HC Deb 11 June 1973 vol 857 cc1165-74

12.22 a.m.

Mr. Fergus Montgomery (Brierley Hill)

I am grateful for the chance of raising this issue on the Adjournment because the situation is causing concern to some of my constituents.

Members in their remarks tonight will not be taken too much to heart by my hon. Friends who are doing a very difficult job in Strasbourg, and that we shall pass this motion with the best wishes of certainly all the Members on this side of the House.

Question put:—

The House divided: Ayes 45, Noes 0.

Some years ago people took out mortgages with the Mercia Building Society and in the agreements they signed at that time there was a clause which said specifically that the interest rate should not be increased beyond the rate of 9 per cent. per annum. In other words, the Mercia Building Society was giving its word in writing, so far as those mortgages were concerned, that there would be a 9 per cent. ceiling.

I understand that before the war many building societies had some such clause in their agreements. However, since the war this has been dropped and few, if any, building societies, apart from the Mercia, give this undertaking. I cannot understand why the Mercia Building Society has continued with such a clause, unless it is a sales gimmick to people seeking a mortgage and wanting the assurance that the interest rates payable will never rise above a fixed ceiling.

In March this year some constituents of mine received a document from the society which said: In view of the expected recommendation by the Council of the Building Societies Association to increase the rate of mortgage interest, and the probability that the new rate will be in excess of 9 per cent. per annum, I am writing to inform you that your Board of Directors have reviewed the interest charged on your mortgage. In your legal charge it states that the maximum rate chargeable should be 9 per cent., and as this is now an uneconomic rate the Society, regretfully, has no alternative but to serve six months' notice on you to repay all moneys secured by the legal charge. In practice, if you do not wish or you are unable to repay the outstanding mortgage the Society is prepared by way of a deed of variation to vary the terms of your present mortgage so that the rate decided by the Directors may be charged from 1st October 1973. The deed of variation will be prepared in this office to avoid any legal costs. Your Directors did not make this decision lightly, because they realise the concern that the proposed action will cause, but, in view of the economic climate in the country, they were faced with no alternative. I must therefore request you to let me know, at your earliest convenience, which of the two alternatives you propose adopting.

In other words, the society was telling those people that within six months they should pay off the money they owed and that if they could not do so there would have to be a variation in the mortgage agreement.

On 12th April the Express and Star published a statement from me, along with a reply from the manager of the society. The report said: An urgent Government probe into allegations that a West Midland building society has been guilty of ' sharp practice' over interest rates was called for by an MP today. Mr. Fergus Montgomery, Tory MP for Brierley Hill, has taken up with Environment Secretary, Mr. Geoffrey Rippon complaints against the Mercia Building Society, which, was formerly the Wednesbury Building Society. Borrowers are seething with anger at a decision by the society to raise interest rates above an agreed nine per cent. ceiling. The nine per cent. ceiling was provided in a clause when the mortgages were taken out. Mr. Montgomery said: 'This clause was used as a sales point to assure customers that in the unlikely event—at that time—that mortgage rates should go over nine per cent. customers should not be required to pay more. The society has now written to people who have mortgages with them saying that this agreement should now be declared void and that the rate of interest should be changed as from October 1st 1973.' Mr. J. Pollard, manager of the Mercia Building Society, said today: 'The notices I sent out did not in themselves increase the rate of interest to any member. It was a step to enable an increase to be made in the light of the current situation. Any increase to be made will be no greater than that of other borrowing members of the society and will be in line with the rate recommended by the Building Societies Association. The step taken is not, as has been suggested, a breach of contract, but an exercise of a power contained in the mortgage deed. Neither was the ceiling of 9 per cent. a sales gimmick.'

The vital words are: The step taken is not, as has been suggested, a breach of contract, but an exercise of a power contained in the mortgage deed. Neither was the ceiling of 9 per cent. a sales gimmick.

We all know that building societies have the power to call in mortgages at any time. That is a right of every building society in the country. Where I take issue with the society is on its failure to give any reason why a 9 per cent. ceiling was ever written into the agreement. The society gave a solemn undertaking to people, and it seems that it is now going back on its word.

It is not the first time the society has been faced with this situation. I am told that some years ago there were people who had 8 per cent. ceilings written into their mortgage agreements. Those mortgages were called in and higher interest rates were charged. There seems to have been little outcry from those concerned then. No doubt the people who run the society today are surprised at the anger that has greeted their action on this occasion.

It would be interesting if my hon. Friend the Minister of State could tell us how many other mortgagors there are with the Mercia Building Society with interest rate ceilings of 10 per cent. and perhaps higher. If it is true that the society is still giving mortgages with a ceiling of interest stipulated in the agreements, it is time it stopped making agreements that it either will not or cannot keep.

The society issued a statement to the Express and Star, which reported on 28th April: A West Midlands building society has hit back at an MP's reference to ' sharp practice' over interest rates. The reference was made by Mr. Fergus Montgomery, Tory MP for Brierley Hill, after a row involving the Mercia Building Society, formerly the Wednesbury Building Society. In a statement issued today, Mercia said: 'Some members may have been occasioned anxiety by the implication that the society's action was not authorised by the deed or mortgage contract. It is. This fact could, and would, have been established to Mr. Montgomery had he contacted the society. Unfortunately, he did not do so.' Mr. Montgomery called for an urgent Government probe into the society's move to raise mortgage rates to more than 9 per cent, after borrowers had claimed that a clause in their contracts provided a 9 per cent ceiling. The Mercia statement added: No communication has been received from any Government department, probably because, as a spokesman for the Building Societies Association put it, the society was well within its rights to take the measures it had taken.'

There is no mention in that statement of why the clause stipulating a ceiling of 9 per cent. had been included.

We all realise how building societies work. We realise that they have to pay competitive rates of interest to depositors to attract money to make loans to would-be home buyers.

The reason why I did not contact the Mercia Building Society was that the hon. and learned Member for Rowley Regis and Tipton (Mr. Peter Archer) had already done so. He had shown me a reply which he received from the Mercia Building Society dated 6th April 1973. The letter stated: I thank you for your letter of the 4th instant regarding my letter sent to Mr. and Mrs. Ward of 56 Bagnall Street, Ocker Hill, in which I stated that in view of the expected rise in interest rates the Society had no option but to request repayment of the loan after the expiration of six months or Mr. and Mrs. Ward could sign a deed of variation so that the terms of the mortgage could be varied. I wish to stress that I did not at that time say that interest rates would be increased, but that I expected such an increase, and from an item in the Express & Star on Monday last you appeared to be under the impression that I had increased the mortgage rate. The reasons for Building Societies increasing their interest rates is because of the shortage of funds. caused by higher interest rates being offered by other bodies. Joint stock banks arc now in competition with us for savings on their deposit accounts; local authorities are offering a higher gross interest rate than Societies. In the recent Budget the Chancellor announced a new issue of Government stock at 9½ per cent. with a bonus at maturity, plus increasing the amount of National Savings Certificates, and this action I feel was the last straw. I am sure that I express the views of most building society managers when I say that our aim is to serve the public. …

In other words, the general manager of the Mercia Building Society was passing the buck and blaming the Government. He must be unbelievably naïve to have written such a letter.

The shortage of funds at that time was due, as most people were aware, to the withdrawals from building societies because of the consumer boom which was taking place before VAT came into force on 1st April. Most of us realise the concern that building societies felt about the Chancellor's decision to make national savings more attractive. In fact, their fears and anxieties have not been borne out. The situation today is that money is pouring into the building societies. Therefore, the hasty action taken by the Mercia Building Society may not be justified in a few months' time.

While legally the society may be right, morally it is completely wrong. I deplore the ham-fisted way in which it has handled the whole business and its failure to abide by a bargain which has been struck. If any of the mortgagors who are concerned with the present dispute had broken their bargain with the society, I suggest that the society would have been very quick to take the necessary action. When is a bargain not a bargain? I suggest that is when a bargain is struck with the Mercia Building Society.

The society has done a great deal of harm to the reputation of building societies. To use a phrase used not so long ago in another connection by my right hon. Friend the Prime Minister, this is another instance of the unpleasant and unacceptable face of capitalism ".—[OFFICIAL REPORT, 15th May 1973; Vol. 856, c. 1243.]

I hope that my hon. Friend the Minister can give some guidance as to ways in which mortgagors can be aided.

12.34 a.m.

The Minister of State, Treasury (Mr. John Nott)

As my hon. Friend the Member for Brierley Hill (Mr. Montgomery) knows, the activities of the building societies are governed by the Building Societies Act 1962. That is a comprehensive measure which, broadly speaking, is intended to regulate the interests of the societies' borrowers and investors. It deals with such matters as the incorporation of societies, their powers, the duties of directors, annual accounts and notice of meetings. The Act also sets out the powers of control of the Chief Registrar of Friendly Societies over building societies.

The Chief Registrar has the power, among other things, to suspend building societies' borrowing from the public if he thinks it is in the investors' interests and to control building societies' advertisements. He also has the duty to lay an annual report before Parliament. His consent is necessary under certain sections of the Act—for example, before a building society can lend money to another building society. However, the Act does not give the Chief Registrar powers to prevent building societies from calling in a mortgage or from raising the interest rate payable on mortgages. It is only right to mention initially just what the powers of the Chief Registrar are under the existing law.

Building societies normally grant mortgages for a specified period, with the borrower paying interest and repaying capital in monthly instalments. It is his normal expectation that his mortgage will be allowed to run the full period. However, mortgage deeds used by building societies and other mortgages often provide a power to call in the mortgage at, say, six months' notice. This is the clause which was in the deeds to which my hon. Friend has referred. Virtually all mortgages granted nowadays by building societies include a provision to permit the societies to vary the rate of interest charged on a mortgage. This has not always been the case. It was common for mortgages arranged in the immediate post-war period to be at a fixed rate of interest.

If societies wanted to increase a fixed interest rate, their normal practice was to call in the mortgage and then, as it were, reissue it at a higher rate of interest. The Mercia Building Society is, in the way it is currently behaving, following that kind of practice. This is clearly a cumbersome procedure, and this was one reason for the introduction of the present system whereby building societies have power to vary mortgage rates at their option.

Besides fully variable and fixed rate mortgages, a number of building societies have mortgages under which they are empowered to alter mortgage rates within specified limits, and the Mercia society is one of the small number of societies which still have this kind of mortgage outstanding. There are not many of them and the total involved is relatively small beside the approximately 4 million or so of all building society mortgages outstanding. I understand that most if not all building society mortgages nowadays are of the fully variable interest rate type.

My hon. Friend asked me to comment upon other maximum rate mortgages which he believes the Mercia society might have issued recently. The information available to me—but I will look further into the point—is that the society issued mortgages with a limit of 9 per cent. until 1967 and then until January 1969 issued mortgages with a limit of 10 per cent. My information—but I will check further since my hon. Friend said that mortgages have been issued quite recently with this kind of provision—is that no mortgages with a fixed limit have been issued by the society since January 1969. It may be that my hon. Friend has drawn an important piece of information to my attention and I will check it.

The burden of complaint against the Mercia society, which my hon. Friend clearly set out, is that many of the society's mortgage deeds state that the maximum rate of interest chargeable is 9 per cent. But I understand that the society has decided that this is an uneconomic rate and has served six months' notice with mortgagors to repay their mortgages in accordance with the provision in the mortgage deed. Alternatively, if the mortgagors concerned do not wish or are unable to repay the outstanding mortgage, the society has given them the option to vary the terms of their present mortgage by way of a deed of variation so that from 1st October 1973 the mortgage rate charged will be decided by the society's directors. But the society has made it clear that it is prepared to draw up the deed of variation so as to avoid legal costs for mortgagors.

My hon. Friend's constituents clearly believe that they have been hard done by. I have read the letter which the society has sent to mortgagors. I can quite see that it must appear to them that the society has voluntarily set itself a limit within which to vary the interest rate and now has decided to call in the mortgage because of a change in circumstances. This is obviously causing great concern to my hon. Friend's constituents. I can understand their feelings.

I have to point out that because of its responsibilities to its mortgagors any building society has to bear in mind also its responsibilities to its investors. The House will be aware that although savings deposited in building societies can be withdrawn at quite short notice, the societies customarily advance money on long term, often for 20 years or more. To borrow short and lend long in this way, a society must retain its flexibility over a course of time to keep its investment rate in line with the rate paid by its competitors. Otherwise a society will find that it is losing its funds and in the long run this could result in serious embarrassment for borrowers as well as investors with the society. Unless a society increases its mortgage rate commensurate with its investment rate, it will operate at a loss. This is clearly something which no responsible building society could tolerate.

Mr. Montgomery

The crux of the matter is that this building society gave a guarantee to these people. I have already explained that it previously gave another at about 8 per cent. It obviously found this was wrong. Why is it continuing with a ceiling interest rate? In his investigations, did my hon. Friend get any explanation why the society has continued to do this? We have had no explanation in the Midlands from the Mercia Building Society.

Mr. Nott

My information was that these maximum rate interest mortgages had ceased being issued by this building society in 1969. If the Mercia Building Society is still issuing that type of mortgage, I will look into it and consider the matter. I certainly give that undertaking. When I came here tonight I was not aware that any maximum rate interest mortgages had been issued by the society since 1969. I will check this point.

My hon. Friend's constituents clearly feel aggrieved by what they regard as the high-handed attitude of the society con- cerned. There is, no doubt, room for argument about the manner in which the society confronted its members with the proposition it put to them. I have read the letter and I think it could have been more appropriately worded.

But on the other hand, as I have pointed out, any building society must have regard to the general position of interest rates and take steps to retain its funds while at the same time striking a balance between the interests of its investors and borrowers, The Government have no powers to intervene in this dispute between the society and its mortgagors and I am sure that the problem can be resolved only by the parties concerned.

I understand that there was a meeting between representatives of the mortgagors and the building society tonight. I have not heard what happened at that meeting. My understanding of the latest position—this information comes to me from a Press release to the local Press issued on 9th June—is that the Mercia Building Society has made certain suggestions which were contained in the Press release, in which it says that the minority of the borrowers who have not already accepted the Mercia's proposals are invited to do so on the basis that the interest rate will be increased to 9 per cent. on 1st October but no further before 1st April 1974. This is the proposal which I understand has been made by the society to a group of those who are complaining about its actions. I very much hope that out of these meetings some satisfactory compromise arrangement will arise.

I fully appreciate the concern which has been expressed by my hon. Friend's constituents and which he has echoed, and I sympathise with the people concerned. But the Government have no statutory powers to intervene in this dispute and in the last resort I am afraid that there is only a legal remedy which is open to the mortgagors themselves. I naturally hope that some reasonable compromise can be arrived at between the building society and the mortgagors as soon as possible.

Question put and agreed to.

Adjourned accordingly at fifteen minutes to One o'clock.