minister explaining briefly why Treasury rather than the FSA should be the locus of decision making.

In conclusion, I shall reiterate what I said at the beginning of my remarks: as someone who was involved in the campaign to stop the collapse of the building society movement through demutualisation in the late 1990s, I think that the arrest of the slide is valuable. Positive initiatives are now being taken to strengthen the legislative basis of mutuality, and I welcome the Bill as an important component of that process.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

Perhaps I can deal with the hon. Gentleman’s first point and the Minister can deal with the second. It is my understanding that the hon. Member for Twickenham is correct in saying that most building societies are managing adequately within the existing limits. However, there is a considerable degree of sentiment that says that that will not remain the case for much longer. This is a fast-moving area and the competition is becoming ever more threatening towards building societies, so they will need to move quite quickly. If the situation developed, building societies would look to the Government to introduce a Bill of this nature, which might take quite a long time given the heavy timetable to which the Government are always subject. This Bill gives us the opportunity to deal with the situation now, in anticipation of those needs.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I say to my hon. Friend that I fully support the brief argument that he has just advanced in response to the hon. Member for Twickenham, who speaks with distinction for the Liberal Democrats. As a sponsor of the Bill, I have made some inquiries in my constituency. A major mutual, the Cheshire building society—and a good society it is—is based in Macclesfield and a smaller building society, the Vernon, operates in my constituency, although it is based in the Stockport constituency. They are supportive of the Bill, because they see it as a moat or defence for the long term. I believe that the Bill’s objectives are thoroughly desirable.

I think that I understand the Treasury’s intention in tabling the amendments and the new clause, and I am prepared to go along with it, because this is one way of getting the legislation on the statute book and, as my  hon. Friend said, that needs to be done soon. Perhaps the Treasury is being a little bit over-careful, but the amendments do not detract from the Bill. Like my hon. Friend, who has worked so hard to advance the Bill, I am happy to accept the Treasury’s amendments and the new clause.

Photo of David Curry David Curry Conservative, Skipton and Ripon 9:45, 25 April 2007

Over-caution on the part of the Treasury is always to be welcomed, since we so rarely see it manifested. Like my hon. Friend, I welcome the Bill and am happy with the amendments.

I just wish to say that the Skipton Building Society in my constituency is one of the big ones and is hugely important. It is the biggest employer in Craven. Practically no voluntary activity in Craven gets under way without the support of the building society, and schools that bid for specialist status do so with its support. In terms of voluntary society and corporate responsibility, it is difficult to find another example of so many depending on one institution. Preserving its status and enabling it to continue to be able to do the things that it does in the community is crucial. That is the basis of my support for the Bill.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

I entirely agree with the comments of the hon. Member for Bournemouth, West, who replied to the first of the two questions asked by the hon. Member for Twickenham. When we debated this matter in detail on Second Reading, I said that I was pleased that my party had achieved cross-party support. By saying “cross-party” I meant not simply the Labour party and the Co-operative party, but support among Opposition Members as well.

The speeches that we have heard from the right hon. Member for Skipton and Ripon and the hon. Member for Macclesfield, supporting the Bill and the values and principles that underpin the role that mutuals play in our society, are welcome and important in respect of constituencies throughout the country. Mutuals and building societies are playing the role that the right hon. Gentleman has just mentioned, and if we can take action to help them do so, either through direct Government legislation or by backing such a Bill as this, it is right and proper that we do so.

I apologise to hon. Members if they feel that the Treasury has been over-cautious in its desire to ensure full and proper parliamentary scrutiny and accountability, but I say to the right hon. Gentleman that this is the way that the modern Treasury seeks to proceed, and it will continue to do so whenever possible.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

My right hon. Friend the Member for Skipton and Ripon made an excellent case for the work that mutual building societies do in the community. They are hugely involved. To assist the Economic Secretary, his colleague the hon. Member for Staffordshire, Moorlands (Charlotte Atkins) is fortunate to have the Britannia Building Society in her constituency, on the borders of my constituency, as it is a huge employer that is massively involved in the community, not only in north Staffordshire but in Cheshire as well. We need to praise the role of the mutual building societies, which do a lot of wonderful work, much of which is unsung.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

I agree with the hon. Gentleman that we must do more to promote the role that mutuals play. On the example that he gave of Britannia’s important role in taking over Bristol and West, it is taking forward remutualisation in the building society sector. As I said on Second Reading, it is a matter of pride for the Treasury and for mutuals and co-operatives throughout the country that the substantial majority of child trust funds—a Government innovation with cross-party, or rather imperfect cross-party support—are being provided by mutuals and friendly societies. That is an example of the mutuals sector not simply resting on its values and history, but providing leadership in a new development, which is being followed by countries around the world.

As I said, the hon. Member for Twickenham asked two questions. It is good to see a member of his party in Committee, given the unfortunate absence of the Liberal Democrats on Second Reading, to cement fully the broader cross-party support that we want for the Bill. The hon. Member for Bournemouth, West set out fully the reason for taking the power to raise the funding limit, which has been pressed for and supported widely by the industry. Over the next year or so, we hope to consult in detail with the FSA and the societies to ensure that we get the precise number and details correct when we introduce the order, for which the Bill paves the way. There will be consultation; but as I said, there has been widespread support.

The second question raised by the hon. Member for Twickenham was discussed extensively, in fact, on Second Reading. Indeed, following a wide range of very supportive speeches from both sides of the House, my hon. Friend the Member for Hackney, South and Shoreditch asked me in an intervention why the Treasury, not the FSA, was taking the power in the amendments. I explained that, having consulted the hon. Member for Bournemouth, West and the FSA, we took the view that, although the latter is the regulator of individual institutions, the responsibility for setting the overall framework in which that regulation occurs is a matter for the House and the Government.

Accountability for getting that legislation correct lies with the House. We therefore took the view that the Treasury in the House should propose the framework and take the powers and that scrutiny should occur in the House. I assure my hon. Friend the Member for Hackney, South and Shoreditch and the hon. Member for Twickenham that that is being done in full consultation with the FSA, and with its agreement. I hope that that will not present difficulties in the Committee today.

Question put and negatived.

Clause 1 disagreed to.