§ The Economic Secretary to the Treasury (Mr. Anthony Nelson)
I beg to move,That the draft Building Societies (EFTA States) Order 1994, which was laid before this House on 24th January, be approved.This order is made under section 14 of the Building Societies Act 1986, which allows the Treasury to designate countries or territories outside the United Kingdom where building societies may lend on the security of land. The order designates all the European Free Trade Area states: those which have joined the European Economic Area—Austria, Finland, Iceland, Norway and Sweden—together with Switzerland, which has voted against entry, and Liechtenstein, whose entry will be delayed.
The agreement on the European Economic Area, signed at Oporto on 2 May 1992, enables credit institutions authorised in any Member state of the European Community to extend their business to all the countries of the European Free Trade Area. A protocol signed on 17 March 1993 revised the agreement to take account of the no vote in the Swiss referendum, including the consequences that that has had in postponing Liechtenstein's entry.
The agreement has been implemented in the UK by the European Economic Area Act 1993 and regulations made under it. In particular, the passport available to banks and building societies under the second banking co-ordination directive has been extended to cover the European Economic Area by the Banking Co-ordination (Second Council Directive) (Amendment) Regulations 1993.
Building societies already have powers to establish mortgage lending subsidiaries throughout the European Free Trade Area, including Switzerland and Liechtenstein, by virtue of the Building Societies (Designation of Qualifying Bodies) (No.3) Order 1993, although they cannot undertake lending in those countries until this order comes into force.
This order completes the picture by enabling building societies to compete on equal terms with other financial institutions in the provision of mortgage services throughout the European Free Trade Area. Societies can already lend on mortgages in other EC member states by virtue of the Building Societies (Member States) Order 1992.
The order enables building societies to make full use of the extension, to those European Free Trade Area states which have joined the EEA, of the passport available to them under the second banking co-ordination directive. The passport allows societies to operate throughout the EEA on the basis of authorisation by the Building Societies Commission. For societies currently wishing to operate in Switzerland and Liechtenstein, separate authorisation by the host state will continue to be required.
The order represents a further useful and sensible measure to deregulate building societies' activities and to ensure that they can take full advantage of the expanded single market. I commend it to the House.
§ Mr. Alistair Darling (Edinburgh, Central)
I am grateful to the Minister for outlining very succinctly why the order is before the House. However, I would like to ask him several questions, the most fundamental of which is 24 why the order is being introduced now, as it is hardly urgent. As the Minister said, it first came before the House 3.35 pm last summer, but it was hastily withdrawn when the Swiss referendum went in an unexpected direction. I understand that the Government withdraw it because they did not wish Conservative anti-Maastricht Members to take another opportunity to humiliate them over the difficulties they then had. The order was before the House last Monday, when it was unexpectedly removed.
My main question is why the order is before us now, when the Government have not completed the review of the Building Societies Act 1986 which they announced on 20 January. Before we give building societies any more powers, we are entitled to ask a number of pertinent questions about the way in which they operate, particularly in relation to the Building Societies Act. On 20 January, the Government announced that they would review the way in which the 1986 Act worked. It would be helpful to the House if the Minister would tell us whether the findings in the review will be made public.
The note to editors that accompanied the relevant press release—as far as I am aware, there has been no announcement in the House—stated:It is hoped that the first stage of the review will be completed by the early summer"—I assume that that will be May or June. When can we expect the review to be available, and will it be brought before the House at an early stage? Many hon. Members are concerned about the way in which building societies operate, and building societies are concerned about a number of the restrictions presently imposed upon them.
As the Minister said, the Deregulation and Contracting Out Bill, which is in Committee, addresses in particular two problems about which building societies have complained. That Bill would make it be possible to grant third-party mortgages and to take part in syndicated lending, which I understand is of particular assistance in the funding of housing associations.
Building societies have long argued that if, banks are entitled to take part in syndicated lending, so should they. The Minister will be aware, however, that those two additional powers form just one small part of a submission—
§ Madam Speaker
Order. I am sorry to interrupt the hon. Gentleman, but the scope of the debate covers empowering building societies to operate in the member states of the European Free Trade Association. Is the hon. Gentleman aware of that? Will he return to the subject of the debate, which is limited?
§ Mr. Darling
I am conscious of the fact that the debate is limited. I had assumed, perhaps wrongly, that, in advancing an argument about why the order might not pass through the House, it was permissible to canvass a number of reasons to support that argument. The fundamental reason to which I referred was that it seemed premature to pass the order before certain other matters were addressed.
§ Madam Speaker
I have no objection to brief references, but the hon. Gentleman was taking too long over those references when making his case.
§ Mr. Darling
I shall be brief, Madam Speaker, and no doubt you will be the first to tell me if I take too long.
As I said, there were a number of other matters relating to building societies' powers generally that seemed to be 25 important when considering whether or not we should allow building societies to participate in lending activities in the EFTA countries.
The Building Societies Association said in crude terms that it was looking for a relaxation of the constraints on buildings societies to allow them effectively to become banks. Clearly, that is a fundamental departure from the way in which building societies presently operate, but the Minister will be aware that the association's submission at the end of 1992 mentioned a number of difficulties that were curtailing building societies' ability to conduct business. It asked for primary legislation to relax the constraints under which building societies now operate.
As I understand it, one of the problems facing building societies is that they have insufficient funds available to lend money at rates that will compete with banks operating in the same sectors. Before we decide whether we should allow building societies to start to lend money in EFTA countries, we should address the problems they undoubtedly face in this country.
It would be helpful if the Minister could say whether he proposes to review the matters mentioned in the submission of the Building Societies Association, which was made two years ago and with which he will no doubt be familiar. If he is of a mind to allow building societies effectively to become banks, that is a matter of some importance to us.
Banks are becoming increasingly aggressive in their attempts to take mortgage business. They can lend in EFTA countries and other European Union countries, whereas building societies cannot. Banks can also compete with building societies in this country. Are the Government prepared to allow building societies to increase what are called "nature limits" from 40 per cent. to 80 per cent.? One of the constraints on building societies is that they can borrow only 40 per cent. of funds outside the money which they raise through building society deposits.
Are the Government prepared to deal with those problems? If so, it will have an impact on how much money building societies are likely to lend in the EFTA countries.
§ Mr. D. N. Campbell-Savours (Workington)
This little order seems interesting. Will my hon. Friend, with his wide knowledge of the matter, say whether its implications are that money could be raised in low-interest countries and lent in high-interest countries? What are the implications of that for housing in the United Kingdom? Is that what this little proposal means?
§ Mr. Darling
Not quite in those terms. The order would allow building societies to lend money for the same purposes as they are currently allowed to lend money. The constraints on them for raising money in countries, whether high or low-interest countries, depend on the general constraints to which I was alluding. Basically, building societies have two main sources of income: first, from the money they take in through deposits; and, secondly, from the money they raise on the general markets. Where they raise that money is a matter for their judgment.
The question that arises is why building societies, given their problems with banks in this country, would want to raise money for lending in EFTA countries. It would be useful if the Minister told us the position on that. So far, he has not said why the order has been brought before us.
26 There is another fundamental problem. If building societies are to have wider powers, the House will need to look again at the prudential supervision of building societies. At present, they are supervised slightly differently from banks. In their submission, they make the point that they may reach the stage where it would be appropriate for their supervision to be carried out by the Bank of England, as opposed to the present regime. That is a matter for them, but the Minister needs to say a little about it.
In his brief introduction, the Minister said that EFTA states include Liechtenstein. The House will be aware that there is a problem with Liechtenstein. It is very well for the Government to say that, if building societies wish to invest in Liechtenstein, they now have a passport to do so in terms of the appropriate European directive, but Liechtenstein's regulatory regime is murky at best. We should not be satisfied with allowing building societies to operate in Liechtenstein or, on a reciprocal basis, to allow Liechtenstein building societies—if such things exist—to lend money in this country until we are satisfied that there is transparency, which does not exist at present.
I am not aware of the regimes in other EFTA countries or of any particular problems, but there is clearly a problem with the Liechtenstein authorities. If I heard the Minister correctly, he said that the Liechtenstein part of this order would not come into force for some time. If that is correct, it would be helpful to know when he expects it to come into force and precisely what the difficulties are.
On prudential supervision, it is important that, if the Government propose to change how building societies are regulated and, in particular, if they propose that they should be regulated by the Bank of England, the Minister should say whether that is part of his review.
§ Mr. Michael Bates (Langbaurgh)
On a point of order, Madam Speaker. As you have already pointed out, this is a narrow order relating to building societies. The hon. Gentleman has just referred to supervision by the Bank of England, which relates to a press release that went out in his name this morning. I seek your guidance on whether it is appropriate to discuss the make-up of the governing body of the Bank of England in debating an order on building societies in EFTA states.
§ Madam Speaker
Had the hon. Gentleman not been in order, I would have called the fact to his attention.
§ Mr. Darling
Madam Speaker, there are many ways in which matters can be raised in the House, not purely during a debate on a narrow order relating to building societies. I am sure that you would have been the first to stop me if I had attempted to go out of order.
My point is that there is concern about the prudential supervision of many financial institutions. If the Government propose to make a change with regard to building societies, we should know about it.
Also, if building societies intend to lend money to EFTA states or, indeed, other parts outside the United Kingdom, it is important to know what impact that will have on lending practices in this country. Some concern has been expressed about the discrepancy between the prevailing bank rate and the mortgage rate. Will this order affect that? Presumably the Minister must know the position, because I understand that the order was made in 27 response to representations by building societies. It is not something that the Government have brought before the House of their own volition or initiative.
Given that there is a differential of about 2.5 per cent. between the prevailing bank rate and the mortgage rate at present, can the Minister tell us whether the order will make any difference to that? Some concern has been expressed that building society mortgage rates are higher than they otherwise would be.
The order is extremely narrow. None the less, there are matters that concern us: the effect that increased building society activity in EFTA states will have on their activities in the United Kingdom, the question whether this order in any way pre-empts the wider inquiry that is being carried out by the Government, when we can expect to see the results of that inquiry and the whole question of prudential supervision which is crucial not only for building societies but for all financial institutions.
We are entitled to answers to those points before the House is asked to approve an order which may appear to be a comparatively small matter, but which may make a substantial change to the way in which building societies conduct their business. It is on that basis that I put those matters to the Minister. I hope that he will tell us a little more, rather than the bald statement that he made earlier.
§ Mr. A. J. Beith (Berwick-upon-Tweed)
This order has been generally welcomed by building societies, but I suspect more in principle than in practice. I know of little evidence of building societies preparing enthusiastically to operate in the EFTA states. Indeed, there has been little movement so far within the existing opportunities for building societies to carry on their activities in Europe. Bradford and Bingley is perhaps a rare example, because of its commitment in Germany. However, I believe that it had to obtain a German partner in order to carry out its activities.
For those of us who believe in free trade, the financial services sector still remains a minefield of obstacles, not least in some European countries. There are few signs that genuine free trade is taking place in financial services, and there are endless obstacles to doing so.
Any building society that contemplated taking advantage of the order could reasonably face a fair degree of debate among its members as to whether it was a prudent and wise step for the society to take. After all, building societies have expanded in various directions which have not proved to be a good idea. The expansion into estate agency proved to be a disaster for building societies. The development of various sorts of financial instruments—for example, home income plans—brought a trail of destruction in their wake.
Therefore, it is conceivable that some members of a society might well say that they did not want to see their society take expansion into EFTA states as the appropriate route. In that context, the increasing dislike of building societies for the processes of democracy by which a member could make clear his opposition to such a move is worrying.
The Financial Secretary will know that I spoke to the Building Societies Association last autumn and stimulated a bit of a debate in the trade press. For example, the 28 Mortgage Finance Gazette referred to members who had a difference of policy with the board seeking election to it. The editorial said:The biggest question being what would happen if the membership voted onto the board an ordinary member with no business experience and no obvious qualifications for directorship … it is not beyond the bounds of possibility. Boards should have in place a contingency for such an eventuality. They must be prepared to explain to members voting at the annual general meeting, that patronising though it might seem, the incumbent board does not feel the membership would be best served by voting for this particular candidate.The Minister must be made aware of the certain hostility towards the stirrings of democracy within building societies. That is rather worrying in this context. I hope that he will not add to it by, for example, releasing building societies from their obligation to notify their members of annual general meetings.
Building societies are quite ready to issue weekly circulars announcing new financial products or services. I am sure that the Minister's doormat is as littered as mine with letters from building societies offering such new services. If they could not be bothered to include in one of those mailings the notice of their annual general meetings, it would be a pretty poor do.
The accountability of building societies is important if they are to expand into new sectors such as the EFTA states. I am not sure that that is a live prospect at the moment for building societies, partly because of the obstacles that still exist in some of those states. Such major policy changes are surely what the building society democracy is supposed to regulate.
There are legitimate differences of interest between existing borrowers and existing lenders in a society, who might feel that consolidation is the most important objective and the professionals in the society, who want to be judged according to how effective they are in expanding it. They want to make it look bigger and more visible in a whole series of markets. Their careers and their ability to move on to a bigger building society may depend on how much of a record of expansion they can show.
That policy is not always in the interests of the existing members of a society, and those members should not be denied the means of expressing their particular interests when a policy decision of this kind, to expand into overseas markets, is considered.
I hope that in pursuing the order, which I support, the Minister will bear those considerations in mind.
§ Mr. Austin Mitchell (Great Grimsby)
I shall make a brief contribution, because this is a comparatively unimportant order. It is just one of the automatic provisions that we must make because of the Economic Area negotiations.
I do not view with any great joy the extension of our building societies into Liechtenstein, although I know that they could have provided accommodation for the late Robert Maxwell on his occasional visits. I do not view with any great joy the extension of building societies into Europe. I am aware of the new venture of the Bradford and Bingley building society in Germany. As the right hon. Member for Berwick-upon-Tweed (Mr. Beith) has just said, however, it has made it in partnership, because such ventures have implicit risks.
That is the problem to which I want to refer when I express certain doubts about the way in which building 29 societies have been allowed to function here. The Minister must consider whether those doubts should be of concern not only to him but to the regulators in the countries in which our building societies will be now allowed to operate under the order.
It is clear that the Government are going through one of their periodic deregulatory phases with regard to the building societies. It is less than 10 years since the Building Societies Act 1986 was passed, and already the deregulation task force has come up with a series of suggestions.
I wonder whether those suggestions for deregulation will incapacitate the building societies, because if they extend into EFTA countries or into the European markets, that might create a situation where they became unstable through being over-extended. That is my worry. I am also worried by the proposals in the Deregulation and Contracting Out Bill and the Minister's own announcement on 20 January.
We are only now managing to deal with the problem that the building societies got themselves into when they went in for a near frenzy of lending in the 1980s as part of the Lawson boom. That created a situation in which they placed themselves in unnecessary danger. I am therefore worried about the possibility of further danger, created by the order, which would allow them to lend on property in the EFTA states. We must learn the lessons from that frenzy and apply them to the lending institutions—particularly the building societies, but also the banks.
In his recent memoirs, Lord Lawson puts the blame fairly and squarely on the Bank of England for not stopping the frenzy of lending on property by the banks. We are talking about the building societies, however, and how they got themselves into a dangerous situation. It was not as bad as the savings and loan crisis in the United States, but it was still a dangerous situation.
I am worried about the order's provision for debt. We cannot presume that house and other asset values will increase for ever in the way they did in the 1980s. There could be periods in which property values in particular are stationary or perhaps even fall in this country, EFTA states and the European Union. Rather than relax regulations, we should think of imposing stricter accountancy.
The standards of recommended practice for banks on debt provision are much stricter than those recommended by Coopers and Lybrand in its report on building society lending three years ago and practised by building societies today. Societies make provision for repossessions, but they are not required to make the same automatic provision in respect of loans that are not performing, either because they have not paid out three or six months of the year or because they represent negative equity.
It follows as night follows day that loans that cease to perform will eventually become liable to repossession. The societies have discretion to decide whether to repossess, because they must make provision for repossession, but not for non-performing loans.
That situation could strain the societies' capital and financial base. As the number of repossessions has fallen and more people can keep up their mortgage payments, this is the right time to strengthen that financial base, and to ensure that societies can lend successfully in EFTA states, by tightening up recommended practice for nonperforming loans.
Building societies are, in a sense, the people's capitalism. The number involved in the mutual principle is 30 far greater than the number involved in banks. The majority of societies provide a better, more efficient service, and we do not want that endangered. As a concomitant of the societies' ability to lend in EFTA states, I hope that the Minister will consider stricter regulation—particularly in respect of non-performing loans debt provision.
I ask the Minister to rethink also the Government's current enthusiasm for the conversion of building societies to banks, which has not been a great success. The Abbey National is the only society that has taken the opportunity. Its loss provision on its estate agency business is substantial. Its decision to operate in that sector was disastrous.
Building societies are right to be cautious about converting themselves to banks. That would provide the freedom to be more irresponsible and to behave in a way that affronts the real role of building societies as popular capitalism and institutions to which the public en masse can entrust their savings and which provide help with property purchases. That is the real function of societies—not lending in Liechtenstein, Iceland or Norway.
At a time when the societies' ability successfully to lend in largely unknown areas and markets is unknown, such an order is irresponsible. I hope that the Minister will therefore deal with the issue of how we ensure the stability of the societies in this country before we encourage them in any of the overseas ventures that he is permitting by the order today.
§ 4.4 pm
§ Sir Peter Emery (Honiton)
I shall be brief. When my hon. Friend winds up, will he make it absolutely clear, because it is important that people outside the House should realise, that the order will do nothing to make it more difficult for a person to borrow from a building society, or make it any less likely that the amount of money being made available for lending on housing by building societies in this country to encourage house purchase should be any less?
Those seem to be the two problems for which people outside the House will want direct answers. They are very simple, and I think that the answers are quite clear, but it would be useful if my hon. Friend could give answers, so that there can be no doubt in anybody's mind about those two problems.
§ 4.5 pm
§ Mr. Dennis Skinner (Bolsover)
Following what my hon. Friend the Member for Great Grimsby (Mr. Mitchell) said, if we can take it for granted that, in less than a decade, £6 billion of irrecoverable debt has been written off on behalf of the top four clearing banks—Lloyd's, Barclays, NatWest and the Midland—will the order in any way, however marginal, assist in the problem of irrecoverable debt?
That is important to the British taxpayer and the electors generally who have had to foot the bill for that debt by the top four clearing banks, which otherwise would have been paid for in tax. Since it has been written off, it has not been paid in tax, so the taxpayer of Britain has lost around £6 billion.
The last thing I want to do today is acknowledge that, at the periphery, there is a small area of extension of powers for building societies. Will the order in any way, 31 however small, add to the problem of irrecoverable debt? There are 55 million people in this country, many millions of whom are taxpayers. The last thing we should want to do is give them the impression that we are enabling building societies to over-extend to the point that at some stage they will be able to write off some debt, with the taxpayer to pick up the bill.
One thing is certain: the ordinary individual taxpayer cannot go to the Inland Revenue and say, "By the way, I have £20,000 of irrecoverable loans that I have made to other members of my family, friends or whatever. Can I write them off?" If they are not in business, they will not be able to write them off. Therefore, I want an assurance on whether the order can in any way, however small, extend the possibility of building societies over-extending themselves to the point at which the taxpayer has to write off irrecoverable debts by the Government.
§ 4.7 pm
§ Mr. D. N. Campbell-Savours (Workington)
I wish to clarify one or two issues. As I understand it, no restrictions are placed on the amount of lending that the building societies will be able to organise. That is to say, in EFTA countries, as opposed to the United Kingdom, technically speaking—not for one moment would it happen—under this order, a building society could lend all its borrowings—in other words all its depositors' money—outside the United Kingdom. If I am wrong, I am sure that the Minister will clarify the position.
I ask that because, on the list of EFTA countries referred to in the order, without going into detail, the track record of some countries on inflation is quite appalling. I am looking at a particular country on the list where the levels of inflation in the past 20 years have been quite draconian, and where to some extent its wealth has accumulated only as people have been prepared to invest in property as a way of hedging against the impact of inflation. I would have thought that would have implications for lending institutions wherever they are in western Europe.
I am simply trying to establish in my own mind that there will be some, if not regulatory framework, discipline to ensure that a building society, by way of a negligent decision, might not place all its money in a risky market. It could be said that, at times—certainly in the 1960s and 1970s—it might have been risky to place one's resources in some countries on the list.
§ 4.9 pm
§ Mr. Nelson
Right hon. and hon. Members on both sides of the House have raised a number of pertinent points. I shall do my best to answer them, and to give the House the reassurance it seeks.
The hon. Member for Edinburgh, Central (Mr. Darling) asked why the order was being introduced now. The timing is partly due to the fact that many building societies hold their annual general meetings in the spring or thereabouts. Societies that qualify under the order—those with bookings of over £100 million—may seek the agreement of their members at those meetings to an extension of their activities in the way for which the order provides; the timing will facilitate that.
I appreciate that the hon. Gentleman raised a wider point, about the review of the Building Societies Act 1986 32 which I announced recently. The review will consider two of the proposals of the financial services task force: the raising of wholesale funding limits—which the hon. Gentleman mentioned—and the simplification of the procedures when societies merge. It will not, however, confine itself to those topics; all the main provisions of the Act will be considered.
This will be a two-stage process. First, officials from the Treasury and the Building Societies Commission will meet representatives of the industry, with the intention of putting a paper to me by early summer; secondly, if my colleagues at the Treasury and I think it worth pursuing the option of significant changes to the current legislation, there will be a more wide-ranging consultation process. It is hoped that that will be completed by the end of the year.
§ Mr. Austin Mitchell
May I ask a question arising from a point that I made in my speech? Will the review include a facilitation of the transformation of building societies into banks? That is what worries me. Where did that proposal originate? Did it come from the societies, which want it made easier to follow in the steps of the Abbey National, or did it come from the Government?
§ Mr. Nelson
We shall be considering fundamental questions relating to the legislation: I think it right to do so. As for where the calls are coming from, certain voices have been heard—particularly that of the banking sector, which is not surprising. The banks might prefer no legislation at all; they might want all building societies to become banks.
One building society has chosen to take up its legislative right to do so; the Abbey National obtained the support of its members for such action. Others—probably the majority of the building society sector—want to retain the so-called nature limits: they want to retain their identity as building societies. They want the protection of the Building Societies Act—or something like it—to remain, so that there is a demarcation between the activities of the sectors.
I shall consider all the issues very carefully. I shall also consider the representations that I receive. I am very conscious that building societies have a special place in people's hearts, as well as their pockets. It is no surprise that the hon. Member for Great Grimsby (Mr. Mitchell) is present: building societies strike me as very much a Yorkshire phenomenon.
It is important to remember the mutual history of building societies, which have provided both prudence and benefits, and the fact that historically—to a large extent, although not exclusively—there has been safety in bricks and mortar, which represent a nature activity or limit of building societies' activities. There must be compelling reasons for that to be abandoned—or, at least, for the removal of the legislative environment that protects or insists on it. Many people choose to deposit their savings with such institutions.
On the other hand, times change. When many of the building societies themselves are seeking liberalisation in regard to what they can do by way of advances, and from whom they can borrow—in the form of wholesale funding limits, for example—both the Government and, more especially, the Building Societies Commission, as the regulatory body concerned, have a responsibility to review matters from time to time, and to establish whether the legislation is up to date.
§ Mr. Oliver Heald (Hertfordshire, North)
The building society movement and Government policy for the past 15 years have increased the number of home owners in Britain from 56 per cent. to about 70 per cent. Will the order enable such progress to be made in Europe, with our building societies helping people in Europe to achieve the same? Is not the order part of a Conservative vision of Europe, and does it not clearly demarcate the difference between Conservative and Opposition Members?
§ Mr. Nelson
Given my strong sentiments about Europe and home ownership, I am tempted by my hon. Friend's grand design, but I cannot pretend that that ambition is embodied in this rather modest order.
§ Mr. Darling
The Minister seems to be saying that the Government have an open mind on whether banks should become building societies and vice versa. Does he agree that this fundamental question should be a matter of widespread public debate and not only ministerial debate? If he goes down that road, does he accept that he will have to review the regulatory regime governing banks? If it is proposed that the Bank of England should regulate building societies, we shall have to do something about the partisan nature of the court of the Bank of England.
§ Mr. Nelson
The hon. Gentleman goes beyond what I said. He must not put words into my mouth and suggest that I am intending to sweep away building societies, to remove their legislative base and to turn them all into banks. We are fundamentally considering the legislation—specifically, a number of provisions such as wholesale funding. It is right to do so from time to time. It is no part of my business or my intent to unsettle people who find security and favour in building societies, and I acknowledge and reiterate the importance that they attach to that.
A debate has been held not only in the House but in a Select Committee on the supervision of banking and building societies. I believe that one has been held on financial services more generally. I shall be interested to read the conclusions. That is certainly not the intention of the order.
The hon. Member for Edinburgh, Central referred to the court of the Bank of England, or directors of the board of the Bank of England. I assume that he was referring to some of the recently announced changes to the directors. I know that he has complained publicly about the fact that the prominent trade unionist, Mr. Gavin Laird, who had two terms as a member or director of the court of the Bank of England, was not renewed in that capacity.
That does not reflect on Mr. Laird, whose contribution and standing in the Bank and elsewhere is extremely high, but it should be no part of policy on the boards of public bodies, on the Bank of England or on other institutions that automatic constituencies must be represented. I am not suggesting that the hon. Gentleman is saying that, but all such appointments are considered on their merits, and from time to time it is considered that changes must be made. In this instance, where somebody was brought in who has particular experience of small businesses, that was deemed to be of some benefit to the Bank of England.
§ Mr. Darling
I am arguing not that the court of the Bank of England has constituencies but that, for the first time since 1946, no one representing trade union interests has been reappointed. Other people have been on the court 34 of the Bank of England for longer than two terms. The Prime Minister, for some reason—either weakness or prejudice—felt unable to reappoint Mr. Laird.
It is a matter of regret that the court should be the victim of such partisan behaviour. I am surprised, because it stands on its head everything that he has said about the new approach, that the Prime Minister has decided to take a partisan and prejudiced position on the court.
§ Mr. Nelson
I am naturally very sorry that the hon. Gentleman should feel that that is the case, because it certainly is not; nor was it the intention. Apart from the six executive directors, the court of the Bank of England will comprise six members, all with interests outside the south-east of England, who will represent industry, five people who have interests in finance and banking, and one accountant.
There is no intention to be partisan in this matter, as it is far too important for party politics to play a part. It is much more important that the right people are chosen for the job, especially in supervisory and regulatory bodies. That is what is done and what is uppermost in the mind of my right hon. Friend the Prime Minister when he advises the Queen on such appointments.
§ Mr. Beith
Lest the Minister should think that it is a knee-jerk reaction confined to the Labour party defending its trade union friends, may I tell him that it is widely felt that it was undesirable the Government should not continue a long-established practice of ensuring that at least one person on the court of the Bank of England was drawn from a trade union background?
§ Mr. Nelson
I hear what the right hon. Gentleman says. He at least used the phrase "drawn from", whereas the hon. Member for Edinburgh, Central used the word "representing". I was trying to say that it is important that people elected to the boards of public companies are not delegates from constituencies but are people who will deliberate and contribute to important decisions in the public interest, not represent particular points of view. I happen to believe that there is sometimes a role for prominent trade unionists as well as others in this institution but that is not always the case. From time to time, there have to be changes and variations, and such there have been.
The order is a useful measure that will help societies compete in Europe. It will be some time before the review of the Building Societies Act 1986 is complete, so it is sensible to proceed with the order straight away. It has in fact been delayed, as it was originally intended to be made in 1992 but, when Switzerland decided not to join the EEA, the order was withdrawn until the position became clear.
At present, building societies have the power to provide financial services throughout the EEA and to undertake mortgage lending throughout the European Union. The order completes the picture by extending mortgage lending to the rest of the EEA and the other EFTA countries. If societies are to adopt it at their forthcoming annual general meetings, it needs to complete its passage through the House as quickly as possible.
The hon. Member for Edinburgh, Central asked specifically about Liechtenstein. As he is probably aware, Liechtenstein's entry into the EEA has been postponed, but it has already signed up to the agreement in principle. Orders have already been made allowing building societies to carry on a range of activities in all EFTA states, so the order is consistent with them. There is no prudential reason 35 to exclude Switzerland and Liechtenstein, and it will avoid the need for another order when Liechtenstein joins, and if Switzerland eventually ratifies the EEA agreement.
Several hon. Members raised the same point. There has been no reference to prudential notes. I tell the hon. Member for Workington (Mr. Campbell-Savours) in particular that the Building Societies Commission, which is the supervisory body for building societies under the 1986 Act, promulgates good practice and the rules that must be observed by means of prudential notes.
There is a prudential note covering aspects of foreign lending, which is included in the Building Societies Act 1986 prudential note 1992/2. The prudential notes contain guidelines, requirements and quite detailed obligations for reporting, assuring capital adequacy, through-provisioning and other matters. They are the working tools that the Building Societies Commission uses to implement the requirements and the restraints of the 1986 Act.
The right hon. Member for Berwick-upon-Tweed (Mr. Beith) urged that there should be no relaxation of the restrictions and democracy of building societies. Indeed, many of the restrictions and responsibilities are laid down in prudential notes.
The right hon. Gentleman was quite right to say what he did, because the sentiment underlying his speech seemed to be that, if building societies were allowed too much freedom, either to change themselves without the agreement of their members or to engage in practices in an executive and unilateral way, they might over-extend themselves and bring not only risks to depositors with a particular building society but, potentially, a systemic risk to the movement as a whole.
Both the Bank of England, in its overall surveillance of the banking and financial markets, and the Building Societies Commission, under its statutory obligations in the Act, are extremely mindful of the fact that I, in my ministerial capacity, meet the chairman of the Building Societies Commission regularly to ask relevant questions about the implementation of those responsibilities and to ensure, as far as we possibly can, that prudential obligations are observed.
Some hon. Members, including the hon. Member for Great Grimsby, asked about provisioning practice. Building societies have made provisions. Interestingly, they have made significantly fewer provisions in their latest reports than was the case a year ago.
The results of the building societies have been relatively good compared with those of many of the commercial banks in recent years. They have had a lesser exposure to provisions than many of the banks have. That may reflect the business they do, although there has been a serious recession in the property industry.
The fact that the societies have remained so solvent and strong, and have retained the affection and respect of high street depositors and the public generally is an interesting and positive reflection on their performance during a difficult period.
§ Mr. Campbell-Savours
The measure seems to have the general support of the House. In the guidelines to which the Minister referred, is there adequate consideration of the political implications of lending in certain areas? I do not want to go into detail about what I think the fortunes of Finland will be in 10 or 20 years' time, except to say that 36 they may well be difficult in the light of recent developments in the former Soviet Union, yet Finland is on the list.
I do not expect that, if one delved into the detail of the documents which, the Minister says, exist for building societies, one would find a specific reference to Finland. However, to what extent are the building societies taking into account the implications of political changes in this much enlarged area, which now includes the whole of the European Union and the EFTA countries? They are a large part of the world.
§ Mr. Nelson
There is already a general interest among building societies in expanding into Europe, although so far only three of the larger societies have gone ahead. The Halifax building society has established a subsidiary to carry out mortgage lending in Spain. The Woolwich has subsidiaries in Italy and France. The Bradford and Bingley has recently established a bausparkasse, which is the nearest German equivalent to a building society.
Societies cannot realistically consider plans to expand into EFTA states until the order is made. I am sure that, in doing so, they will take account of the political and economic risks that may be involved.
It is also important that the hon. Member for Workington and the House generally understand that, under the prudential note requirements, before building societies can go ahead, they will have not only to seek the agreement of their members—that is, 75 per cent. of those who vote in a meeting—but to adhere to the prudential note requirement of reporting and to comply with the requirements laid down by the Building Societies Commission.
The hon. Member for Workington and others were concerned that moneys raised might over-extend the building societies, or that risks might be involved. The prospects of that are extremely limited. We are dealing here only with the largest building societies, with more than £100 million. The building societies will have very small exposures or interests in these countries, if they have any at all. The building societies already have the right to undertake certain banking activities. The order will allow them to lend against the security of land.
If building societies lend in a particular country, which may involve foreign currency, there may be an interest rate differential. Some hon. Members mentioned interest rates. Equally, there will be an exchange rate differential. The point is that it is most unlikely that a building society would want, or that the Building Societies Commission would allow, a significant exposure to a foreign exchange risk, even where there was an interest rate differential.
Normally, a building society would cover its position in the derivatives market to match any currency risk which was involved. Certainly it is not the intention of the order to enable any building societies either to expose British depositors in sterling to substantial exchange rate risks and exposures elsewhere, or substantially to enhance or increase their activities in foreign currency countries compared to here, and I hope that the order will not enable them to do so.
My right hon. Friend the Member for Honiton (Sir P. Emery) rightly said that the order will not make any difference to the savings practice or to the security of people in the country who deposit money with their building societies. It would be alarmist and incorrect to suggest that it would make a difference. It provides a fairly 37 modest, liberalising measure to enable building societies to do what banks in Britain are currently able to do—lend against securities in any EFTA state. Why should not a building society be able to do that against the security of land?
§ Mr. Austin Mitchell
It is not such a relief to my mind, because of the danger that those financial institutions have delusions of grandeur, see themselves as big players and want to get into currency speculation and all the rest of it.
Another danger is that lending which could usefully be pursued and which the building societies would have to pursue on the market with the developing, interesting alternative to the simple house purchase, such as becoming involved in housing associations or becoming landlords, would be curtailed by their desire to lend in Europe. Will the Minister tell us where the building societies will raise the money that they will be lending in the EFTA countries? Will it be raised in local markets or come from money raised in Britain?
§ Mr. Nelson
The building societies will be able to raise money to lend in the local markets. That will enable them to lend there, and they will be able to raise money there. Whether there is a net exposure in those EFTA countries is a matter for the overall policy of the building societies.
The extent of that exposure will be overseen by the Building Societies Commission, as will the extent to which that exposure may translate itself if there were not a derivatives cover of it into a foreign exchange risk. It would be quite wrong to suggest in any way that this modest order will suddenly or in the course of time result in massive exposures of risk to Finland, Liechtenstein or any of the EFTA states. That would be the wrong interpretation.
§ Mr. Nelson
I shall give way for the last time. I know that we have time, but I am sure that the House has other business with which it wishes to proceed.
§ Mr. Campbell-Savours
The Minister referred to net exposure. The right hon. Member for Honiton asked an interesting question. If I understand his original question, 38 it was that the Minister give an assurance that no moneys currently available for investment in the housing market in the United Kingdom would be lost to other markets, and that the order would have no effect on the availability of moneys that a building society is open to lend.
That is not quite the case. The Minister assures the House that there will be no great shift. However, all that I am putting to the Minister is that, in the light of political developments in Europe, or in the European Union over the next the 10 or 20 years, a shift may well take place. It is possible to foresee conditions in which, to some extent, there may be a crowding out of the UK market.
The Minister cannot foresee that now, but is it not possible that that may happen under the arrangements being introduced? I support the arrangements, but I am simply trying to extract from the Minister an understanding that that could happen under those arrangements.
§ Mr. Nelson
It is a fair question, but I hope that I can reassure the hon. Gentleman that my right hon. Friend the Member for Honiton is, to all intents and purposes, right. It will not be the case that, in some way, deposits made in this country will be unavailable for lending here, and that the prospects for mortgages will be crowded out by the order. The order will provide for building societies, either by way of subsidiaries which they set up in the EFTA countries, or directly through branches, to engage in secured lending and to receive deposits.
Of course it is possible that, in an individual EFTA state, there may be a net exposure given the totality of the building societies' assets; but a small net exposure in a particular area of activities is quite different from the overall assets of the building societies being put at risk in some systemic way. So it will be business as usual.
There is nothing for building society depositors and savers to be worried about in this modest measure. To the extent that it puts building societies on an equal footing with banks, it is a good move forward. I commend it to the House.
§ Question put and agreed to.
That the draft Building Societies (EFTA States) Order 1994, which was laid before this House on 24th January, be approved.