CLASS I AND CLASS 2 ADVANCES: SUPPLEMENTARY PROVISIONS. (Hansard, 24 July 1986)

§ Mr. Ian Stewart
I beg to move, That this House doth agree with the Lords in the said amendment.

§ Dr. McDonald
The amendment focuses our attention again on the issue of the development of the secondary mortgage market. The Minister in the other place made it clear that the Government were not averse to the development of that market, and the Minister for Housing, Urban Affairs and Construction said in this House that they had set up a study group to look into the implications of the development of that market. Although that announcement was left open ended in the House, it 686 appears that the working party will report in the autumn and take into account as only part of its considerations the protection of consumers.
On Second Reading, in Committee and on Report the Government seemed to express the view that it was extremely important to protect consumers because with the development of this market a mortgagee could find his or her mortgage sold on from the building society to some financial institution or, indeed, a wealthy individual. In the past when a mortgagee has been in difficulties over the payment of his mortgage building societies have always gone out of their way to discuss those difficulties with the mortgagee and to rephase payments so that the mortgagee is not turned out of his or her home and does not find that the mortgage had been foreclosed. Now it appears that the study is more wide ranging than it had first appeared, that the Government have as only one consideration the need to protect consumers, and that they are not averse to the development of the market.
I remind the Minister that in the United States the market has been extremely well developed but not without difficulties, especially for consumers. The announcement was only given in the form of a written answer in this House whereas in the other place more information was given. I hope that the Minister will explain why the consideration of consumers' needs seems to be less important than they appeared to be from the Government's response earlier.

§ Mr. Ian Stewart
First, amendments Nos. 14 and 225 merely rearrange the text of the Bill and do not relate to the business of a secondary mortgage market.
It was perfectly fair of the hon. Member for Thurrock (Dr. McDonald) to raise the points. Indeed, she raised them on Second Reading when, because I was hard of hearing, I thought that she was referring to second mortgages. Since then we have discussed the matter extensively.
As the hon. Lady knows, I have had meetings with the Building Societies Association which, in relation to the potential transfer of mortgages granted by building societies, is anxious to arrange for a code of practice which would preserve the rights of existing mortgagors and those who take out mortgages on similar terms in future so that any type of mortgage for which there might be a transfer in the secondary market in future must contain explicit conditions. It must be evident and made clear to borrowers when they take out such a mortgage that the ownership of the right of mortgage might be transferred.
The hon. Lady is right. My hon. Friend the Minister of State announced that he would be instituting a wide-ranging study of this question. One reason for that is that it concerns not just building societies. I think it is quite clear that other lenders in the market are more likely to be providing funds on the basis that there would be an expectation of possible transfer than in the case of building societies, themselves. As she knows, a main reason for that is that, at least for now, most building society mortgages are based on the society's own rate of interest rather than an objectively determined market rate such as something connected with the London inter-bank offered rate or some rate of that kind independent of a particular institution.
She suggested the fact that other considerations needed to be taken into account somehow downgraded the interests of consumers. I would not want her to feel that 687 that is the case because that is not the Government's purpose. We have to bear in mind the fact that there are market aspects that need to be taken into account in provisions to deal with this area. It may or may not be the case that at some stage legislation would be needed. There is no presumption that it would be. I hope that it may be possible to regulate the market without that because it is often more flexible, but there is an open mind on that. The fact that other matters are taken into account in no way diminishes the concern of the Government to look after the consumer, the borrower, who pledges his or her house, which is often the person's main asset with, therefore, a very proper interest in ensuring that, by having it as security against the loan, the borrower is not in fact entering into a special arrangement with a different lender without being aware of the fact.
I shall direct my hon. Friend's attention to what the hon. Lady has said, and I am glad that she has had another opportunity to discuss it this evening.

§ Mr. Ian Stewart
I beg to move, That this House doth agree with the Lords in the said amendment.

§ Dr. McDonald
I have selected, I must say somewhat arbitrarily, one of the amendments to clause 53 because the point relates not only to this amendment but to other amendments in the group. I hope that it will be all right for me to comment a little more generally.
Clause 53 is concerned with the disclosure of information by the commission. Since the commission serves as the supervisory or regulatory body for the building societies and since now the building societies will be engaged in other activities besides those of financing house purchase, those other activities will obviously be regulated by other supervisory bodies.
There is some difficulty here in that although some of the bodies referred to in clause 53 and the amendments have already been established—for example, the Bank of England—a number of other supervisory bodies that will have to regulate some of the new activities of building societies have not yet been established since they fall under the Financial Services Bill, which has not yet completed all its stages.
The point that I want to make concerns this problem, that obviously disclosure of information will be possible from the commission to the other bodies that are already in existence. I should like to know exactly what the proposals are, concerning the relationship of the building societies commission to regulatory bodies that have yet to be set up, and what details will be included in the Financial Services Bill. In the other place, concern was expressed about that point in relation to clause 53 and the various amendments that we are now considering. I should like to know exactly how much information will be passed to and fro, from one to the other. Under what sort of confidentiality and rules will it be passed from one such regulatory body to the other?
For example, in certain circumstances such information could be considered defamatory. There are such problems 688 to be considered. Not all the self-regulating organisations that have yet to come properly into existence have been given legal immunity, so there is an enormous range of problems, which are not dealt with adequately in the Lords amendments to clause 53.
The Minister should explain to us how the clause, together with the amendments, is to relate to the Financial Services Bill. This also requires justification, although it is a more general point. Financial institutions now all engage in exactly the same range of financial activities, whether selling insurance, being responsible for the personal equity plan, selling mortgages and so on, yet each of those activities is to be supervised by bodies that are allegedly independent of each other. Now, not surprisingly, that independence is to be broken down by the exchange of information.

§ Mr. Ian Stewart
What the hon. Member for Thurrock (Dr. McDonald) says is right. There will be provisions for the exchange of information between supervisory bodies. She said that she had chosen one amendment out of the group. Let me explain that the group itself consists of amendments Nos. 79, 83, 84, 86, 87, 94, 98, 102 and 104.
Those amendments are designed to provide a framework governing the onward disclosure by one supervisor of information received from another. Following the passage of the Building Societies Bill, the Financial Services Bill and the banking legislation that was foreshadowed in December's White Paper, there will, as the hon. Lady says, be a range of financial supervisors at work, with a range of powers.
In this country, we have chosen to have a supervisory structure that is based on the activity rather than the company or institution being supervised. It is done the other way round in the United States, where there is a supervisory authority in relation to a particular institution, sometimes more than one because they overlap and have both state and federal institutions. The Americans do it by institution whereas in the City of London we are doing it by activity.
It is therefore right to say that there will be a number of supervisors in some cases involved in dealing with the affairs of a particular building society or other institution in the City. As has already been announced, in each case there will be one supervisor who will fulfil the role of lead supervisor to ensure that all the activities of an institution are looked at together. The commission will be responsible for the great bulk of the business of building societies, but other matters will fall to be dealt with by the different supervisory bodies that are to be set up under the financial services legislation, when enacted.
Regulations will be made under clause 53(8) to designate at the appropriate time the Securities and Investments Board and the SROs to receive information as part of this network of supervisory authorities.
The basic principle of the system that these amendments describe is that when one supervisor passes information to another, the second operator should not be inhibited from using if for his own supervisory purposes. In some cases this may involve further disclosure—for example, to an appeal tribunal or to a professional body with which the first supervisor has no dealings in the normal course of events. However, information would have been supplied to the supervisor, on the understanding that it would be subject to strict confidentiality restrictions.
689 A potential problem therefore arises when the second supervisor wishes to disclose the information in a way which would not be open to the first supervisor who originally supplied it. The amendments to clause 53 are designed to deal with this problem by providing that any information supplied by the commission to another supervisor may be disclosed by the recipient, but subject to his own confidentiality restrictions and provided that the commission gives its consent. That is the way in which the matter is designed to be controlled.
This should work out satisfactorily in practice. The amendments to clause 54 provide for a reciprocal arrangement for disclosure by the commission of information obtained by the Bank of England. Further disclosure by the commission would be possible, again with the consent of the Bank of England. The power being framed in general is to allow furtherance of the commission's own functions.
I hope that I have sufficiently explained the points that the hon. Lady raised.