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

As we know, the principal reforms in the Bill are not directed at building societies. However, building societies should not be exempt from the restrictions that a ring fence would propose. Currently, the restrictions on building societies in the legislation that applies to them are analogous to those that apply to ring-fenced banks. There is a danger that if building societies fall within the scope of the Bill they will be obliged to comply with two bodies of legislation that broadly have the same intent. If we are to avoid having two sets of primary legislation we would have to repeal the Building Societies Act 1986, ring-fence building societies and remove the special nature and recognition that they currently have.

The answer to the conundrum posed in policy terms by the introduction of these banking reforms is, as we propose, to exempt building societies from the ring-fencing rules. To ensure a level playing field, Clause 8 gives the Government the power to amend, via statutory instrument, the legislation that currently applies to building societies to bring them into line with the ring-fencing rules for banks. We will publish the consultation that will give effect to these provisions, including the draft statutory instrument, over the summer for a full public consultation. The approach that we have set out has been much reflected on and consulted on during all the stages of consultation on the Bill and the draft Bill. It has been warmly endorsed by the Building Societies Association. So it is a pragmatic solution to a particular problem.

It is a pleasure to serve under your chairmanship again this morning, Mr Bone, and to be able to make a few comments about Clause 8. As the Minister outlined, it deals with the treatment of building societies as far as ring-fencing regulations go. It is important that he put on the record the Government’s desire to solve what he described as the conundrum of having different sets of legislation to comply with and the need for a level playing field. That has been welcomed by the building society sector. As he explained and as the explanatory notes outline in some detail, building societies are excluded from the definition of ring-fenced bodies because they already operate under the significant restrictions of the Building Societies Act 1986.

Under current rules, 50% of a building society’s funding should be in the form of retail deposits and 75% of lending must be secured on residential property. That gives them their particular significance and there is concern that that may change. We are not entirely clear what the Government intend to do following the publication in 2012 of the Treasury consultation on the future of building societies. I will come back to a couple of questions around that. Clause 8 aligns the reform for building societies to that which will apply to ring-fenced banks under part 9B of FSMA. Building societies and ring-fenced retail banks will be treated in broadly the same way. That is the right and proper thing to do.

We know the importance of building societies and the wider mutual sector to the economy. Building societies in particular form a vital part of our UK financial services sector. Mutual lenders and deposit takers have total assets of more than £375 billion and, together with their subsidiaries, hold residential mortgages of £245 billion. Building societies are often the very organisations that have worked closely with local  communities and with people to ensure that they get a start on the housing ladder. They hold more than £250 billion of retail deposits and that accounts for more than a fifth of all such deposits in the UK. Some 50,000 people work full and part time for building societies in approximately 2,000 branches, which shows their spread. Building societies have been able to continue in many instances with those high street branches. They have largely proved to be prudent and sustainable. Only one building society needed Government support during the financial crisis when in March 2009 the Treasury dealt with the issues surrounding the Dunfermline building society. The Nationwide went on to buy all Dunfermline’s branches, good loans and deposits.

I welcome what the Minister said about publishing a consultation and draft legislation over the course of the summer on this issue. How will that sit in the context of any wider action that may come from the Government following the commitment that was given in the coalition agreement:

“We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry”?

While the Minister is doing something about tidying up the process in relation to building societies, we are still rather unclear about what the Government’s intentions are following the consultation that took place on the Building Societies Act 1986. He may be able to tell us more about that.

My other question may be also be covered by the consultation in the summer. What new functions relating to building societies are likely to be handed to the Financial Conduct Authority or the PRA? Those are some technical points that are covered in the clause. In general I have no difficulty with the clause and, as I said, it has been welcomed. But it would be useful to have some of those points on the record, so that we can be clearer about what the Government intend to bring forward and how that relates to the Bill.

I am glad that we have the support of the hon. Lady on how we intend to proceed on this. She is right that we want to see a greater diversity of competition in the sector. The provision of financial services has become far too concentrated as a result of the crisis and we want to see an expansion of the market share of smaller players, particularly building societies and mutuals. I will address some of the ways that that is already being carried out.

First, the hon. Lady will know that the Financial Services Authority has been conducting a review on the barriers to entry for the authorisation of new banks. It has introduced a new system and committed to recognising the special circumstances and improving some of the aspects of financial resilience that come naturally to institutions with a longer pedigree. If the risk, particularly the systemic risk, is low from the start, that should be taken into account.

When we consider the new clauses, we will have the opportunity to discuss some further measures that the Government propose to table. We will shortly publish a consultation on the changes to payment systems. Those changes will allow access to the payments systems for those who are outside the magic circle of firms that control access to them. There will be an opportunity for those concerned to contribute to that consultation.

We are keen—I made this point at the beginning—to take the views not only of the Parliamentary Commission but of the House, both in Committee and at later stages of the Bill, on how we can further reinforce our determination to drive competition in the banking sector. That includes building societies.

The PRA and the FCA are required to make a specific assessment of the proposed rules on mutual societies. We recognise that although mutuals compete and operate in the same spaces as banks, they are from a different tradition. Their capital requirements and operations are different. The provision will ensure that the regulators will not unintentionally disadvantage mutual firms when creating rules. It will also build up an evidence base that can be used to ensure that mutuals are treated appropriately in the regulatory system. The regulatory principle of proportionality also applies in this regard. If regulators are taking action that impacts one firm more than another, it should be done only on the basis that it is proportionate to each of those firms.

As part of the consultation on this part of the Bill, we will be open to suggestions from the building society movement and depositors and lenders from building societies. We will consider, both through that consultation and anything that is suggested by the Parliamentary Commission or the House, whether any further legislative change is needed, including within the Bill, which is a vehicle for that. What we have introduced in the Bill meets the requirements set out by most people in the sector by ensuring that the sector is treated fairly and properly while recognising its distinct characteristics. As I have said, we are happy to consider further legislative steps if they are needed.

Question put and agreed to.

Clause 8 accordingly ordered to stand part of the Bill.