Clause 52 - Power to direct transfer of building society’s business

Financial Services Bill – in a Public Bill Committee at 4:45 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 52 is probably the clause that relates most closely to the issues of the existence and continuance of the building society and mutuals sector. The series of changes to the Building Societies Act 1986 hopefully helped to stem the tide of demutualisation that afflicted the building society sector when some decided to move to a plc model, and we know what happened then. In fact, we are close to the 25th anniversary of the 1986 Act, which allowed all that to take place. None of the 10 then building societies that demutualised exist independently now, whether that is Abbey, the Halifax or others. Bradford & Bingley building society—based in Shipley, the constituency that I used to represent—was a fine mutual institution that demutualised, and we know the saga that came from that.

Clause 52 puts the Banking Act 2009 powers on an equal footing with the original 1986 demutualisation powers, which are relevant to this discussion.

Photo of Fabian Hamilton Fabian Hamilton Labour, Leeds North East

My hon. Friend mentioned Bradford & Bingley building society, but the largest building society at the time was the Halifax, which swallowed the famous Leeds Permanent building society, and we all know what happened to the Halifax.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Absolutely. That is why, when we are talking about transferring building society businesses from a mutual to perhaps another form of mutual or, in this case, company, we have a duty to learn the lessons of what went wrong in the 1986 Act and to ask whether we are doing the right thing to protect a model that is already under some stress.

I am pleased to say that the building societies that weathered the storm have been doing a lot better recently, and more power to them. They are important players in diversifying the sector, but I worry whether enough is being done proactively to support the sector, never mind to create a level playing field.

Photo of Chris Evans Chris Evans Labour, Islwyn

To underline what my hon. Friend is saying, is he aware that Moody’s has upgraded six building societies’ stand-alone ratings? That is a good comparison with what he has said about those that are no longer in existence following demutualisation or their being swallowed up by larger entities.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

There is logic in the way that the building societies market has developed subsequent to that consolidation process. However, that also comes with its own advantages and disadvantages. We have discussed such matters previously, and, when we were discussing the sector’s diversity, my hon. Friend the Member for Foyle mentioned that credit unions, which are a different form of mutual, have taken up much of the space in terms of the small-scale, micro-finance participants. I worry, however, that there is gap in the provision of financial services in that mid-scale non-plc structure, which may not be there for much longer, and we need to be mindful of that.

I do not want to detain the Committee for too long, but clause 52 seeks to update the Mutual Societies (Transfers) Order 2009, which was taken through in another place before the last general election. Just so  hon. Members are aware, the clause amends the Building Societies Act 1986 to give the FSA—currently—powers to direct a mutual

“to transfer its business to a company that is the subsidiary of a mutual”.

There may be some sound reasons for that, and I would like the Minister to say what particular companies or subsidiaries of building societies he has in mind with that change. I know that it is unlikely that the Minister will be tempted to name the names of existing mutuals that may have subsidiary company structures beneath them, but a change obviously took place when the Britannia building society merged with the Co-op. That move was facilitated by the changes made by the previous Administration and would have been prevented by the rigidities within the old building society legislation. We need to take steps to allow flexibility to such building societies. In many ways, the change is probably useful, but I have several questions for the Minister.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

Does my hon. Friend agree that many people actively choose to use building societies because of their structures, because of the membership model, and because of the opportunity for them to participate in, or at least have an influence on, decision making? They would want reassurance that, whatever the Minister intends to do here, the ability of those organisations’ members to have a say will not be undermined in any way.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

That is true, and we want to ensure that the added value that comes from being a member, rather than purely being a customer, is protected and supported, which is why I was trying to get a sense from the Minister of what specific cases he has in mind. Would particular building society arrangements be applicable under clause 52?

However, we must be careful with the business of membership. My hon. Friend will be familiar with the concept of carpetbaggers, which was the phrase used at the time, meaning people who would open an account with a building society with a view to obtaining shares in the windfall that would flow from demutualisation. My hon. Friend the Member for Leeds North East mentioned such building societies as Leeds Permanent, Halifax, Abbey, and Bradford & Bingley. In the rush to demutualisation, the floodgate was opened for some of those by the 1986 Act.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

I may be wrong and perhaps my hon. Friend will correct me, but I do not recall that the 1986 arrangements were necessarily specifically intended to encourage demutualisation. In effect, a loophole was found that allowed people to start that process. A lot of people were perhaps tempted, without understanding the full implications, to go with something that offered some quick gains. Is there anything in the clause that could open up those loopholes, in particular subsection (2)(b)?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I do not know. To be fair to the Minister, the clause is probably proposing a useful small change in respect of transfers between mutuals and other mutuals, although some of their structures will have plc or limited company forms beneath them. My question is whether  clause 52 has sufficient strengthening powers within it to deal with some of the challenges that the building society sector faces today. Might there be other transfer scenarios not envisaged by clause 52 that ought to be in the legislation?

The building societies eventually got wise to the carpet-bagging technique and devised what is known as the “poison pill” strategy to counteract the thirst of the carpetbaggers to get those windfall gains. They required in their constitutions that any windfalls from those shares should be given to charities; essentially they could not be pocketed by the customer. That sutured the problem to a degree. However, I am not yet convinced that we have properly solved that particular problem. It has not arisen much subsequently but it is a saga relevant to clause 52.

Photo of Chris Evans Chris Evans Labour, Islwyn

I remember that time. Many building societies were under hard pressure to demutualise, not through the Government—accepted—but the media. Many of the carpetbaggers referred to by my hon. Friend had well funded media and advertising campaigns. They specifically targeted members of the building society to vote for demutualisation. How does my hon. Friend envisage overcoming that if the situation arises again?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

As I said, I get a sense that a lot of building societies have taken matters into their own hands and changed their constitutions. A lot of those roads have been closed off. It is important to note that, under the current legislation, the scope for mutual societies to transfer their business is quite limited. That usually means they are permitted to transfer their business only to another mutual of the same category, for example, from a building society to a building society. Otherwise they may transfer to a company and become demutualised, leading to the loss of mutual status and membership.

The previous Government took steps to increase the options available to building societies, allowing them to transfer to a subsidiary of another mutual society under a simplified procedure. I mentioned before that of Britannia to the Co-operative Group in 2009. That was made possible to retain the business within a mutual ethos as well as provide for members of the transferring mutual to have rights in that holding mutual. Therefore, that 2009 transfer order has stood the test of time. I am presuming that these proposed changes are consequential to that.

Why does not clause 52 properly pick up the promise that the Minister made in the coalition agreement, when talking about fostering the diversity of the financial services sector and promoting mutual? We have nothing in the Bill other than this small cluster of clauses to go on when it comes to those arrangements. Do not just take my word for it, Mr Gray. The hon. Member for Cardiff North (Jonathan Evans) chairs the all-party parliamentary group on building societies and financial mutuals, which published a report on this issue in July. The Minister appeared to give evidence at its hearings, as did the current chief executive of the PRA. Having heard the evidence, that group came to some very important and quite startling conclusions. Its first conclusion was that

HM Treasury appears to have taken a reactive stance to the mutual sector—beginning to deal with important issues such as building society capital, but little else of substance.”

It went on to make this recommendation:

“It is imperative that the Coalition urgently adopts a comprehensive policy strategy to implement its Coalition Agreement commitment to promote mutuals.

HM Treasury should act as a strong advocate for mutual businesses, in particular in its dealings with the Financial Services Authority and subsequent new regulatory authorities.”

This is where the recommendations to that all-party group are extremely relevant. It argued that the Treasury

“should pro-actively promote the interests of financial mutuals within Government, and ensure that balance is given to understanding and promoting mutuals across all Government departments”.

Photo of Fabian Hamilton Fabian Hamilton Labour, Leeds North East 5:00 pm, 20th March 2012

Does my hon. Friend agree that while the clause goes some way towards supporting and strengthening mutuals, it does not go far enough? Moreover in hindsight, had some of those former mutuals not demutualised, the financial crisis we faced in 2008 might not have been as extreme.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

This is one of those lessons that has to be learnt. A stronger mutual sector during the financial crisis would not have been disadvantageous; it would have been a protection. It would have ensured that those key decision makers had different motivations and so might not have taken as many risks. The key point I was coming to was the all-party parliamentary group’s specific recommendations:

“Legislation establishing the new regulatory authorities must include ‘Promoting mutuals and fostering diversity’ within the statutory objectives.

Moreover, Regulators should be statutorily committed to take account of diverse business structures.

An overall Head of Mutuals policy should be appointed at the newly formed PRA.”

That latter recommendation was resisted by the PRA during the hearings by the all-party group but it is perfectly reasonable. One of the other interesting adjuncts is that the group also recommended that some sort of diversity index be created as a proxy for testing whether the level of diversity in the financial services sector is improving or worsening. That is a useful idea.

Photo of Teresa Pearce Teresa Pearce Labour, Erith and Thamesmead

I have listened with interest to what my hon. Friend has said. I agree that the price of demutualisation is a bitter pill that taxpayers have had to swallow. I am also interested that 65% of complaints received by the banking ombudsman are about banks and only 2% are about building societies. That demonstrates the good model of consumer service that we are looking to achieve with the Bill. Does he agree that we need not just to protect building societies but to help them to flourish so that we have that diversity in the high street?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Indeed, it is important that we have more challenge to the plc model. It does matter. Corporate structure feeds through into the attitudes of those companies towards their customers and their members. If an organisation is owned by its customers it stands to reason that it will treat them with more respect and more courtesy than if they did not have those additional rights over it. That is something we should advocate.

Why has the Minister not taken up some of the recommendations in the all-party parliamentary group’s July report? He has had ample time to reflect on some of those and move forward with them. Given the inclusion of this promise in the coalition agreement I was under the impression that that some pressure would have come to bear from Liberal Democrat Members on Conservative Members about strengthening the building society and mutual model. It appears not to be the case. We do not see these provisions in the clause or the other suite of clauses in part 3 of the Bill. That is a great shame.

The Building Societies Association and others have made their own representations to Ministers about the need for improving the regulatory frameworks so that they support and work with the grain of the mutual sector far more successfully. It would be important if the Minister could deal with those particular points.

I have asked specific questions about some of the provisions under the clause, especially whether the hon. Gentleman had cases in mind for the changes that regulators will transfer. The explanatory notes refer to the Financial Services Authority having the residual powers under the clause, but they do not set out whether the PRA or the FCA will take them on from the FSA. It is always slightly worrying when I see references in the explanatory notes to the FSA continuing to have certain responsibilities, but it is the broader matters of defending and supporting mutuality, learning the lessons from the demutualisation saga and taking the opportunity to improve the Bill that I particularly wanted to press.

Photo of Fabian Hamilton Fabian Hamilton Labour, Leeds North East

It is a pleasure to see you in the Chair this afternoon, Mr Gray. I want to continue one of the themes that my hon. Friend has discussed, and to pose one or two more questions to the Minister. The Secretary of State for Business, Innovation and Skills, a senior member of the Liberal Democrat party, on 23 February 2010 just before the general election said:

“While the Liberal Democrats have no fundamental ideological opposition to selling the taxpayer stakes in the nationalised and semi-nationalised banks—indeed we support re-privatisation—there is no hurry and every reason to show patience. UKFI now believes that it will be a state shareholder for at least five years. Experience in Korea, Sweden, Israel and in the US would lead us to believe that the optimal time frame for disposal of nationalised or semi-nationalised assets is probably close to 10 years. That is the time needed to sort out and restructure banks, manage bad assets and restore normal, safe lending…Sweden still owns almost 20% of a bank that it bailed out in the early 1990s (Nordea). We should not rule out the taxpayer taking interests in Northern Rock, Lloyds and RBS for similarly long periods.”

Why have the coalition Government sold off Northern Rock in such a rush, and at such a huge loss to the taxpayer? Will the Bill, in fact, help prevent such a fire sale? Surely it would have been better to have waited for the economy to recover before selling off the assets at rock bottom prices. Does the Minister believe that the clause and part 3 of the Bill, in general, would have prevented a rushed sale like that from taking place, and perhaps will prevent one in future? Does he agree that what has happened represents poor value for taxpayers? Will the clause ensure that proper consideration is given to the need for greater diversity and competition in the banking sector in future?

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I had not intended to contribute to the debate now but a number of important points have been made. However, before I proceed I should refer  to my entry in the Register of Members’ Financial Interests in respect of being a Labour and Co-operative Member.

My hon. Friend the Member for Nottingham East referred to several issues in relation to the principles of mutuality and the problems that have existed about demutualisation. Those of us with a strong commitment to the mutual sector want to hear not only about protections for existing mutuals, but how, proactively, the Minister proposes to ensure that, as is stated in the coalition agreement, financial services will

“promote mutuals and create a more competitive banking industry.”

I am not entirely sure how the Government intend to do that. I am also aware of the recommendations set out in the all-party group’s report, to some of which the Minister has responded.

In his remarks, will the Minister tell us a bit more about what he proposes to do and about how his performance in promoting mutuals will be measured? We need to know how the Government will promote mutuals, and what staging posts will be used to measure success and to ensure that the right approach is taken and—importantly—that there is continued consultation. I hope to hear more from the Minister, who I am sure can respond to those points and to the ones raised earlier.

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

Before I turn to the clause, I am happy to respond to the comments made in the debate, which has gone wider than what, as I shall explain, is a narrow power. The coalition agreement commits us to the promotion of mutuality, and mutuals have an important role to play in financial services. I point out that some mutuals suffered financial distress during the financial crisis—I think that the first use of the Banking Act 2009 powers was for the Dunfermline building society—so the question has to be seen in proportion. The mutual sector also has issues that need to be resolved, and that is one reason why we have driven forward the debate on CRD IV, which is a good example of how we are promoting the mutual sector.

On Northern Rock, the hon. Member for Leeds North East quoted at length the remarks of the Secretary of State for Business, Innovation and Skills. The deal that the previous Government agreed with the European Commission for rescuing Northern Rock required it to be sold within two years. That is not a matter for this Government; it is yet another legacy of the Labour Government that we have had to deal with. We encouraged mutuals to come forward with bids for Northern Rock, which was well documented in one of our recent publications.

Sitting suspended for Divisions in the House.

On resuming—

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

I was just saying that we had sought bids from mutuals, as indicated by the document on the sale of Northern Rock published earlier this month. No mutual made it through to the final round, but we are  keen to promote mutuals. I understand that the Building Societies Association is trying to devise a diversity index.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I know that the Minister wants to move on, but on Northern Rock, surely he approached the Competition Commissioner in the European Commission for an extension, beyond the end of 2013, of the state aid arrangements in respect of the sale of Northern Rock. I would have expected the Treasury to seek that.

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

The previous Government signed up to the commitment for disposal, which was the right thing to do. The sale was in the interests of the Northern Rock business and, as demonstrated by the Deutsche Bank financial analysis that is documented in the report we published, in the interests of taxpayers. To have kept Northern Rock in public hands for longer would have led to the destruction of value. I counsel the hon. Member for Nottingham East, who takes a keen interest in the matter, to look at the report, which sets out the issues clearly.

I am wary that the clause is not about the sale of Northern Rock, and I am sure that you, Mr Gray, would like me to come back to order. [Hon. Members: “Hear, hear.”]

I do not want to repeat my earlier point about the provision in clause 22, which ensures that the FCA and the PRA produce a report looking at the impact of regulation on the mutuals sector; that would be repetitious. However, that commitment is there.

Photo of Karen Bradley Karen Bradley Conservative, Staffordshire Moorlands

My hon. Friend will be aware that my constituency has a great history of mutuality and co-operatives, with both Leek United and one of the main centres of the Co-operative—the old Britannia base—being located there. Will the Minister reassure the members of those mutuals and my constituents who are employed in them that nothing in the Bill will make their lives more difficult or threaten the mutuals’ status?

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

Indeed. Nothing in the Bill will threaten their status. New section 138K, to which I referred earlier, will help the mutuals sector.

Returning to clause 52, the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 allowed Britannia and the Co-operative to come together, because the Act enabled mutuals of two different types to merge without members—in this case Britannia—losing the benefits of mutuality. That was an important piece of legislation, steered through this House by a former colleague, Sir John Butterfill. It was occasionally known as the Butterfill Bill in tribute to his work.

Clause 52 seeks to build on the 2007 Act. It will extend the regulators’ existing power under section 42B of the Building Societies Act 1986, enabling them to direct the transfer of a building society to a subsidiary of a mutual. It will ensure that section 42B will be updated to take into account provisions of the 2007 Act. It will enable the smoother transfer of building societies into subsidiaries of mutuals. I remind Opposition Members that the clause strengthens mutuality, because it could be used in situations in which a building society is in financial distress. To ensure that it remains viable  and to protect the interests of its members, the FSA could direct that it be transferred into a subsidiary of another mutual. Those are the circumstances in which I would envisage the clause being used. Currently, there are no circumstances in which I would expect such powers to be used.

The clause is not about carpetbagging or demutualisation, but about finding another tool to strengthen the mutuals sector. It is a further example of the work that we have done in pursuit of the coalition Government’s agreement.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I hear what the Minister says about protecting and strengthening, but a point was raised about the promotion of mutuality. How do the Government intend to do that and by what standards will that be measured? How will this particular clause help? Will the Minister explain what the Government intend to do?

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

I started my remarks, both after and before the Division, by referring to this matter. I mentioned some of the things that we are doing—such as CRD IV —at the beginning of our proceedings this afternoon. We have had previous debates—on clause 22, for example—along similar lines, so I do not want to trespass on the Committee’s patience. As I said, the measure is an example of what we are doing to promote mutuality: it would ensure that regulators have a full suite of powers to enable them to intervene when a building society is under pressure or when we want to see ownership transferred to another mutual. That will help to protect and strengthen the sector.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am grateful to the Minister for his patience. Will he specifically address the provisions that could have been in clause 52, as recommended by the all-party group on building societies and financial mutuals? It said that it wanted a specific regulator to have a duty to promote mutuals and foster diversity, and it recommended that the PRA should have a

“Head of Mutuals policy”.

Why has the Minister not taken the opportunity to do that?

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

Again, that would be micro-management. It is not for me or the House to decide upon the organogram of the PRA. The PRA will decide what is appropriate. Clause 22 and new section 138K impose a specific duty on the PRA and the FCA that gets the regulator to think very carefully about the impact of its rules on mutuals, which is an important step.

In a previous sitting, we debated the context of social investments. Customers of all financial institutions expect a level playing field and the same protection, whoever they deal with. They expect an institution to remain sound and solid. They do not expect special favours, which would perhaps reduce the protection available to them and give them a worse deal. We need to see consistency, and that is why it is appropriate that we do not favour one sector over another. Opposition Members would be concerned if we had a special pro-listed company objective. We do not. It is right that we have a level playing field across the sector, and that is underpinned by new section 138K.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

I understand the position that the Minister outlines about a level playing field, but is there not a problem? Sometimes a level playing field can conceal problems and differences. For the social enterprise sector, and indeed for the mutual sector, the form of regulation that might be appropriate for other financial organisations may be inappropriate, which might result in there not being a level playing field. Such organisations could be disadvantaged by inappropriate regulation.

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

Again, I refer to proposed new section 138K. Under subsection (4):

“The regulator must prepare a statement setting out…its opinion whether or not the impact of the rule is significantly different from the impact of the proposed rule on…the persons within subsection (3)(a)(i), and…those persons as compared with persons within subsection (3)(a)(ii)”.

That provision takes up the point about distinction—that regulation might have different impacts on mutuals compared with organisations in the non-mutual sector. It underpins not only the concept of a level playing field, but the understanding of the differential impact of regulation on different types of entity. The right provisions are in place, and clause 52 helps the mutuals sector. We should make progress.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am disappointed by the Minister’s response. Of course, it is important to focus on the questions in clause 52 that relate to transferring business in a mutual to another mutual arrangement, but other protections are missing that might have been included. I was not the only one to entreat that the clause take a more proactive and positive stance on the mutual model; in his own commitment in the coalition agreement, the Minister said that he would promote mutuals.

The fig leaf that the Minister keeps citing is new section 138K in clause 22, which provides for rules and guidance for the regulators. However, the provision ensures only that a statement will be written about what happens to the mutual sector—it does nothing to promote it. He might think that that fulfils the coalition agreement, but I am convinced that many people will think it does not. Why does clause 52 not include provisions that address not only the concerns of the all-party group, but the promises made in the coalition agreement? He has not dealt with those matters satisfactorily.

The clause relates to transfers of mutual business. The Northern Rock deal must stand as one of the worst as far as the taxpayer is concerned. I wish the new venture well and hope it succeeds, but it virtually gives away the asset from the taxpayer. With £250 million stripped from Northern Rock’s assets to fund the purchase—[Interruption.]

Photo of James Gray James Gray Conservative, North Wiltshire

Order. I am sorry to interrupt the hon. Gentleman. I have been fairly generous so far in allowing a Second Reading-type debate, but we ought to return to the specific question of whether the clause should stand part of the Bill. We should not be discussing the sale of Northern Rock. The specific question is that the clause stand part of the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

In discussing that question, we must understand whether the provisions that govern the transfer of business—perhaps of a mutual in distress—to the  public sector, to another mutual or to a subsidiary of the mutual learn the lessons of the circumstances that most recently inform us.

In the case of the Northern Rock transfer to a private company, not to another mutual, the Minister says, “Well, the advice from Deutsche Bank and others is in the public domain.” I am not sure that that is so. I think that there was a cursory summary document about the transfer. If there are to be further business transfers with other consultants being brought in to advise on them, as in the case of Northern Rock, we must have more transparency in public information. I got the impression that the Minister was saying that that Deutsche Bank advice would be published. If that is so, we would welcome that.

The hon. Member for Staffordshire Moorlands, whose contribution I welcome, mentioned the Co-operative and the Leek United building society in her constituency. Nothing in the clause may threaten the building society model, but there is certainly nothing substantive to promote the mutual sector. We are voicing those concerns today.

Praying in aid new section 138Kin clause 22 does not address the problem, but it would be invidious to oppose this minor, specific improvement in the clause. My hon. Friends and I are concerned about the elements that are conspicuous by their absence. I do not want to oppose the clause, but I regret that the Minister has missed the opportunity to fulfil his commitment to the coalition agreement.

Question put and agreed to.

Clause 52 accordingly ordered to stand part of the Bill.