§ 10.10 p.m.
§ Mr. G. R. Mitchison (Kettering)
I beg to move,That an humble Address be presented to Her Majesty, praying that the Building Societies (Authorised Investments) Order, 1960 (S.I. 1960, No. 2091), dated 15th November, 1960, a copy of which was laid before this House on 18th November, be annulled.The investments of building societies are always a fascinating subject. This Order was made under Section 11 of the Building Societies Act, which provided that the way in which a building society might invest any part of its funds which were not immediately required for its purposes should be such as might be prescribed by Order. This is the Order which does so prescribe. To summarise, what the Order does is this: first, it provides a class of investment in which any amount of the building societies reserves may be invested.
§ Mr. Speaker
It is so difficult to hear whether the hon. and learned Gentleman is in order. I should be obliged if hon. Members could manage their conversations a little more quietly.
§ Mr. Mitchison
I respectfully hope I am in order so far.
The Order first provides a class of securities in which any amount of the funds of a building society may be invested and, to put it very shortly, those are really short-term gilt edged securities. So far as the marketable ones are concerned, they have to be such as are repayable within five years. I think that no one could take exception to that provision.
The Order next provides that if 7½ per cent. of the assets of the building society are already in those securities a further purchase may be made of securities which are due for repayment—I am taking the marketable securities for the moment—in more than five years but in not more than fifteen years. Thirdly, the Order provides that, if not less than 15 per cent. of the assets of the building society are in those classes of securities, then a further investment may be made in a third class of securities which are, as regards the marketable 356 securities, those which are due for repayment in more than fifteen years but in not more than twenty-five years.
I have taken only the one type of securities as an instance, and I think that hon. Gentlemen will agree that, though the provisions are different, the same sort of principle applies to the other types of securities in each part. One must consider what the object of this investment is bound to be. These are funds which are not immediately required for the purposes of a building society. Therefore, if there is over-investment in securities, the money is not being used to that extent for the proper purposes of the society.
On the other hand, I agree at once that, apart from whatever balance there may be in the bank, which is dealt with in another part of the Act, there must be something in the nature of what are commonly called liquid reserves. Those liquid reserves serve two purposes. First, looking at the matter from the point of view of the building society, it will obviously require what might be called, perhaps rather loosely, floating capital—that is to say, money which it has not for the time being been able to apply to its main purposes. Secondly, looking at the matter from the paint of view of the person who is putting money into building societies, he must be sure that he can get out his deposit or share investment with promptitude on demand.
Although I have said "with promptitude on demand", building societies are entitled to a period of repayment, certainly in the case of shares, and I think also in the case of deposits, of a month OT more, but the larger building societies nowadays make a point of saying to investors that they repay on demand or within a very short period. That is quite right and proper, and building societies should be put in a position to be able to implement that promise.
The practice appears to be, judging from what was said in Committee by hon. Members with more experience of building societies than I can claim to have—I see two of them sitting opposite—to have 7½ per cent. obligatory in liquid assets and another 7½ per cent. as a matter of sound practice. Therefore, in practice the investments go up to 15 per cent.
357 If that is the practice, I fail to see the need for the third category of investments which are authorised by the Order. These are investments which come in only if there is already 15 per cent. in the other two categories. They are investments of a length of repayment which seems to be too long for the purpose of investing funds not immediately required for the purposes of the society. They include fixed-interest securities for repayment between fifteen and twenty-five years from the material date, and there are other provisions with regard to the loans of local authorities, to which I think there is perhaps less objection. I do not see the need for the third category.
Once there are investments which are not repayable within fifteen years and which may run up to twenty-five years, the type of difficulty is invited which some building societies have met in the past. We must be quite clear what the difficulty is.
For example, the Scottish Amicable was absorbed finally by the Co-operative Wholesale. Its obligations were met. I doubt very much if that society was insolvent. It was a question of time. What happened was that some newspaper started the tale that the Scottish Amicable had not enough reserves. The result was a run on the society, and it could not meet it immediately. It had to be helped over it. That is the sort of thing which at all costs we want to avoid. When I say "at all costs", I mean by any reasonable measure. Investment in securities as long as this means one of two things. Either the funds of the building society are not being applied to its main purpose, or, if they are, the reserves will not be callable and adequate for the object in mind.
Why have any comparatively long-dated securities at all? I look at the first two parts of the Schedule, which make provision between them for investment to an unlimited amount in the first case and, in the second case, to investment if there is already 7½ per cent. in the first place, and say, "Those are the ones which matter" What they are foreseeing is investment on the present lines up to 15 per cent. I should have thought that that was probably enough, but I wonder whether the second category ones are suitable. These are five- to 358 fifteen-year investments which may come on after having 7½ per cent. in the first category.
Although they are not open to as strong objection as the securities in Part III, I should have thought that it was inadvisable to allow investment in securities of as long a character as that, mainly from the point of view of the depositor or shareholder, but also from the point of view of the building society. Building societies have a knowledge and skill in making advances on bricks and mortar and on what necessarily flows from that. They are not investment trusts, and the people who manage them do not set out to be anything of the sort. Obviously, in view of the legislation about building societies and their functions, they ought not to start as anything like that.
I therefore discount the suggestion that building societies ought to have investments the dates of repayment for which were spread over a fairly long period. That seems to me to be the function of something like a pension fund and, to some extent, of other bodies which have investment in securities as their main business. That is not the main business of building societies.
I turn to the position of the joint stock banks. I remind the House again that the larger building societies, at any rate, make it a practice, which I suggest should be encouraged, of repaying share capital and deposit loans practically on demand. They are, therefore, not quite in the position of a joint stock bank, but they are far nearer to it than they would be if, in practice, they relied on the one month's notice provision or, in some cases, a longer period in their own rules. I need hardly remind the Economic Secretary that for liquid assets—and it is only the first category in this Schedule which could be treated as liquid assets—the banks require 30 per cent. of their deposits. They require 7½ or 8 per cent., if not more, in the form of cash, which includes bankers' deposits in the Bank of England and notes and money in their own tills. That is a very stiff provision for liquidity which has been found necessary in the case of joint stock banks. They all do it.
I would not say that building societies are by any means in the same position. But if we are to confine their obligatory liquid assets in this rather narrow sense 359 to 7½ per cent., after which they may wander into longer-dated securities, the contrast between 7½ per cent. in their case and 30 per cent. in the case of the joint stock banks is rather shocking. It strikes me as being too large.
I do not want anything I say here tonight to be taken as an imputation of insolvency against the larger building societies. That is the last thing I need to suggest. One has only to look at their balance sheets, to see that. This, however, is not a case of insolvency. It is a case where there may be a rather silly rush by depositors or shareholders, as there was in the case I mentioned. It is always a possibility. It always was a possibility in the case of the banks until we got to the stage of the few very large banks that we now have. In the remoter past, it was more than a possibility.
I should like, therefore, to hear from the Economic Secretary his justification for including Part III of the Schedule, the reasons why he thinks that Part II of the Schedule serves a purpose and his answer to my suggestion that in the circumstances of building societies, it would be better to confine the investments of funds which they do not immediately require to really liquid assess in the sense in which those words are used in relation to the 30 per cent. required of the joint stock banks.
§ 10.27 p.m.
§ Sir Cyril Black (Wimbledon)
I rise to make a brief intervention in this discussion. I want, first, to express a personal view on the merits of the Order and then, more particularly, to address to my hon. Friend the Economic Secretary two questions on which it would be helpful if he could give the House some information, so that we may have on the record two points to which building society people will attach importance.
Speaking personally, I welcome the terms of the Order. It seems to me that the balance between the various kinds of dated securities is probably as right as can be judged at the moment. I think I am right in saying—I speak from recollection—that the troubles in which the Scottish Amicable Building Society found itself involved arose not by reason of the fact that that society 360 held Government securities with dates of redemption more than fifteen years ahead, but because it held a large portfolio of undated Government securities which had been purchased at a comparatively high price in a period of low interest rates and which depreciated to the extent of, perhaps, 40 or 50 per cent. when interest rates became much higher. I think that it was that circumstance that got the society into difficulty.
§ Mr. Mitchison
I agree with the hon. Member. That, too, is my recollection, and the hon. Member knows that there have been other cases.
§ Sir C. Black
Whether or not that society was insolvent may well be a matter of doubt and opinion, but it was undoubtedly frozen to such an extent that it could not meet the heavy and abnormal demands for repayments which it received from its shareholders and deposit holders. Hence, it found it necessary to amalgamate with a larger and stronger society. I do not, however, think that it was long-dated securities that caused the trouble in that case. It was the ownership of undated securities.
I am in favour of the investment proposals embodied in Parts I, II and III of the Schedule, because they seem to me to provide what I would describe as a well-balanced investment portfolio. I recollect that I said something about the principles of this in Committee on the Bill and I do not think that the hon. and learned Member for Kettering (Mr. Mitchison) agreed with me then.
I believe, however, that it is generally accepted that a well-balanced investment portfolio of Government securities consists of stocks falling in over quite a period of time at different dates so that the problem of the reinvestment of the whole of the money does not arise within a comparatively short time but can be undertaken in an orderly sequence over a considerable number of years. It seems to me, therefore, that the balance of this Order is probably as good a balance as can be achieved with the experience which we have at the moment.
I think that there is a second reason for giving the right to building societies to invest in the longer dated securities, and it is this, that in normal market 361 conditions in the gilt edged market one can get a larger return on one's money with the longer dated stocks than is the case with the shorter dated stocks, and if we confine the building societies to the shorter dated stocks on which the yield is smaller we remove from them some of the encouragement which they would otherwise have to invest in Government securities, because the rate of interest is, frankly, not enough to attract them. Inasmuch as it is a good thing as a general principle to encourage building societies to err on the safe side in considering their liquid resources, I think it would be a pity to discourage them from investing an adequate amount of their money in Government securities by confining them entirely to securities on which the yield would be lowest. Therefore, I think that there is a good reason for the scheme of investment which is embodied in the terms of this Order.
I now come to the two points I want to put to my hon. Friend. I think I can do so in just a moment or two. The first is this. This is an Order which is made under the Building Societies Act, 1960, and I would assume that the investment scheme which is embodied in this Order will be reviewed from time to time by the Chief Registrar and by the Treasury and possibly in consultation with building societies. We are, I think, undoubtedly in what one may call to some extent an experimental period following upon the new Act. It is quite clear that experience of value will be gained in the next few years as the Act comes into operation, and I should like to think that this scheme of investment is not something which is necessarily fixed for all time, but that it embodies the best thoughts of the Registrar and of the Treasury at this moment. I think it would be helpful if we could be told that the position will be reviewed from time to time as further experience is gained.
The second point I should like to put to my hon. Friend is this. Let me take an investment made under Part II of the Schedule. Let us assume that a building society buys a stock which has six years' life which it could not, of course, buy under Part I of the Schedule but it would be permitted to buy under Part II. When that stock has been held for a year and the repayment date has then fallen to 362 within the five-year period, can that investment be transferred out of investments held under Part II of the Schedule and form part of the investments held under Part I of the Schedule? To take another example. In the case of a stock with a life of sixteen years purchased under Part III of the Schedule, when that has been held for a year, and the date of repayment is then in the fifteen-year limit, can that stock be transferred into stocks held under Part II?
I rather imagine that the answer to this question is in the affirmative, but speaking as a layman I am not entirely clear that this is so under the Order. It seems to me to be good common sense that it should be so, but, of course, the legal position does not always correspond with good common sense, and it would be helpful, I think, if we could get a clear answer to that question.
§ 10.30 p.m.
§ The Economic Secretary to the Treasury (Mr. Anthony Barber)
It would probably be most convenient if I were to deal first with the two questions which my hon. Friend the Member for Wimbledon (Sir C. Black) has just put to me. This is, as he realises, the first Order to be made under Section 11 of the Building Societies Act. 1960, and I can certainly give him the assurance for which he asked that from time to time the provisions of the Order will be reviewed. Indeed, I was going to say in any event, even if he had not asked me, that this was the intention of the Chief Registrar and of the Treasury.
Certainly the Order does not contain provisions which are fixed for all time. Indeed I think that the whole House will agree that one of the great advantages of setting out the rules governing investment by building societies in a Statutory Instrument as opposed to their being included in the Act itself is that we will be able from time to time to amend them as necessary.
The second question my hon. Friend asked was about the purchase by a building society of stock with a six-year maturity which would at the time of purchase fall within Part II of the Schedule, but whose redemption date would after a year or so be less than five years away. He asked what the position would then be. The stock would then fall within Part I of the Schedule and would count 363 towards the 7½ per cent. This, if the 7½ per cent. rule were fulfilled, would then enable further investment to be made under Part II of the Schedule. The same principle would apply to an investment in stock with a sixteen-year maturity under Part III of the Schedule, which, after a year or two, would come within Part II.
In order that I may deal adequately with the points raised by the hon. and learned Member for Kettering (Mr. Mitchison), it would probably be helpful if I spoke briefly about the background to the Order. As I have said, this is the first Order of its kind. It is made under Section 11 of the 1960 Act which gives the Chief Registrar of Friendly Societies the power to prescribe the ways in which a building society may invest those of its funds which are not immediately required for its purposes, and it makes it an offence for a building society to invest its surplus funds in any manner not so authorised.
The main purpose of Section 11 is to prevent building societies from evading restrictions imposed by Section 1 of the Act on the types of advances that they may make. I see around me hon. Members who sat through part of the proceedings when we considered the Bill, and I do not think that I need trouble the House with an explanation the content of Section 1. There is a second purpose in Section 11 of the 1960 Act, which is to avoid repetition of the difficulties in which some societies have found themselves in recent years because of unwise investment. Societies at present have powers of investment almost identical with the powers of investment of trustees and there is no limit on the length of maturity of the stock in which they can invest.
Some societies, as the hon. and learned Member for Kettering pointed out, have invested in undated or very long-dated stock and then found that they could be realised only at a substantial loss. The hon. and learned Member will know that it has always been the Government's intention, since the 1960 Act was first published as a Bill, that the Orders made should restrict the maturity range of a society's investments. If I may repeat a phrase which became somewhat hack- 364 neyed during the passage of the Bill, a building society carries on its business by borrowing "short" and lending "long". The relevance of that truth to this Order is that a society must keep some portion of its funds in a liquid form, so that it can be readily available if there is an unexpected demand for withdrawals of shares and deposits.
That is the primary purpose for which a society holds investments. But there is also a separate reason which may lead a building society to invest some of its funds. Listening to the hon. and learned Gentleman—I say this with great respect—I felt that he had not fully appreciated the second reason, or at any rate that he did not give it enough weight. It may sometimes happen that the inflow of funds from investors may exceed the demand for mortgages. That, of course, is not true at the present time, but it happened, I am told, at times between the wars, and it happened also immediately after the last war, and, of course, it is a possibility as far as the future is concerned.
In such circumstances, when the inflow of funds exceeds the demands for mortgages, it may be perfectly proper for a building society to hold a slightly higher proportion of its assets in the form of investments rather than to turn away all new funds offered to it. But it could afford to do this only if it could get a reasonable return from its investments, and this may be possible only by investing in something longer than short-dated stocks.
§ Mr. Mitchison
I would admit at once that no one on these benches can compete with the Government's knowledge of "hot" money at present—they are experts on it—but surely the hotter it is on arrival the more likely it is to be withdrawn in considerable quantities—or do not the Government agree?—at short notice.
§ Mr. Barber
The point is that obviously it is a matter of judgment as to what proportion of the assets of a building society should be held in the form of "shorts" or short-medium stocks. When one has a sufficient surplus or a sufficient proportion of liquid assets, I would then have thought it reasonable, if funds are flowing into the society, for it to hold these funds in stocks which are rather longer than short-dated stocks 365 and indeed in stocks of longer than fifteen-years' maturity. This distinction between the two purposes for which a society may wish to invest its funds is reflected in the structure of the Order.
The hon. and learned Gentleman explained very clearly the details of the Order, so I need not go over that ground again. But it provides, of course, that a building society may, in general, invest without restriction in marketable fixed-interest gilt-edged or local authority securities which will mature in less than five years, that is, in what are generally known as "shorts." Then it deals with the position concerning the five to fifteen years medium-dated stocks, and, finally, with the fifteen to twenty-five years fixed-interest securities.
The hon. and learned Gentleman deliberately. I think, did not deal with the question of local authority loans, so unless he particularly wishes me to do so I will not touch on those.
§ Mr. Mitchison
I should have had to call attention to the fact that all the funds could be lent to a parish council.
§ Mr. Barber
If the hon. and learned Gentleman would like me to deal with local authorities I will do so.
§ Mr. Barber
I think that the main burden of the hon. and learned Gentleman's argument was that he thought it wrong that a building society should be allowed to invest in securities with a period of maturity of as long as twenty-five years. But even if a society were holding investments only to form a liquid reserve—and as I have already explained, this is not necessarily the sole motive—there would to my mind still be a good case for allowing it to hold part of its funds in something longer than "shorts," that is in stocks with redemption dates longer than five years.
I agree, of course, that the first-line reserve should be held in cash, Treasury Bills, mortgages and short-dated securities, all within the five-year period. But, as my hon. Friend the Member for Wimbledon pointed out, one can earn more in the longer dated stocks. I think it would be justifiable, without running any undue risks, for part of the reserve—always assuming that it is adequate in size—to be in- 366 vested in something longer than "shorts" so that the society need not unduly jeopardise its earning power in order to maintain the necessary liquidity. After all, this concept of what one might call "first-line" and "second-line" reserves is not peculiar to building societies. It is to be found in many institutions, and it seems to me to be a perfectly sensible and proper concept.
It is not irrelevant to consider what is the present practice. I am told that many reputable building societies have a considerable proportion of their investments in the six to fifteen year maturity range. It may be true that some societies have a higher proportion in that range than one would like to see. The effect of this Order will probably be to reduce the proportion for most societies because they will not be able to make any further investments in that maturity range, until they have built up their "shorts" to 7½ per cent. of total assets.
It is worth bearing in mind that in practice this will mean first-line liquid funds of about 10 per cent., because cash and money in the bank will not count towards the 7½ per cent. calculation and is usually, I am told, not much short of 2½ per cent. of the assets.
The hon. and learned Gentleman asked what was the purpose of giving building societies this power in certain circumstances to invest in stocks with fifteen to twenty-five years maturity. It is intended, as I explained earlier, to be used in circumstances where a society has to leave a greater proportion of its assets in the form of investments than is necessary to meet the requirements for normal liquidity purposes.
In these circumstances, societies will want to invest in a reasonable spread of maturity, as my hon. Friend the Member for Wimbledon pointed out, and I think it reasonable to say this should include securities within the fifteen to twenty-five years maturity range. This is not likely to happen at present when the demand for mortgages is heavy, nor in the very near future, but it is for the building societies to decide, as the hon. and learned Gentleman said.
Those who look after the affairs of the societies are people with special skill and knowledge, and it is worth while looking at the present position. 367 Very few societies have at present more than 15 per cent. of their assets in the form of investments. If one consults the Chief Registrar's Report for 1959, one finds that, at the end of that year, of the forty-six societies with assets of over £10 millions, only six held investments representing significantly more than 15 per cent. of their assets.
Even of these six, it is unlikely that more than one or two will satisfy the criteria set out in Article 3 (b), which authorises them to invest in Part III securities, but in principle we see no objection to this new provision, and we thought it right to include it in the Order.
Finally, I realise that the question raised by the hon. and learned Gentleman is, in the end, one of judgment. No one disputes that the investment powers of building societies must be limited. The question—in the words of my hon. Friend the Member for Wimbledon—is whether this Order gets the balance right, bearing in mind, on the one hand, the need to protect building society members, and on the other hand the desirability of not curbing unduly the activities of these societies.
This Order amply protects members against undue risks to their savings, but naturally the Chief Registrar and we at the Treasury will keep an eye on developments. If it becomes necessary, a new Order can be made at any time. I realise that the contents of this Order involve matters of judgment and degree, and, as always in such matters, there is room for differences of opinion.
I may not have completely convinced the hon. and learned Gentleman on the merits of the proposal, but I think that I have said enough to convince him that a great deal of thought and consultation lies behind the Order, and I hope that hon. Members will take the view that at any rate it deals with the problem in a fair and sensible way. I commend it to the House.
§ Mr. Mitchison
After, rather than as a result of, what has been said, I hesitate to divide the House. I beg to ask leave to withdraw the Motion.
§ Motion, by leave, withdrawn.