§ Order for Second Reading read.
§ Mr. Speaker
Before I call the Minister to move the Second Reading, I must announce to the House that I have selected the reasoned amendment in the names of the Leader of the Opposition and his right hon. and hon. Friends.
§ The Economic Secretary to the Treasury (Mr. Ian Stewart)
I beg to move, That the Bill be now read a Second time.
The story of British building societies has been one of success and of national achievement over many generations. They have helped millions of people to buy their homes. Currently more than 25 million of our fellow citizens use the societies for their savings. Indeed, at the outset I should declare that I have a share account and a building society mortgage, and I suspect that the same is true of the majority of hon. Members. The societies have promoted their traditional purposes of thrift and home ownership for nearly 200 years. The main purpose of the legislation before the House today is to enable them to continue to develop and prosper in a world which has changed a great deal since the societies came into being at the end of the 18th century.
The Bill is the most far-reaching legislation on building societies for more than 100 years, since the Building Societies Act 1874. There has been amending legislation since, notably in 1894, 1939 and 1960, but the fundamental structure of the 1874 Act has survived until now, and the consolidated Act of 1962, which is now in force, still bears a clear similarity to it.
But time has moved on, and as the societies themselves have changed since their humble beginnings, so has the market place in which they operate. Individually, the largest societies are now among the great institutions of our land. Collectively, the societies represent a major influence not only on the housing market but in the financial system as a whole.
In today's fast-changing markets, societies need to be able to offer a wide range of facilities to an increasingly sophisticated public if they are to continue to compete effectively. New technology and greater customer awareness are posing a new challenge for all financial institutions, but I believe that, by allowing the societies more scope, we will not only enable them to develop their business but will bring extra healthy competition into housing and finance.
Seen from today's perspective, the existing legislation contains restrictions that no longer make sense either in commercial or in prudential terms. For example, although societies can arrange insurance on a borrower's garage, they cannot obtain cover for his car. They can supply him with a valuation report by a staff valuer, but it cannot be extended to a full structural survey. There are many other such limitations which, as time has passed, have come to seem increasingly illogical.
Many technical provisions of the old legislation have simply become out-of-date, reflecting neither the sort of institutions that societies now are, nor the corresponding 593 legislation for companies that has been passed in recent years. Some provisions are entirely anachronistic. It is safe to say that we no longer need a prohibition on balloting for mortgages to see which member will be lucky enough to get the next advance. Nor need an officer any more put up personal security for the funds in his charge, rather as though he were treasurer of the Christmas club.
Such considerations have led us to conclude that completely new legislation is needed, not just another in the long line of amending Bills. Therefore, I do not apologise for the fact that the new Bill is large. Beside providing new powers for the societies, it thoroughly modernises their legislative framework, and incorporates many of the provisions which have already been enacted for companies in the Companies Acts of the past 25 years. Before embarking on such a fundamental revision, we thought it right that there should be a full process of consultation. Since the Government's Green Paper was published nearly 18 months ago, we have received and considered a wide range of comments which have been of great assistance in formulating our proposals. On some matters, consultation was not completed in time for inclusion of the necessary provisions in the Bill, and one or two are still under consideration, and on these I propose to bring forward amendments in Committee.
Although the Bill marks a fresh start in terms of building society legislation, I should at once say that its primary theme is continuity based on a successful formula. So the basic function of providing loans for house purchase from the savings of members will continue to form the core of building society business. But the Bill is designed to allow considerable diversification around that central theme. Societies will be able to provide a much greater range of services, but the emphasis will still be on their primary function.
Some flexibility has been deliberately included in the Bill. As time goes by and in the light of experience, the specific powers and the quantified limits placed on them may need revision. Therefore, the Bill provides for some of those aspects to be amended, within limits, by statutory instrument, so that necessary changes need not be shelved until a place for primary legislation can be found in the busy parliamentary timetable.
The new powers that societies will have fall broadly into two groups—those that involve the balance sheet, mainly in the form of new types of lending and other assets, and those that involve the provision of new sorts of services.
The commercial assets of a society are defined as all its assets other than fixed assets and its liquid funds, and they are divided into three classes. Each class is subject to quantified limits, which will be variable so as to provide for some further evolution; but again only within limits, since there comes a point when extension of the permissible proportion of the new types of assets would no longer be consistent with the basic purpose of societies, and where fresh primary legislation would be appropriate if further change was proposed.
Class assets correspond to the principal existing mortgage business of societies. They consist of loans secured on first mortgage of property for the borrower's residential use. Such loans account for about 99 per cent. or more of present building society lending. So the requirement that at least 90 per cent. of a society's total 594 commercial assets should fall within class 1 allows ample scope for developing other business. But the 90 per cent. requirement will ensure that the great bulk of building society lending continues to be of the sort traditionally done by the societies. I should add that the Government still intend that class 1 should include loans secured on shared premises such as houses split into two flats, one of which is occupied by the owner, or corner shops with flats above them.
§ Mr. Peter Viggers (Gosport)
I apologise for challenging my hon. Friend on what may appear to be a detailed point, but can he give us any idea of how the Government will interpret the division between the part of a premises occupied by the proprietor and the part not occupied by him? Do the Government expect that there will be a restriction on lending on business premises only 40 per cent. of which are occupied by the person who seeks the loan? Do the Government have a percentage in mind?
§ Mr. Stewart
We have in mind a figure of 40 per cent., which should allow for shared property between domestic uses, allowing for part of the premises to be in common use. A similar percentage would apply to commercial uses.
The balance of up to 10 per cent. of a society's commercial assets will be available for other purposes. In principle, the whole of that figure may be used for what are defined as class 2 assets, but no more than half of it—or 5 per cent. of total commercial assets—may be devoted to the essentially riskier type of assets which fall within class 3.
Class 2 will consist of other lending secured on mortgage. Some such lending is open to societies now—for example, lending to housing associations or other bodies corporate. But it will also cater for lending on second mortgage. The ability to participate fully in shared ownership schemes and the greater scope for index-linked loans will enable the societies to contribute more effectively to the development of new forms of finance for housing and home ownership.
Class 3 includes the remaining assets which it will be permissible for societies to hold, including the share capital of subsidiary or associate companies, lending without mortgage security and the ownership of residential land and buildings. The last of these represents an important extension of the capacity of societies to participate more actively in the provision and rehabilitation of housing and in projects involving housing associations and local authorities. My hon. Friend the Under-Secretary of State for the Environment will have more to say about that when he replies to the debate.
The new power to lend without the security of first or second mortgage will allow people to borrow from their building society for other purposes, for example, to meet the expenses that inevitably go with buying a new home, such as carpets, curtains and furniture. It will also enable the societies to offer a more comprehensive banking service. To encourage societies to spread their business and their risk in this new area of lending there will be a limit of £5,000 on class 3 loans to any individual. Because of the need to ensure that a society has sufficient depth of management to undertake class 3 lending or the ownership of land, these powers will be exercisable only by societies with at least £100 million of commercial assets.
The 1962 Act did not address itself to the need for societies to maintain adequate liquidity, merely referring 595 to the investment of what is called "surplus funds". In the more competitive market conditions of the present day the legislation needs to be more explicit about the function of liquid assets. At the same time it provides that the proportion of total assets that may be held in liquid form should be limited to one third, the purpose of this being to ensure that the balance sheet of a society reflects its principal purpose and that its capital should not be used to support the conduct of a money market business for its own sake.
For a similar reason a limit is also placed on the other side of the balance sheet in respect of the proportion of liabilities that can be raised from wholesale sources. The 20 per cent. limit on such funds should allow societies adequate scope to increase their wholesale borrowing, but it means that they must continue to raise money primarily from individual members. Not only is this in tune with their own traditions, but experience shows that a solid funding base is essential for the prudent management of deposit taking institutions.
I have already alluded to the anomalies and inconsistencies in the range of services which building societies can offer under the present law. The Bill includes a new and specific list of what they may do, enlarging their scope to compete in the provision of services related to both finance and housing. In addition to more comprehensive money transmission and banking services, they will be able to handle a wider range of insurance and investment matters. New opportunities will also be open to them in the housing market to own estate agencies and to provide structural surveys as well as valuations. The existing prohibition on conveyancing will be lifted, although, like other institutions, societies will have to comply with rules to be laid down by the Lord Chancellor.
With more institutions expressing interest in entering the housing market, it makes sense for the societies to be able to offer other lenders the benefit of their own skill and experience as managers. The societies will thus be able to engage in property management and to manage mortgages. And as more people now move home from one country to another in Europe, it is right that societies should no longer be prohibited from operating elsewhere in the European Community.
The use of the further powers contained in this Bill will clearly expose building societies to new risks with which they will be unfamiliar. While the prime responsibility for protecting their reputation for soundness will continue to rest with the boards of the societies themselves, we certainly need to strengthen and modernise the arrangements for their prudential supervision as their business becomes less restricted. Although the problems that have arisen in relation to building societies in recent years have not been unduly serious, we must not neglect the need for their proper supervision. And the supervisory system for the societies must reflect and respond to developments elsewhere. The Government are committed to providing for the first time a comprehensive framework of regulation that maintains confidence in the financial sector as a whole. My right hon. Friend the Chancellor of the Exchequer published his White Paper on banking supervision earlier this week, and the Financial Services Bill is published today. The prudential provisions in the Building Societies Bill are therefore part of the Government's approach to the supervision of financial businesses in general.
§ Mr. John Fraser (Norwood)
My understanding of the Bill is that building societies will be able to establish subsidiaries that will operate in other member states. Will the Economic Secretary to the Treasury confirm that the class 1 asset restriction—lending on first mortgages for houses in the United Kingdom—will not be affected? If money is to be raised for lending overseas, will it have to be raised overseas as well as disbursed overseas?
§ Mr. Stewart
The subsidiary that is operating will need to raise foreign currency in order to lend in foreign currency. Except for a marginal mismatch, that matter would be taken into account by the prudential supervisor.
Accordingly, under this legislation we propose to establish a Building Societies Commission to exercise and extend the functions at present carried out by the Chief Registrar of Friendly Societies. The Chief Registrar himself will become the first chairman of the new commission, which will include people with suitable experience outside the public service, and the supervisory staff of the registry will be strengthened. In parallel with this, the commission will have new powers, based on the Community requirement for prior authorisation of deposit taking institutions.
The main power of the supervisor will rest in the granting and revocation of authorisation and in the imposition of conditions on it. The Bill sets out criteria for prudent management, against which the commission will be able to measure the performance of a society's board. There will also be statutory powers for the commission to obtain from societies the information necessary for supervision, which will be treated as confidential and may be shared with other supervisory authorities only in strictly defined circumstances. And in line with what my right hon. Friend the Chancellor of the Exchequer announced on Tuesday in the case of the banks, we are proposing to make it a criminal offence to provide false or misleading information to the supervisor.
§ Mr. Jim Craigen (Glasgow, Maryhill)
The Economic Secretary to the Treasury has referred to the new commission. What will be the residual position regarding industrial or corporate societies and friendly societies?
§ Mr. Stewart
I shall be pleased to clarify that point. The Registry of Friendly Societies will continue in being for all of its other existing purposes. The commission will be established only for the purpose of supervising building societies.
New provisions relating to the preparation of the accounts of building societies and the duties of auditors are also included in the Bill. Following the issue of a consultative paper in the summer by the Registry of Friendly Societies, the accounting and control provisions have been brought up to date, and the Government will bring forward appropriate amendments in due course covering a number of further changes which have now been decided. Each year the auditors of a society will have to make a report to the commission, sent in the first instance to the board, on whether the society has complied with the statutory requirements for accounting and control systems. Communication between auditors and supervisor has long taken place, but we shall be introducing measures to permit dialogue between the two on a similar basis to that envisaged for the banking sector.
Since many of the supervisory provisions in the present Bill have been drawn up in parallel with the proposals on 597 banking supervision and financial services, amendment will be necessary on certain points to reflect the development of policy. For example, detailed provisions will be introduced for appeal against the supervisor's decisions on authorisation to reflect the system as it will in future apply to banks; and adjustments will be made to the provisions governing disclosure of confidential information between supervisors in line with the Financial Services Bill.
§ Mr. Tim Smith (Beaconsfield)
My hon. Friend referred to the position of auditors, which is dealt with in clause 76(6). It says:The auditors … shall be entitled".Does my hon. Friend intend to amend the subsection to read:The auditors … shall be requiredin certain circumstances to communicate with the supervisor?
§ Mr. Stewart
My hon. Friend draws attention to a point to which I have already referred. The Bill's provisions do not entirely coincide with what has now been announced in relation to banks, where, in certain circumstances, there will be communication both ways between auditor and supervisor. We propose to bring the two into line.
Effective management subject to appropriate supervision is the best means of providing for the integrity and soundness of the societies. But the Bill contains further measures to protect the interests of investors and to ensure that the societies give proper public account of themselves, and compete fairly and openly in the market.
As part of the comprehensive reform of the constitution of the societies, directors will have to make full disclosure of any personal interest in the business of their societies, and there will be new restrictions on loans to directors and their families in line with provisions already enacted for banks.
We propose to put building societies and banks on an equal footing in respect of exemption from the Consumer Credit Act. At present, the societies enjoy exemption from that Act in respect of all their mortgage lending, but under this Bill such exemption will be limited to first mortgage loans for the purchase, improvement or repair of property, and an early opportunity will be taken to enact a similar provision for the banks.
Anxieties have also been expressed about the way in which building societies might exploit their huge share of the housing market in the use of their new powers. We have therefore decided that they should not be permitted to make offers of mortgage conditional on the use of their other services and that the cross-subsidisation of one service by another should be brought above board by a requirement to quote separate prices for each of them.
§ Mr. Robert McCrindle (Brentwood and Ongar)
Will the Minister explain, in relation to what he just said, why, if that was considered necessary, it was not also considered necessary to remove the conditionality, as I understand it is called, in relation to some of the additional services in which the building societies are now to be allowed to participate, in particular lending on unsecured loans?
§ Mr. Stewart
The provision of services relating to housing is so closely related to the main function of 598 building societies, in which they have such a huge market share, that it puts that consideration in a much higher relief than the point which my hon. Friend raises about the rather limited provision that would apply to other sorts of lending.
At present, the building societies operate a voluntary scheme to protect investors, in which not all societies fully participate. The Banking Act, on the other hand, includes a statutory scheme covering up to 75 per cent. of the first £10,000 of any investment, and we have felt it right that the societies should also be required to provide a similar level of protection by statute. They will, in addition, be given the power to provide a higher level of protection by entering into voluntary arrangements, if they so wish.
Throughout their existence, the constitution of building societies has been based on mutual ownership. This Bill is based on the principle that, as long as the members of a society so wish, its mutual status should continue. But mutuality in the conditions of today is not without its problems. It can, in particular, cause difficulties of accountability when applied to institutions as large as some of the major societies are today.
The Bill therefore contains a series of measures designed to enhance the opportunities for member participation and to make the mutual system work more efficiently. The rights of members to vote on resolutions have been overhauled and the extent to which voting rights can be restricted is limited. The election of directors by members is made mandatory, and members wishing to stand for election will be able to circulate statements in support of their candidature. The rules for co-option and proxy voting will be tightened.
§ Mr. Richard Ottaway (Nottingham, North)
While I welcome the protection envisaged in the Bill for investors in and members of building societies, the measure makes little reference to protecting building society borrowers. What does my hon. Friend propose to do about abuses by building societies, say, of the introduction or use of penalty clauses in mortgages, the portability of mortgages and the way in which building societies set their interest rates? Does he propose to introduce any regulations or to amend the Bill in those respects?
§ Mr. Stewart
I do not have such amendments or regulations in mind. With increasing competition within the building society movement and between building societies and banks, those building societies which seek to impose unacceptable conditions on the lending they make are not likely to get the business of my hon. Friend and those who think like him.
§ Mr. Christopher Hawkins (High Peak)
Building society borrowers need a guarantee that they will be charged the market rate of interest on their mortgages after they have become locked into them. The Halifax has cut its interest rate for new borrowers but not for existing borrowers.
§ Mr. Stewart
I appreciate my hon. Friend's point, but I do not think it would be proper to set out in legislation for any group of companies or institutions the precise way in which they should set the terms of their lending, and we have no plans to do so in this measure.
§ Mr. Peter Pike (Burnley)
The question of protection and proxy voting will be vitally important should a building society ultimately move forward to incorporation. 599 There is fear that there will be abuses of the present proxy voting system. Will the safeguards to which the Minister referred ensure that on any of those matters the members will take the decisions and the decisions will not be taken for them?
§ Mr. Stewart
We are anxious that all decisions are properly taken by the members on mergers, conversion or any other matters to do with the ordinary routine business of the society. The measures that we are suggesting for proxy voting will tighten up the procedure and make it less open to any abuse of the kind about which the hon. Gentleman is concerned. I hope that that will be the result of the provisions that we are bringing forward.
Two important constitutional issues which have attracted much comment are those of mergers and conversion to companies. Again, we are providing for increased participation by members before any such change can be implemented. In addition to the 75 per cent. majority of investors voting, any proposal for merger or conversion will also require the approval of a majority of borrowing members voting so as to protect the interests of those with mortgages. When a merger involves a society being absorbed in a much larger one, there is to be a minimum vote required of 20 per cent. of all its members.
Despite these safeguards, some directors of smaller societies have expressed misgivings about the plan to allow a society which sees advantage in a merger with another to put its case directly to the latter's members, even if its board does not agree. I recognise their worries and we are considering some detailed amendments to the procedure, including tying it more closely to annual general meetings rather than to special meetings. But I am sure that it would be wrong to allow an unresponsive board to insulate itself entirely from commercial pressures against the wishes of the shareholders.
Equally, I am convinced that it would be wrong to forbid the members of a society to make a decision that it should incorporate, if that is their clear wish. Along with the Bill, we published a consultation document on the procedure for conversion, since the technicalities involved are complex. But the principles are clear and simple. We need to prevent the movement of speculative funds from one society to another in search of easy profits, and to protect the rights of members in societies undergoing conversion without giving them an incentive to convert purely to capitalise on their stake in the reserves.
Furthermore, during the first five years of a former society's existence as a company, no single shareholder will be able to hold more than 15 per cent. of its capital. The provisions we propose should ensure that a society is converted into a company only if its members clearly wish it to evolve beyond the constraints of the building society legislation, and that, if it does so, it would be able to convert in a manner which does not involve surrendering its independence.
The Bill gives the building societies important new opportunities to respond to the needs of their customers today and to plan for the future. Our purpose has been to provide a framework in which each of them can develop in the way it judges best, while always retaining the essential characteristics on which their reputation has been based.
Of one thing I am sure, and that is that there will still be room for societies of all sort—large and small, national, regional and local—so long as they provide 600 the services that the public want. Indeed, the Bill should not diminish but enhance the diversity of the building society movement, which has been one of its greatest strengths.
The societies have given outstanding service to the community since the time of our grandfathers' grandfathers, and this legislation will enable them to continue to do so for many years to come. I commend the Bill to the House.
§ Dr. Oonagh McDonald (Thurrock)
I beg to move, to leave out from "That" to the end of the Question and to add instead thereof:this House declines to give a Second Reading to a Bill which extends to building societies powers to engage in unsecured lending and commercial investment which may lead to their failure to maintain their commitment and responsibility for increased housing finance; weakens this commitment by the facility for societies to become public limited companies with only a commercial interest in housing finance; creates the risk of United Kingdom and foreign financial institutions taking over smaller societies; increases financial risks without substantially new statutory means of control; and reduces public accountability.When appearing on a television chat show in May 1983, Clive Thornton, the then chief general manager of the Abbey National, described the building societies as the highest form of Socialism. If that were wholly true, we could understand the Government's enthusiasm to introduce a Bill which, over a period of time, could fundamentally change the nature and status of the building societies. We do not totally accept that description of building societies, but, as the Minister has said, the societies have performed an important service for a long time by providing a stable system of housing finance.
The fact that mutual organisations are non-profit making has enabled them to fulfil social and housing needs, as well as maximise their profits. That feature differentiates building societies from profit-making companies. We may come to regret the fact that within five or 10 years building societies, as a mutual sector focusing on housing needs, could slowly disappear.
The Bill has been introduced in response to pressure from some members of the building societies movement, especially the large building societies, in particular, the Halifax and the Abbey National. Some of the changes proposed in the Bill are unnecessary and could detract from the main purpose of fulfilling the housing need. We do not oppose the principle, but we are concerned about the possibility of building societies being converted into public limited companies.
I said earlier that we were anxious about the publication of the consultation paper. The Minister has said that the process of conversion from a mutual to a public limited company is complex. His recent experience in that area has not been entirely happy. Therefore, the consultation document should have been published earlier and we should not have to wait until the end of the proceedings on the Bill to analyse and debate the clauses that will allow building societies to be converted.
I emphasise that the Opposition are opposed to allowing building societies to convert from mutuals into public limited companies. We do not consider that that move is necessary. We believe that it would bring about enormous changes in the building society movement.
In the City the proposed legislation has stimulated great interest in building societies. The reasons are obvious. 601 Building societies have 26 million customers and 7,000 branches. Interest has been shown by various financial institutions, to the surprise of the deputy secretary general, Mr. Mark Boleat, who, in the Financial Times of 7 December 1985, admitted:It is clear that there are many predators around who want to get their hands on building societies and their branches.It is perhaps a little late in the day for the Building Societies Association to recognise the implications of the big bang that will occur in 1986.
I am aware that the Minister has tried to build safeguards into the process of conversion, but it could lead to mergers. Building societies could become even more dominated by a few large societies, which may then convert into public limited companies. One or two societies have already expressed the wish to become public limited companies. They could be then taken over by other financial institutions, and the result would be large financial conglomerates whose main business would no longer be housing finance.
If societies become large financial institutions, they may be anxious to retain a higher cash ratio, which could have implications for foreclosures on mortgages. The House will know that the building societies have an excellent record; the number of foreclosures is small. As constituency Members, we are aware that building society managers are often anxious to assist mortgagees to retain their mortgage, despite difficult financial circumstances or a family crisis. I hope that the Government have properly considered the long-term future.
§ Mr. Tim Smith
Is there any evidence that the clearing banks, which are now quite big in that market, foreclose more often than the building societies?
§ Dr. McDonald
The Minister should be able to answer that. We want to know whether that has been considered in the formulation of the Bill. Both sides of the House are anxious for a stable system of housing finance to continue, and no one would wish for an increase in foreclosures. We wish to know whether the Minister has made any comparison and what the future possibilities are.
The changes in the building society movement could lead to an increase in the market for secondary mortgages. Those are not so attractive in Britain as they are in America, where there is a fixed rate of interest on mortgages. However, there could be an attractive market here, because it is a safe method of lending. If that market increases, what protection will there be in the legislation for the borrower? Have the Government considered that eventuality, which is important for the future of housing in Britain?
§ Mr. Ian Stewart
It would be for the borrower to ensure that the terms of a second mortgage were suitable. That applies whether it is offered by a building society or by any other lender.
The hon. Lady also mentioned that there might be more foreclosures or a different attitude to borrowers if there were a merger or a conversion into a public limited company. I emphasise that the new provision means that at least 50 per cent. of borrowing members would have to vote to approve any change, such as a merger or a conversion. That would place the onus on those proposing a different corporate structure or ownership to satisfy the 602 borrowers that they would not be placed in a worse position. That could be a difficult task. The borrowers would have a new power, through their votes, to exercise their judgment as to whether they wanted such a change. They would not be going in with their eyes closed.
§ Dr. McDonald
I appreciate the Minister's remarks about that provision. However, we wish to be reassured that the onus is on the societies to make clear to the borrowers the implications of any change in structure.
I believe that the Minister misunderstood my point about secondary mortgages. The hon. Gentleman referred to second mortgages. A secondary mortgage is when a parcel of loans is sold off to another company. Perhaps the Minister could reply on that point.
There are two or three points to be made about unsecured lending. First, Labour Members do not see the necessity for another source of unsecured credit. As anyone who walks down the high street knows full well, there are already many sources of unsecured credit. It is not necessary for building societies to provide it as well. In fact, the Consumer Association said that only a quarter of building society members whom it surveyed were interested in that particular facility being provided.
§ Mr. John Watts (Slough)
The hon. Lady says that in a survey only 25 per cent. of building society members were interested in taking advantage of that new facility. Would she concede the possibility that a wider range of services being made available by building societies might well make them more attractive to a wider investing public and that that would increase the flow of funds into building societies for the purpose of their major objective, which is lending for house purchase?
§ Dr. McDonald
That is possible, but I do not think that that is the main reason for people choosing to invest in a building society as opposed to some other form of organisation.
There has been a growth in consumer credit under this Government. It is interesting to note now much that has grown. After allowing for inflation, the amount of debt outstanding in terms of consumer credit rose by about 60 per cent. between 1979 and 1984, and it now stands at over £22 billion—an enormous growth in consumer credit. The Bank of England has estimated that if building societies put half of what was allowed into consumer credit that would add another £2 billion to the outstanding debt and give them a market share of about 10 per cent.
The Minister's proposals in the Bill have been described as modest. That is a fair comment so far as it goes. However, he is no doubt aware that some of the societies are already pressing for an increase in the limits. The Abbey National's view, which was given to us this week, suggests that instead of 5 per cent. of their total assets being used for unsecured lending, building societies should be allowed to start at 10 per cent. He will also be aware that, although his proposals might be described as modest, they can be changed by parliamentary order. That means that the amount of unsecured credit offered by building societies could increase fairly rapidly over the next few years, once the Bill takes effect.
The building societies claim that they want to become public limited companies because of the necessity for raising capital which they might not otherwise be able to do, so that they can extend their services in a variety of ways. It is interesting that the building societies should put 603 forward such an argument when, in fact, in the Building Societies Association's October bulletin an article is devoted to describing the success of the building societies movement in raising money on the wholesale market having been given the necessary tax changes and permission to do so by the Government during the 1980s.
It is especially interesting that it should be argued that building societies must become public limited companies in order to raise sufficient capital when not only the wholesale market but the Eurobond market proved attractive for societies. The reason for that is that the unique security which building societies as mutual institutions offer means that those looking for sterling floating rate assets will find building societies' floating rate notes particularly attractive. In other words, building societies have not found that they have suffered particularly great difficulties in raising funds over recent years; and they appear to have every opportunity to continue in that way. Therefore, we reject the argument that some building societies have put forward for wanting to become a public limited company, and we do not consider that to be necessary. We would rather that they remained in the housing sector as mutual organisations.
Let me deal with some of the issues which will affect the small building societies and investors. I am concerned that the investor protection scheme proposed in the Bill falls short of the level of protection currently available to most building society investors. I cannot see that there is any reason, particularly as building societies are entering into more risky ventures, for reducing that level of protection. I hope that the Minister will consider amendments to that in Committee. If not, the Opposition will certainly stress the need for that.
The Building Societies Commission is obviously an area at which we shall look closely since we are concerned that building societies should be properly regulated. One of the issues that the Minister must make plain in the course of our debates on the Bill is that the commission will have adequate resources. Secondly, we shall want to know a great deal more about the relationships between the commission and the other self-regulatory bodies and the proposals to regulate banking activities. In so far as building societies engage in those activities, they should come under banking regulations.
The Minister referred to the anxieties of small and medium-sized societies which fear the prospect of hostile takeovers. I am glad that he intends to respond to some of that pressure. I have received a number of such letters and I must mention one from the Essex Equitable building society which operates in my constituency. It is the fifth oldest in the country and, as it says, has grown steadily if slowly. It is a small society, but I have a particular interest in ensuring that it is protected from any hostile takeover bid; and that applies to other societies which have made their views clear. Many of the small to medium-sized societies offer either a specialist service or a service to a particular area. There is no reason why the minnows should be swallowed up by the whales. I hope that the Minister will ensure that they are properly protected.
We are glad to see some of the other services being offered by building societies in connection with house building, but we shall want to ensure that the consumer—the borrower—is properly protected against conflicts of interest while at the same time making sure that the legal profession does not have it all its own way.
604 The Opposition feel that the Bill contains proposals which in the long term could mean that the building societies movement as we know it will disappear from the scene. Its loss is something that we could well live to regret. It has served us well. It has provided for many people's housing needs throughout the country. We want to make quite sure that it will continue to do so. We are not certain that the proposals in the Bill will ensure that that will happen.
§ Mr. Christopher Hawkins (High Peak)
I am grateful to you, Mr. Deputy Speaker, for the chance to speak about this important Bill.
I, too, have certain misgivings. I would prefer building societies to stick to their last and to remain as mutual societies, friendly societies, which were set up to help people to buy their own home. What better aim could they have? I do not want to see them lending money for people to buy motor cycles or holidays abroad. I do not want to see them become banks and put up charges to make profits for shareholders.
I ask the Minister to assure me that he will carefully monitor the effects of the Bill, and will be prepared to come back with new legislation if the fears of some of us are realised and if changes occur which are not in the public interest—and in particular not in the interest of home owners.
To some, the Bill may appear merely to tidy up the current law relating to building societies. To others, its importance will lie in the extension of powers giver, to building societies so that they may, if they wish, become full-blown banks or may extend into providing services such as insurance, estate agency, conveyancing and valuation. Those aspects of the Bill merely allow building societies to do what others are already doing. They will not radically change people's lives.
There is, however, one clause in the Bill which will allow building societies to do something which is radical and different. It is clause 10(4)(a) in part III, which gives building societies the power to make advances in whichthe amount due to the society may be adjusted from time to time by reference to such public index of prices as is specified in the mortgage".Although it may seem an insignificant clause, it would be possible to write a book on what it implies. In fact, I wrote a book on what it implies, in early 1983. I would not normally seek to plug a product in this House but, as many other hon. Members wish to speak, instead of saying all that I should like to say on this complex topic, I will merely say that the book is called "Britain's Economic Future" and is available in the Library for those who would like to see it. Having campaigned for several years for index-linked mortgages to be widely available, I am naturally delighted to see clause 10 in the Bill.
The problem with the conventional mortgage is that the money payments are constant over the life of the mortgage. Therefore, in real terms they are very high to begin with and decline over time as inflation erodes their value. To buy even a £20,000 house at recent interest rates costs from £40 to £45 per week, even after allowing for tax relief. With the addition of the cost of rates, water rates, repairs, maintenance and so on, it creates a real burden for a young married couple on average earnings or less.
605 In the early years of marriage, the burden is especially high because of the need to furnish the home and because many will be raising a young family. Later, the burden will become far lighter, partly because commitments will have declined but mainly because inflation will have eroded the value of the payments that need to be made, and the couple will have had a major growth in their real living standards as the economy grows.
The present mortgage may be fine for those who can afford it, but for many the burdens are the wrong way round. The burden is greatest when they can least afford it in real terms; the burden is least when they can most afford it. Index-linked mortgages solve that problem by having low payments in the early years, which rise over time as incomes and prices rise. Under those schemes it will be cheaper to buy a council house than to rent one. It will be cheaper to buy a £20,000 private sector house than to rent the average council house. That will radically affect many people's lives.
It is true that the mortgage payments will rise over time in line with inflation, but so do rents. It is better to have a smaller mortgage payment rising with inflation than to have a larger rent which also rises with inflation. As a result of introducing such mortgages on a widely available basis we could well see, by the end of the century, over 80 per cent. of families owning, or in process of buying, their own home.
We have given people the right to buy. In the Bill we can now offer them the means to buy. Together, the changes will create a property-owning democracy on a scale never dreamt of before. In doing that, we shall have created one of the biggest social revolutions of the century. For those reasons, I commend this radical and important Bill to the House.
§ Mr. Gordon Oakes (Halton)
Like the Minister, I must begin by declaring an interest, in that I have a mortgage and a building society account. I am also an honorary—I stress the word "honorary"—vice-president of the Building Societies Association. I assure hon. Members that I get no fees and have no directorships. I attend an annual vice-presidents' dinner, but I do not think that my mind is too much swayed as a result of that.
I am very proud to be a vice-president of the Building Societies Association because the origins of building societies spring from working class people. At the beginning of the 19th century, working class people banded together for their own protection from rapacious landlords or employers who wanted not only to own their souls at work but their homes. Therefore, working class people banded together in a mutual institution to buy their own homes.
The origins of building societies are closely linked with my part of the world, the north of England. Among the greatest and oldest societies are the Halifax, the Burnley, and the Bradford and Bingley. They are northern names of northern societies set up by northern working people many years ago. As a result, building societies are steeped in the principles and practice of mutual aid. I am glad that the Bill preserves that characteristic, while at the same time bringing societies out of a straitjacket of an Act which is 111 years old this year. The Act of 1874 is the principal Act. There was an Act in 1962 but it was merely a 606 consolidating measure; it did nothing new. Building societies have been constrained by the conditions of 1874 since that time.
I welcome the Bill and I assure the House that the Building Societies Association welcomes it. I think that for once the Government have got the balance right. That is the result of three years of extensive consultation with the Building Societies Association, with building societies and with others. It is essential that we get it right, because it may well be another century or half-century at least before we have another comprehensive Act.
In the commercial climate, in competition with other financial institutions, building societies at present have one hand tied behind their back. Despite that, they have enormous popularity with the public. We are not talking simply about building societies or about the association; we are talking about people—constituents.
I have some facts and figures which may astound some hon. Members. Over 60 per cent. of all adults in Britain have building society accounts. That means about 28 million individuals. Societies have been particularly successful in attracting business from the younger age groups. A research survey in 1983 showed that no fewer than 52 per cent. of those in the 16 to 19 age range had building society accounts, compared with only 29 per cent. who had bank accounts. Well over 60 per cent. of all adults in the 20 to 30 range are building society investors. Societies have helped considerably to spread the habit of saving and efficient money management among the young. It may astound the House to know that over a third of all children now have building society accounts, although individually the amounts are small.
The popularity of building societies arises from their friendliness and the sense of belonging. People feel that they are wanted by the societies in the 7,000 outlets at which they can do their business with the societies. Those outlets are usually in the high street where the shops are. They are easily reachable. One principal reason is that they are open when people need them whereas banks are not, for example, on a Saturday, at tea time or after 3.30 pm.
The Bill brings many improvements. I shall deal with clause 14 and unsecured advances. I do not agree with my hon. Friend the Member for Thurrock (Dr. McDonald) in her anxiety on that matter. It is only a small proportion of building society funds that can be used in that way. It is right to enable a borrower to buy furniture or to pay for home improvements or essential repairs when it would be meaningless and costly to add those to the mortgage.
The Bill gives power to the building society for cash dispensing facilities. They are a doubtful legality at present, although some building societies do have cash dispensers. Most importantly, it gives power to the building society to issue cheque guarantee cards. At the moment if a building society were to give a cheque book it would be of little use without a guarantee card. To do that would almost certainly be illegal under the Building Societies Act 1874.
Clause 15 of the Bill gives building societies the power to own land for residential purposes. That is important in inner cities and it enables building societies to become what their name implies, a "building society" rather than a mere loan club. That is even more important in the concept of shared ownership. I agree with much that the hon. Member for High Peak (Mr. Hawkins) said about the burden of the mortgage being at a time when the borrower can least afford it. One answer to that is shared ownership. 607 At the moment, it would be illegal for a building society to own the rented part of that shared ownership. That would have to be avoided by various legal devices. The Bill will enable the building society to own the rented part.
I know that the Bill cannot do anything about our land tenure system but I believe that it is ludicrous. If one was to buy a back-to-back, small terraced house, or even a flat, the mechanism and the law involved in buying it is the same as if one were buying a baronial medieval estate. It is time that some Government—I hope that it is my Government—brought the whole issue of land tenure in Britain kicking and screaming out of the 14th century and put it in the 20th and 21st centuries. The power of ownership under clause 15 allows some flexibility. I want to see that, as I know from his speech does the hon. Member for High Peak.
The Bill gives power in clause 16 for the major societies to operate in the EEC. That is important today because many working people retire to Spain or Portugal and buy a villa. It is important that while buying that villa they have the help of their own building society, the one that they are used to, especially when they are operating under foreign law and in foreign climes. Such people are not tax exiles; they are rain exiles. They go away after a summer such as we have just had and they want to live abroad in order to buy sunshine. Why confine clause 16 to the EEC? Why not make it a worldwide power instead of just a European geographical area in which building societies can operate that clause?
There is also the important provision of new services. It is right that a building society investor can use his account to pay gas or electricity bills. The building society can also operate insurance facilities, foreign exchange, valuation and estate agency facilities. For example, the Leicester building society introduced a scheme a couple of years ago called Home Link. It is a pioneer scheme using computers in one's home. With the aid of a television set and telephone, one can pay bills and deal with many matters. That is a boon to disabled people because they do not even have to leave their houses in order to pay bills. That is the sort of innovation and experiment that the enabling power will encourage.
My first major criticism of the Bill is that it does not deal with conveyancing. My hon. Friend the Member for Great Grimsby (Mr. Mitchell) was let down by the Government in that matter because he withdrew his private Member's Bill on an undertaken that the Government would do something. However, on the day that the Bill was published, 6 December, the Solicitor-General told the House:the Government have concluded that there is no difficulty in principle in such institutions providing conveyancing to persons to whom they are not also offering a loan. However, the Government are not satisfied that lending institutions could safely be permitted to offer both conveyancing and a loan in the same transaction. It is therefore proposed to prohibit lending institutions from providing conveyancing, either directly or through a subsidiary company in which they hold a majority stake, to those who are also borrowing from them."—[Official Report, 6 December 1985; Vol. 88, c. 354.]That is arrant nonsense. What conflict of interest can there possibly be? The building society is obviously just as worried and entitled to ensure that the purchaser has a good title as the purchaser himself. It is lending its money to the purchaser, so there is no conflict of interest.
When I was a solicitor the practice was that the purchaser's solicitor invariably acted for the building 608 society as well. I believe that that still happens today. The building society instructs the purchaser's solicitor. I can see that there could be difficulties if, for example, a building society had foreclosed and was selling the house through a loan to another purchaser, but rules can be made and drawn up to deal with that matter. It is nonsense to say that building societies should not have the power to provide conveyancing services.
My hon. Friend the Member for Great Grimsby was temporarily out of the Chamber, but as he has now returned I shall repeat that I feel he was let down by the Government on the undertaking that they gave him. I was convinced that the Bill was the vehicle by which that undertaking could be carried through. It is obvious from the Solicitor-General's statement that that is not the case. No doubt, my hon. Friend the Member for Great Grimsby will deal with that at greater length.
I am worried about building societies becoming limited companies. I do not think that many will want to do that. There may be a need for the odd experiment in that direction but, given the constraints that the Government have rightly put in the Bill, there will be few building societies which will have a sufficient percentage of investors who will want to convert the society to a limited company.
Clauses 84 and 85 worry me. They deal with the matter of unagreed mergers. I think that I know what the Government are worrying about. Their object is to protect members from directors blocking the merger for their own ends. I stress to the Government that a building society is a mutual institution. It is not a company. Therefore, I cannot see how one can have an unagreed merger of a mutual institution of that nature.
My second worry about those clauses is that the membership list could be subject to abuse. I know about the Data Protection Act 1984, but people could obtain that membership list and use it for many purposes. It is a valuable commodity. It identifies the amount of money that people have at their disposal. That is something that commercial companies would give their right arms for. It would enable them to check the credit of particular individuals. I think that in Committee something should be done about safeguards against abuse.
The third matter that worries me is building societies' staff. If an unagreed merger is possible, there should be some way of consulting the staff. The Bill provides for the society members to be consulted, but the staff should have some say in the matter. That must be put right in the Bill.
On the subject of agreed mergers, there is no doubt that societies will continue to merge. In 1974, there were 416 building societies, and at the end of last year there were 190. In 10 years, there has been a considerable merging of building societies, and that will continue.
The smaller building societies do not have a great deal to worry about from the Bill because, as my hon. Friend the Member for Thurrock correctly said, they offer specialised services. Some offer those services geographically. They give more favourable treatment to people within their own counties. That is commendable. Other building societies look not so much to the geography of an area but to the characteristics of the residential property upon which they are lending. They might, for example, look more favourably on thatched houses than most building societies. Some building societies will not touch them. They may look more favourably on houses with a cellar. It has always intrigued me that a house with 609 a cellar is almost unmortgageable in many parts of the country. I do not know whether the building societies fear for the structure of the house or fear that the existence of the cellar will lead the purchaser to drink so much that he will be unable to afford his mortgage. Cellars are anathema to all but one or two building societies which say that there is nothing wrong with them.
Thirdly, a small society might specialise in a particular class of person. Some societies favoured policemen when they were in police housing. When their service was complete they needed to buy a house. That does not apply so much now because many policemen live in their own houses during their service. Another example is that of public house tenants. They suddenly find when they are in their fifties and wish to retire that they need other accommodation and a mortgage. Some of the smaller societies specialise in that category of borrower.
In Committee, where I hope to serve, there will be other i's to be dotted and t's to be crossed, but this is a most useful Bill which will be to the benefit of many millions of borrowers and investors. It preserves the nature of the building societies but brings the law up to date for present and future needs. It has the broad support of the Building Societies Association and it certainly has mine.
§ 6.2 pm
§ Mr. Michael Latham (Rutland and Melton)
The right hon. Member for Halton (Mr. Oakes) has talked himself into a job with his last remarks about the Committee stage. I am sure that he will make a distinguished contribution to it. I wish to begin by echoing the same interest as he did. It is an entirely non-financial one. Like him, I am a vice-president of the Building Societies Association and also of the Midland Association of Building Societies. They are both honorary, unpaid positions.
I have been involved directly in the building industry for 18 years. I have been a director or employee of a large building company for nearly 11 years. That company has recently combined with two large building societies to assist urban renewal in decaying inner city areas.
My general attitude to the Bill is one of cautious welcome. I was never especially enthusiastic for new legislation in this sphere. The British building society movement is the envy of the world for the efficient and economic manner in which it helps millions of people to buy homes of their own. It has a special place in the affections of our people. They see it as a completely safe investment. I shall say more about that, as the Bill contains some disappointing provisions in that regard.
The public do not regard building societies as a dodgy speculation, run by smart Alicks or City whiz kids. They see their local manager as a pillar of his community, utterly respectable and safe, cautious perhaps, and dull, even in the view of the media or the publicity conscious business entrepreneur. That reputation is to be treasured. Building societies have brought home ownership and completely safe investments to vast numbers of our fellow citizens. They have rarely been troubled by the squalid scandals which have sometimes disfigured the City of London. When building societies have fallen into the hands of crooks or incompetents, the other societies have immediately rallied round to give complete protection to the investing or borrowing public.
§ Mr. Conal Gregory (York)
My hon. Friend used the phrase "complete protection", but will he confirm that that is not the case and that building societies that have got into difficulties, such as Grays building society, did not give a 100 per cent. return to their investors? It is only marginal protection.
§ Mr. Latham
I shall deal with that point in a moment.
As a good friend of the movement, I should like to sound a firm word of warning. Yes, let us have cash dispensers, as the right hon. Member for Halton said, improve the savings schemes and compete over interest rates and terms offered to the public, provided that the high street is not filled with too many identical branches. Those changes may be necessary in 1985–86, but we should never forget that the societies' real job is to help people to buy homes. We should never forget that people expect building societies to be cautious, conservative, and even dull. There is nothing but honour in the course that has been followed for the past 150 years. Smart dealing should be left to the whiz kids. The societies do not need that type of business, and they should not be looking for the type of director or general manager who will urge it on them.
I hope that clause 14 business will be the exception rather than the rule for societies. If they have spare money, I hope that they will prefer to use it for residential or other kinds of development in inner city areas under clause 15 rather than to make too many unsecured loans for general consumer credit or activities in the Common Market.
I doubt whether it is necessary for societies to have the powers in clause 14 which enable them to offer loans to the public to buy cars or summer holidays. Surely those things can be left to banks, Barclaycard, Access, or finance companies. But if that concession is to be made to the societies, why should it be restricted to those with assets worth more than £100 million? If the power is acceptable in principle—it is limited to 5 per cent. of assets—there is no clear reason why the smaller societies should be denied it, subject, of course, to the control of the new Building Societies Commission, which will replace the registrar.
A smaller, but completely respectable and greatly respected local society, such as the Melton Mowbray building society, whose assets last year were £72.6 million and which has been helping my constituents since 1875, is as capable of using such a power sensibly and cautiously as a society with assets of £130 million. Either the power is desirable in principle or it is not. I find it difficult to believe that Conservative policy is that big societies can be trusted to behave sensibly but that smaller ones are beyond the pale. That clause will need further consideration in Committee.
There is one power in the Bill that I find utterly regrettable and that I believe should be struck out. It is in clause 84(2) and schedule 13. It has been mentioned by the right hon. Member for Halton and the hon. Member for Thurrock (Dr. McDonald). For the first time, a Conservative Government are offering us the prospect of contested takeovers for building societies. Do we not have enough bids for public companies going on at the moment? Are we returning to the 1960s syndrome of large is beautiful?
I remember the first time that, as a new vice-president, I went to the annual lunch given by the Building Societies 611 Association for its vice-presidents. The then chairman, Mr. Alan Cumming—he is with the Woolwich—started his speech to his startled audience by saying:One thing is quite certain. When we meet again in 12 months' time, there will be fewer of us.He did not mean death, the grim reaper of us all. He meant the flood of voluntary society mergers. Of course, he was correct. Whereas in Leicestershire we had a Leicester Permanent and a Leicester Temperance and then a merged Leicester, we now have an Alliance-Leicester. The Midland Association of Building Societies has lost a leading permanent member. That, at least, was a voluntary arrangement.
The Bill will allow largish authorities seeking growth at all costs to circularise the members of smaller local societies and to offer them "bonuses" to vote for a forced merger. That is not my idea of building society practice.
The Melton Mowbray building society, with branches in Melton Mowbray, Oakham and Grantham, has regularly to rebuff larger societies wishing to absorb it voluntarily. It has an excellent management team, and I wish to see it getting on with the job of granting mortgages to my constituents, not directing management effort to fighting off unwelcome embraces from larger societies.
Under the Bill, if a contested merger is unsuccessful, the same society cannot try again for another three years. But there is nothing to stop another society from doing so the next day. That means that the management of the smaller, locally based, perfectly well run society will be continually looking over its shoulder for takeover bids. That is not a proper expenditure of time for non-profit making, mutual organisations. There is no need for tooth and claw City practices in the building society movement. There are already clear and well used systems for voluntary mergers.
Several societies, other than the Melton Mowbray building society, have written to me and many other hon. Members on that matter. Indeed, the Building Societies Association is opposed to those provisions. I shall certainly seek to have them deleted at a later stage.
Of course, if a society decided to go for company status, as is foreshadowed in the Bill, that would be a wholly different matter. Obviously, the normal rules for takeovers would then apply. I find the concept of contested takeovers of mutual organisations in the interests of growth to be quite abhorrent. Surely no Conservative Member can instinctively feel that it is right for large societies to be given an effective carte blanche, sweetened by cash inducements, to harass the smaller local societies. It does not seem right that that should come from a Conservative Government. It is not my idea of Conservatism. If change is not better—to coin a phrase—it is better not to change.
My final point concerns the investors' protection scheme in clauses 22 to 28, but especially clause 25. I am disappointed with the Government's proposals and with what the building societies have agreed—that in the event of the failure of a society, investors shall be protected only up to 75 per cent. of their investment, or a maximum of £10,000.
In the past, when societies have been in trouble—my hon. Friend the Member for York (Mr. Gregory) referred to the Grays building society—or have been compulsorily transferred by the registrar because of irregularities, investors have been protected because another large society has stepped in to take over the assets 612 and the mortgage book. I believe that nothing less than 100 per cent. protection is acceptable. That can be done. Indeed, I believe that that has always been done in the past.
Money in a building society should be like a house built upon rock—safe and solid. The voluntary scheme currently operated by societies involves 90 per cent. protection, although in practice it has been 100 per cent. protection. It has worked satisfactorily, and I cannot see any reason to change it. I hope that those provisions will be altered at a later stage of the Bill's progress through the House.
The societies called for this legislation some years ago with the Spalding report and other subsequent documents. I was never enthusiastic about going to any Government for new legislation. I warned them that once the Pandora's box of legislation was opened, all sorts of gremlins and evil spirits might jump out, as in the ancient myth. In fact, the Minister's box has been mainly benign.
Building societies realise that there is some pressure for change from their consumers, and they want to meet that. They have a major and honourable role to perform in combating urban decay. The Bill certainly deserves a Second Reading, but some of us hope that it will be somewhat changed in Committee before it returns on Report. Indeed, some of us will do rather more than hope, and will seek to bring about changes.
§ Mr. Austin Mitchell (Great Grimsby)
I suppose that, like other hon. Members, I should declare an interest because, in a sense, I own the Halifax building society. I happen to share that ownership with several million other people, and at times I feel as though the society owns me, given the size of my mortgage.
Like other hon. Members, I welcome the Bill. The building societies have served the people well and have encouraged home ownership. They have made home ownership more widely available to a constantly widening circle of people. They have a long tradition of service to the public—some of us might call it Socialism in action, others might call it people's capitalism. We can quibble about the label, but the fact is that building societies have mobilised the savings of the people to serve the community and to advance the cause of home ownership. They can be proud of their record.
However, that record needs to be updated, because the societies face new competition from the banks, there are the problems of new techniques and methods, and new requirements need to be served. Therefore, there is a need for a flexible arrangement that is adequately regulated and supervised. I believe that the Bill provides exactly that.
In common with most hon. Members, I want to look at the Bill from the point of view of the problems and difficulties that it poses. Several hon. Members have pointed to the same problems. The first is the safeguarding of deposits. Through the voluntary scheme that has operated until now, deposits have been adequately safeguarded—up to 100 per cent. in most cases. It is wrong that that protection should be scaled down to bring it into line with the level of safeguarding practised by banks. That will mean less protection, which cannot be right. The current level should have been confirmed, with the banks brought up to that level, rather than the societies being scaled down to the level of banks.
613 My second reservation is much more substantial. The Bill, together with the regulations that will come from the Lord Chancellor's Department, restricts the ability of building societies to provide the integrated house buying service which they want to provide, and which is a logical and important extension of their role in encouraging home ownership. It is important to have the full ability to provide an integrated house buying service—one-stop shopping, call it what we will—to the consumer. A new generation of people and groups are buying houses who do not have the same middle-class skill of building up an orchestra of a solicitor, a building society, a surveyor and so on, and then conducting the orchestra to provide the full symphony of home ownership.
If organisations compete to provide an integrated service, that is better for the consumer. That competition can come from estate agents employing conveyancers, from solicitors running property shops—they are increasing in number, following the pattern of Scottish solicitors—or from the building societies.
To provide that integrated service was the intention behind my House Buyers' Bill of two years ago. In an attempt to divert support for that Bill from the Conservative Benches—it was striking a popular chord and was obviously a necessary measure—the Government proposed, of their own volition, that building societies, like banks, should carry out conveyancing.
On 20 December 1983, exactly two years ago, the Prime Minister told the House that the Government had decidedto introduce a Bill to enable solicitors employed by institutions such as building societies and banks also to convey houses.—[Official Report, 20 December 1983; Vol. 51, c. 270]
The Prime Minister must have believed what she was saying because she repeated it in January on the television programme "Weekend World".
In the negotiations about the withdrawal of my Bill, I asked the Government firmly to state their commitment to the promise that they had given, and they did so. On 12 January 1984, the Solicitor-General said in a letter:We are committed to legislation to enable solicitors employed by organisations such as building societies and banks to undertake conveyancing.There was no equivocation or reservation—the Solicitor-General said that the Government were committed.
The agreement which formed the basis of my withdrawing the Bill was confirmed in a written answer on 17 February 1984 from the Solicitor-General, who talked of the timewhen solicitors employed by banks, building societies and other organisations are permitted to undertake conveyancing for their employers' customers."—[Official Report, 17 February 1984; Vol. 54, c. 347.]He said for "employers' customers", not anybody else's customers or some remote organisation that the building societies do not own. That is an absolutely clear and unequivocal commitment.
The Prime Minister must have had time to consult the Lord Chancellor—the fount of all Government policy and wisdom, especially on these matters. They were honourable commitments, honourably given, on the basis of which I withdrew my Bill in February 1984. The commitments were confirmed by the Green Paper on building societies. The building societies were promised in that document and on other occasions the ability to offer 614 their customers a full, integrated house-buying service. Since then, the Law Society has roused itself into a paroxysm of fury about the prospects of building societies undertaking conveyancing. The Law Society fears the competition and the loss of revenue and money that that competition might cause.
Conveyancing has provided over two fifths of the revenue of solicitors' practices. I did not fear the Law Society's anger, because the Government clearly were not going to give way to a sectional interest, however powerful. The Government are the custodian of the general interest and do not want to give way to sectional interests. I did not fear the Law Society's anger because competition is integral and central to the Government's policy and the proposal allowed competition.
The proposal allowed a necessary form of competition because house buying and selling is an increasingly rich market. The circles of home ownership are widening and approximately 64 per cent. of the population now own their own homes. More housing is owned by occupiers and occupiers are moving house more often. House prices are increasing, and the fees are based on percentages of purchase price.
There is a rich market, in which there must be increasing competition. There is a lot of loot to share out, if I may put it that crudely, between the interested parties, and an increasing total of revenue to be shared among that competition. It is essential that the Government allow that competition.
The Lord Chancellor began to act in his capacity as the provisional wing, the political arm, of the Law Society, and started to make demurring noises. We now find that the Bill allows building societies to do conveyancing, but only under the regulations which the Lord Chancellor has rushed to announce.
Why has the Chancellor rushed to make that announcement? Does he want to assure the Law Society that all is well and that he will hold the line until the bitter end? There is no other conceivable reason for rushing out the announcement at this stage. The effect of the announcement is that building societies will be able to undertake conveyancing for other people's customers, and that is absolutely ludicrous. Is a customer of the Halifax to be told, "Well, we can do everything else for you, but we would like you to go across the road and have your conveyancing done by the Bradford and Bingley"? There can be nothing more comic that that. Alternatively, conveyancing may be done by a company which the building society does not control. That is just plain silly.
Why should there be a hands-off operation in connection with conveyancing when other aspects of the integrated service are not so restricted? The pretext for that is that there is a conflict of interest, but I stress that that is only a pretext. That is a last-minute argument dredged up by the Law Society and it has no great validity. If ever there was a profession qualified to cope with conflicts of interest, it must surely be the legal profession. Solicitors handle such matters every day and they know how to deal with them. Indeed, conflict of interest does not stop solicitors from setting up property centres. I welcome that as competition, but solicitors do not feel that there is a conflict of interest in property centres; that is for their benefit and therefore acceptable.
Where conflicts of interest do arise they can be coped with by regulations of the Office of Fair Trading. There can be proper safeguards and even prohibitions for 615 handling certain cases. There can be proper warnings, and no difficulties should arise in coping with the problem of conflicts of interest.
If by conflict of interest we mean that people should have independent financial advice, solicitors are not qualified to give that advice or legally responsible for it. Indeed, many solicitors have a vested interest in recommending clients to building societies with which they have a connection and a financial relationship. That cannot be independent financial advice. It is interesting that both Sir Gordon Borrie and Professor Farron, the chairman of the Farron conveyancing committee, have said that the pretext of conflict of interest is ludicrous. That restriction is therefore not fulfilling an honourable promise honourably given, on the basis of which I withdrew my Bill in February 1984. That makes the Prime Minister and the Law Officers look dishonourable.
I would not have thought that the Prime Minister, with her roll of honour which includes Orgreave, the head of Arthur Scargill, Liverpool and all her other triumphs over sectional interests, would want to be seen to be succumbing to the Law Society, however powerful the society and the legal profession may be on the Tory Benches and in Cabinet. The indecent spectacle of the Prime Minister giving way to such interests should not be foisted on the right hon. Lady by any party that has a real concern about her public interest and standing.
The Law Officers are also made to look deceitful. There is now a cloud of corruption hanging over the City, Lloyd's and other financial institutions and over the country as a whole, which resembles an offshore tax fiddle in many financial markets. Do we want that cloud of corruption hanging over the Government because they betray honourable promises, honourably given to an Opposition Back Bencher to persuade him to withdraw his Bill? The Government cannot want that spectacle, but that is exactly what will happen if the Government persist in the restriction proposed by the Lord Chancellor.
Competition by the building societies is necessary to maintain pressure on conveyancing prices to keep the prices coming down, to keep the market covered and to provide better service for the consumer. That provision will come with the same Lord Chancellor. What we are seeing now is a rearguard action and nothing more. Lord Hailsham is not eternal. [Interruption.] My speech might be eternal but Lord Hailsham cannot be.
I should like to make the final point about the selling on of mortgages. It is an innovation from America which is used by local government and which may well be used by financial institutions. Some financial institutions have already displayed interest in the selling on of mortgages as that provides access to capital which, in difficult times of mortgage famine, might be a useful way for building societies to raise money. It is interesting that Barclays bank and the Trustee Savings bank are considering that for their mortgages. The Chemical bank has shown an interest in buying the Alliance or the Bristol and West. I am not sure how it can do that, but there has been interest by American institutions to move into that market.
The Government have stepped in to stop local authorities selling on mortgages in that fashion without the permission of the person who took out the mortgage. That provision is made in the Local Government Bill that will come into effect in two stages, part this year and part next year. That protects people and prevents local authorities from carrying out that practice. It should offer the same 616 protection to mortgagors with building societies that is offered to local authority customers. One would not want a mortgage shunted off, without consent or consultation, over one's head in the superior cattle trading that goes on in financial institutions.
I do not echo the fears of my right hon. Friend the Member for Halton (Mr. Oakes) about unsecured credit. There is no great harm in more unsecured credit, particularly when that comes from institutions we can trust like the building societies. That is competition and is therefore desirable. That form of unsecured credit is preferable to people falling into the hands of loan sharks or hire-purchase contracts with huge rates of interest. I welcome the Bill because the building societies have done a good job in protecting people and encouraging house purchase. The Bill will allow them to do that in ways relevant to a more modern and dynamic society.
§ Mr. Eric Cockeram (Ludlow)
First, I must declare an interest. I am the parliamentary adviser to the Midshires building society, a society with strong regional links in the west midlands and the north-west. I was a director of the society some years before being returned to this place.
I welcome the Bill, although it does not do everything that one would expect or that building societies want from it. I welcome the Bill because of the contribution that I believe it will make to the nation's housing. I felt that my hon. Friend the Economic Secretary to the Treasury was not as generous as he might have been in his tribute to the building societies movement. It has been one of our great successes since the war. If only other industries had been as successful as the building societies movement. The movement has about 6 million borrowers and 25 million depositors. Building societies overtook the banks long ago as the bankers for the people's savings. Men, women and schoolchildren use the building societies. The societies have been extremely successful, and one of the reasons for their success is that they have proved to be such a safe place for people's savings.
When a building society runs into trouble—happily, that does not happen very often but it has happened enough times to cause us concern—the Chief Registrar of Friendly Societies is called in. He is rather like a fireman, who sits in his fire station waiting for the telephone to ring. If someone telephones the fire station because his house is on fire, the fireman will go out to deal with the emergency. That is the role of the registrar. When he receives a telephone call saying that the Puddlecum-on-the-Marsh building society is in trouble, he reaches for his Bradshaw, packs his bag, and goes to Puddlecum-on-the-Marsh.
Who saves the society? Who puts his money where his mouth is? Who looks after the depositors? The answer is the building societies movement, through the Building Societies Association. The association moves in staff and they reorganise the crashed society, whatever the cause may have been, and look after the depositors. There is criticism about the time that it takes to do that, but the building societies movement has always looked after the savings of the nation in those circumstances. I am by no means convinced that the Building Societies Commission will be any better than, if as good as, the present system in protecting the savings of people in societies where something goes wrong.
617 There is a second aspect of the Bill which disturbs me. It is expensive for a building society to print, envelope, dispatch and post annual reports to hundreds and thousands of its members. The Bill proposes that a depositor with a holding of £100 or upwards shall be entitled to receive an annual report. I think that the sum chosen is too low and that it should be £250. A depositor who puts money into a bank does not receive a copy of the bank's annual report. A depositor can take his money out at any time. I see no reason why building societies should be under an obligation to send reports to depositors with comparatively small deposits. Of course, any depositor is entitled to demand a copy of the annual report, which should be available in any branch of the society.
I fear that the Bill could lead us into a phase where we see many people being proposed for directorships of building societies and a substantial number of contests. The qualifications required for a director of a building society are experience and ability. I do not want to see what may be likened to political canvassing. I refer not to canvassing by politicians but to canvassing for seats on a building society's board. The public, including depositors, want people with experience and ability; they want people in whom they have confidence. I hope that the limited personal details which have to be circulated, and of which I approve, are limited to that which is proposed. I believe that the Bill goes a little too far in the scale of the details that are enabled to be circulated.
Finally, I support the comments of those who have addressed themselves to the proposals for unagreed mergers. The proposals do not amount to the sort of legislation that I would expect from a Conservative Government. The number of building societies has contracted substantially since the end of the war. About 80 per cent. of them have been subject to merger, and some no longer exist. For every five societies that we had at the end of the war, there is only one left now, and that contraction has been accelerating of late. I do not see that there is any cause to provide a further catalyst to encourage the swallowing up of the smaller regional societies, but that seems to be the purpose of the Bill.
The principle of unagreed mergers in mutual institutions is unprecedented. I do not believe that the Government have made out a case for it. The obligation of societies to make available their register of members to outside inquirers is an abuse of confidentiality and will be seen to be so shortly after the Bill, if it reaches the statute book in its present form, is enacted. Insurance companies and other financial institutions would be glad to get their hands on a list of registered members of a building society. They would use it to canvass those who are known depositors in a society. That is not to be encouraged. I do not believe that depositors wish that role to be undertaken by societies.
We should not permit steps to be taken that will encourage the takeover of the smaller regional society by the larger society. The consumer has a wide choice. The individual can make his deposit in a large national society or in his own regional society. Many people make deposits in more than one society. It is not necessary for us to provide a catalyst for further mergers. It should not be made easier to distribute the reserves of a society after an unagreed merger than would be the case with a corporate conversion, but that will be one of the effects of the Bill.
618 I support Second Reading. Like others, I hope to be a member of the Committee which considers the Bill. I give notice to my hon. Friend the Economic Secretary that there are parts of the Bill that I should like to see amended in Committee.
§ Mr. David Penhaligon (Truro)
I do not know how many Second Reading debates I have heard introduced by various Ministers over the past 11 or 12 years. I listened to the speech of the Economic Secretary to the Treasury and it was clear. The Minister was articulate, and it was obvious that he had given much thought to the Bill. However, when he resumed his place I was unaware of the Government's aim in introducing the Bill. I have heard Ministers introduce Bills with aims with which I agreed and there have been Bills introduced with aims with which I have disagreed. In this instance, the Minister seemed to have no real aim. He was not claiming that reform was required to retain building societies in our nation.
The Economic Secretary advanced a number of reasons for the Bill, some of which were amusing. Many Members smiled when he talked about balloting for mortgages. That did not seem to be a strong enough reason for introducing such an enormous Bill. The reasons that he gave for changes being required are hardly ever heard mentioned, or are never mentioned, by the societies.
During the time that I have been in this place I have rarely found myself more in accord with the speech of the Opposition spokesman. The hon. Member for Thurrock (Dr. McDonald) seemed to share my feeling about the Bill. The building societies movement is working extraordinarily well. There may be a case for some changes, but are we not digging up the roots, which have provided life for so long, to see whether we can make the plant grow quicker when we probably cannot achieve that end?
Of all the institutions that are of real value to our constituents—let us declare that they are of interest to us—it is difficult to think of one that has served us better individually, collectively and on a constituency basis than the building societies movement. The building societies have done a superb job, and it is right to put that on record. In considering the details of the Bill, I shall look with a jaundiced eye on anything that casts even a shadow of doubt on the building societies' successful role.
Some hon. Members have referred to the takeover system which, to put it mildly, seems to be rather peculiar. Clearly, there is a case for allowing building socities to merge if they wish. I do not want mergers to continue until all the small societies have been eradicated. Some of the building societies serve a useful purpose in their local communities, as at least two hon. Members have said I do not see why we should make this compulsory unless building societies are or are likely to be in financial difficulty. As I understand it, a small building society which is doing no one any great harm can be taken over against its will by one of the massive building societies, with all of its capacity to advertise and argue. That small building society can be forced to hand over a list of all its members and depositors to enable a ballot and direct mailing to take place. With some limitations, details of which I find difficult to interpret, the large building societies would be able to offer a bonus to the depositors in the small building societies to obtain their votes. Some years ago, Parliament outlawed the practice of offering 619 financial inducements to obtain votes. I have honest doubts about this measure, but I shall listen to the detailed arguments before I condemn it absolutely.
My sole criticism of the building societies is their endless desire to increase the size of their empires and set up offices in every town. It is not uncommon when travelling to any part of the country in a political or other role and talking to local people about their town to hear people say that everything has been taken over by the building societies. That is not unique to Cornwall or to Northumberland. There is a general feeling that the building societies have been a little too anxious to increase their empires and to think, for prestige reasons, that they must have branches everywhere.
The Bill could provide a new method by which the building societies could expand their empires. That might be done even more cheaply. I suspect that the capital value of the properties owned by the smaller societies is much more, in terms of hard cash, when placed under the auctioneer's hammer than the book value. I remain unconvinced, although I am not paranoid about this issue.
Hon. Members have received a brief from Abbey National stating that the society believes that it should be able immediately to start lending up to 10 per cent. of the money deposited with it and that the amount should be increased to 20 per cent. "in due course." I suspect that "in due course" means "quickly" if the Bill is passed by the House.
I can see that there is some advantage in having another avenue through which people can obtain credit by way of competition. They would be able to obtain the best deal they could find. I wonder about the thoughts behind this proposal, when a building society the size of Abbey National tells us that it wants one fifth of the hundreds of millions of pounds in its care to be used for the purchase of refrigerators, washing machines, beds, Japanese television sets, and so on. The building societies claim that that will allow them greater freedom, but they do not say that there will be a great economic advantage to the country. I can go along with the idea that extra freedom will be provided, but I am worried about the proposal to increase the proportion to 20 per cent.
§ Mr. Tim Smith
The 20 per cent. limit which Abbey National wants would cover not just unsecured lending, but all the other new activities envisaged by the building societies. If building societies are to invest in those activities, a considerable amount of capital will be tied up in them. I do not think that anyone is suggesting that the whole lot will be used for unsecured lending.
§ Mr. Penhaligon
I realise that. I have some time for the other activities in this category. I have found that the societies seem to be interested in the direct credit proposal. They will be in the fortunate position of being able to select with more skill than most the very best of creditworthy customers to whom to lend money. One suspects that they will be able to gather unto themselves some of the best businesses in a particular area. I have gathered from my conversations with building societies that some see themselves going in for consumer credit in a big way. I do not know what the legal definition of "consumer credit" is. I am not arguing with the hon. Member for Beaconsfield (Mr. Smith) about what politicians would call "consumer credit."
I listened with interest to the hon. Member for Great Grimsby (Mr. Mitchell). I recognise his valuable work, 620 but I am not sure that he has reached the correct conclusion. I am an engineer by training, which perhaps makes me as independent as I can be. I am neither a lawyer nor a financier, which is perhaps an advantage in this debate. I am not a lawyer, so I just listen. The hon. Member for Great Grimsby argued for the general expansion of conveyancing, which I applaud. It is proposed that the building societies will offer a portfolio of services but will not be able to offer all the services themselves. They will, in effect, be forced to send a person who comes to borrow money for the purchase of a property elsewhere for conveyancing. The logic behind that argument is that people could obtain independent advice.
The hon. Member for Great Grimsby accurately said that one of the new phenomena resulting from 64 per cent. owner-occupation—a wonderful statistic—is that many of the people who buy houses are not prepared to do so by family tradition and advice and perhaps by what the hon. Gentleman calls "middle class expectations". In that case, it is important for the people who are buying a property for the first time—when there is little easily obtainable advice around them—to be able to obtain some genuinely independent advice. The hon. Gentleman's point was that some of the advice that they now obtain is not independent because of the unofficial link between building societies and solicitors. There may be some truth in that. Unless the Bill includes a clause to that effect, any hope that independent advice will be provided for the most vulnerable section of buyers will cease. The Government have a considerable amount of logic on their side.
In my community there is the phenomenon of Mundic block houses—concrete block houses built in the 1920s when tin mine waste as opposed to clay mine waste was used. That waste contains a chemical that attacks cement over 20, 30 or 40 years. The simple hard-nosed truth is that properties built with that product can fall down because it turns to dust. It is difficult to find anyone who will take responsibility for one of those properties. When a house is declared "Mundic", it is the kiss of death. If that label is put on a property, a zero can be knocked off the value.
I am well aware that independent advice is crucial to people who are making what is usually their biggest ever financial transaction. By all means let us have competition and freedom, but let us ensure that ordinary, honest people can obtain the best opportunity at the most opportune moment.
I believe that we will all receive many more briefs from the building societies during the Bill's passage. I should appreciate it if the Minister would again go through that part of his speech in which he outlined the aims behind this substantial piece of legislation. I hope that the Government are not going to contract the biggest of all parliamentary diseases—that because something has not been legislated on for a long time, now is the moment to do so. I look forward to a further description of the Government's aim.
§ Mr. Robert McCrindle (Brentwood and Ongar)
My approach to the Bill is different from that of other hon. Members who have spoken. I should like to start by extending a general welcome to the Bill and in the process to pay tribute to the building societies for the service that they have given to both lenders and borrowers over a Long period. In the mind of the ordinary person, they have brought about a perception of integrity and probity. It is 621 only fair to say that a number of financial institutions have been rather less successful in that regard. However, it is now time to update the basis upon which the building societies operate, to allow them to make a greater contribution to solving the housing problems and to enable them to operate wider financial services than they are permitted to do at present. The underlying caveat to all that is that they should be permitted to do so in fair competition with others.
Speaking as a building society investor and an erstwhile borrower, I welcome a good many aspects of the Bill. By a tidying-up process, I hope that we can look forward to such improvements as an end to early redemption penalty clauses, as I believe they are called. Such clauses, it seems to me, make the transfer of a mortgage more difficult, and make flexible lending just that little bit more difficult than it need be.
Speaking as the parliamentary adviser to the British Insurance Brokers Association, an interest which I now readily declare, I think that the provision of all financial services by the building societies which they are now being enabled to engage upon should be subject to the same stringent controls as is the rest of the financial sector.
It is significant that we are debating the Second Reading of the Bill on the same day that the Financial Services Bill has been published. I think that it is crucial that the same level of protection be extended to the consumer when the building societies are enabled to move into the insurance broking sector. I believe that the very trust which people have placed in building societies, and to which I referred at the beginning of my speach, tends to lead to an assumption of expertise which in my experience is not always present in insurance at the average branch office of a building society. I very much accept and welcome the development of organisations providing a range of financial services and, in the interests of the consumer, I hope that the House will agree that they must be subject to appropriate regulation in relation to the individual services.
With regard to insurance services, the only regulation current in operation which places considerable responsibilities upon practitioners is the Insurance Brokers (Registration) Act 1977. In the proposed financial services legislation, self-regulatory organisations are to be created, which, if anything, will toughen the requirements under which insurance broking is undertaken. Under the Bill, it appears that the building societies are not to be subjected in this field of endeavour to the same level of consumer protection that is now expected of the Insurance Brokers (Registration) Act, or that will be expected of them if and when the Financial Services Bill is enacted.
Can the Minister tell me why the Green Paper proposal that new insurance services should be subject to the existing regulatory regime for insurance broking—that is to say, the provisions of the Insurance Brokers (Registration) Act—has been dropped? I wonder whether the very high repute in which the building societies are held will tend to lead people who now are likely to purchase insurance to a greater extent through their local building society branch to expect a level of consumer protection which is not necessarily involved in the Bill as drafted. I look closely at the proposals in the Bill for protection of building society investors. Unlike some of my hon. Friends, I take no exception to what is 622 proposed, but it seems to me that the level of protection offered to customers in the ancillary services into which the building societies are now being encouraged to move is less substantial than the protection offered to those who place their money only as investors in the building societies.
§ Mr. Ian Stewart
My hon. Friend is suggesting, I think, that there would be less supervision on building societies carrying out functions for insurance agents and so on than there would be on others in the same market. That is not the case. Building societies would be subject to the same provisions of the Financial Services Bill as anyone else.
§ Mr. McCrindle
That is a good assurance to have. I have to confess that I have not had the opportunity which my hon. Friend clearly has had to wade through the 165 clauses of the Financial Services Bill. If he is giving me the assurance that, after both Bills are enacted, an insurance broker and a building society offering insurance broking services would have to provide the same level of consumer protection to the customers, that is the assurance which I am seeking. If that is what he is telling me—he appears to be indicating assent—a good deal of the concern that I have been expressing can, indeed, fall away. What I seek is fair competition, adequate control, appropriate expertise and proper redress. If those exist when insurance is purchased through a broker, and if my hon. Friend is telling me that they will similarly exist when insurance is purchased through a building society acting as an insurance broker, that is reassuring.
§ Mr. Christopher Hawkins
I do not know whether I am correct, but from what I have been told, I believe that the Financial Services Bill does not cover people buying private insurance for a house or motor car. My hon. Friend might like to bear that in mind when accepting the assurance.
§ Mr. McCrindle
Yes, indeed. One of the things that I noticed—indeed, it was the basis of my intervention in the Minister's speech—is that, although it is a happy fact that there is to be no conditionality in relation to the provision of a mortgage—in other words, a building society will not be allowed to require a customer to place an insurance through the insurance broking subsidiary of a building society—there is no such undertaking in regard to the other areas into which the building societies are being encouraged to move.
I have to say to my hon. Friend the Minister that, although I welcome his intervention, which allays some of my anxieties, there remain some areas in which the fair competition for which I have called seems to be not entirely to the fore. In this area, amendments may be expected in Committee.
I wish to draw to the attention of the House a remarkable omission from the Bill. Nowhere in its pages can I see any reference to the creation of an ombudsman. A noticeable development in recent years in several spheres of financial services is the evolution of the office of an ombudsman. In insurance there has been an ombudsman for a considerable time, and I pay tribute to its enormous success. There is to be an ombudsman in banking also. If I have a choice of effecting my mortgage through a building society, a bank or an insurance company, it is remarkable that in two cases I am to have 623 access to an ombudsman, but in relation to building societies I am not. I wonder whether some consideration might be given to the desirability of this system. It appears to be here to stay, it has now been proven, particularly in insurance, and it is now trusted. That is why it is being extended to banking, and I believe that building society customers should have the same right.
I repeat that, in general terms, I welcome the Bill. My single reason for addressing the House was to see whether the same level of competition was being encouraged on insurance being sold through insurance brokers, through insurance broking subsidiaries or through building societies. I am grateful for the partial assurance that my hon. Friend the Economic Secretary has given, but there are still points to be covered, to which I shall return in due course.
§ 7.0 pm
§ Mr. Ken Weetch (Ipswich)
The Bill contains few surprises because all the principal issues in it have been well canvassed over a long period in both Government policy and discussion documents and in two recent speeches by the Economic Secretary to the Treasury.
The Bill is long overdue, and for a number of reasons. In the first place, building societies have long outgrown their current legal framework. The Act that governs them is the Building Societies Act 1962. There was nothing new in principle in that Act, because it was based on the same set of principles as the Building Societies Act 1874. Now, in 1985, even in terms of self-help, we are a world away from what society was nearly 100 years ago.
In the second place, the market in which building societies have had to operate has changed because the current financial market place is much more fiercely competitive than ever before, both in the supply of mortgage finance and in the competition for savings. In addition, the structure of financial institutions has altered. Until now, there has been a highly structured system with clear lines of specialist demarcation. We now see many more multi-purpose financial conglomerates emerging. All this has been aided and abetted by the Government's policy on fiscal neutrality between financial institutions. The world has altered and therefore the Bill, which will be on the statute book before summer, is long overdue.
One of the reasons why I look as I do is that I have read every building society debate that has taken place in the House since 1874, and they all have one thing in common. I am sorry to say it, but building societies have always been regarded with a completely uncritical eulogy in which I do not join. I agree that they have done wonders for home ownership, and all credit to them for that, but for far too long they lived in a sheltered world where the only attention that they wanted was of that uncritical eulogy. It was a closed world in which directors did not need, and were not equipped with, entrepreneurial skills of any kind. They were also a self-perpetuating oligarchy with well-used procedures of co-option from among golf club cronies. They usually reserved their energies to keep new blood off the board. I have fully assessed that close interest. In the past, the Anglia and the Nationwide, to name but two, manipulated the rule book to keep genuinely elected members off the governing body, and thereby made a mockery of mutuality.
For many years, the cartel set borrowing rates and lending rates and boards sat comfortably in between. For a good many years, any rocking horse could have been a 624 director of a building society—all they had to do was to avoid financial risks and to keep the books straight. In the cases of the Grays building society, the Wakefield building society and others, the directors did not even have to do that, so weak were the financial procedures.
That is a matter of history, and I make no comment on it. The building societies failed to use their considerable financial clout on behalf of their customers because they connived in and underwrote some of the worst professional restrictive practices in the housing market. However, that is history, times change and the more modern generation of managers and directors have, to their great credit, tried to come to grips with the modern world.
What are we saying about the Bill? Subject to the detailed process of scrutiny and amendment in Committee, the Bill should be supported in principle, because its major aim is right. It is to allow building societies, subject to proper safeguards, to provide a greater range of services for their members, and that is a correct strategy. It is also prudent to do this while keeping the building societies' purpose in the main stream of mortgage finance and owner-occupation.
The legislation is not concerned with what the Government, the bank or the building society directors want. What the punters want is the main point at issue. Building society members want and would welcome an expansion in the range of services. Over the years, as I have gone down to my constituency surgery every Saturday I have seen the queue of people waiting for money transmission services in front of the building society grow and grow. Many people want more money transmission services in building societies.
Building societies have the capacity and confidence of the public that enables them to develop such services. Many consumers look forward to the opportunity of having a package of housing services from under one roof. However, I must say a couple of words of warning to the Government. At this stage of the argument the warning is one of principle that the caution that they have rightly used may be overtaken by events in a rapidly changing financial world. I am speaking particularly about the merger provisions in the Bill and the controversial question of building society takeovers, and even more particularly about the takeover of small building societies by larger ones. The matter could go even wider if public limited companies are formed and normal commercial company practices are not followed.
I was pleased to hear the Economic Secretary offering some additional safeguard. At least he is prepared to do so. The implication of what he said was that he would speak further on these issues in Committee. The last thing that we want to do is to unleash any speculation that would make small building societies pawns in a financial game. That would be bad.
Building societies have always had a deserved reputation for soundness, respectability and public confidence. We do not want the seemingly sleazy edges of current City financial morality to invade sections of the building society movement. Are the safeguards the Bill adequate? Outside the House there is a lot of doubt about that.
East Anglia is the home of small building societies which have a few branches but which have a lot of local knowledge and flexibility. They do a great service for the local communities in the difficult area of accumulating savings. My hon. Friend the Member for Thurrock (Dr. 625 McDonald) used the quotation which I intended to use from the Financial Times of 7 December when the deputy general secretary of the Building Societies Association, Mark Boleat, warned that there were predators in this area of activity. Many smaller building societies in Britain are worried about the future state of the movement. I quote from a strongly worded letter from the Ipswich building society, which is one of the smaller building societies:It will give access to the register of members to any other building society and this we consider will create a dangerous situation. It may well be that where a small society has high reserves it would enable the much larger society to make offers to members of bonuses as an incentive for a merger and one can see a situation quickly arise where no matter what restrictions are placed on the type of takeover that they would be insufficient to provide any safeguard.I emphasise to the Minister that that same warning would be given by most smaller societies in Britain and I hope that he will take it seriously. Does the Minister have any vision of the future shape of the building society? Has he any idea of what he wants it to be? It is not in the interests of the building society movement to be dominated by a small number of large societies. It would be unhealthy and would reduce the competitive framework of the movement.
The building society framework should have as much variety as possible. I am not averse to some building societies converting themselves into public limited companies. If we do not try that form of organisation, we shall never know whether it has any advantages. Some societies could remain firmly rooted in the mutuality principle whilst other large societies could evolve new ideas. Some societies—not very many, I hope—could evolve into public limited companies.
The building society movement will run into difficulties right from the start because it is entering a new area of financial management of which it has had no experience. It will be difficult, in the short run, to recruit the financial expertise to cope with the new skills demanded within the new areas of risk that some societies will undertake. Is the Minister optimistic that the building society movement will be able to recruit the necessary expertise as it enters into engagements and activities in Europe? Will such recruits be able to undertake this type of business successfully, especially in the short run? There are doubts about that.
I pay tribute to the registry and the current registrar for the improvements in supervision and control which have been brought about in recent years. I have been a Member of Parliament for 11 years and in that time I have taken a close interest in the registry and how it supervises building societies. There have been occasions when its supervision has been amateurish and not of the professional standard to which we are entitled. I hope that the new commission will be adequately funded and that it will not be a dustbin where all the old lags can find jobs. I hope that the registry will be a highly professional and commendable organisation when dealing with new areas where there will be new problems. The investors' protection scheme will need considerable improvement.
It is encouraging that the Minister has been given a fair wind for his Bill on Second Reading, but a difficult voyage lies ahead in Committee.
§ Sir Hector Monro (Dumfries)
It is a pleasure to follow the hon. Member for Ipswich (Mr. Weetch) after his thoughtful and interesting speech, based on much historical research.
It is good to know that he gives the Bill a general welcome. However, the hon. Gentleman's overall criticism of building societies being out-of-date is unfair. Many of the societies have competent management. I agree that among the 190 building societies there are bound to be some black sheep. The dramatic fall in the number of building societies in the past 10 years from over 400 to 190 may be due to the disappearance of those societies which, in the view of their members, were not well managed. The hon. Gentleman asked how many building societies we would have but that is anybody's guess. The rate of decline in the number of building societies has dropped, and I should be surprised if the figure did not settle down.
I declare an interest in a building society and I certainly welcome the Bill. It pays a warm tribute to the building society movement, which is one of the successes of the century and which has brought home ownership to millions of people. It is right that the Government should move forward with the Bill. Societies should have an opportunity to evolve and adapt to rapid financial changes and the Bill enables them to move forward much faster than under present legislation.
In introducing the Bill, my hon. Friend the Economic Secretary to the Treasury showed the value of detailed consultation. My hon. Friend has worked very hard in the past two years and he has met many societies and the Building Societies Association. For this reason we now have a Bill that has received general welcome throughout the House.
The Bill has four main themes. The first is the removal of many restrictions on lending. The second is a widening of the range of services to bring in Europe, cheque cards, insurance, and the management of land and houses, which will bring the societies into a much closer relationship with the housing associations. We should commend the building societies that have made a special effort to provide accommodation. For example, Abbey National has done much restoration work in Edinburgh. Other societies throughout the United Kingdom have done much to raise the standard of building and show what can be achieved with competent management. The third theme is a strengthening of the safeguards within which building societies will operate. The fourth gives new rights to members and the opportunity to play an active part, which I am sure will raise the eyebrows of many building society managers.
Those are all highly commendable objectives. There is no doubt that, with a Bill of 120 clauses and schedules, the Committee stage will be a gargantuan task. However, the welcome that it has received so far should mean that the Committee stage will not be intolerably long, although many matters are bound to be discussed.
One matter that causes some anxiety is the freedom for market competition. Any competition with the banks must be seen to be fair. Building societies and banks will operate in the same market, yet the building societies will be restricted at first to using no more than 5 per cent. of their total assets. I know that the figure is likely to be increased to 10 per cent. in the foreseeable future, but even 627 that is too low. Perhaps on reflection the Government will consider starting at 10 per cent. and working up to 20 per cent. Only then would we reach something approaching fair competition. If we do not have such competition, a bull point of the Bill will fall by the wayside.
The freedom to convert to company status is likely to occur only rarely. I do not envisage a flood of applications to change from society to company status, unless the restrictions on the societies are far too tight for them to operate in the changing world of the 1990s. The Government recommend a procedure in the Bill, but the major societies believe strongly that the voting requirements for their millions of members are unrealistic. If that is the only route to company status, surely a simple majority of two thirds of the investors and borrowers in a society would be more appropriate than the complicated system in the Bill.
The key clause deals with the freedom to manage, because the key to a successful building society is the quality of its management from the top down to the counter staff. Many societies have introduced computers, cash dispensers and different business management processes, but at the end of the day building societies thrive because of the personal service that they provide to their customers. That management skill must not be put at risk because of a little coup dreamed up at an annual general meeting, where a small group of members could elect someone unsuited, unqualified and lacking in experience. Management could be at risk if we accepted the proposal in the Bill for a minimum investment of £100 and the support of 10 other members to nominate a candidate. Those figures should be substantially higher—perhaps £300 and 50 members—so that no inexperienced or bizarrely qualified candidates can be nominated or elected.
I welcome the Bill and hope that it progresses quickly through Committee. But during its passage and in the future, we must remember that the Government must continue their economic policy with the prime purpose of keeping down inflation. If they do, we shall have lower interest rates, which the building societies want. After all, lending for house purchase is their prime objective. The lower the interest rates, the more likely they are to achieve that objective.
§ Mr. Jim Craigen (Glasgow, Maryhill)
As the hon. Member for Dumfries (Sir H. Monro) said, this is a sizeable Bill. He may be over-optimistic about the time that it will need in Committee, because it is a big Bill about a movement that has had a large influence in the shaping of the social condition of our citizens and the housing conditions of our communities. I agree with my hon. Friend the Member for Ipswich (Mr. Weetch), who is not known for his uncritical approach to building societies, that we must overhaul the current legislation. However, I am wary about the methods and means of doing that and the likely outcome of some changes.
Like most hon. Members, I am a borrower and an investor in a building society, and, with my right hon. Friend the Member for Halton (Mr. Oakes), I should declare that I am an honorary vice-president of the Building Societies Association. That post is not financially remunerated.
With the hon. Member for Dumfries, I hope that the importance of mortgage interest rates will be highlighted in Committee. The liberalisation of existing building 628 societies legislation should offer the prospect of cheaper mortgages. It is not simply a matter of improving arrangements for house purchasers: at the same time, we must help members of building societies by the extension of services available.
On classes 2 and 3, I part company with the hon. Member for Dumfries, because I am worried that liberalisation may result in an exodus of resources for house purchase in the United Kingdom as against the availability of such resources in Europe and elsewhere. I can understand people wishing to go to the Continent because of our unemployment problem and our general economic climate. But I hope that not too many holiday homes and retirement homes will be financed from building society deposits that might otherwise go to the regeneration of our inner cities and to the fulfilment of the hopes of those who simply wish to purchase properties in the United Kingdom. The European Community directive on the harmonisation of mortgage credit is forcing the Government in a certain direction. However, I am wary about the exodus of funds from the United Kingdom. The Economic Secretary to the Treasury referred to the primary purpose of building societies and suggested that the legislation will lead to diversification. But the primary purpose of building societies is to encourage home ownership. I hope that that primary purpose will not be deflected becauuse some societies believe that they can get a higher return on capital by investing in high risk areas. If too much speculation of that kind takes place, the Building Societies Commission will be very busy.
I share the misgivings of the hon. Member for Rutland and Melton (Mr. Latham) about the rationalisation of building societies. In some circumstances, larger societies can provide larger services on a more economic scale if they are well managed, but there is nothing to prevent smaller building societies from providing an excellent service for their members. This is a remarkable period. We are living in a takeover society. Private sector takeovers now occur on a very considerable scale, but they do not help to improve the productivity of industry. They merely increase the profitability of some of those private companies that are engaged in takeovers. I hope that competition will not be squeezed because of rationalisation and the considerable cannibalisation of existing building societies.
I know what has been said by all the leading lights about mortgage interest relief. That is not a matter for this legislation, but the availability of mortgage interest relief creates the general climate in which building societies operate. The Fowler reviews of housing benefit, the cuts that are to be made in social services and the pressure that the Government have exerted on rent levels have swung the balance very much against those who, perforce, have to rent property. Instead of exhibiting fiscal neutrality, the Government constantly display fiscal partiality in favour of the home owner.
It is right that those who pay the standard rate of income tax should be eligible for mortgage interest relief. However, it is quite wrong that those who pay a higher rate of income tax should benefit above that from mortgage interest relief. If the Government were to move in that direction it would reduce house prices and thereby increase the opportunity for people to purchase their homes. The Government may find that their social security policy leads 629 inescapably to the logic of doing away, over a five or 10-year period, with mortgage interest relief for those who pay higher rates of income tax.
My hon. Friend the Member for Ipswich referred to the accountability and control of building societies. I need not, therefore, deal with that point, apart from saying that the Building Societies Commission may have to spend more time dealing with the small building societies simply because the larger building societies have larger audit departments. Although many building societies began life as local societies in, say, Halifax, Woolwich or East Anglia, their activities now spread from Lands End to John o'Groats. That leads to special problems about mutuality. It also leads to the problem that shareholders may be unable to attend the meetings of public limited companies held in London or elsewhere, although they would like to take part in them.
The Government have published a Green Paper on home improvements. I am glad that it relates only to England. I hope that the Secretary of State for Scotland has forgotten all about publishing a Green Paper on home improvements in Scotland, because I do not particularly like the contents of the Department of the Environment's Green Paper. My impression is that the building societies were not involved in the Green Paper consultations. I hope that the Parliamentary Under-Secretary of State for the Environment will dispel that misapprehension.
The building societies have a considerable role to play in the regeneration of the inner city areas. I hope that the development of partnerships between building societies and local authorities for the regeneration of the inner cities will be encouraged. People do not simply buy their homes; they buy a stake in their community. They are concerned about their immediate environment as well as about a roof over their head. Therefore, it is important that the building societies should be able to play a full part in helping communities to improve the environment. Home owners should feel proud of their environment.
Will the Under-Secretary of State say why Scotland is excluded from the provision for conveyancing services in clause 101? Scottish lawyers need to be watched just as much as do English lawyers, so I hope that the Under-Secretary will refer to that point.
Reform and overhaul of the legislation that governs building societies is now overdue and the Committee stage will be crucial. We must ensure that the right kind of development is encouraged and that social conditions and housing standards are improved. We must beware of some of the fashionable distractions that have emerged from certain quarters. They seek to divert resources that ought properly to be invested in bricks and mortar and in the environment.
It is all very well that the building societies should be able to do this, that and the other, and it is all very well that we are blurring the distinctions, but there is much to be said for knowing that a building society is a building society and not a bank, a financial society or something else. There comes a point when the distinction becomes so blurred that nobody is very clear about what is meant. During the Committee stage we shall try to pin down the Government in order to ensure that what emerges is better than what we already have.
§ Mr. John Watts (Slough)
I was concerned, before the publication of the Bill, about the basis on which building societies would be allowed to undertake conveyancing work. I feared that a conflict of interest could arise if an employee of a society was also allowed to undertake conveyancing work on behalf of the borrower from the society. I am pleased that building societies are to be permitted to compete for this work, but it is right that they should be excluded from undertaking conveyancing for those who borrow from them. The right hon. Member for Halton (Mr. Oakes) asked where a conflict of interest could arise, and his hon. Friend the Member for Great Grimsby (Mr. Mitchell) pooh-poohed the idea that any conflict could possibly arise.
After a lengthy meander along the Cornish country lanes, I found myself in agreement with the hon. Member for Truro (Mr. Penhaligon), who made the valid point that if we were not careful the package could be so comprehensive that the most vulnerable in house purchase might never receive any truly independent advice at any stage.
§ Mr. John Mark Taylor (Solihull)
Does my hon Friend accept that advice is seldom of the best or the most impartial or most helpful if it comes from someone who is at the same time lending the money?
§ Mr. Watts
My hon. Friend makes a powerful point.
The right hon. Member for Halton wondered where a conflict could arise. He said that the building society and the purchaser had the same interest in establishing good title to the property, and he described that as self-evident. I immediately began to wonder about the terms of the mortgage advance—the point raised by my hon. Friend the Member for Nottingham, North (Mr. Ottaway), who referred to the severe penalties which some societies impose for the early redemption of mortgages.
Does the right hon. Member for Halton or the hon. Member for Great Grimsby believe that a solicitor employed by a building society would point out to a borrower that the terms on which he was being offered the loan were onerous and that he should consider looking elsewhere? That is only one example—I am sure that I could think of others—where a possible conflict of interest could arise. The Bill gets the balance right on that point.
I did not intend to concentrate on the question of conveyancing. Like my hon. Friend the Member for High Peak (Mr. Hawkins), I welcome the Bill because it permits building societies to make an even greater contribution to the development of a property-owning democracy in Britain. The creation of such a democracy is a longstanding Conservative objective. It has been a slogan from the 1950s onward. The Conservatives, since being elected in 1979, have done the most to turn that dream into a reality for hundreds of thousands of people. We need look no further than the right-to-buy legislation to realise the truth of that. Nearly 900,000 new home owners have moved from council and other public sector tenancies into home ownership. I welcome the further proposals for extending or improving the right to buy to the sale of flats.
The concept of a property-owning democracy does not centre solely on home ownership. The programme of privatisation and the encouragement of wider share ownership are also important in this context, and a 631 provision of the Bill will allow building societies from their high street shops to offer some facilities for the sale and purchase of shares. That is a further welcome improvement, although it is a small part of the Bill.
There is no doubt that home ownership remains central to anyone's idea of what a property-owning democracy is about, and policies that encourage the further growth in home ownership are in tune with the wishes and aspirations of the vast majority of our citizens. It is interesting to note that since 1979 the level of home ownership has risen by 1.5 million, including those who have become home owners under the right to buy. Continuing to provide further means of promoting wider opportunities for home ownership should remain at the forefront of our housing policy.
While there has been enormous and commendable progress in facilitating the conversion of council tenants into owner-occupiers, there has been a gap in the total strategy, for the right to buy is not of itself a comprehensive home ownership policy. The gap exists because there has been no effective help available for those not privileged enough to enjoy a public sector tenancy which they can convert into home ownership—people who do not have the means of getting their foot on to the first rung of the ladder of home ownership.
I concede that the figures for the growth of home ownership outside the public sector show that there are still substantial numbers of individuals and families who are able to move into home ownership without any further assistance. That is not to say that it is easy for them or that they can do it without accepting a period of financial hardship. It was ever thus. No doubt most hon. Members have been through those early years of bearing the heavy burden of a mortgage.
My concern is for those who aspire, with the vast majority of their fellow citizens, to home ownership but whose incomes are too low to finance a conventional house purchase—those who find home ownership just outside their grasp at every stage. As their incomes and savings rise, so do the prices of houses, which are always just that bit ahead for them ever to turn their aspiration into a reality.
One of the best solutions for that group, for whom conventional purchase is difficult, is the further development of shared ownership. I speak from personal experience about that, from my six years as leader of the London borough of Hillingdon, where in 1978 we inherited a building programme of 900 houses and decided that our priority was to extend opportunities for home ownership. We offered those houses under construction for sale, with priority to our existing tenants and those on the waiting list who wished to become home owners, and we gave the option of shared ownership.
Over half of those houses were sold on shared ownership terms. The scheme was so popular that queues began to form outside the civic centre in Uxbridge two or three weeks before the date on which the properties were to be released. To avoid the difficulties and hardships of such long waits, we moved to a balloting system—ballots not for mortgages but for houses—as the only equitable way of determining who should benefit from the limited supply of houses that were available under the scheme.
We found almost without exception that purchasers opted to buy the maximum that they could afford. Even though we allowed a minimum of a 50 per cent. stake in 632 a flat or as low as a 30 per cent. stake in a house, people bought the maximum that they could afford. They did not look on shared ownership as a means of paying a minimal premium to get themselves into rented housing. They showed that they wanted to become home owners, and that scheme—part buy, part rent—enabled them to achieve it.
Shared ownership schemes continue to be offered by some local authorities and building societies, but on nothing like the scale that is needed to meet the potential demand. I was sorry to see the demise, because of lack of funds, of the do-it-yourself shared ownership scheme, which operated on a pilot basis a few years ago. It is right that the priorities for public sector housing investment should be improved maintenance and improvements to bring properties up to a better standard, not necessarily in new build or shared ownership, although those are imaginative schemes. I would hold a slightly different view if it were essential that funding had to come from the public sector, but that is not the case.
The Bill makes a major contribution to the development of shared ownership by empowering building societies to participate fully in such schemes. I hope that societies will take full advantage of their new powers, thus extending opportunities for home ownership to a large and new market of potential home owners.
Slough has a housing shortage that arises as a consequence of its economic success. Our unemployment rate is only 6.8 per cent.— the ninth lowest in the country. Skill shortage is the major problem facing companies in Slough. In a recent survey, 82 per cent. of local companies reported difficulties in recruiting skilled labour. Skill shortage is acting as a brake on the further economic growth of companies in my constituency. Slough has had skill shortages in the past. The traditional solution has been to import skilled labour from other parts of the country, but that solution is no longer available, principally because of constraints on housing.
The wider availability of shared ownership schemes and index linked and equity mortgages provided by the Bill could provide substantial help for unemployed skilled workers from other areas who are at present prevented from seeking available jobs in Slough and in other parts of the Thames Valley because of their inability to find a house to rent or to buy. I have in mind especially those who face the substantial gap between the value of a house in, for example, Newcastle and the price that they would have to pay for an equivalent or smaller house in my constituency. Shared ownership is one way in which that problem could be overcome. It could facilitate moving to where the jobs are and where business needs those skills. That would be good for business and for the unemployed.
It is right that the Bill establishes at the outset a limit on the proportion of lending in the non-traditional areas. I welcome the fact that the Building Societies Commission has the power to raise the ceilings. I hope that my right hon. and hon. Friends on the Treasury Bench will not be slow to amend the legislation, should that prove necessary, when we have had some experience of the legislation in practice. I believe that such amendments could be necessary, because shared ownership will become an increasingly popular form of tenure for first-time buyers and for those who are forced to move round the country for employment reasons.
By increasing access to home ownership a substantial new market will be opened up for house builders. Far more 633 opportunities could be created under that scheme than through the old-fashioned and discredited policy of pumping more and more money into public sector housing.
The Bill provides for the hopes and aspirations of thousands, if not millions, of would-be home owners to be met by the private sector through the magic of the market.
§ Mr. Peter Pike (Burnley)
The hon. Member for Slough (Mr. Watts) referred to the shortage of housing in his constituency. That is not a problem in Burnley, where there is a surplus of housing stock in the private and the public sectors. That does not imply that we do not have a housing problem—insufficient finance has created one. The growing divide between the north and the south is illustrated by the empty housing stock. So many people are leaving the area, as they did in the 1930s, because of the lack of employment prospects.
I shall follow the general tone of the debate. Most hon. Members have broadly welcomed the principle of the Bill. However, like many hon. Members, I have reservations about aspects of it. Unfortunately, unlike some hon. Members, I will not be able to serve on the Committee because I am already serving on the Standing Committee that is considering the Gas Bill. However, I shall be closely watching the progress of the Bill. I intended to consider it on Report and on Third Reading. I believe that some changes are needed and I would support some of the changes that have been proposed, but I would be unhappy if other changes were made in Committee.
I accept that building societies need to make changes and it is important that they should meet the demands of the customer. I accept that there is a need for building societies to move into the area of unsecured loans. I am not averse to the 5 per cent. limit in the initial stages, which has the ability to rise to 10 per cent. Many hon. Members may forget how recently high street banks went into unsecured lending. When I first left school and worked in a bank more than 30 years ago, most banks did not lend on an unsecured basis. The Midland bank, for which I first worked, was the first bank to introduce personal loans. I recall that when the Midland bank went into personal loans, which was the biggest growth area of unsecured lending—long before the days of credit cards—the other banks frowned upon that departure and the financial institutions in the City condemned it. Noticeably, the other banks rapidly had to follow the example set by the Midland and made personal loans available.
The need for a limit to be fixed does not arise from the fact that building societies would get into financial difficulties, because they will have to consider carefully any application for unsecured loans. My worry is that, if too much money is used for unsecured lending, there will not be enough funds available for their main function—extending home ownership and assisting people to buy their own home.
My constituency has a long tradition of building societies, which is one reason why home ownership in Burnley is well above the national average and above the figure of 64 per cent. that has been mentioned this afternoon. Building societies have had a long tradition of service to the country and they have played a major role in extending the growth of home ownership. That is shown 634 clearly in my constituency. Until two years ago we had the headquarters of the Burnley building society of which we were very proud. Many people in Burnley regretted the merger of that society with the Provincial building society to form the National and Provincial building society at the start of 1984.
Indeed, many people were opposed to that merger—for two reasons. The town became known throughout the nation from the advertising of that society. The building society, along with Burnley football club, promoted Burnley throughout Britain.
§ Mr. John Mark Taylor
Would the hon. Gentleman's constituents have objected to that amalgamation if the new building society had been called the Burnley?
§ Mr. Pike
I am sure that the people of Burnley would have been much happier if it had been named the Burnley and Provincial, the Provincial and Burnley, or some such name. The people of Burnley were opposed to the merger and may well have been tempted to vote against it for that reason, but people in other parts of the country would not have done so because they viewed that change in the same way as people will view this Bill. In other words, they were most concerned about the stability of the building society and the features that we all wish to protect, which we hope will be adequately safeguarded by this legislation.
The Burnley building society was known to the people of the town as the Burnley and they regarded it as their bank. Many people in northern towns do not have bank accounts. It is only relatively recently that people have begun to open accounts with the joint stock banks.
The position of the Burnley building society also highlights the problem of non-agreed mergers with which the Bill deals. If that merger had not been voted for by the members of both societies, it would have been wrong for it to be forced through. I have strong reservations about the proposal in the Bill that gives draconian powers to override the wishes of the people whether it be in relation to a relatively small building society or not.
My hon. Friend the Member for Ipswich (Mr. Weetch) made the point that East Anglia has a large number of local building societies which, like the Burnley, have a fine local tradition. The same applies in many other parts of the country. If people do not want a merger, there should be no way in which it can be forced through.
We need a Bill which will ensure the safety, security and stability of building societies. We must make sure that the Bill protects the interests of the members, whether they be borrowers or depositors. We must also protect the interests of the staff. There is sometimes a reluctance to remember that the staff's interests must be taken into account. We must be mindful, at a time of technological change, that staffing requirements in building societies are changing rapidly. We must be aware of their concern in that direction.
Given the changes that have taken place in building societies over recent years, it is surprising that, when one looks at adverts, whether in newspapers, on hoardings, on television or in the windows of the building society, one rarely sees share accounts being promoted as share accounts. One sees "liquid gold" accounts, accounts combined with a credit card and higher interest accounts. The different building societies have a wide variety of names to choose from. I am a little worried as to why the share account appears to have been demoted. Certainly it has been played down.
635 I hope that, as has already been mentioned, when the Bill is passed arrangements will be made for a building society ombudsman. There could well be a need for such a person. The insurance industry has had one for a number of years. Banking is to have one and that has been relatively recently announced. I hope that that will be considered as the Bill progresses. If such an ombudsman were recognised by all the building societies and had real authority in resolving disputes, it would take a lot of work away from the commission and enable the commission to concentrate on its most important task—the supervision of societies. That is important.
I am worried about the views expressed by the Abbey National building society. I have strong reservations about the prospect of a building society changing to a public limited company. It will completely change the concept. Just as I spoke against the Trustee Savings Bank Bill, so I have the same opposition to this principle. Building societies have grown on a mutual basis for many years, and that should not be changed. However, if that provision goes through, it will mean that building societies can be taken over by any bank. I am aware that Citibank of America has said that it is looking for 350 outlets in Britain and a public limited company building society could well provide the outlet that it wants.
The voting requirements need to be strong. My objection to the Abbey National's proposal, and the reason why I would if anything want to go even further than the Bill proposes, is that it wants a simple two-thirds majority. Certainly I support the proposal in the Bill rather than that of the Abbey National, which I could not accept. We need the type of safeguard which would give not only investors but also borrowers a vote. I would welcome that, because they have a right to be involved.
On the question of the freedom to manage and the requirement of deposits for people who stand, I accept the figure of £100 in the Bill. I would not want to see it go up to £250, the sum that the Abbey National is talking about. We must have democracy there. My hon. Friend the Member for Ipswich referred to the self-perpetuating system in the past. We do not want to move in that direction.
The staff have strong reservations about the Bill. I met the Federation of Building Society Staff Associations which represents the majority of building society staff. I believe that the Halifax and the Leeds Permanent building societies are not in it, but most of the other big building societies are. It recognises the need for change. Its members wished to make the point that they are not Luddites and they accept that the Bill should go through.
One aspect that the federation would particularly like to see included in the Bill relates to matters affecting staffing and the future of societies. It believes that some consideration should be given to include compulsory consultation, without the power of veto for the staff of building societies. I always support the view that the staff of any organisation should be consulted. I shall be consistent and say that that is a fair point, and I hope that it will be taken into account in Committee. If there is any way of providing such a safeguard, I would welcome it.
I generally support the Bill and will seek to ensure that the safeguards that are in it remain and, if anything, are strengthened. I hope that the one or two points on which I have reservations will be dealt with satisfactorily.
§ 8.8 pm
§ Mr. John Mark Taylor (Solihull)
Any debate which calls into question the immortality of the Lord Chancellor is bound to be a nourishing and interesting one. When it also quotes from none other than Clive Thornton, it is clearly a wide and catholic debate, too.
My remarks will not be uncharitable to the building societies. This is no time for being uncharitable, least of all to an organisation which has made a great virtue of borrowing short and lending long. Indeed, it has made a great success of an admittedly privileged and dominant position in a particularly historic market. After all, building societies lend in fairly safe circumstances—with belt, braces and form-fitting trousers, one might almost say. Usually they lend with the security of 105 per cent. or more of the amount of money that they lend, and with the benefit of a mortgage protection policy for which the borrower has to pay, secured by a valuation for which the borrower also has to pay. When we recall that building societies have enjoyed, by statute, certain historical privileges regarding taxation and stamp duty, it is not difficult to see how they have reached their dominant position in the home loans market.
Building societies have been able to benefit greatly from high interest rates. With the dominant position of the societies, usually the home buyer reconciles himself to a society's terms. There is not much variation between one society and another. It is no more than Hobson's choice for the borrower who buys his home. He is consoled, as has been said, by tax reliefs which make him less discriminatory, in looking at the interest rate that he has to endure, than the customer on the other side of the building society's activities, the depositor, who discriminates very keenly as to the institution with which he places his money. It is because building socities have been able to lend money expensively that they are correspondingly able to attract deposits by high interest rates.
Therefore, without being unfair, one can say that the societies have thrived on a high interest rate regime. In the process they have taken a considerable amount of money out of the economy. Of course, they have helped people to become home owners. One would not doubt the virtue of that for a moment. It would not be stretching anyone's credulity too much to say that if any hon. Member had the good fortune to acquire a few thousand pounds that he had not expected—perhaps through the death of an elderly aunt in Australia—and had the choice of investing that money in an engineering company in the midlands or putting it in the Halifax building society, it would not take him long to decide.
There is an absence of symmetry in the workings of building societies. They can offer very good terms to depositors while at the same time lending money quite expensively to borrowers. That absence of symmetry is also shown when interest rates rise. When that occurs, the person who has borrowed money on a mortgage finds that his interest rate rises immediately and automatically, whereas the person who has deposited funds with the society often finds that, to participate in the new higher rate, he has to give notice, close his account and open a new one.
The role of the building societies—certainly in the 1970s, when house prices climbed so dramatically—is 637 one more reason from the recent past why most fair-minded people will welcome the Bill, and welcome reform within the building society movement. In the 1970s, as many of us remember rather painfully, building societies were still operating on a basis which was such that at one stage in the year they were starved of cash, while at another time they would be bursting with funds and lending uncritically on an inflating property market which they were actually helping to inflate. It is like a shallow tray with liquid in it: if it is tilted a little one way, all the liquid goes to the other end. The system governing building society rates was not them a very discriminating instrument. I think it has improved in recent times.
There are now so many building society branches that some of the high streets in our constituencies are heavily peopled with them. It is a mortmain on the freehold on each of those individual sites. In many constituencies, the high street is decreasingly owned by local people and increasingly owned by institutions from outside the town, with no prospect of those sites ever going back into local private ownership.
The building societies have indeed come a long way from their collectivist origins. Many changes have taken place during that long journey, and we are due for a review. The Bill is a substantial one and a serious attempt to carry out a comprehensive review. I welcome it.
§ Mr. William Cash (Stafford)
This is, in a sense, a rather nostalgic occasion for me. My family have had much to do with the building society movement in the past century. The Abbey National building society was founded by my great-grandfather, William Cash, and his cousin, John Bright. But we now have to move into the 20th century.
I welcome the Bill. It provides an opportunity, in an intelligent and good framework, to ensure that the young people of tomorrow—and, I hope, those of the immediate future—will be able to get access to funds, which they have had some difficulty in doing. It is of the greatest importance that young people should be able to acquire homes for themselves. The Bill should go a long way towards helping them so to do.
My first point concerns competition. I raised it when the Administration of Justice Bill was going through the House last year. We could be moving into a situation in which we have effectively four main clearing banks which control a series of services, many of which are set out in the Bill. Incidentally, the Bill has to be read closely with the Financial Services Bill, which was released today and forms a kind of kaleidoscope of legislation in this field.
There is no definition of investment in the Bill. That is extraordinary, as there is an extensive definition of investment in the Financial Services Bill. I should be grateful if the Minister would consider that point.
I am slightly concerned about clause 32(2), which enables the Treasury, by order, to vary the power to provide servicesby adding to or deleting from it any description of service or any provision or by varying any description of service".Will the Minister consider whether that is going too far? Will he let us know in due course exactly what is intended by it? As it is related to financial services, it would seem that the Treasury would have the power to extend to almost 638 anything the services that a building society could provide. I shall be grateful for some indication of the direction in which the Minister thinks that the power is likely to be used.
Clause 86 relates to the transfer of business to a commercial company. The 20 per cent. restriction—given that there is the power to do the conversion—should be much more easily obtained than by the 20 per cent. rule that is being imposed. Given that building societies are to be enabled to do it, I have some reservations as to whether the cost is justified in the circumstances.
The press note that was published on 6 December says that comments to the Treasury are invited by the end of January. I understand, therefore, that that is part of the consultative process of Second Reading. I ask the Minister if he will look at the matter. I understand the reasons for including the 20 per cent. rule, but I feel that if it is to be done it will be done at great expense by a few of the building societies and I wonder if it is as important as has been claimed.
I wish to refer again to the subject of competition. When I was studying the material for the Administration of Justice Bill 1985 I came across a speech by Sir Gordon Borrie about the provision of competition in conveyancing. He said that it was important to have an element of weed killer that he would liberally supply, if given the opportunity, to make sure that there was competition in the provision of conveyancing services as and when provided by the main institutions. As we move into this new era of competition between the banks and the building societies, I ask the Minister to make sure that we do not end up with the banks having such a stranglehold over the system that the consumer at large finds that without that dose of weed killer he is faced with cartels which have a tremendous amount of monopoly power in terms of land tenure, stock jobbing, insurance, brokerage, estate agency and conveyancing services. I am concerned that there might appear to be competition but, although justified in international terms, from the consumer's point of view there is a near monopoly.
Perhaps the Minister will have an opportunity to explain those matters in Committee. I welcome the Bill and I look forward to hearing the Minister's comments.
§ Mr. Peter Viggers (Gosport)
Like many right hon. and hon. Members this evening, I must declare an interest in this matter, although it is a negative interest. If it were a theatrical performance, the programme note would carry an item that read "Mr. Viggers appears by courtesy of the Portsmouth building society."
I join other right hon. and hon. Members in praising my hon. Friend the Economic Secretary to the Treasury for introducing the Bill and for all the work that I know he has put in in the many months since its gestation began. He has taken great care in consulting many people, building societies and others, and it is a great tribute to him that most of the debate has been criticism of points of detail. Broadly speaking, the Bill has the support of both sides of the House.
I support the modernisation and liberalisation of the building society movement, but I am concerned about three clauses. Clause 84(2) gives a building society access to the list of members of a building society which it may wish to acquire or merge with. I am concerned for several 639 reasons that another building society should have access to a target building society's list of members. The list has considerable commercial value. Larger societies might try to pick off smaller societies for various reasons. The new commission will have the power to regulate the reserves of societies and it may be that a society which has insufficient reserves will find it an attractive proposition to approach another society that has more adequate reserves in an attempt to merge.
Some hon. Members have referred to rationalisation in building societies. It has been pointed out that the number of building societies has reduced from 400 to 190 in 10 years and it is likely to reduce further. I quote from Mr. Peter Birch, the chief general manager of the Abbey National building society, who was interviewed on television on 8 December 1985:
there are far too many Building Societies—in some High Streets there are 25 Building Society Branch Offices. The number of societies must reduce dramatically in the near future".There will clearly be a desire on behalf of some managers of building societies to merge with others and I think that the reduction in numbers in the past 10 years has shown that building societies are receptive to mergers. I do not think that it would be a good idea to open the door to contested mergers.
Unfortunately, I have some experience of a contested takeover, not among building societies. I am the director of a small oil company. By oil company standards "small" means about £70 million market capitalisation. We were subject to an aggressive takeover about a year ago. It took about £500,000 of legal fees, accountancy fees and circulars to beat off that unwelcome takeover bid. That did not include the cost of any advertising. We must think of the problems that would occur if one building society were to approach another and seek to merge with it against the wishes of the target building society. The money deposited by investors in the building society would be used in a contested bid. That is not what the money is there for.
My hon. Friend has taken great care to build restrictions into the Bill which will prevent building societies from being taken over. I respect the fact that he has included a provision so that the members of the target company have to pass a resolution in terms of borrowers and depositors. There are restrictions on the minimum number of people who can vote in the meetings of the building society to approve a merger and so on. My argument is that we do not want to be involved in that area at all.
§ Mr. John Fraser
I wonder whether the hon. Gentleman will explain something that has always mystified me. Why do smaller building societies—I think the Portsmouth building society is one of them—tend to place their mortgages through brokers who take commission from borrowers and tend not to use panel solicitor arrangements? That increases the cost to borrowers. Why is that more prevalent in smaller building societies than large ones? Is that one of the things that they are sensitive about in relation to takeovers?
§ Mr. Viggers
The hon. Gentleman is an experienced Member of the House and, I think, a practising solicitor. I think that he is probably in a better position to answer that than I am. I cannot speak on behalf of the smaller building societies with whom I have no connection other than that which I have disclosed. The smaller building societies with whom I have had discussions and who have informed me of their position appear to be extremely 640 successful in their rate of growth and in the service that they provide to their customers and depositors. Other than that, I cannot answer the hon. Gentleman's question.
My second concern is clause 82. It is a question born of interest rather than a concern of substance. Borrowers are to be given voting rights for the first time in the Bill. It is interesting that that should be the case. I cannot see that a borrower from a building society should have any more right to vote over the future of the building society than a person who has an overdraft from a bank. One may think that a borrower from a building society is in a more stable position than a person who has an overdraft at a bank. However, the average mortgage lasts approximately seven years, whereas a bank customer is usually there for life. It is a staggering fact that a young person is more likely to get a divorce than to change his clearing bank. Therefore, there is more stability in overdrafts than in borrowing from a building society.
§ Mr. Christopher Hawkins
That figure about the average mortgage lasting seven or five years is an illusion because that is how often, on average, people move. They then take out another mortgage or transfer the mortgage to another house. The building societies continue to quote that figure and it is terribly misleading.
§ Mr. Viggers
I accept my hon. Friend's point. I do not have any figures, and I do not know whether any hon. Member has, as to the number of people who return to the building society which they were previously with. I suspect, as my hon. Friend said, that they frequently return to the same building society. I accept his point.
My third point relates to my anxiety about clauses 11, 12 and 18, which refer to the restriction of the building society's right to lend on premises which are defined asfor a person's residential use".The inter-relationship between those clauses means that a mortgage can be granted on freehold and leasehold estate, provided that it is not more than £60,000 to any one borrower or limited company. The restriction is intended to apply so that not more than 10 per cent. of the amount lent by a building society will be for premises other than those which are for the residential use of the borrower. To find the definition ofresidential use of the borrowerwe have to go to other clauses.
The question then arises whether premises are exclusively owner-occupied. In areas such as that which I represent there are many guest houses, rest homes, hotels, flatlets, bed-sits, and shops to which loans are made. It may be that 40 per cent. of those premises are not occupied exclusively by the owner. Large parts of those premises are in common use. I am worried that building societies might be unduly restricted if they have to make 90 per cent. of their loans on premises which are occupied exclusively by the owner. Will my hon. Friend consider that point, which has been made in writing? I hope that he will take it into account in Committee.
§ Mr. Conal Gregory (York)
This is the first entirely new legal framework for the building societies movement since the Building Societies Act 1874, and it is right that it should be debated at some length today. Much has changed since then, with societies wishing to extend their range of services. In considering the Bill, the House is modernising and strengthening the operations of societies, 641 including the establishment of a Building Societies Commission and a new statutory investor protection scheme.
I fully support extending investor choice, commensurate with adequate safeguards. The conversion procedure should allow those societies which wish to develop beyond the present legislation to evolve to the benefit of their members. However, we should not lose sight of the raison d'etre of the building societies, which is to facilitate the purchase of homes. Everything else is ancillary. Widening the package of services to include estate agency, valuations and survey work may be helpful, but it may be a grey area where there is a conflict of professional loyalty between service to the society and those seeking funds.
The management of residential land and the operation of services in other European Community states can be seen as useful adjuncts to the societies' overall role.
Building societies have greatly assisted individuals and families to become home owners. They serve about 25 million people. It is right, therefore, that the Bill restricts 90 per cent. of lending to owner-occupiers with first mortgages. After all the Conservative party encourages saving and investment, fosters home ownership—now about 62 per cent. of the population—and promotes improvements in housing standards.
I believe the members of the Building Societies Association to be honourable, and I am proud that Yorkshire is the home of no fewer than 11 such societies—seven giants in the form of the Bradford and Bingley, Halifax, Leeds and Holbeck, Leeds Permanent, National and Provincial, Skipton and Yorkshire; and four fine, if smaller, societies: Barnsley, Beverley, Scarborough and Sheffield. All 11 of those Yorkshire-based societies give greater protection to investors than other non-association building societies by Government designation as eligible for trustee investment status, and by being members of the Building Societies Association's investors' protection scheme.
However, there are 32 building societies nationally which do not belong to the association. I seek assurances from my hon. Friend that investors will be adequately safeguarded. Some of the societies have sizeable liabilities—the Century with over £6.1 million, the Foresters with over £1.7 million, Kidderminster Equity whose liabilities exceed £2.7 million, Louth, Mablethorpe and Sutton with over £3.3 million, Merseyside with over £2.7 million and Thrift with over £9 million. Three societies in the group are based in Yorkshire—the Capital and Counties of Sheffield, Kirklees of Dewsbury, and the Ecology of Keighley which has some admirable aims in revitalising older property. The liabilities of all those non-association members exceed £60 million. Those societies include some with enticing names such as the British building society, the County of London building society, and the United Kingdom building society, and, one might add, the Immigrants building society which might well appeal to ethnic minorities.
Investor protection under the Bill must be more beneficial than that of the association which is less than 100 per cent. The Bill suggests a level of protection of only 75 per cent. That is much less than should be acceptable 642 to those who entrust their savings to the building society movement. Why should less than 100 per cent. be set in statute?
On the plus side for investor protection, I welcome the hope that societies that are currently outside the scheme will come within the range of the Building Societies Commission and safeguard funds deposited with them.
Whilst I have drawn my hon. Friend's attention to the need to protect the investor through the full range of institutions that seek the status of a building society, the greatest omission from the Bill is in respect of protection for the borrower. I give three telling instances. The first is the differential rates of interest, the second is portability, and the third is penalty clauses.
On differential rates of interest, the societies are quick to respond to market forces for investors but slow for borrowers. There is such a wide turn that societies could assist by reducing their management charges which are about £1.19 for each £100 of assets managed.
With regard to portability, societies should not make it difficult for borrowers to transfer their mortgages. Portability is an important factor in job mobility. Penalty clauses should be outlawed. For example, societies should not seek to impose three months' penalty interest if a mortgage is redeemed within three years of its commencement.
Whilst the authorisation regulations ensure that building societies have to maintain a minimum liquidity ratio for trustees' funds, clause 19 does not continue that requirement, but it sets an upper ceiling. There is no minimum reserve ratio as presently set out.
It will surprise many inside and outside the House that societies have allowed their liquid assets to rise to about one-fifth of total assets—20 per cent. plus. That is excessive. It goes beyond a reasonable buffer level of, say, 8 per cent., but the Bill permits an increase to 33.5 per cent. If the primary role of building societies is to assist home owners, their funds should be invested substantially in bricks and mortar.
I echo the warmth expressed already for the friendly and helpful attitude of building societies' staff. I know that those in York are held in high regard and enable many citizens of all ages to have a solid stake in a property-owning democracy. More competition and freer financial services will benefit all who seek to own a roof over their head and build up a small nest egg for the future. The Bill takes us further towards those objectives. I commend it to the House.
§ Mr. Tim Smith (Beaconsfield)
I welcome the Bill, as far as it goes. I congratulate my hon. Friend the Economic Secretary on the work that he has put into producing it over the last two years.
The Bill is really the product of an agreement between the Treasury and the Building Societies Association. As a result, I find it unduly cautious and unduly conservative. Of course, no one should underestimate the major contribution that building societies have made to home ownership, but I am always a little suspicious when people get up, one after the other, and tell us just how wonderful something is, and when they are generally euphorically ecstatic about it.
The myth that building societies are the only institutions that could contribute to home ownership was destroyed quickly when the clearing banks moved into that 643 market four or five years ago. As I said in an intervention, they are now very big in that market and service a large number of people. Therefore, it is not only the building societies that are making a major contribution.
Today, the financial services market is changing rapidly, and building societies are well placed to take advantage of the growth and the proliferation of financial services. That growth has, in part, been stimulated by the Government's policy initiatives on the extension of share ownership and on personal pensions, all of which is to be welcomed. The building societies are well placed because of their branch network and their prime positions in many high streets.
If we allow building societies to compete, they will do so on an equal basis with the clearing banks. For too long, the clearing bank cartel has been left untouched. At the top end of the market there is fierce competition for business. The Americans are falling over themselves to lend to the likes of ICI. But at the bottom end of the market there are four stodgy old clearing banks with little to choose between them. It is the small business man who is the loser. Of course, he is partly to blame because, when he asks to borrow money, he is so frightened of being turned down by his bank manager that the last thing that he asks about is the rate of interest.
What bank ever rang a small business man and offered to lend him money? What clearing bank employs people as salesmen? For too long the clearing banks have had it too cosy. As a .result, the cost of borrowing is far higher for the small business man than it need be.
There are only two solutions to the problem—first, the clearing banks should be broken up, or, secondly, they should be subjected to more rigorous competition. I cannot envisage any Government agreeing to breaking up the clearing banks. Indeed the Labour party wants to nationalise them, so competition would be completely eliminated. The solution must be more competition. However, effective competition can be provided only by institutions that already have a branch network. In practice, it must be the building societies.
The Bill is too restricted to allow that to happen. That is because of the deal to which I referred between the Building Societies Association and the Treasury. The association is unduly cautious because most building society general managers have never worked anywhere other than in a building society and are frightened of radical change.
One man who does not fit that category is Mr. Peter Birch, the chief executive of the Abbey National building society. On the competition point, he says that societies have to compete with their hands tied behind their backs. The Abbey's total assets are about £20 billion. The 5 per cent. restriction means that it will be limited to lending no more than £1 billion unsecured, rising to £2 billion. That sounds a great deal of money, but we need only look at the clearing banks' figures to put it into perspective. Mr. Birch believes, and I agree, that the 5 per cent. and 10 per cent. figures should be doubled.
Then there is the question of incorporation. My view is that the Bill should require all societies to incorporate and become subject to banking supervision within 10 years of the passing of the Bill—that is by the end of 1996. We could then do away with the two separate bodies of law and the two separate regulatory structures designed to regulate two groups of institutions that should, in due course, be competing as equals.
644 Mr. Birch does not go as far as I would. He simply states, and I agree, that the proposals for voluntary conversion are so restrictive as to be unachievable. In particular, the proposal that 20 per cent. of depositors should vote for incorporation is wholly unrealistic. The Halifax would need 1.5 million votes in favour and the Abbey National would need 1.6 million votes.
We must remember that votes are not weighted as they are in companies. If I have £1 invested in a building society, I have one vote. If I have £20,000 invested, I still have only one vote. It is an absurd voting structure.
§ Mr. Smith
That is self-evident. Building societies have millions of investors and they must treat them all as equals. They must send out millions of copies of the annual report and accounts. Most people do not put their money into a building society because they want a copy of the report and accounts, because they want to make the building society accountable, or because they want to participate in the reserves. They do so because they want security for their money.
The voting structure is nonsense. We could overcome the problem of incorporation if we recognised that large depositors should have more say than someone who invests 50p. The system is a nonsense. Only a tiny majority of depositors actually take any interest in the affairs of the society in which they invest. They do not invest to become members of the society; hey are probably not aware that they are entitled to shares in the reserves. They invest for security, accessibility and convenience.
I once went into a building society and asked for a copy of its annual report. The counter clerk had no idea of what I was talking about. The return had to be obtained from head office. That is how often investors ask about a society's affairs and that is how much interest they take in the society. Therefore, why are we intending to make it so difficult for societies to incorporate?
In a relatively protected business environment, building societies have been a great success. They have marketed their limited but expanding range of services effectively. Their high street branches are much more attractive and inviting than those of the clearing banks. This Bill offers a great opportunity to allow them to take on the monolithic clearing banks. If they are to succeed, as Mr. Birch said, they must not have their arms tied behind their backs.
§ Mr. John Fraser (Norwood)
Like other hon. Members, I must declare an interest as a borrower and a lender, and, of course, as a solicitor. It is only right that I should declare the latter. My hon. Friend the Member for Great Grimsby (Mr. Mitchell) is not here, but some matters involving solicitors evoke great passions. It is almost as though Mr. Eddie Shah had undertaken to do his own journalism, and also to sub-contract for others as well.
I can quite understand why these matters will be debated with great passion. There needs to be an occasion on which that single issue can be discussed by the House. There needs to be an opportunity to vote on that issue alone. The issue has been raised not only by my hon. Friend the Member for Great Grimsby, but by other hon. Members.
645 I have to make a second declaration, which is not one of interest but one of affection and love. Like many other hon. Members, I am a fan of the building societies, and even more so of the principle of mutuality and of the non-profit making structure that building societies represent.
Of course, building societies are not without their blemishes, although it is very difficult to find many serious blemishes on their record during the past couple of hundred years. Even when blemishes have arisen, the movement has rallied round. For example, it did so when the South London building society was at risk; the Woolwich building society assumed its obligations and came to the rescue. In broad terms, the building societies have fulfilled the functions that they set out to fulfil when they were formed 200 years ago. They provide finance for housing at reasonably cheap rates.
It is worth while reflecting for a moment upon the success of building societies. On the whole, they have been efficient organisations. I have found them personal and free from the mystique and fear that the banks impart to people wanting to borrow money. They do not engage in the excessive pontificating and remuneration associated with the top bankers. The building societies' operating margins have been extremely keen compared with other private sector lenders and Government organisations. Above all, the building societies have been patriotic. I agree with the Economic Secretary to the Treasury that building societies exist to provide housing in the United Kingdom. Broadly speaking, they should continue to fulfil that function.
I have recently been in correspondence with a bank, although I do not know why it circularised me. I opened a letter one day in which one of our leading banks told me that I should now invest in Germany and in German growth. I dropped it a note about patriotism, which I assume it dismissed. The following month I received another note from the bank telling me to invest—
§ Mr. Fraser
The hon. Gentleman is correct; he must know which bank I am talking about. The same bank is fairly heavily committed in Argentina and I do not suppose that there are many countries in which it would not put its money if it thought that it was possible to turn a penny for its shareholders.
I do not wish to spend time castigating the banks, but there is a strong distinction between banks and building societies. The banks, because they think it is in the interests of their investors and their shareholders, are ready to push their money into any part of the world, without morals or remorse. The banks believe that it is their function to make the maximum profit by any form of operation and the bank rate tribunal some years ago revealed the full depth of these operations.
In contrast, the building societies are patriotic bodies—partly because the law does not allow them to be anything else. I hope that the building societies continue to provide the £100 billion for investment that is largely sunk in Britain. If there is a choice between providing money for people who are badly in need of housing, whether in Brixton, in the constituency of my hon. Friend the Member for Glasgow, Maryhill (Mr. Craigen) or in any other area, providing money for jobs or lending money to buy second homes on the Costa del Sol, I would want 646 the money to be invested in Britain, in our future and our jobs. No aspect of building societies legislation should weaken the building societies' long-standing tradition of investing in this country.
Building societies are proof that the profit motive is not the only motivating force. They have shown that social ownership in a competitive environment can be a roaring success. That has been such a success that the building societies have written their own White Paper—the Government did not write it—for reform. That is why the Bill is before the House today. The last thing I want to see is the building societies turning into a capitalist institution modelled on the banks. I admire, and the Opposition want to preserve, the principle of mutuality, based usually on one person, one vote. We would like to add to that principle the principle of accountability.
If there is to be any change, there should be legislation to make the banks into mutual organisations rather than to turn the building societies into public limited companies. I welcome the Economic Secretary's comments about the greater accountability of building societies to their members.
The Opposition are wholly opposed to the proposal that building societies should be able to convert themselves into public limited companies. The Treasury proposals are very much constrained. Massive constraints are built into the idea that a building society can convert into a public limited company. I realise that the clause relating to that is a dummy clause. I hope that the Government, like a baby growing up, will throw the dummy away and remove the proposal to convert to public limited companies. I have some reservations about the practices of some of the smaller building societies, but it would very much divert the energy of the building society movement if it were to start becoming involved in contested takeovers. There is a good case for dropping those provisions.
It is suggested in the building societies' document of February 1984 that the movement should be able to lend overseas, especially to EEC countries. I think that it would be a pity if that were to happen. It would be a drain on investment. There is enough money pouring out of Britain already to invest in industry elsewhere without the building societies joining the queue.
As I understand it, it is proposed that the building societies should be enabled to invest comparatively small sums in subsidiaries, which will then raise funds for lending on the purchase of property outside the United Kingdom. If that is done by a subsidiary which raises its funds locally—there can, of course, be a link with the United Kingdom society—that is all right. If it means a flood of funds leaving the United Kingdom, I am opposed to it.
I do not believe that it is necessary for building societies to place their mortgages via brokers. It should not be necessary for a borrower to have to pay a broker. He will have to pay the broker for finding a mortgage with one of the smaller building societies and, in effect, he will pass on a substantial commission to the broker on the arrangement of life assurance. A society's lending policy should be open and known and not a vehicle for others to make a profit out of the house purchase transaction, which is not necessary.
We need a strong consumer voice in the running of building societies. In the past, this has asserted itself through the National Consumer Council. There have been changes in policy, so that borrowers now have a choice of 647 insurer for their fire insurance. A good deal of pressure has widened the system of panel solicitors, which has reduced the cost to the borrower.
I want to see a strong consumer voice on the Building Societies Commission. I understand that it is intended that there should be between four and 10 members. When the Minister replies, I hope that he will tell us how many of the members will be consumer representatives.
There is no need to he afraid of an open discussion between the Building Societies Commission and the building society movement about the development of building society policy. For instance, the commission and the movement should not be afraid to ask building societies about their redlining policy. I know that that policy has diminished considerably and that societies such as the Abbey National have done a great deal to help in the purchase and renovation of properties in the inner cities. However, I hope that the consumer members of the Building Societies Commission will press for openness of building society policy on lending in the inner cities, which were called redline areas. I hope also that they will encourage building societies to develop policies that bear on the categories of borrower, so that there is a fair spread of lending covering those at each end of the income range. I trust that the spread will include lending to those from different ethnic origins and to women as well as to men. Much more information should be provided to members as well as consumers.
I hope that building societies can be encouraged to take a public view on their proposals for unsecured lending. I understand the societies' argument that, if they are to run current accounts and guarantee cheque systems, there is always the risk that someone may run into overdraft and need to have unsecured lending provision. On the other hand, for building societies to lend as much as £20 billion unsecured, for purposes unassociated with housing, would be a great departure from the traditional role of building societies, and one that I would regret.
I should like to see the societies using their powers for unsecured lending—which is limited to 5 per cent. of their lending—for top-ups on repairs, for example, when someone is short of money, cannot afford to repair his home without borrowing and does not want to go through all the formalities associated with a further advance. Unsecured lending could well be used for other forms of housing expenditure instead of using that provision for entering into competition with the banks.
The hon. Member for Beaconsfield (Mr. Smith) wants to see the building societies with the shackles taken off as the big competitors of the banks. That is a perfectly honourable aim. If I had to choose between the building societies having the shackles taken off to provide more money for housing and the building societies having them taken off to provide more competition with the banks, I know where the Opposition's priority would lie—in the provision of housing.
We believe that legislation should codify the best voluntary standards to protect investors. It is wrong to have a doctrine of equality of misery with the banks. The guarantee to investors should be at least 90 per cent., and preferably 100 per cent., which would make the large building societies more careful about the activities of those who might be at risk.
At the moment, building society lending is almost exclusively for owner-occupation. We should not be too starry-eyed about this, because the Bank of England 648 calculated in one bulletin that about half the money that was being lent for the purchase of homes was leaking into other forms of financing, such as for use in borrowers' businesses, in trading up to get the advantages of capital gains and in purchasing consumer goods. One must not make too light of this. There has been a series of commentaries on this matter, including "Faith in the Cities" and the reports of the Duke of Edinburgh, and even commentaries from building society organisations. There is concern about the use of subsidised money which is not going primarily in the provision of housing but is being fed through the system of house mortgages for other purposes.
There is an overwhelming demand for private housing to buy, which is being satisfied by the building societies movement, but the overwhelming need, as opposed to the overwhelming demand, is for low-cost housing to rent, or to buy, or for mixed tenure. I should like the building societies to put more money into meeting the overwhelming need for housing as well as the demand for funds simply for house purchase. In some ways, the 13ill does not go far enough in giving the building societies movement flexibility to lend for different kinds of tenure.
I am not certain that it is right to restrict building societies to 90 per cent. lending for class 1 assets when they could be lending or investing more money in, for example, shared ownership schemes. They could put their money into many other types of schemes—for example, for the purchase of property for the elderly. Many elderly people want to get out of their large houses, to realise their capital and move to a combination of renting and purchase so that they can release some of their capital for their old age. I should like building societies to encourage such an operation. I want them to put money into shared ownership schemes and towards housing to rent. Within the primary purpose of providing money for housing, I think that building societies may be too restricted in the percentages laid down for lending for house purchase.
Improvements and repair are another aspect where we could do with some experimentation in the way in which building societies help housing. The repair and improvement policy is in an absolute shambles. Because of the way in which housing investment programmes have been cut, many local authorities, whether Labour or Tory—there is no longer any political distinction between Labour and Tory authorities—have had to cut their house improvement and repair programmes arbitrarily. That is to the great distress of many individual house owners and, in the long term, is to the disadvantage of our housing stock.
It might be a good idea if the Government were to look at ways in which the building societies—I am not excluding the local authorities in any way—might help a great deal more in housing repair and improvement rescue operations. Some subsidy might be channelled through building societies. They are well equipped to react quickly to borrowers' needs. We have these new powers to provide for unsecured lending. I am sure that is worth exploring at a time when there is a virtual famine of money available to the poorer owner-occupier for housing and repair. Many of the Bill's provisions will help the building societies to compete with the banks for housing funds on fairer terms. As a result of the Bill, I hope that even more money will flow into the provision of housing, which is still one of the country's greatest needs.
In so far as the Bill fulfils those purposes, we welcome it. In so far as the Bill contains aspects which may weaken 649 the general thrust of the building society movement, we should examine them carefully in Committee. With those reservations, we support the Second Reading of the Bill.
§ 9.5 pm
§ The Parliamentary Under-Secretary of State for the Environment (Sir George Young)
The debate has been a little like a mortgage—it has lasted somewhat longer than was envisaged at the outset—but it has been a good one, and bodes well for consideration of the Bill in Committee. My hon. Friend the Economic Secretary and I have made notes of the detailed points raised in the debate.
Hon. Members have shown considerable allegiance to small local building societies and have spoken of them in affectionate terms normally reserved for their football teams. I shall say a word about smaller societies later.
The Opposition motion saysThat this House declines to give a Second Reading to a BillThere seems to me to be a slight discrepancy between that and what the hon. Member for Norwood (Mr. Fraser) said in his closing remarks—indeed, what every Opposition Member said, apart from the hon. Member for Thurrock (Dr. McDonald). I think I can say without distorting the facts that, almost without exception, Opposition Members welcomed the broad thrust of the Bill and the general principles behind it, although, of course, with reservations about one or two aspects that will be examined in Committee.
I thought that the speech of the hon. Member for Thurrock was a rather conservative one. The reality is that the building societies now operate in a changing world. The legislative framework which may have been right 100 years ago is no longer appropriate. If we are to harness the energy and resources of the building societies in the ways explained by the hon. Member for Thurrock, we must look at the framework and modernise it. There was a general consensus, I think, that the Bill proposes a package of sensible measures that will enable those objectives to be achieved.
My hon. Friend the Member for High Peak (Mr. Hawkins) was anxious that the traditional role of the building societies should remain. As I believe he knows, at least 90 per cent. of their business will be devoted to their traditional function of mortgage loans for house purchase. I give him the assurance for which he asked on any necessary changes to the conversion procedure. I commend him on his successful campaign on index-linked mortgages. I think that he is right to juxtapose the measures in the Bill giving access to index-linked mortgages with the existing entitlements under the right to buy. It may well be that a number of local authority tenants, when they re-work the sums, will find that with an index-linked mortgage they are better off buying council houses with a discount than remaining tenants.
The right hon. Member for Halton (Mr. Oakes)—one of the many vice-presidents of the Building Societies Association who spoke in the debate—made what I thought was a realistic contribution. He outlined what was in it for the building societies. It is of course the case that the Building Societies Association has welcomed the Bill.
There was quite a lot of debate on unagreed mergers. An unagreed merger is one that is unagreed by the board, not by the members. If one is to follow the principle of 650 mutuality, which is control by the members, it is right that decisions about the future of a society should be taken by the members. As the law now stands, a building society board can effectively veto any merger proposal it happens not to like simply by refusing to circulate the proposal to members. This may be for reasons that are in the narrow interest of the board rather than in the broader interests of the society as a whole. I do not see why building society boards should be accorded this privilege.
That having been said, we recognise the fears expressed by hon. Members which reflect the concern of the smaller societies. Without some safeguards, it might be possible to abuse the procedures. The new merger procedures in the Bill embody a few safeguards. For example, no small society can merge with a much larger one without the consent of at least 20 per cent. of those eligible to vote. My hon. Friend the Member for Beaconsfield (Mr. Smith) said that that was rather a hurdle to overcome, particularly in the larger societies with a fluctuating membership, and limits will be placed on cash bonuses to members, so preventing one socieity from buying off the members of another with large payments from its own reserves. At the moment, there are no such restrictions, so that will be an additional safeguard.
My hon. Friend the Member for Ludlow (Mr. Cockeram) made a point about the costs of the annual report and drew an analogy with bank depositors, who are not entitled to receive an annual report. I am sure that he will recognise that the analogy is not fair, because a bank depositor is not a member in the sense that a depositor in a building society is.
The hon. Member for Truro (Mr. Penhaligon) suggested that the Government did not have much serious legislation to get through the House and had produced a 207 page Bill to keep Ministers, the House of Commons and civil servants happy. He said that he did not know why we were introducing the Bill. I suggest that he rereads in Hansard tomorrow the speech made by my hon. Friend the Economic Secretary. It sets out clearly what the problems are in the building society movement and how one needs an up-to-date framework to tackle some of the problems that remain in housing. I assure the hon. Gentleman that Ministers, Back Bench Members and everybody else have enough work to do without, just for the hell of it, engaging on a rather comprehensive exercise just to fill what he may see as a gap in the legislative programme.
My hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) made some points about early redemption penalties and the ombudsman, and we shall have a look at that. The hon. Member for Ipswich (Mr. Weetch) asked what perception the Government had of the future of the building society movement. In the moving peroration to his speech, my hon. Friend the Economic Secretary set out how we see the building society movement developing.
The hon. Member for Glasgow, Maryhill (Mr. Craigen) echoed an aspiration that we all have, that of cheaper mortgages. There is a tradeoff here between cheaper mortgages and the availability of mortgages. For the past few years, there has been no mortgage famine such as that which we used to have, although the price may have been the slightly higher mortgages. Speaking as a housing Minister, I would prefer to see the ready availability of mortgage funds, albeit at a slightly higher price, than the famines that we used to have at a slightly lower price. The hon. Member for Norwood asked about the exodus of 651 funds and recognised that my hon. Friend had dealt with this in his opening speech. It is our contention that money sent overseas should be raised overseas.
We are now in the consultation period of the Green Paper on improvement grants. We are absorbing the comments that were made on it, such as those made by the Building Societies Association, which has responded. Scottish conveyancing is under consideration. As the hon. Member for Norwood will know, the system in Scotland is different from ours and for that reason it is not appropriate to be dealt with in the same way.
My hon. Friend the Member for Slough (Mr. Watts) demolished the arguments put forward by the hon. Member for Great Grimsby (Mr. Mitchell). I am sorry that the latter was not here to listen to what my hon. Friend said about the real conflict of interest that can emerge when a building society solicitor also acts for the chap who wants the mortgage. He gave one example of a problem that might well crop up with the loan. The borrower might be better advised to go to another lender. It is not the case that the building society's solicitor would so advise him because he has a duty to his employer. The solicitor would have to divulge to his employer anything that might affect his willingness to make the loan, so the client might feel inhibited about seeking confidential advice about the change in his financial circumstances. There is a genuine issue about the conflict of interests over which the hon. Member for Great Grimsby slightly glossed.
The hon. Member for Burnley (Mr. Pike), like other Labour Members, welcomed the broad principle of the Bill and my hon. Friend the Member for Stafford (Mr. Cash) asked some difficult questions. He asked what services would be covered by the Bill and said that he could not find that information in the Bill. My hon. Friend the Economic Secretary, who knows the Bill backwards, advises me that schedule 8 will give the answer.
With regard to the investor protection scheme, we are increasing statutory protection, but it is open to the building societies and the BSA to continue the existing level of protection if they so wish. There is no detriment in what we are proposing. For the first time, investors with building societies will have the protection of a similar statutory scheme which depositors with banks enjoy. The BSA does maintain a scheme on a voluntary basis and it shall be free to continue that. The 100 per cent. protection is not the same protection as that which is given to bank depositors and one has to put them on the same basis.
The point was raised about the disclosure of a list of members in a disagreed merger. The Bill is clear on this. A list of members can be disclosed only for the purpose of circulating merger proposals and not for recruiting people to societies or any other purpose.
The hon. Member for Norwood seems to have a reputation with the banks as someone with a high disposable income ready to be invested in Japan, Germany or anywhere else. I must say that no one on this Bench receives letters from clearing banks inviting him to invest in this country or elsewhere. There is a slight inconsistency in what the hon. Gentleman said about being in favour of mutuality and yet against conversion. Conversion can take place only if the society members wish it.
Finally, I wish to comment on the housing aspect of the Bill which is my ministerial interest. The Bill gives building societies an opportunity to own and develop land as a commercial asset. This will enable them to offer a form of entry into home ownership which has been both 652 effective and popular—shared ownership or buying in stages. Until now, shared ownership has been achieved through housing associations or local authorities. Building societies have been involved in many of these projects as providers of finance. In future, they will be able to play a more direct role as the owners of the residual rented portion of the house. They will also be able to provide accommodation for rent which the hon. Member for Norwood was anxious they should do.
Index-linked mortgages provide scope for housing associations to obtain funds on terms which allow repayment to start low and increase over time by reference to an index. This matches their income from increased rent on shared ownership schemes. I hope that the good link between building societies and housing associations will be developed.
As Minister with responsibility for housing, I have taken special interest in such services, which play an important role in stimulating renovation work which otherwise might not be carried out. Two days ago I opened a new project in Gloucester which had been put together by the neighbourhood revitalisation services arm of the National House-Building Council and with the active co-operation of a local building society. Building societies have played an important part in these schemes, but there have been restrictions on what they are able to do. They have not been able to offer agency services. This Bill will enable them to do this. Anyone who has an interest in urban area housing will welcome these new powers.
We want to encourage the building societies to become much more closely involved in the revitalisation of our run-down council estates. Several societies are almost actively helping in this area by providing finance both for the redevelopment of estates and mortgages for the new owner-occupiers. In the Wirral, the local authority has teamed up with a builder and, with finance from a building society, tackled a council estate's rotten core. That area has been transformed and there has been a dramatic spin-off effect on the rest of the estate.
We want to see much more similar work with the building societies taking a prominent, active role on run-down estates. The Bill gives building societies the flexibility they need to do so. The building society movement has a unique status in this country, both legally and in the public mind. They are rooted in their mutual tradition and they take their social responsibilities seriously. But they have a responsibility to act prudently, and we do not want building societies to act as social agencies at a loss. But our proposals sit well with their traditional activities. They have been associated with housing associations and housing trusts and will be able to do much more by setting up subsidiaries as housing trusts, which they cannot do at present. We want to do more to simplify house buying. Again, the Bill makes a contribution to that, because the societies will be able to offer estate agent, surveying and valuation services, which will benefit house buyers and sellers.
The Bill will bring many benefits to housing. Home ownership will be made easier for many. New efforts can be put into solving the many problems of our inner cities, and we can do all of that without altering the traditional image of the building societies. We are building on an enviable reputation—substantial achievements for many years—and I believe that the founders of the societies would be pleased with the new opportunities that we are offering.
§ Amendment negatived.
§ Main Question put forthwith pursuant to Standing Order No. 41 (Amendment on Second or Third Reading), and agreed to.
§ Bill accordingly read a Second time, and committed to a Standing Committee pursuant to Standing Order No. 42 (Committal of Bills).