§ 9.5 pm
§ The Economic Secretary to the Treasury (Mr. Peter Lilley)
I beg to move,That the draft Building Societies (Commercial Assets and Services) Order 1988, which was laid before this House on 19th May, be approved.
§ Madam Deputy Speaker (Miss Betty Boothroyd)
With this it will be convenient to discuss the draft Building Societies (Limits on Commercial Assets) Order 1988.
§ Mr. Lilley
The Building Societies Act 1986 spelt out societies' powers in schedule 8.The schedule gave a precise list of the new services that societies could undertake, but as it turned out most societies wanted to use the powers in slightly different ways from that envisaged in the schedule. Societies were therefore constantly frustrated by legal technicalities. Market conditions were also changing very rapidly, and societies had begun to make representations for extensions in their powers in a number of respects.
I announced a review of the schedule in October last year. The main conclusions were announced in my answer on 2 February 1988 to my hon. Friend the Member for Stafford (Mr. Cash). Following detailed discussions with the Building Societies Association, those conclusions have been given legal form in the orders.
The orders will do two things. First, they will turn schedule 8 inside out. Instead of—as at present—banning everything except narrowly specified powers, it will permit societies to do anything within broadly defined areas except what is specifically prohibited. That will provide a more sensible and flexible regulatory environment in which societies can operate. Secondly, the orders will implement a wide-ranging extension of societies' powers to provide financial and housing-related services.
The Act was intended to provide scope for gradually extending the range of powers available to societies. However, it has become clear from societies' early experience of the Act that this step-by-step process is not really appropriate. Societies need to know the broad scope of their powers for some years ahead to make sensible long-term commercial plans. Different societies will want to exercise different powers, and each individual society will probably want to diversify into only a small number of new areas. So I concluded that the right approach was to open up a wide range of new powers now, while limiting the speed with which any individual society could diversify into new areas.
This restraint will be exercised in two ways: first through supervision of business plans by the Building Societies Commission, and secondly by easing only gradually over five years the overall limits on societies' holdings of non-traditional assets. Consequently, individual societies will be able to exploit the new powers only at a prudent pace.
There will still be restrictions on what societies can do. They will continue to provide services in the main to the personal sector rather than to companies, but the proposed measures will enable them to compete more effectively in their primary markets. Subject to certain limited restrictions, societies will be able to own or take an equity stake in a life assurance company, to take a limited stake in a general insurance company, to own or take an 1351 equity stake in a stockbroker and to undertake fund management—including management of unit trusts generally, rather than just for the provision of pensions.
§ Mr. Robert McCrindle (Brentwood and Ongar)
In so far as building societies continue to operate as intermediaries, or even if they get involved in becoming insurance companies, what is the position regarding conditional lending? Some building societies in the past have been prepared to advance mortgages to prospective borrowers only on condition that some insurances be effected through the agency of the building society. Is anything in the orders set to confirm the position or, indeed, to reverse it?
§ Mr. Lilley
My hon. Friend has taken a close interest in this aspect of the matter for a long while. He will be pleased to know that the Director General of Fair Trading has said that he proposes to take an interest in the question of conditionality of services provided by building societies and, I believe, banks. So that will be covered. It will not, however, be covered by the orders that I am introducing tonight.
The other service that will be introduced is the provision of the full range of personal banking services that customers now expect.
Turning to the actual orders, the main one—the draft Building Societies Commercial Assets and Services Order —will replace schedule 8 of the Act with a completely new schedule. This new order will provide the following six broad service powers: banking services; investment services; insurance services; trusteeship; executorship; and land services.
A society will be able to provide any service within these categories unless it is specifically ruled out or restricted by other parts of the schedule. To undertake this wider range of business, societies may need to acquire new forms of asset. Schedule 1 to the draft order therefore contains provisions which will enable societies to acquire mortgage-backed securities and similar instruments; to undertake leasing and hire purchase; more readily to provide temporary bridging finance for house purchase; and to repurchase the residue of a securitised pool of their mortgages. This last measure will enable societies to participate in the secondary mortgage market.
Following on from this review of schedule 8, the Building Societies Commission will shortly consult societies and other interested bodies about making an order to permit societies to own or take an equity stake in companies involved in the acquisition of mortgages from other lenders.
The asset limits which constrain the rate at which societies can diversify will remain unchanged for the present, but it is proposed to increase these limits gradually in the future to provide societies with the scope they need to offer this wider range of services. The draft Building Societies (Limits on Commercial Assets Order), which is also before the House, proposes a gradual increase in these limits between 1990 and 1993 to the maximum extent possible within the primary legislation.
Two further orders are required to implement the conclusions of the schedule 8 review. These will be made by the Building Societies Commission, with Treasury consent, and come into force simultaneously with the rest 1352 of the package. The Designation of Qualifying Bodies Order will allow societies to invest in or support new subsidiaries. The Limits on Lending Order will, as previously announced, increase the limit on a society"s unsecured lending to individuals to £10,000.These negative orders cannot be made until the orders which we are debating tonight are approved. But drafts were placed in the House Library last month, along with a summary note of the intended provisions of all four orders, so that hon. Members could be aware of the whole package.
These proposals will create a more sensible framework for societies and provide them with a clear basis for their future planning. Societies will have the freedom to develop and compete across a wide range of financial services and to provide a much more flexible and better service to their customers. If these orders are approved, I would not expect any need for such a comprehensive package of secondary legislation on this scale for some years.
I commend these orders to the House.
§ Mr. Chris Smith (Islington, South and Finsbury)
The orders bring about fundamental changes to schedule 8 of the Building Societies Act 1986.They take virtually to the limit permissible under the Act the powers available to societies. They give increased flexibility and freedom and enable societies to offer a wider range of services to their customers.
It is perhaps worth recording a small note of sadness at seeing the old, trusted, familiar, heart-of-the-high-street face of the building society movement changing so dramatically as it has over the past few years. The orders accelerate that change. The trusty, stable, secure image of the building society movement, as part of the housing movement above all, is being modified rapidly before our eyes. We hope that the building societies will never become just any old financial institutions, like all the others. So we do have one or two regrets at the changes which are before us. We recognise, however, that the world is changing and that the building society movement has to change and adapt or it will lose out to less-scrupulous predators.
Before the October crash last year the building society movement was already losing out. Its market share of home lending had fallen below 50 per cent. It is now back up to about 70 per cent., but the movement faces fierce competition from banks and specialist lenders such as the Mortgage Corporation. Such lenders have readier access than the building societies to money on the wholesale market. Since October all that has become less of a problem because of the massive influx of funds into the building societies. Over the past four months they have averaged an inflow of funds of about £1 billion a month.
The movement remains large and is becoming larger. The largest 15 societies together hold about 40 million investment accounts and have about 6.25 million borrowers. We recognise the need for societies to be able to compete. Dramatic changes have been occurring and the orders will hasten more of them.
We shall not oppose the orders. Many of the measures are sensible and inevitable. It is right, for example, that societies should be able to offer proper bridging loans to people buying houses with building society mortgages. The involvement in the insurance business is a logical extension of much that has already been happening. However, we are concerned about the building societies 1353 offering customers too monopolistic a financial service. We, too, are concerned about the issue of conditional lending that was raised by the hon. Member for Brentwood and Ongar (Mr. McCrindle), and we welcome the information given us by the Economic Secretary that the Office of Fair Trading will look into that practice.
We sound a note of caution about the proposals on unsecured lending. We know that the Economic Secretary has not gone as far as the building societies wanted in that respect, and we are glad of that. The Government are right to be cautious. The level of unsecured consumer credit is rising too fast. In May, the volume of retail sales was 8.2 per cent. higher than a year before. Any thriving economy needs a healthy supply of credit, but it should not be lent at usurious rates of interest, as too often happens now. The same applies to the connected problem of rising levels of unsecured personal indebtedness. We hope that the Government will keep a watchful, cautious eye on what happens and on how cautiously the societies operate their unsecured lending powers.
We warmly welcome one positive change of recent years that has been enhanced by the orders—the issuing of current accounts and the direct competition for domestic business with the clearing banks. That does nothing but good for the consumer. The building societies have led the way in paying interest on accounts, in issuing higher-limit cheque cards and in increasing the use of high-technology banking systems. In all those respects, some building societies are beating the banks hollow, and a good thing too. It is about time some of our clearing banks earned the massive profits they have been making from domestic customers. The National Westminster bank, for instance, made a profit on its domestic business last year of £1 billion. It is about time we saw some improvements in service to justify that sort of profit.
We have one other powerful reason for supporting the orders. They make it less attractive to building societies to convert from mutuality to public limited companies. We are deeply sceptical about the rush by one society, the Abbey National, to convert and about the consideration being given to conversion by others. Certainly we welcome the change of mind that the orders and the expansion of powers under schedule 8 have brought about in some quarters.
I was interested to read in The Observer of 22 May, almost alongside a flattering photograph of the Economic Secretary, a quotation from the managing director of the Cheltenham and Gloucester building society, who had said last October that conversion was almost inevitable. However, in the light of the altered schedule 8 powers, he says:For a society of our size there are relatively few things that we want to do that we can"t do as a building society.That will be true for the great majority of building societies.
Our opposition to flotation is based on several principles. First, at present a society has a duty to operate in the interests of its members, investors and borrowers alike. After flotation, the interests of shareholders will be paramount, overriding all other interests. That cannot, in logic, be good for borrowers or for investors.
Secondly, building societies are remarkable and valuable financial institutions because they borrow short and lend long. That central feature of their financial operation is likely to be damaged by conversion. Thirdly 1354 five years after conversion a plc can be taken over by anyone. Who then will protect the housing interests of borrowers?
Fourthly, after conversion, borrowers may find their mortgages being bought and sold over their heads without their being consulted. That is already happening in the operations of the Mortgage Corporation. I should be grateful for the Economic Secretary"s advice on whether such an operation will be made easier for existing building societies under the orders.
Fifthly, we regret that no facility is built into the procedures for flotation for opponents to put then case to members at the society"s expense. We hope that the Building Societies Commission will make it clear at the outset that it will use its powers to block conversion if proper facilities and funds are not made available to ensure that the opposition case to flotation is put to members at the same time as the directors" support for flotation.
Because of the orders, we have to ask what is gained when a mutual building society transforms into a plc, except the ability for the directors to gain executive share options. Could that perhaps be not a million miles away from the mind of the Abbey National directors? Doubtless, however, there will be other opportunities to air our concern about flotation in greater detail. The argument that clinches for us the need to reform schedule 8 is that it gives societies the flexibility they need without the new unnecessary process of conversion.
Building societies are a valuable and vital part of our national life. They are mutual societies, owned by their members and acting in the interests of their members, and primarily in the business of lending money for home ownership and providing security for small savers. Long may they continue to do so.
§ Mr. John Butterfill (Bournemouth, West)
I welcome the orders and the increased scope that they will give to the activities of building societies. The orders will play a valuable part in increasing the general level of competition, which can only have long-term—and short-term—benefits for the consumers of their services.
I have every confidence that my hon. Friend the Economic Secretary has scrutinised these matters with his usual meticulous assiduity. I want to bring to his attention one or two points about which I have some concern. First, the explanatory note to the Building Societies (Commercial Assets and Services) Order—I am confining my remarks to that order—states:Article 5 varies Schedule 8 to the Act by replacing it with a new Schedulewhich is schedule 5.My hon. Friend the Economic Secretary said earlier that schedule 5 replaced schedule 8 to the Act.
However, paragraph 15 says:parts of Schedule 8 (powers to provide services) to the Act are hereby varied so as to have effect as set out in Schedule 5 below.That seems to imply that schedule 8 is not replaced in its entirety but is varied in part by schedule 5.However, the parts of schedule 8 to the Building Societies Act 1986 do not coincide with the parts of schedule 5 to the order. Many services set out in schedule 8 are not referred to in the order.
1355 Paragraph 1 of schedule 8, for example, refers to surveys and valuations of land and conveyancing services. I know that conveyancing services are dealt with in schedule 21 to the Building Societies Act 1986.One can see immediately that the two are not synonymous. I should be grateful for clarification. It is not clear to me or to some other hon. Members to what extent schedule 5 replaces schedule 8 and to what extent parts of schedule 8 will remain unchanged by the order.
My next question relates to the extension of the activities permitted under the order. It is a very broad and wide-ranging extension of powers into a number of activities in which building societies—at least in most cases —do not have an enormous amount of experience, such as banking services, unsecured lending, personal equity plans, collective investment schemes, the holding of investments and the establishment of pension schemes.
All those are very worthwhile extensions of the building societies" activities, and I have no objections in principle to those extensions. However, I am concerned that they should be properly regulated and I am especially concerned about investments, in view of some of the recent unfortunate circumstances relating to investments. We should be absolutely sure that regulation is as tight as possible. I hope that my hon. Friend the Economic Secretary will be able to assure me that the regulatory body set up by the Building Societies Association to monitor those activities will be equivalent to the other bodies that the Securities and Investments Board will be regulating under the Financial Services Act 1986 and that every possible scrutiny will be given to this particularly sensitive area.
I have a further concern about valuations. The House will recollect that there have been a number of scandals and alleged fraudulent activities relating to valuations carried out by building societies, especially when they have been connected with estate agency. I believe that this has been commented on recently by the ombudsman.
§ Mr. McCrindle
My hon. Friend is addressing himself to the question of surveys and valuations. Will he turn his attention to the first report of the building society ombudsman, who was set up by the Building Societies Act 1986, in which he draws attention to his lack of powers to investigate the many complaints about building society valuations? Will my hon. Friend refer to that report and to the desirability of embracing valuations within the ambit of the building society ombudsman?
§ Mr. Butterfill
The question of valuations has caused considerable public concern. I hope that additional powers will be given to the building society ombudsman.
I have some worries about what is permitted under the order. Under paragraph 5 of part III of schedule 5 there is a restriction on any employee of a building society, a subsidiary or associated body of which is carrying on estate agency work, whose duties include making reports on valuations or performing any other service for the subsidiary—the estate agency—or other associated body.
Clearly it would be wrong for building societies that might have two financial interests in the same transaction —especially the earning of estate agency commission—to be involved in such a conflict of interest. I should like the matter to be taken further, to include structural surveys 1356 and other matters that may be germane to whether the sale takes place. The ability to influence a sale or a purchaser on behalf of somebody providing finance could seriously prejudice the public interest and create unacceptable conflicts of interest for the employee concerned.
Given the incidence of fraud in this sector, I am more concerned that paragraph 5 of part III of schedule 5 is qualified by part IV, which deals with general powers. It gives a building society the power to arrange the performance of anything that it is not permitted to do under the preceding parts of the Bill. That commits building societies to getting other people to do things for them. One can foresee two building societies acting in collusion, with one estate agency arranging matters for the other. That is a danger from which the general public should be protected. They may not be adequately protected by the order.
The penalties in paragraph 6 of part IV of schedule 5 may not be adequate to deal with the possibility of particularly unpleasant fraud. The penalty isa fine not exceeding level 4 on the standard scale.I assume that that refers to the Criminal Penalties etc. (Increase) Order 1984.The maximum penalty under level 4 is £1,000.That may not be adequate, given that frauds have run into millions of pounds. Perhaps we should carefully consider whether that level of penalty is adequate.
I should like the margins by those selling foreign currency to be carefully monitored in general. Changing money has become an activity in which some people are not giving good value to the general public. I hope that my hon. Friend the Economic Secretary will give a general assurance that he will keep a careful eye on that aspect in relation not only to building societies but to all those who change money.
§ Mr. Lilley
I am pleased that the hon. Member for Islington, South and Finsbury (Mr. Smith) has welcomed the broad thrust of the orders and most of their component parts. His motivation is slightly different from that of the Government, but there is some overlap and a community of regard for the building society movement and the importance of updating it and giving it the freedom to compete and provide services for its customers.
The hon. Member for Islington, South and Finsbury asked me to reply on two particular points. He asked whether the process of conversion or anything in the schedule would make it easier for mortgages to be sold over the head of the borrower once conversion had taken place. I assure him that members" agreement would still be needed under the normal rules that operate, so there would be no adverse change.
The hon. Gentleman mentioned the risk of takeover five years after conversion. The converted building society would then be no more or less likely to be taken over than any other bank of similar size and ownership structure. As a bank authorised under the Banking Act 1979—once converted, in effect a building society becomes a bank—the agreement of the Bank of England will be needed for anyone to control more than 15 per cent. of the voting rights.
The hon. Gentleman gave as his main reason for supporting the commercial assets and services order which transforms schedule 8 the fact that it would make it less attractive for building societies to convert. I should make 1357 the Government"s position clear. The Government are neutral on whether any society should remain a mutual building society or should seek to convert. We have endeavoured, therefore, to remove unnatural obstacles and artificial incentives to conversion.
In the Budget, my right hon. Friend the Chancellor announced the removal of a number of tax obstacles, and this will come up before long in the Finance Bill. This measure removes an artificial incentive to convert. The hon. Member for Islington, South and Finsbury was right to say that some societies that felt impelled to consider conversion simply to escape from the straitjacket of the old schedule 8 now no longer felt the need to do so.
Once one has removed the artificial obstacles and inducements to convert, it is up to the members, because the members of a building society are its owners and must make the decision. The hon. Gentleman was correct to say that they should do so on the basis of full and proper information. It will be required, as the Building Societies Commission has made clear, that building societies inform their members fully and not just put facts representing and reflecting only one side of the case. I am not aware of any intention to go as far as the hon. Gentleman suggests and to require them to finance the distribution of views put forward by those opposing conversion.
In an intervention during the speech of my hon. Friend the Member for Bournemouth, West (Mr. Butterfill), my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) referred to the building societies ombudsman. I have already announced that we intend to review his powers and we hope to have the views of my hon. Friend the Member for Brentwood and Ongar and others on how wide they should be.
My hon. Friend the Member for Bournemouth, West said that he is worried about whether the parliamentary draftsmen have exercised sufficient skill successfully to replace schedule 8 of the order with schedule 5. I have complete faith in the powers of the parliamentary draftsman. Article 5 says:The parts of Schedule 8 to the Act are hereby varied so as to have effect as set out in Schedule 5 below.Schedule 5 is subtitled:The parts of schedule 8 to the Building Societies Act 1986, as varied by this order.The original four parts of schedule 8 are to be replaced by the new four parts of schedule 5.We need not worry about anything having been lost or retained unintentionally, but within those parts different aspects have been shifted around. Matters relating to surveys and valuations are now included under the title "Land services". Personal equity plans and unit trusts are included under the heading "Investment services". Money transmission and arranging credit are included under the heading "Banking services". It is all there somewhere.
§ Mr. Butterfill
I am sure that the ingenuity of the parliamentary draftsman is such that he must be right, but I can find no reference in schedule 5 to surveys and valuations in the section headed "Land services".
§ Mr. Lilley
My hon. Friend is a page or two ahead of me. Subparagraphs (a) to (i) of the section headed "Land services" include that information. I am not a sufficiently fast reader to check that it is all there, but if it is not there it is somewhere else. If necessary, I shall write to my hon. Friend and follow up these points.
1358 My hon. Friend referred to the fact that this is a very broad extension of powers at the same time as we are reorganising the structure of the schedule. He expressed concern that building societies may be inexperienced in many of these areas. That is true. However, it could become a self-perpetuating process. The only way for building societies to gain experience is to permit them to do so, but it is important that they should be properly supervised during that process. I think that my hon. Friend emphasised that point. We believe that, by and large, most building societies will wish to diversity into only one or two new areas at a time and to gain experience in them. If they were foolish enough to try to diversify right across the board and to take on more than they could possibly swallow, they would be prevented by the existing supervisory arrangements. The Building Societies Commission is required to vet their business plans. I do not imagine that it would accept a business plan that was not prudent and sound.
I agree that problems have arisen over investment advice. I assure my hon. Friend that, under the arrangements that obtain, investment advice supervision will be equivalent to and as tight as that in other areas that come under the aegis of the Securities and Investments Board.
I understand the point about valuations and, although it may not be correct, we can clarify that in subsequent correspondence. My hon. Friend the Member for Bournemouth, West is concerned that building society employees may, although they are forbidden to work for the estate agent subsidiary of that building society, be nonetheless permitted to work directly for the client. I understand that that is prohibited by the fact that building societies are allowed to carry on their estate agency services only through subsidiaries and not through their direct employees.
Collusion between building societies to cross-transfer their valuations is exceedingly unlikely and I will investigate the measures that exist to prevent it. I. am grateful to my hon. Friend for drawing that to my attention and, although I suspect that it is hypothetical, it is always important to investigate such things.
I shall look into the question whether penalties are sufficient. They are intended to match the offence.
On margins on foreign exchange dealing, we do not envisage building societies becoming major players in the foreign exchange markets. The provisions are to allow them to provide a service to customers who may want to obtain some foreign exchange for going on holiday, and so on. There is no direct control on margins on that. As in anything else, ultimately it is competition that is needed. By allowing more people to compete in the market, there will be more pressures to bring down the margins, and that is the important thing.
I hope that I have dealt with all the points raised by my hon. Friend the Member for Bournemouth, West and by the hon. Member for Islington, South and Finsbury who spoke for the Opposition. If I have not, or if on inspection any points need further elaboration, I shall write to them. Meanwhile, I commend the orders to the House.
§ Question put and agreed to.
That the draft Building Societies (Commercial Assets and Services) Order 1988.which was laid before this House on 19th May, be approved.