Clause 2

Dormant Bank and Building Society Accounts Bill [Lords] – in a Public Bill Committee at 10:45 am on 14 October 2008.

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Transfer of balances to charities, with proportion to reclaim fund

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

I beg to move amendment No. 9, in clause 2, page 2, line 1, leave out ‘building society or a smaller bank’ and insert ‘smaller bank or building society’.

Photo of Joe Benton Joe Benton Labour, Bootle

With this it will be convenient to discuss Government amendments Nos. 11 to 13.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

The amendments intend to bring the Bill back to the state in which it was originally introduced. It is right to have a significant debate on the objectives of the small and local schemes. I would like to remind the Committee about the objective of the Bill, which is to facilitate fair and efficient distribution of funds in dormant accounts for the benefit of society.

We recognise that small banks and building societies often play a key role in supporting and engaging with our local communities. It has always been clear that small, locally based institutions should be able to focus dormant account assets on needs in their local communities. That was announced as far back as the pre-Budget report of 2005. In consultation with the bank and building society sector, we have identified £7 billion as a  credible threshold to define small and locally based institutions. The Building Societies Association advised us that of those building societies with less than that amount in total assets, more than 90 per cent. have all their branches within 70 miles of their head office. We consulted on the suitability of that threshold for identifying small, locally based institutions, and the majority of respondents who expressed a view believed the limit to be appropriate. The Government are fully committed to supporting mutual organisations and recognise the many benefits that such organisations bring to society and communities across the United Kingdom. We recently introduced new legislation to support the sector, including improving the rights relating to member shares and improving procedures involved in transferring business to the subsidiary of another mutual.

The vast majority of building societies will be eligible for the alternative scheme. The BSA advises that 50 out of their 59 members—nearly 85 per cent.—will be eligible. On Second Reading, it was helpfully pointed out that building societies which will not be eligible hold a large proportion of the dormant account funds in that sector. To be precise, the BSA has estimated that £100 million of the £130 million in dormant accounts in the sector lie in the larger institutions. I am aware of the views that have been regularly expressed by Nationwide building society. Much has been said of the great need in the areas to which spending priorities in the scheme have been directed, particularly the need for youth facilities and for improving financial capability and inclusion. One of the key messages on Second Reading was the strong support across the House for investment in youth facilities and in matters of financial capability and inclusion.

One of the reasons behind the scheme is that, if the larger building societies do not take part in the main scheme, the funds for the spending priorities will be heavily impacted on. We are aware that banks and building societies support a variety of good causes in different communities and, of course, we fully support such laudable objectives. However, are banks and buildings societies really in the best position to consider consistently the needs of wider communities throughout the United Kingdom? We have identified the good causes following an extensive consultation exercise in England, and other Administrations have similarly consulted. We think that it is right to proceed with the scheme. If we were to allow all dormant account money to be administered through multiple individual foundations, it would inevitably lead to significant overlaps and potentially large gaps in provision. It is in the interests of a fair and efficient distribution of funds to have a centralised national distribution scheme.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury) 11:00, 14 October 2008

Is the Minister satisfied that the £7 billion threshold is still appropriately pitched, given the events of the past few weeks and months?

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

Yes, I am. I have asked that question of officials. Obviously, there have been changes during the past few weeks and months, but I am confident that an asset limit of £7 billion strikes the right balance and enables us to have a scheme of a sufficient size that it can be efficient in its distribution of funds.

We very much welcome the recent BSA statement in support of the Bill as it was introduced to Parliament, which is what the amendments are designed to achieve. The Government’s proposals for an alternative scheme for smaller financial institutions have also been welcomed by the BSA. We also welcome its statement expressing its members’ commitment to making the scheme a success and their intention to participate in it, as we do the British Banking Association’s statement confirming commitments to participate from banking groups representing 90 per cent. of the UK retail banking market.

The proposed scheme is designed to be simple and efficient, to minimise costs to institutions and the scheme overall, and to maximise funds for distribution. The asset limit provides a balance between giving small, locally based banks and building societies the flexibility to benefit directly their local communities against maximising the assets for the main scheme, which will be operated through the Big Lottery Fund to give money to good causes. We believe that the amendments will produce the alternative scheme for small, locally based institutions, which is what small banks and building societies want.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The matter under discussion was the subject of significant debate in the other place, and I happen to think that the balance of debate there was right. Building societies are in a particular position in our society and they differ from banks. We are talking about the money not only of customers, but of members of a building society. The society is a mutual and the money is its members’ money. I am conscious that members of building societies have made decisions about how building societies should operate. For example, at its last annual general meeting, members of Nationwide agreed to a commitment that 1 per cent. of its profits should be allocated to charitable purposes.

There is a strong belief in those organisations, which is one reason why there is so much support for mutuals throughout the House. The mutual nature of such organisations gives them different status; they see their mutuality as a distinctive selling point compared with other institutions. To carve out one group from the whole population says that there is almost a two-tier category of building society: those that are of sufficient size and thus will be dealt with on a different basis when it comes to dormant accounts and those that will be allowed to continue to use their members’ funds when there are dormant accounts to benefit the communities in which they are based. That creates an unhelpful distinction.

The hon. Member for Taunton asked whether the asset limit of £7 billion is right. From the Minister’s justification of the Bill, a better measure is the one that he used on the concentration of branches—to what extent does a building society serve a well-defined local community?

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

I am not sure how this is helping the hon. Gentleman’s argument. My argument is that it is right to have a small and local scheme, and that small building societies, which generally serve local or regional and sub-regional communities, are in a different place  from the larger building societies, which have extensive branch networks and customers throughout the United Kingdom.

The hon. Gentleman mentioned the Nationwide building society. I have enormous respect for the Nationwide and its policy on giving money to good causes, but it has 14 million customers and is about to acquire the Derbyshire building society, which will make it even larger. It does not help his argument to say that we should treat all building societies the same. The Nationwide is of sufficient size that it deserves to be regarded as an institution on a par with some of our banks, and it is right in that case that it participate in the wider reclaim scheme, which will give money to good causes through the Big Lottery Fund.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Again, the Minister points out two communities that could lose out as a consequence of this measure. The communities of customers being served by the Derbyshire and Cheshire building societies would benefit if dormant accounts were sitting there and those societies were not taken over by or merged with—I am not sure what the technical language is—the Nationwide. Now, those accounts will be lost in the big pot that will be transferred to the Big Lottery Fund. The communities that those two building societies serve could have used dormant accounts to help particular projects in their area. Let us not forget, these building societies have been built over time through the agglomeration of smaller building societies.

We are in danger of losing the potential for local links for larger building societies and creating two different sets of building society. It boils down to the Minister’s argument that the Government want more money for the good causes. We support the three spending priorities that are set out in the Bill and we want to see those work well, but the scheme is voluntary, there is competition and there is tension between the scheme and recognising the principle of mutuality and how members of building societies and the local communities that they support should be able to benefit.

A second issue arises from the £7 billion limit, which is what happens when the value of the assets fluctuates. When is a scheme in or out? If a building society shrinks its lending book and has lower assets, one year it will be over the £7 billion limit, the next it will be under. That does not create a stable base on which to operate.

There is regular discussion on the financial pages about de-leveraging. That could lead to shrinkage in the size of some of those building societies, which would suddenly go below the threshold. I think I am right in saying that the Skipton building society has recently gone over the £7 billion limit, although it might find itself going below that threshold, so even the threshold does not quite work. The Government are making an artificial distinction. It does not sit well with the treatment given to the vast majority of building societies, and it is a retrograde step to restore the Bill to how it was before it was, I believe, improved in the Lords.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

Clearly, there is a difference of opinion between us on the matter, but let me have one more go at reassuring the hon. Gentleman. We want co-ordination and a fund of sufficient size to give money to good  causes. I repeat that youth provision, financial inclusion and capability are important areas, and they have been recognised widely as such here and in the other place.

The hon. Gentleman seemed to suggest that having a small and local scheme will create an artificial distinction. I do not agree. Building societies are all not the same. They vary enormously in size, and many small and local building societies are primarily locally and regionally focused. Clearly, some societies with many millions of customers are not, and it is not the case that building societies will be disadvantaged in any way by participating in the reclaim fund and the scheme if they are of sufficient size.

The Big Lottery Fund has already proved that it can invest effectively in projects at local level and will continue to do so. If Nationwide participates in the reclaim fund and the scheme, I am sure that many of its members will benefit from the reclaim fund through the Big Lottery Fund at local level. I must say to the hon. Gentleman that large building societies such as the Nationwide are national. The clue is in the title. They are not small and local, and I do not think it unreasonable to have a small and local scheme.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Minister’s argument is rather spurious, given the existence of building societies such as the Chelsea, which has its headquarters in Cheltenham, as well as the Yorkshire and the Skipton. To say that the clue is in the name is not the best argument that he can make in Committee.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

I understand the hon. Gentleman’s point, but it plays to what I am saying as well. A number of building societies have names that might imply that they are regional, such as the Yorkshire, although in actual fact they operate very much on a national basis.

Photo of Janet Dean Janet Dean Labour, Burton

Has my hon. Friend estimated how much less there would be for good causes, such as youth facilities, if large building societies were allowed to opt out of the scheme?

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

The best figures that we have available show that, of the £130 million that we estimate would be classified as dormant and be transferred to the reclaim fund in the first instance, £100 million would come from building societies with assets in excess of £7 billion. By the way, that includes the Derbyshire, which, although it is being acquired by the Nationwide, is already above the £7 billion threshold. We are saying that if the Bill remains as amended in the other place, £100 million will not go into the reclaim fund and then, I hope, out to the Big Lottery Fund for distribution.

Without wanting to be in any way critical of large building societies, which I am emphatically not, having a scheme of sufficient size to be able to operate strategically, which is our intention, is the right thing to do. It is also important that we make provision for small and local building societies. That is the balance we struck as a result of the consultation exercise. The BSA is happy with our amendments and the approach that we want to follow.

I hope that I have has reassured the hon. Member for Fareham, although I suspect that I have not done so entirely.

Question put, That the amendment be made:—

The Committee divided: Ayes 8, Noes 5.

Division number 1 Nimrod Review — Statement — Clause 2

Aye: 8 MPs

No: 5 MPs

Aye: A-Z by last name

No: A-Z by last name

Question accordingly agreed to.

Amendments made: No. 10, in clause 2, page 2, line 19, at end insert—

‘( ) The reference in subsection (1) to an account that a person holds is to be read as including an account held by a deceased individual immediately before his or her death.

In such a case, a reference in subsection (2) to the customer is to be read as a reference to the person to whom the right to payment of the balance has passed.’.

No. 11, in clause 2, page 2, line 27, after ‘bank’, insert ‘or building society’.—[Ian Pearson.]

Clause 2, as amended, ordered to stand part of the Bill.