Clause 51 - Building societies: creation of floating charges

Financial Services Bill – in a Public Bill Committee at 4:30 pm on 20th March 2012.

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

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Clause 51 looks technical and detailed, although it is short and sweet. Government Members welcome the clause’s updating of the Building Societies Act 1986. My hon. Friends will recall that that particular Conservative Administration introduced legislation that liberalised the rules on building societies. The 1986 Act, of course, allowed widespread demutualisation of the building society sector. My hon. Friends will know the saga that occurred thereafter.

Clause 51 makes further changes to the 1986 Act—the previous Administration made a number of changes—that will hopefully go some way towards strengthening the defences of the mutual sector. The Minister, like my hon. Friends, has said elsewhere on a number of occasions that the actions of demutualised ex-building societies played a part in the growth of sub-prime lending in this  country. As a Labour and Co-operative Member, therefore, I want to ensure that we introduce provisions that properly regulate and defend the good name and honour of the non-plc, mutual sector. That excessive risk-taking—that dash for profit—and the associated risks were hastened and amplified following demutualisation. My general thesis is that, had we had more protection for the building society and mutual sector, we might not have seen such difficulties with Northern Rock and other previously mutual financial services institutions. To that end, I would be grateful if the Minister put on record his view on the importance of building societies with particular regard to their role in ensuring a stable financial services sector.

Specifically on clause 51, the previous Government gave the Treasury secondary legislative powers to allow building societies to create what are known as floating charges where such a move might be necessary for stability. As far as I understand it—as a layman in such issues—a floating charge is a form of security interest giving preferential rights over a fund of changing assets that floats, or hovers, until its conversion or crystallisation into a fixed charge. A body of case law and common law governs many such floating charge arrangements. In literature on these matters, there is a lot of discussion about the ambiguity of some of that common law and whether, over the past 100 years or so, there has been sufficient definition about how the courts define floating charge arrangements. They have often been cited as legal devices created by lawyers, without necessarily requiring any statutory or legislative support.

Floating charges give a certain degree of latitude to transfer circumstances, where building societies might, for various reasons, need to be subsumed or merged with other entities. Will the Minister explain why the clause goes further at this time than in the past? The only safeguard I can see built into the provisions is a reliance on European definitions of “participants” in debt payment systems. Does the Minister feel that that offers adequate protection to building societies?

The clause amends the Building Societies Act 1986 to legalise the application of floating charges. Apparently, there is an existing prohibition against floating charges, which inhibits the building societies sector’s ability to access private sector funding. An exemption to the 1986 general prohibition against floating charges was made by the previous Government, to enable assistance to distressed building societies to be made. In 2010, my noble Friend Lord Myners proposed changes to a series of arrangements for building societies, and an order was made. Although there was a consultation on the floating charge arrangements, he did not in the end decide to proceed with the particular floating charge provisions before the Committee today.

At the time, he said that in light of further consideration on the floating charge proposition, he had decided to make a more limited order that would enable building societies to do certain things, but would not allow the floating charge arrangement to be implemented. He felt that a wider order might result in floating charge arrangements being made in a way that would not necessarily relate to financial assistance. He said that it

“would have given a general and indefinite permission to building societies to grant floating charges so that they could access settlement and payment and settlement systems directly. To do  that would increase risk in the sector, and goes beyond the intention of the policy”.—[Official Report, House of Lords, 18 March 2010; Vol. 718, c. GC282.]

The orders at that time only enacted a couple of provisions, and not the one in the clause. The crux of the issue is why the Government feel now—but not then—the need to implement the provision, and why those risks have apparently disappeared in the intervening period.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

This is not quite what the hon. Gentleman thinks it is. We still maintain the general prohibition on floating charges. It is clear, however, that if a building society wishes to participate in the sort of payment and settlement systems that banks take part in, it needs to be able to give a floating charge to enable such participation. The fact that building societies cannot participate in the settlement and payment systems means that they cannot really compete on a level playing field with banks, and do not offer as good a deal to their customers as a consequence. It is a very limited amendment to section 9B of the 1986 Act and the prohibition on floating charges. It also happens to have been requested by the Building Societies Association. I hope that with those reassurances, the hon. Gentleman will allow the clause to stand part of the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I do not understand what is achieved. Can the Minister set out the purpose of the change in layman’s terms? The clause is probably perfectly rational, but if he explained that, it would help to give the Committee a better grasp of why it is necessary.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury 4:45 pm, 20th March 2012

I think that I have explained: it is to permit participation in settlement systems. It is done at the request of the BSA. That is the reference in subsection (3) to subsection (4). It explains why we need to introduce the change. I am not sure that I see the controversy about something that is in the interests of building societies and their customers.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am not entirely satisfied with that answer. I do not think that it is adequate simply to regurgitate the words in the Bill—or in the rather unhelpful, in this case, and useless explanatory notes—and say what the effect of the floating charge arrangement is. It would be nice to have a sense of why the circumstances now require the change. What is the practical application? What building societies are we talking about? Does the Minister have particular company circumstances in mind to which this might apply? He has his head down and wants to plough on, so I will not stand in his way, but I am not very happy with his explanation of why the changes are necessary.

Question put and agreed to.

Clause 51 accordingly ordered to stand part of the Bill.