Clause 2

Financial Mutuals Arrangements Bill – in a Public Bill Committee at 9:45 am on 25 April 2007.

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Power to amend etc, to alter priorities on dissolution and winding up of 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 discuss the following: Government amendment No. 6.

Government new clause 2—Power to alter priorities on dissolution and winding up.

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

New clause 2 will give the Treasury the power to amend the Building Societies Act 1986 to ensure that, in the event of a building society insolvency, any assets available are distributed equally between creditors and members. That will change the current position, in which creditors have priority over members. The power may also be used to make transitional provisions to cover, for example, debts entered into before the changes take effect. The power will be exercised under the affirmative procedure—again, for the reasons that I outlined when I introduced clause 1 to the Committee.

The current position puts members at a disadvantage. In the event of insolvency, they are entitled to their deposits in savings accounts only when all creditors have 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 will enable the Treasury to deal with them individually, which it was not practical to do in the Bill.

It is important that transitional provisions ensure that the rights of creditors in respect of debts entered into before the commencement of the order are unaffected by the change. The power is also exercisable under the affirmative procedure. As the use of the power would be a significant change to insolvency law, as applied to building societies, the views of the Insolvency Service and others will be sought before exercising the power.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

I very much support the proposal, but it is important to put it in context. No building society has failed for at least 40 years—it is therefore an extremely unlikely event—but the new clause addresses a moral issue: is it right on an insolvency that small retail depositors who are unsophisticated in financial matters should be subordinated to the wholesale capital markets who are extremely sophisticated players? Redressing that is quite long overdue.

Question put and negatived.

Clause 2 disagreed to.