§ Order for Second Reading read.
§ 12 pm
§ Mr. Austin Mitchell (Great Grimsby)
On a point of order, Mr. Deputy Speaker. The Bill changes the balance of power and the relationship between building societies that converge and those that remain mutual. Three or four major societies, including the Halifax, are in the process of conversion. That is going to mean that a lot of money will go to members of those societies. Is it not in order to ask Members speaking on the Bill, if they are going to benefit from a building society's conversion, which is going to give them free shares or money, to declare that as an interest?
§ The Economic Secretary to the Treasury (Mrs. Angela Knight)
I beg to move, That the Bill be now read a Second time.
It gives me great and long-awaited pleasure to ask the House to give the Bill a Second Reading. I understand that the opposition parties are prepared to co-operate fully in passing it into law in good time and, if that is true, I thank them for it.
There have been two years of consultation on the Bill. It is one of the first Bills ever to be produced in draft form. The benefits of that have been seen in changes that have been made to the Bill as a consequence of the consultation. Everyone who has been involved has been pleased by that process.
§ Mr. Frank Field (Birkenhead)
The Minister says that there has been extensive consultation. With whom has the consultation taken place? Is there not a problem in that some building societies have wanted to convert from their mutual status so that the directors can receive share options? That has been one of the big driving forces. Whom has she consulted other than those who will make a considerable amount of money out of selling the trust that members have built up in those societies?
§ Mrs. Knight
Those are points that I shall come to later, but, if I may answer the hon. Gentleman briefly, the consultation has involved all building societies and all financial institutions. I am delighted that a considerable number of others with an interest in those matters, both individuals and groups, have also given their comments on the Bill. It has not been a confined consultation in any way. It is one of the broadest-based consultations that has taken place.
§ Mr. Field
I am a member of a number of building societies. I have not once been asked by the leadership of those societies what my views are. If political parties asked for or were involved in consultation and did not consult any of their members, there would be a lot of flak in a debate such as this, yet it appears that that is precisely what has happened with members of the building society elite. They have all talked to the Minister, but none of the members has.
§ Mrs. Knight
That is not quite correct. We have heard from mutual building societies and from building societies 77 that propose to convert, but we have also heard from the associations that represent them, from the associations that represent the employees of the building societies, of which there is more than one representative group, and from a range of individuals who are members of societies—both ones that are converting and ones that are staying mutual. We have also heard from organisations such as the Consumers Association. That is why I say to the hon. Gentleman not only that this is one of the widest-ranging consultations that has taken place, but that we published at an early stage a draft Bill, which enabled individuals and all those groups to go through it in considerable detail—in far greater detail than would otherwise have been the case. We therefore have answers and comments that we would not otherwise have had. For those reasons, I believe that we have before us a Bill that is wanted by the mutual organisations, perhaps in particular, as they are seeking that level playing field in which to operate in future.
§ Mr. Austin Mitchell
If the consultation has been so long, and it is certainly true that much of the review work began in January 1994, if the Bill has been ready for so long and if the societies are so interested in it, why is it being introduced now in this scuttle-like fashion in the dying days of a dying Parliament?
§ Mrs. Knight
The Bill was first published in draft form in March last year. There was then, if you like, the last stage of consultation and it was published in its final form in the autumn of last year. I am sorry, too, that it was not possible to include it in the Queen's Speech, but the hon. Gentleman will know that some legislation was required, particularly that relating to the tragedy at Dunblane, which meant that something had to give way.
I always said that, if it were possible to find a slot towards the end of this Parliament, which is when slots come up, I would introduce the Bill. A Treasury Minister and a shadow Treasury Minister are taking part in the debate. We have only just come out of the Committee that considered the Finance Bill, the last stages of which are tomorrow. It is difficult to see any earlier point at which this legislation in its final form could have been introduced.
§ Mr. Tim Renton (Mid-Sussex)
I whole-heartedly agree with the decision to present the Bill in this Session. Many building societies such as the Alliance and Leicester and the Halifax are about to become plcs and it is good that societies should know the precise form for doing that. The Bill makes more evident the changes in the building society world.
§ Mrs. Knight
My right hon. Friend is correct. Those organisations have been involved as much as the mutual societies in the consultations not only after the Bill was published in draft form but before that.
The Bill is strongly supported by a wide range of people. The Building Societies Association has said that societies warmly welcome its proposals and the Portman building society has said that it could not have come at a better time. The Bill will ensure that societies which choose to remain mutual can develop their business as they wish without the unnecessary constraints of the current legislation.
78 The Building Societies Act 1986 was a liberalising measure. For example, it enabled building societies to become banks if they wished to do so and it allowed mutual societies to provide more services while remaining mutual. As a consequence of that Act, societies have thrived and developed. Some have decided that their future is as banks. The 16 million people who are due to receive a windfall as a consequence of the Halifax, the Alliance and Leicester, the Woolwich and the Northern Rock building societies converting would not have been able to benefit in that way without the 1986 Act.
My right hon. Friend the Deputy Prime Minister made some of those points quite clear in a Sunday newspaper. I was surprised to find, in that same newspaper, that my right hon. Friend's remarks—that it would enable building societies to convert to publicly quoted companies—were taken to be the Bill's prime aim. That is incorrect. My right hon. Friend made it quite clear that the 1986 Act enables that conversion to take place. Although much is made of the four converters, 72 societies will remain mutual. The 1986 Act prevents them from offering the range of financial services that their competitors, such as banks, can offer. That means that that Act unfairly restricts the mutual sector.
The Government are not in the business of wishing societies to choose one route or another. We aim to change the legislation so that a society can make its own decisions about its future. To use that rather hackneyed expression, we seek to give societies a level playing field because, currently, it is tilted against them. The Bill will introduce permissive legislation because none of us can second guess the future, especially in the financial sector, which is a fast moving market. I expect that, as a result of the Bill becoming law, the mutual societies will flourish and develop and will continue to have close ties with home ownership and with local communities.
The Bill will preserve the unique characteristics of building societies as mutual organisations that are owned by members and that look after savings, ranging from small amounts towards Christmas or a holiday to the larger sums built up over a long time for retirement. Their primary purpose will be to enable people to make the most important purchase in their lives—the purchase of their homes.
As I have said, the Bill is the result of a long consultation process but its objectives are simple. It aims to increase the commercial freedom of societies and bring in increased competition and wider choice for customers. It will also update the prudential supervision of societies by the Building Societies Commission, and it will bring societies even closer to their members and underline their mutual identity.
Building societies are renowned as safe havens for money and are rightly popular with their members. At present, even with gradual deregulation, societies are not free to plan for the medium to long term in the way that their business requires. They are constrained by legislation because they have to wait for new powers to be added. Under a permissive approach, societies do not run the risk of being shut out from new developments, such as considerable technological changes. The Bill will sweep away the qualifying assets holding which places strict limits on societies with commercial assets of £100 million or less. Further freedoms will be created by widening the scope of the lending limits and the principal 79 purpose so that lending to finance rented housing will, for the first time, be part of a society's core business, if it chooses.
Preventing societies from developing their full potential and preventing customers from getting the friendly and efficient service in the wide range of retail financial services that they have come to expect from savings and mortgages does not make sense in 1997. Societies have a proven track record for prudence and performance, and should be allowed to use their financial experience and expertise to compete with other institutions to provide people with the services that they want. The Bill provides that a society can carry on any business that is set down in its memorandum, subject to keeping within the nature limits, and to the Building Societies Commission's prudential supervision.
There will still be a few restrictions. Societies will not be permitted to trade in commodities or currencies or to be market makers in securities for transactions over £100,000. As with the lending limit, the Bill provides a power to vary those restrictions if that becomes desirable in future. The Bill makes some improvements to the ombudsman scheme. Every authorised society is required by law to belong to an ombudsman scheme that meets the requirements of the 1986 Act and the Bill. The supervisory body is the Building Societies Commission. Its functions include promoting the protection of funds that people have placed with societies and the financial stability of building societies generally.
The framework of day-to-day supervision has stood the test of time. Under that system, the building societies are healthy, well capitalised and well managed and investor funds have been protected. No regulator can be complacent and we see scope for sharpening the commission's power to deal with problems if and when they arise. Everyone knows that a stitch in time saves nine.
Accountability to members will also be improved. Societies are already accountable. Many customers enjoy and appreciate their position as members and the extra relationship with the society that that brings, which is more than simply being a purchaser of goods or services. However, Parliament and societies can improve on that. During the consultation, the champions of mutuality often pointed out that in a building society there is no interest apart from that of the customers: they and they alone are the people for whose benefit a society is run. Directors are the custodians of the society for its present and future members and owe no allegiance to any outside group. Improving the availability of information for members and enhancing their ability to have a say in what they think should happen will strengthen those bonds of mutuality. Borrowing members will have broadly similar rights to a say in the running of a society as investing members.
§ Mr. Renton
Perhaps my hon. Friend can inform my ignorance. She is rightly talking about the importance of members in societies that continue to be mutual. What rights or possibilities have those members if, given the examples of the Alliance and Leicester and the Halifax, they would prefer their societies to convert into plcs so as 80 to have the sort of windfall that members of the Halifax and the Alliance and Leicester building societies will receive?
§ Mrs. Knight
In terms of accountability, members of societies which wish to remain mutual will have a far greater amount of information about their societies, and that is good. Equally, it is undoubtedly correct that members will be able to make their views known to the directors of their societies. Of course, only the directors could propose to a society general meeting or annual general meeting that it should convert and become a public limited company.
I should tell my right hon. Friend the Member for Mid—Sussex (Mr. Renton) that those are serious decisions. Some societies see their future as banks—we know their names only too well—but many others have undoubtedly served very well as mutuals. In recent articles, mutual societies have very clearly made the case for the benefits that they can offer to borrowers and savers by remaining mutual. I think that any member of any society must not only consider what might happen tomorrow but take a long-term view of their mortgage or savings with a society and attempt to attain benefits over the long term and not in the short term.
Accountability is part of the overall package, and it was a part of the points made by my right hon. Friend. It is important that a society should not change its strategic direction without consulting its members. Any proposal to expend more than 15 per cent. of a mutual society's own funds on the acquisition or establishment of a business outside the society's core activity of mortgage lending will require members' approval.
There are some changes to the mechanisms of conversions and of takeovers, although the broad framework and required threshold for voter turnout and support remain intact. Furthermore, if a society intends to transfer out of the sector and simultaneously to increase the remuneration of any director or other officer of the society, the members should be able to vote on that proposal separately from the main transfer resolution.
A special and important feature of mutual organisations is that customers are the members, with the right to vote on the society's resolutions. The Bill will provide that, in future, any individual who saves with a society will have a membership account. Societies will still be able to use deposit—non-membership—accounts for corporate accounts and, if they choose to, for those who want current accounts, deposits at overseas branches, qualifying time deposits or certain other services.
During the consultation and before the introduction of the Bill, there were calls for changes to the rules on distributions of bonuses on a conversion or takeover. The 1986 Act forbids distributions of cash bonuses to shareholding members of less than two years and to borrowers, although the courts have held that the Act does not rule out certain flat-rate distributions of free shares to members of less than two years. Societies and some others have asked that Parliament revisit and change that to rule out any bonuses for members of less than two years—which is often referred to as strengthening the two-year rule.
The Government do not propose to make that change, and I shall say why we have taken that decision. First, a society that wishes to convert or to be taken over already 81 has a discretion, if it so chooses—by choosing the qualifying date for bonuses—to rule out recently arrived members. It is not for the Government to dictate to a society which members it should rule in and which it should rule out. It is for the society to make those decisions, and we have given societies the freedom to do so.
Secondly, the law as interpreted by the courts has now stood for almost eight years. During that time, a number of societies have proposed to convert or to be taken over. In terms of member numbers, a bigger shift has already occurred than is likely to recur in future. A change made now affecting any possible future conversion or takeover would be seen as unfair and incomprehensible by a society's members. I say in all seriousness that, if the Government made a change now to rule out any future distribution to members of less than two years, and in future should another society convert or be taken over, the Government of the day would be under unstoppable pressure to reinstate the current law.
A part of the Bill affects the position of building societies that become public limited companies by transferring their business to a specially formed company—by conversion rather than by takeover. Clause 40 abolishes the priority liquidation distribution right—the PLDR. The reason for abolishing it is that it is no longer valid, as the situation in 1986 is not the current situation.
Clause 41 deals with the so-called "five-year protection period" for converting building societies. The 1986 Act states that, during a five-year protected period after a building society has converted to plc status, the successor company is required to prevent any one shareholder from holding more than 15 per cent. of shares, effectively protecting the company against takeover. At the time that that provision was made, the situation in financial markets was very different from that of today. Moreover, the converting societies are substantial and strongly capitalised, and three out of four converters are likely to be in the FTSE 100 index.
I realise, however, that a converted society may need to take time to become established in its new form as a bank. We have therefore decided on a middle approach. I propose in most circumstances to leave in place the five-year protection. However, if a converted society, which is of course a new bank, wants to acquire other authorised financial institutions—such as another bank, building society, insurer, friendly society or investment business authorised under the Financial Services Act 1986—it will lose its protection. It quite clearly would be unfair on other financial institutions if one type of institution which is protected is uniquely allowed to go on the acquisition trail of another financial institution that is not protected.
The Bill is one of the first to be published in advance as a draft, and I believe that the benefits of that practice have been shown. I thank all those who have taken an active part in contributing to it. The legislation is an endorsement of mutuality, and it will take into the next century the best elements of self-help—which were the basis for the movement in the past century. The Bill gives mutual building societies an assured future, and I commend it to the House.
§ Mr. Mike O'Brien (North Warwickshire)
Labour welcomes the Building Societies Bill, which is at last before the House. It will benefit millions of consumers 82 and building society members across the United Kingdom. For that reason, the Bill deserves—indeed, commands—widespread support, both inside and outside Parliament. Labour would not have drafted particular aspects of the Bill in the same way as the Government, and I shall outline those differences later. Overall, however, we want the Bill, amended or unamended, to become law before the general election. We will give it a fair wind in this debate on its Second Reading, and we will support its broad principle next week in Committee and in the debate on Third Reading.
Labour's position on conversion is that it is for members to decide whether they want their building society to convert or to remain as a mutual. Many new shareholders have substantially benefited from conversion. Of course we wish them well, if that is the course that they want to take. We also wish the converted building societies well in their new endeavours as banks.
The conversion process has also—perhaps paradoxically—helped mutuals, as it has awakened in them the need to be in close contact with their members. In recent years, the overall philosophy of mutuality has been revived—after some building societies had undoubtedly become a little remote. Therefore, the conversions, bonuses to members and changes in the market have had important benefits beyond providing a stimulus to the economy. However, there is a need for balance, and that is what the Bill is all about.
There is a public interest in maintaining choice in the market. The great strength of the British financial services industry is its diversity and choice. It provides access to investment and savings opportunities to millions of people. That choice currently includes the option to join a mutual building society, and it would indeed be regrettable to lose that choice.
Mutuals do not have to pay dividends to shareholders, and they therefore have an opportunity to use their assets to offer cheaper mortgages and better interest rates on savings. Some mutuals are already doing so. A recent survey in What Mortgage suggested that, of 72 building societies, the 25 best opportunities were with mutuals. One of the large mutuals—I will not advertise its name—told me that on a range of products it is offering 0.7 per cent. higher savings rates than its main high street competitors. Its standard variable mortgage rate is 0.2 per cent. below that of other market leaders.
Many would argue that mutuals play a unique part in securing good value for the consumer as well as the opportunity to join a self-help organisation and tap into the important heritage of mutuals. Of course, converted societies have their strengths too, but mutuals can arguably play an important part despite their smaller proportion of the building society sector.
Today, many believe that mutuality is in danger. Last week, I heard a speaker on, of all things, the "Thought for the Day" spot on Radio 4's "Today" programme graphically warn:We may be selling a great cultural heritage for a mess of pottage".The warning was that there may be large bonuses for individuals now, but that that may reduce the choices for all savers and borrowers in the future.
Building societies were one of the great successes of the self-help movement among working people in Victorian Britain. Indeed, the first recorded building 83 society, the Kettley building society, was set up in Birmingham in 1775, many decades before Queen Victoria, in what is now my locality. Like friendly societies and co-operatives, their motivation was mutual self-help rather than profit, although, of course, the profit was the way to pay good interest rates on savings. They served local communities and were accountable to their members. Most of us in the Chamber, like the vast majority of the British people, bought our homes with the help of a mutual building society. However, their success produced problems.
As markets became competitive, societies merged to reduce overheads. In 1900, there were 2,286 building societies; by 1950, the number had fallen to 819 and, by 1990, it was down to 80. The amalgamation of societies sometimes made them more remote from members. They had huge assets but could be unadventurous in using them. Their very reliability and stability were advantages in attracting customers but, in a few cases, constrained innovation.
Societies were also operating under a prescriptive regime, introduced initially in legislation in 1874 and then amended by the Building Societies Act 1986. That legislation restricted their operations under an out-of-date and highly restrictive regulatory framework. It prevented them from taking advantage of the new opportunities of an expanding financial services market.
In the late 1980s, some societies began to believe that mutuality had become a straitjacket. They wanted to provide a wider range of services for their members, and conversion was seen as the only option. Two thirds of the building society sector has converted. The process began in 1989 with the Abbey National flotation. However, one third of the sector remains mutual. It has £120 billion-worth of mortgages and 17 million customers and accounts for a quarter of the mortgage market. It should be protected from predators.
The good news is that many mutuals have risen to the new challenge. They are back in contact with members, offering competitive mortgages and savings rates. They are rediscovering the spirit of mutuality, and we should encourage that process. However, they still need greater freedom to serve their members. That means that the prescriptive regime of the 1986 Act needs to be amended.
Three years ago, Labour warned the Government that the future of mutuals would be in doubt unless they were freed from the shackles of the 1986 Act introduced by the Conservatives. We warned that choice and diversity would be lost, but the Government prevaricated and dithered. Promises of a new Bill were broken, but let me pay tribute to the Economic Secretary who, when she took on her current role, tried to press the idea of a new Bill.
The Government said that the Bill would be included in the Queen's Speech last November—indeed, they had promised it the previous November—but it was dropped at the last moment. Why? I suspect that someone decided that there were no votes in it and, at that point, Conservative leaders were interested only in trying to revive their sagging fortunes. However, there was always public interest in the Bill. The Economic Secretary recognised that. Labour forced the idea back on to the political agenda and demanded an explanation of why it had been dropped.
84 To her credit, the Economic Secretary also fought for the Bill. It has been revived, but why has it taken so long to get to the House? We were told that a time slot was needed, but everyone knows that the House's business has been finishing early, certainly since Christmas, so why the mysterious delay? I do not doubt that the hon. Lady wanted the Bill. We both continued to press for it and now, at last, it is with us. It is very welcome.
The price of delay, however, has been uncertainty and the undermining of the mutual sector. One aspect has been long queues outside many building societies as speculators open accounts to bet on the next conversion. In response, some mutuals have put up their minimum account rates to £1,000 or more, thus freezing out the small investor. That cannot be satisfactory. Of course, it must be up to members to decide whether a society should convert: we would want them to have the choice, but long-term members should not have the decision made for them by mere speculators.
The Bill has its drawbacks, but we need to get something on the statute book soon. Labour wants to free mutuals to compete in the market. We regret the delay; we want the Bill passed, but we are disappointed by the failure to discourage speculation, which is not fair to long-standing members who have stood by their societies for years. We will give broad support to the Bill, and we want it passed before the general election.
Labour will support the Bill, but the question is, do the Government? Of course, the Economic Secretary has sponsored it—I do not doubt that she supports it—and we presume that the Government understood the inadequacies of the 1986 Act and sought to change it. Our understanding of the Bill was that it was intended to put mutuals on a level playing field with other organisations so that members would not need to vote for conversion, if only because the Building Societies Act 1986 imposed a prescriptive regime on them which denied them access to particular investment opportunities and new capital.
The Minister told us today that the Government did not seek to encourage building societies to convert or not to convert, but yesterday, the day before the Treasury introduced the Bill to protect mutuals from takeover and to reduce the need to convert to banks, the Deputy Prime Minister announced that he supported the 1986 Act and wanted to support conversion from mutuals to banks.
Writing in The Mail on Sunday, the Deputy Prime Minister says that itmakes sense to make the ownership of building societies more transparent; to give the members—the lenders and borrowers who have always owned those societies—the direct rights of ownership which shareholding offers… These have long been central tenets of Conservative philosophy.The Deputy Prime Minister endorses the 1986 Act, which the Minister seeks to amend. He describes the transition from mutuals to plcs as "extraordinary and exciting", despite the fact that the aim of the Bill is to make it less necessary because, presumably, the Minister wants to see diversity and choice maintained, and that includes mutual building societies.
The Deputy Prime Minister, however, seems to be challenging the very basis of the Bill. The Mail on Sunday, hardly a Labour newspaper, calls itan extraordinary rebuff to building societies on the eve of the Bill designed to protect them.85 Perhaps we have here an answer to the mystery of why it has been such a struggle to get the Government to bring forward the Bill.
§ Mrs. Angela Knight
The hon. Gentleman should stop reading headlines and read the articles. If he reads the article written by the Deputy Prime Minister, which is headed "Deregulation the way to greater financial freedom", all will become clear to him. My right hon. Friend rightly points out that 16 million people are benefiting from conversion, but he is also very much in favour of the mutual sector. The hon. Gentleman should read the article.
§ Mr. O'Brien
I shall give way to the Minister again if she can tell me where in the article the Deputy Prime Minister says that he is very much in favour of mutuals.
§ Mrs. Knight
Perhaps the hon. Gentleman does not realise that my right hon. Friend the Deputy Prime Minister is one of the backers of the Bill.
§ Mr. O'Brien
The hon. Lady has not answered the question; nowhere in the article is there any endorsement of mutuals—quite the contrary. The hon. Lady is suggesting that I might somehow be misleading the House about what the Deputy Prime Minister says. I shall read out some more of the article so that the House can judge for itself.
The article says:the extraordinary changes now taking place in the building societies come as a direct result of the Government's deregulation initiative.The Deputy Prime Minister claims that the conversion process is part of the deregulation initiative. He goes on:In 1986 our building societies legislation enabled building societies to convert from their mutual status to plcs—in practice, to become banks.I do not deny that that is a statement of fact. He says further on:with today's massive availability of funds it now makes sense to make the ownership of building societies more transparent; to give the members—the lenders and borrowers who have always those societies—the direct rights of ownership which shareholding offers and to allow the societies to compete more effectively in the modern world. Hence the legislation to give the building societies the ability to convert themselves"—he is endorsing the 1986 Act—into publicly quoted companies.Hence the extraordinary and exciting changes we are now seeing.During the conversion process a large number of people have qualified for free shares. The Abbey National flotation took place in 1989.I am reading Conservative propaganda. I am waiting for a reference to how important mutuals are, but it does not come. The Deputy Prime Minister tells us thatNow the floodgates are opening",but still he has not mentioned mutuals. He seems pleased with the floodgates opening to conversion. On he goes:As I write, the Halifax, Alliance and Leicester, Woolwich, Norwich Union, Northern Rock and Scottish Amicable are all poised to float on the stock market.He goes on about the £1,000 that people are getting and how 16 million people are benefiting. He says:This outcome flows directly from the Government's policies, its determination"—86 the hon. Lady has been engaged in some sort of altercation with others on the Back Benches, but she should hear this—
§ Mr. O'Brien
In a moment. Let me just finish, then I shall give way to the hon. Lady, because she has a lot of explaining to do. The Deputy Prime Minister talks about the Government'sdetermination to deregulate business and promote competition".All the way through the article, he seems to be endorsing conversion. The Mail on Sunday regarded the article as extraordinary. I regard it is bizarre. The Deputy Prime Minister thinks that conversions aregiving people more choice, new opportunities and better service. These have long been central tenets of Conservative philosophy.Surely all that is an attack on mutuals and a promotion of the idea of converting.
§ Mrs. Knight
The hon. Gentleman is being extraordinarily silly. He is not normally this silly, but we have seen him silly before. He is reading an article about some of the societies that have converted or are converting and the benefits that that has brought and will bring to 16 million people. The object of the Bill, of which the Deputy Prime Minister is a sponsor, is to ensure that mutuals can compete on a level playing field. It is deregulatory. The Government are in favour of societies making their own choices on which way to go. The hon. Gentleman's interpretation is silly.
§ Mr. O'Brien
The hon. Lady cannot have read the article properly. I am not relying merely on my interpretation. The headline in The Mail on Sunday—normally a Conservative-supporting newspaper—calls it "Heseltine's snub for die-hard mutuals". If the Deputy Prime Minister did not understand the Bill, one might appreciate his comments, but he appears not to want to reduce the need to convert. He does not want to preserve for the consumer the choice of mutual status. He wants all building societies to be converted. That is what the article is all about. He says that conversions came about as a direct result of the Government's deregulation initiative.
§ Mr. O'Brien
Let me answer the hon. Lady first.
The Deputy Prime Minister advocates conversion. That is what the article is all about. The timing and the tone of the article, on the eve of a debate on the Bill, are a slap in the face for the Bill and, in many ways, for the hon. Lady. Why are the Government sponsoring a Bill of which the main purpose is to reduce the need for what the Deputy Prime Minister thinks that the Government want done? Why did he choose to launch his plea for more conversions yesterday, unless he intended to dissociate himself from the Bill? Why did he attack the core objective of the Bill? The truth is that, like rats in a sack, the Tories are at each other's throats again.
§ Mr. French
I am not sure whether it is worth intervening, because the hon. Gentleman has clearly made up his mind and put his own construction on the article.
87 While he has been speaking, I have re-read the article. The Deputy Prime Minister is clearly writing about societies that are choosing to convert. It is an article about conversion, not about mutuality. If it were about mutuality, he would be saying something quite different.
§ Mr. O'Brien
The hon. Gentleman has made my case. The Deputy Prime Minister does not mention mutuals. He endorses conversion, claiming that the move away from mutuality is part of the central tenets of Conservative philosophy. I give credit to the Economic Secretary. She understands what mutuals are doing and wants the Bill passed, but I do not think that the Deputy Prime Minister has the same view.
§ Mr. O'Brien
Not at the moment.
That explains the mystery of why it took two years to bring the Bill forward. Why, despite promises, was it dropped from the 1995 legislative agenda and from the Queen's Speech last year? Why was there such resistance to the Bill? I know that the hon. Lady supported it, but why has it taken until now, since her announcement last November, for the Bill to be reintroduced? There has been more than enough time. Parliament has hardly been overburdened with work. Members of Parliament have been going home early. The reason is now exposed; the Deputy Prime Minister does not support the Bill.
§ Mr. Butterfill
The hon. Gentleman is being a little disingenuous. He knows perfectly well why the Bill has taken a long time, as does anyone who takes an interest in the matter, including all the members of the all-party building societies group. There has been a delay, because various people who were consulted were not able to agree. The mutuals have not all been able to agree; nor have the converting societies. Other financial institutions, such as banks and insurance companies, have taken different views. It has been necessary to reconcile all those views to get a Bill that everybody can support. That is what has taken time, as the hon. Gentleman knows well.
§ Mr. O'Brien
Three years? It takes three years to consult? It takes three years to find out what people think? That is nonsense. The consultation period has lasted much too long. Enormous pressure has been put on mutuals to convert, which has been damaging. The hon. Gentleman's excuses do not stand up. There has been so much delay because there have been internal rows in the Conservative party. We have seen that on Europe and on bovine spongiform encephalopathy. On all aspects of Tory policies, there are internal rows and public attacks on each other. Now the splits have been exposed on the Building Societies Bill.
Let me defend the Economic Secretary and the Bill against the Deputy Prime Minister. The right hon. Gentleman was wrong not to endorse mutuality. It must be left to members to decide whether to convert. That is what the Bill is supposed to be all about. There is a public interest in keeping choice and diversity in the market. That requires a healthy building society industry that includes mutuals. Ten million people remain satisfied 88 mutual members. That figure rises to 17 million counting all those with links to mutual building societies. The Deputy Prime Minister seems to want to let that vital mutual sector wither on the vine. As well as demonstrating further Tory disorder, that also explains why the Bill was delayed for so many years. Let us get on with the Bill and get it through with no more prevarication. It is good for mutuals and good for the consumer and will strengthen Britain's financial services industry.
§ Mr. John Butterfill (Bournemouth, West)
I pay tribute to my hon. Friend the Economic Secretary for the assiduous and vigorous way in which she has promoted the Bill and brought it before the House. The House owes her a debt of gratitude. The task has not been easy. There have been considerable divergences of view throughout the financial services industry. We have all been subject to the lobbying of the various interest groups that have taken different views. The hon. Member for North Warwickshire (Mr. O'Brien) knows that perfectly well. That is why it has taken longer than I would have liked to bring the measure before the House. Nevertheless, my hon. Friend the Economic Secretary has done a splendid job, and I hope that the Bill speedily becomes law.
The origins of the building society movement demonstrate that it is a uniquely valuable British institution. The hon. Member for North Warwickshire was quite right to say that it developed out of the self-help that working people created to enable them to own their own homes and to save and borrow money on a mutual basis. It is a uniquely valuable asset and I am quite confident that we would all be sad if it were ever to disappear.
It was, however, quite right that, when we decided to liberalise the movement in 1986, significant restrictions were placed on the activities of building societies. At the time, many of us who supported a degree of liberalisation were quite nervous about going too far because of the nature of the societies. They had been constrained into a narrow sector of activity: accepting deposits from savers and lending them on to those who were purchasing their homes. That did not give them much experience in the wider range of financial services. I shared the fear that was expressed in the House that, if they were allowed to go too far, problems might arise and that management expertise was not always adequate and there might be ill-advised lending. That is why, quite properly, restrictions were imposed on the amount of unsecured borrowing that societies could undertake among other activities.
Since then, however, the world has moved on. There have been significant changes in the way in which building societies are run. Most of them are now managed extremely professionally and are eager to offer a much wider range of services, and it is quite right that the Bill should allow them to do so.
On the other hand, it is worth remembering that, even under the Bill, building societies are still not permitted to engage in all the activities that banks and other financial institutions can undertake. Indeed, part I of the Bill imposes severe restrictions on them. Primarily, they can lend only on residential property and, quite advisedly, they are not allowed to engage in some of the more sophisticated financial instruments that have brought problems to more sophisticated institutions. So the balance is right.
89 The 1986 Act also provided the two-year rule. Frankly, I am sorry that it is not included in the Bill. It would be a valuable power for building societies to possess, because there is undoubtedly rather undesirable speculation in building societies at the moment. The fact that some societies found it necessary to raise the threshold of deposits before conveying membership rights is undesirable, because it undermines a principle that building societies will take the widow's mite and provide a savings vehicle that quite poor people find useful. It would be a sad day if that principle were undermined.
Similarly, the 1986 Act gave protection to societies that, having built up their businesses, decided that they wished to convert. It is known as the five-year rule. That was absolutely proper too. As many societies were quite unsophisticated in the world of financial services, it was quite clear that they could be vulnerable to more sophisticated institutions. The need for that rule has diminished over the years. As my hon. Friend the Economic Secretary said, many converting societies are quite large businesses in their own right. Nevertheless, the need for that protection has not disappeared altogether. I am slightly disappointed that my hon. Friend has not included an element of protection in the Bill. It would be quite wrong if converting societies could then be predators on other mutual building societies. None of us would wish to see that happen, as we all want mutual societies to continue to prosper.
I would have preferred an arrangement whereby any converting society that took over a mutual society—whether by hostile bid or by consent as we all know that consent sometimes involves an element of coercion—would lose its protection under the five-year rule. However, to say that to take over any other financial services business, or almost any such business, will lead to the loss of that protection is going much too far. It means that converting societies will be limited in the sectors in which they can expand their businesses without risking losing that protection.
I know that my hon. Friend will say that it would be unfair to insurance companies and banks who will not be under the same constraints. However, the five-year rule never applied to them as they were never building societies. It was never designed to cater for their circumstances, so that would be something of a non sequitur. Far more important, they are not subject to the constraints that have applied historically to building societies. Before the 1986 Act, since then and even under the Bill, there have been significant constraints on the activities of building societies. Therefore, it is still appropriate that some degree of transitional protection should be available to converting societies, otherwise there is a danger that we shall end up with a two-tier market: we shall have very large banks and other financial institutions, a much smaller group of smaller bodies—the mutual societies—because everything in between will have been gobbled up by the big boys. We shall end up with four or five major lenders for those who wish to buy their homes or make a deposit and a dwindling band of mutual societies which will be very much at the small end of the market.
That would be entirely undesirable. Some means by which we can have a middle layer of converting societies that are temporarily protected from predation seems to be desirable in providing the maximum choice to the consumer. I very much hope that, as the Bill progresses, 90 my hon. Friend the Economic Secretary will go some way towards my point of view on that and on the two-year rule. I very much look forward to the Bill proceeding and succeeding, as it is an admirable measure.
§ 8.8 pm
§ Mr. Alan Keen (Feltham and Heston)
I am pleased to have the opportunity to support the Bill, particularly in my role as chair of the Co-operative group of Members of Parliament. I shall be brief as others are waiting to speak and I shall concentrate purely on the mutualities.
The co-operative movement understands mutuality better than most as it was founded by people who needed to band together to protect themselves against the difficult circumstances that they faced in the 19th century. In many cases, the monopoly suppliers—often their own employers—insisted that they bought their basic supplies from them. The building societies came later, but helped the same people. They provided a solid base of reliability and trust that enabled people with small savings—a small excess of income over expenditure—to invest and save with security. They of course also provided capital for the purchase of houses which was so necessary in those days, as it is today.
As a young person, I tended not to trust banks. In saying that, I have not forgotten the contribution that the clearing banks have made to the functioning of Britain's financial industry and to industry and commerce itself. We were probably all misled by that famous "bank manager in your cupboard" television advert of 20 or so years ago. It did not take the public long to realise that that bank manager was not necessarily their friend and was beginning to be controlled from head office by computers and faceless people. People also began to realise that the bank manager had a different incentive—he was being pushed and pressed to produce profits early, quite often losing the good will of his own bank in the medium and long term.
Despite the fact that I was very sad over the loss of mutuality, the movement of some of the mutuals into the banking sector gave well-needed competition to the clearing banks in an area where there had been little real competition. I am not being critical of the banks in a destructive way. I am mentioning them to try to highlight the difference between mutuals and the banks, with shareholders to satisfy. It is quite enjoyable to attack the banks, but that is not what I want to do in this debate.
The contribution that the building societies have made can be understood fully only by those who have lived in working-class communities, where the surplus of income over expenditure was very small and people searched to find somewhere that could be trusted to put their money. Building societies provided such small investors with that trust. There is no doubt that those investing in building societies were greatly affected and influenced by mutuality. It gave them the feeling that they were among people who cared for each other. At the same time, they had the satisfaction of knowing that they were helping to put a roof over other people's heads. It was probably an example of a do-good factor as well as a feel-good factor.
As my hon. Friend the Member for North Warwickshire (Mr. O'Brien) said, even after the current conversions, building societies will have assets of £120 billion and serve 10 million customers, which is quite an achievement for any organisation. Although I agree that mutuality 91 gained trust, the ability to compete in the open market has enabled building societies to continue to flourish. Mutuality does not mean the loss of the ability to compete.
I shall not repeat the detailed arguments in support of the Bill—I support it very strongly. We want to get the Bill through the House as quickly as possible. I follow my hon. Friend the Member for North Warwickshire in praising the Economic Secretary for her efforts. Let us get the Bill through. Let us allow building societies to compete on equal legislative terms with other corporate organisations in the market. The British people need building societies and the British economy certainly needs a flourishing building society mutual sector to look after the small savers and draw money in with trust as they always have done.
§ Mr. Douglas French (Gloucester)
In the spirit of the intervention of the hon. Member for Great Grimsby (Mr. Mitchell), I declare an interest as a modest customer of several building societies and as the chairman of the all-party building societies group, which is of course unremunerated.
I greatly welcome the Bill, which is very important for the future of the building society sector. I greatly hope that it will pass through the House without delay. I also congratulate my hon. Friend the Economic Secretary on her persistence in bringing forward the Bill. I certainly dissociate myself totally from the conspiratorial interpretation of the hon. Member for North Warwickshire (Mr. O'Brien). I assure him that, had my right hon. Friend the Deputy Prime Minister been against the Bill, there is absolutely no doubt that we would not be here trying to give it a Second Reading because he would have made certain that his views had been properly heard.
I regard the Bill as a natural and logical step in building societies legislation. The original Building Societies Act 1962 prohibited building societies from offering almost any service unless it was a savings scheme or a mortgage. The legislation was developed in the Building Societies Act 1986, which introduced partial deregulation—allowing diversification into many other services including current accounts, credit cards, life assurance and unit trusts—and paved the way for societies to convert to public limited company status, without which the public would not be about to enjoy share distributions and would not already have received bonus distributions from societies' conversions.
Now that we are ready for a further tranche of deregulation, it is perfectly natural to get away from the still rather prescriptive nature of the 1986 Act and adopt the principle that a society can do more or less what it wishes—apart from that which is specifically excluded by the Bill. That is why, quite correctly, the Bill prohibits societies from trading in commodities, making markets in securities and involving themselves in derivatives—all of which we know are very risky, likely to lose money, likely to place depositors' assets at risk, and therefore not appropriate for a building society to engage in.
I very much welcome the retention of the special operating characteristics of some societies. It is perfectly right that they should still have to raise at least 92 50 per cent. of their funds from individual retail investors; it is perfectly correct that 75 per cent. of their assets will still have to be invested in loans on housing—although not necessarily for owner-occupation. That opens the way for more building society funding of the rented sector, which is a very sound judgment. The remaining 25 per cent. of their assets can be invested anywhere that they choose, subject to the overseeing of the Building Societies Commission—to ensure that the management of a building society has the necessary skills and financial expertise to make competent decisions and to ensure that it keeps out of areas in which it ought not to be because it does not have the skills.
I also welcome the fact that, to accompany the wider powers, there will be greater accountability of societies to their members. I noticed that, in the recent experience of building society conversions, there was much confusion among building society customers about the rights of those who had a proper share account and those who simply had a deposit account. It is desirable that that confusion should be cleared up. I am also pleased that there is confirmation in the Bill that, in future, borrowing members will have broadly the same voting rights as investing members. That helps to bring legislation into line with public expectation.
Another point about accountability which I welcome was made by my hon. Friend the Economic Secretary. If a society transfers its business to a public limited company, the proposals for enhanced remuneration of the society's directors will be subject to a separate resolution for members' approval. That will address the concerns of those who felt that to accept conversion to plc status, it was necessary to accept the whole package, including what some people might regard as robust consideration for the directors of the society when they become directors of the plc.
The most controversial provision in the Bill is the five-year protection from takeover, which my hon. Friend the Member for Bournemouth, West (Mr. Butterfill) mentioned. I have thought carefully about the subject. Some people believe that the potential loss of the protection if a newly converted society embarks on a takeover is unfair. I cannot come to the same conclusion. Newly converted societies do not need the same protection as when the 1986 Act was passed. Such protection would create two classes of public limited companies—those that enjoyed the five-year protection after conversion and those that did not. My hon. Friend would argue that it is necessary to provide some transitional relief because building societies would be going out into the big wide world without having had long enough to establish their services on a level footing with the banks. However, protection from takeover for five years would place the newly converted building societies in a different position from banks that have not been through the process, and would add a new unevenness between newly converted societies, some of which are large and substantial, and banks that could not claim the same protection.
§ Mr. Butterfill
Can my hon. Friend name a bank or major insurance company that has been subject, in the 93 past few years, to the constraints that we imposed on building societies' activities by the 1986 Act and will impose in the Bill?
§ Mr. French
I cannot, but that is all part and parcel of the risks that a society has to weigh up when making the decision to convert. If societies that may convert believe that the competition that they will encounter as plcs is greater than they can cope with, they should not convert. I cannot agree with my hon. Friend on that point.
It is not right if that conversion gives societies a protection that is not available to other institutions. A building society that does not enjoy the protection could be taken over by a predator, such as a former building society, which does enjoy the protection. That creates an uneven playing field between the newly converted building society, now a bank, and building societies that have not converted. In an extreme case—although I admit this is a theoretical example—the abandonment of mutual status could be a way to fend off a takeover. That is not acceptable.
The Alliance and Leicester has argued that protection should be lost only after a takeover of another building society, and not in the case of a takeover of any other financial institution. I have discussed the issue with the Alliance and Leicester, and I cannot see that such a halfway house would provide a satisfactory formula. The company that wishes to make a takeover bid, of a mutual or other institution, should not be immune from receiving a takeover bid itself. Again, that would create an uneven playing field. It would also mean that the business that was being acquired attracted immunity from takeover by yet another institution, because it came under the umbrella of a new bank that already enjoyed the protection. However one approaches the issue, it creates an uneven playing field and an illogical situation.
§ Mr. William O'Brien (Normanton)
The Halifax building society, which will shortly become a plc, has accepted that it will not enter into a takeover of a mutual building society on the principle of the five-year rule. In its application, the Halifax says that it would be wrong to have the right to take over a mutual building society after becoming a plc. Does that influence the hon. Gentleman's views?
§ Mr. French
No. The Halifax building society is in a unique position because of its size. It is easy for the Halifax to choose voluntarily not to avail itself of the protection for five years because the number of institutions that would have the resources to take over the Halifax could be counted on one finger. The Halifax has not given up a practical protection that it would otherwise have enjoyed.
The Alliance and Leicester seems to be arguing that it would be retrospective to make the protection for five years conditional on not taking over another institution, but it should accept that the possibility has been under discussion for a long time. It is easy when changes are made on the introduction of new legislation—we see it with the Finance Bills—for those who are affected to jump to the conclusion that it has a retrospective element. All institutions that make significant decisions need to 94 keep their eyes and ears open and anticipate possible policy developments. They should not base their decisions on guesses that something is never likely to happen.
§ Mr. Peter L. Pike (Burnley)
The hon. Gentleman will recall that the Alliance and Leicester acquired the Girobank. The members of the Girobank, who are now customers of the Alliance and Leicester, have not shared in the windfall payments that it has made.
§ Mr. French
The hon. Gentleman makes a good point and I will come in a moment to the subject of windfall payments.
My broad approach to the Bill is that mutuals need the legislation. It will give them greater operational flexibility. They will be better able to compete properly with the banks and will be better placed to respond to customers' needs. The Bill underlines the advantages of mutual status, which have been placed under pressure lately. Many people have expressed the view that the mutual movement is in its death throes, but the Bill will make an important contribution to ensuring that mutuality has a future. I support those who feel that the mutual movement, and building societies in particular, make a vital contribution to the financial services sector.
Some four or five, perhaps six, major societies have converted or will convert. It is reassuring to note that the remaining large mutuals have reasserted their absolute commitment to mutuality, including the Nationwide, the Bradford and Bingley, and the slightly smaller Portman and Birmingham Midshires societies. I take those commitments not only as statements by today's chief executives, but as commitments on behalf of those societies in the future. They have all said that they cannot envisage circumstances in which they would abandon mutuality, and they are committed to it. The Nationwide, for example, is committed to demonstrating to its customers, and prospective customers, that mutuality offers customers tangible benefits through more competitive mortgage rates and better-priced savings products. It is seeking to feed the benefits of mutual status directly back to its members—exactly the way of conveying to the public and to members of societies that mutuality in practice delivers tangible results.
The feeding back of the benefits of mutuality needs to be accompanied by a growth strategy by societies. Unless they can foresee an expansion of their business, the feeding back of benefits will in essence amount to giving back to members some of the profits that the society would otherwise have registered. The more societies dilute their profits in that way—even for sound commercial reasons— the cheaper they will be to a predator wishing to take them over. There needs to be a strengthening and a growth in the size and activities of mutual societies.
None of the societies which have declared their commitment to mutuality has made any statement that they would not at some future stage merge, because the merging of societies may well be a necessary requirement to ensure that they are strong and able to protect themselves against future predators.
Another benefit of the Bill is that it will make the relative attraction of plc status rather less. It gives operational freedom but makes the relative attraction of operating under banking legislation less obvious, as more can be done under the building society legislation. That is very important.
95 Issuing shares by societies which convert may be very good if one wishes to go on the acquisition trail, but it is not good if one is seeking to offer competitive mortgage and savings products. Typically, a bank pays about one third of its profits in dividends to its shareholders. In a society with a normal business profile, that is equivalent to about three quarters of a point of margin between mortgage and savings levels. That means that if a mutual society does not have to pay dividends to shareholders, it is able to offer products more competitively than might otherwise have been the case. In future, customers of mutual societies will be able to look forward to competitive deals on all products.
Mutuality is a trading status that we should never allow to perish, and I emphasise that the Bill does a great deal to reinforce it.
I would like to say a few words about the manner in which some building societies have chosen to convert to public companies. It is sad that some of the societies currently converting—in what seems to be a headlong rush to become plcs—seem to have forgotten the very ethos of mutuality which, for more than 150 years in some cases, has brought them commercial success and has given them their enviable image. Some societies seem to have forgotten that they started life trying to look after smaller savers, making sure that they treated all customers fairly and trying to return to members the benefits of membership of a mutual society.
As a prime example of such an offender, I cite the Halifax building society. I very much hope that no society seeking to convert in future will approach the task as the Halifax has done in the past few months. When the Halifax prepared its flotation, it decided to leave out of the distribution several million of its customers, including people who were disabled and who could not sign their own accounts. This was a fundamentally flawed judgment. It was deeply offensive to those left out and, indeed, to some who were included, and who as a result would get more than they would otherwise have received.
The Halifax first tried to justify its extraordinary decision by blaming the existing state of the law. That was incorrect, because nothing in the Building Societies Act 1986 would cause it to take such action. It went on to say that the disabled people—who were second-named account holders—were not members and therefore could not be included in the share distribution. That again was incorrect, because the 1986 Act gave a converting building society the power to include in a share distribution whoever it decided to include. The next excuse was that it was too difficult, administratively complex and would present practical difficulties that the society could not solve. In truth, however, there were a number of simple ways in which the dilemma could have been avoided.
When the Halifax was asked if it felt that its formula was unfair, it replied that it regarded the scheme as perfectly fair. Incredibly, it tried to justify the formula on the grounds that no one should pick out the disabled as a group that had been left out because, in truth, the society had left out a number of other categories as well—as if that somehow justified the sad judgment. To cap the insults, the society went on to claim that many disabled 96 people had been included under the distribution formula, and any change to the arrangements would mean that some 8.5 million people would be upset by a delay.
The Halifax then announced 97 per cent. support for the scheme—almost universal support—when the only people whose votes it was counting were those likely to be recipients of the distribution. Those not likely to be recipients did not have a vote, so it is hardly surprising that the proposal received near-unanimous support. What is so distressing about the conduct of the society was that its directors—who are doing nicely out of the conversion—seem to have forgotten that they are today's guardians of the assets of that society, which have been built up from the loyalty of customers over 150 years. The directors have a duty to pass benefits to customers and to be fair. In short, the Halifax building society has betrayed its founding fathers and the ethos of mutuality.
Even at this stage, the Halifax could redeem itself by making a statement of intent that it will put on the agenda of the new board of the public company a resolution to allow the shareholders to decide whether they wish to make an ex gratia payment to the disabled people left out of the formula. Company law allows for that to be done now, and I very much hope that the Halifax will come to the right decision. It could follow the lead set by the Northern Rock building society and set up a charitable foundation to ensure that the very people left out of the distribution are helped via a donation to relevant charities. It is not a substitute for ensuring that all customers and members receive their rightful distribution, but it would at least go some way to making up for the appalling judgment exercised by the Halifax building society. Certainly, the Halifax directors ought to recognise that they should do something, not just maintain a stony silence. They might like to follow the example of the Alliance and Leicester, which, shortly before this evening's debate, wrote me a letter as follows:It is intended that an item will be placed on the Agenda of the PLC Board after flotation, to seek approval in principle for the provision of funding for an appropriate charitable donation to disabled persons, or to a charity or charities on their behalf, subject of course to the approval of the company's shareholders.That shows a willingness to do the right thing which has thus far been manifestly lacking on the part of the Halifax.
If the Halifax continues to act like a hard-nosed bank before it has even become one, and continues to spoil the good reputation that building societies have enjoyed for so many years, I for one hope that its customers will decide in their millions to move their accounts elsewhere, on the grounds that it is not a society in which they would wish to continue to hold their savings.
§ Mrs. Diana Maddock (Christchurch)
Like the hon. Member for Gloucester (Mr. French), I declare my interest—in my case, as vice-chairman of the all-party building society group. I also have various other interests in building societies. I certainly associate myself with the hon. Gentleman's remarks about the five-year rule and the future of mutuality.
There may be arguments over whether we should have had a new Building Societies Bill somewhat sooner, but I begin as others have done by congratulating the Economic Secretary on getting the Bill to the Floor of the House in this form. Despite what was said earlier, hon. Members 97 know that there was consultation with a wide range of people. First, we had a draft version, then more consultation, then another draft before Christmas; finally we had the Bill as it appears today.
That is in stark contrast with what happened to the Bill that became the Housing Act 1996. The day before we were due to discuss part of it, the people behind the security of loans for social housing suddenly discovered what was going on, faxes began to fly to and fro, and there was a great threat to the whole financing of some social housing projects. That is why I pay tribute to the Minister for her work to avoid the same happening again, and to come up with a Bill with which all parties are in broad agreement.
Many of us were disappointed to find that the Bill, contrary to expectations, was not mooted in last autumn's Queen's Speech. Thereafter, however, the Minister promised to do all that she could to find time for the Bill—if she could get agreement on its contents. She has been as good as her word, on which I congratulate her. We may not know the whole truth, but I suspect that she may have had some difficulties with the Deputy Prime Minister. At least she won—that is the main thing.
My one objection is to dealing with the final stages of the Bill all at one time next Monday. There should be a gap between the Committee and Report stages, however well the Bill's contents have been dealt with. There ought to be more time for consideration on a Bill as large as this.
Why do we need another Bill 10 years on from the last one? If we examine the role of the building society movement, and what has happened in the financial world in recent years, we can see part of the answer. That movement has tremendous strengths and brings great strengths to our economy. Its traditional function—matching savings to housing finance—remains predominant: it does the job very well. For millions of savers and home buyers, building societies are the trusted one-stop shop.
Over the years, the building society movement has taken care to protect its customers from the effects of society failures, which have been extremely rare. Building societies are also of great importance to the regional economies of Britain, not just because of the employment in their branch networks but because their headquarters, like those of the major insurance companies, are to be found not in London but in our provincial cities and towns. They act as a welcome counterbalance to the centralisation of financial affairs in London.
Shortly after I entered this House three years ago, my right hon. Friend the Member for Berwick-upon-Tweed (Mr. Beith), at that time financial affairs spokesman for the Liberal Democrats, was asked to address the annual lunch of the Building Societies Association.
§ Mrs. Maddock
In fact, we did create some excitement at the meeting. Anyhow, my right hon. Friend described some of the problems to which the Bill today offers some solutions. For instance, he mentioned the problem, during the recession, of the over-promotion of credit which led to a lot of people ending up with negative equity. Some of them still have it.
My right hon. Friend also said that building societies often help first-time buyers instead of looking after their current members' interests. He also raised the 98 accountability of building societies to their members—an element of the Bill that we all welcome. My right hon. Friend ended by saying:The British people have invested a lot of their money and a lot of their trust in the building societies, and the results have included wider home ownership than in many other countries and a building society movement which is without equal. It is time for some public reflection on how the industry can build on these strengths.That reflection has continued in recent years.
I was particularly struck by Will Hutton's comments in The Guardian in July 1995, when he stated even more forthrightly:One of the great bequests of the last century to the modern world is withering before our eyes. British building societies, owned and run for the mutual benefit of their members, were a tangible expression of a form of common ownership. Now they are being cannibalised into becoming the latest standard bearers of the public limited company, complete with stock options and a lord on the board— and a credulous public is being offered a sweetener of some hundreds of pounds to offer its assent.Listening to the hon. Member for Gloucester saying how he thought building societies should think carefully before becoming public limited companies, with the attendant large payouts, I pondered Will Hutton's comments. I must tell the hon. Gentleman, though, that some of his Conservative colleagues are hoping that many people will get their feel-good factor before the general election, in the form of the massive payouts coming their way later this month.
§ Mrs. Maddock
There is some dispute about that.
As I was saying, many of the concerns expressed in recent years about mutuality have been dealt with in the Bill.
The Building Societies Association welcomes the Bill, as do many of us who are in favour of mutuality. It will preserve the unique characteristics of building societies and ensure that their record of safety continues. All of us welcome the fact that the legislation is to be permissive rather than prescriptive.
The new legislation will place building societies on the same footing as other organisations, in that they will be able to do many more things that will be of interest to their members. However, many us believe that their concentration on the requirements of personal savers and on housing is important. I welcome the fact that they will be able to invest in rented housing. The need to do something to make lending for renting stack up has become obvious to me in my time as housing spokesman for my party. We have a problem in trying to expand the private rented sector, because the different tenures are so concentrated in one form.
I especially welcome the measures designed to approve societies' accountability to their members. Election to the board will be more transparent, borrowers will have votes and, for many societies, fewer people will be required to nominate members for election. There will be a legal requirement to hold special general meetings at request, members will have to vote in favour if a society wants to make significant acquisitions of business not related to mortgages and savings, and if a society decides to transfer to plc status, it will have to ballot its members and have 99 an additional advisory vote on any proposed enhanced remuneration packages for directors. I welcome all those measures on behalf of my party.
We want to enact the legislation quickly, partly because we are about to embark on a general election. Because of the problems that we have had in the rapidly changing financial world and because so many building societies have started to move towards plc status, we must move as quickly as possible to safeguard the mutuals that many of us want to flourish. That is why my party is happy for the Bill to proceed.
At the same time, I hope that the private Member's Bill to which the hon. Member for Gloucester referred will reach the statute book. All of us have received many letters in recent years about people who were named second or not included for one reason or another. That is one reason why many people will be in favour of the Bill. I associate myself entirely with the hon. Gentleman's comments about the sad situation of disabled people being left out, and my party and I fully support the Bill.
§ Mr. Peter L. Pike (Burnley)
I hope that the Bill will receive Royal Assent before the general election, because it represents the best way of preserving the building society movement and the concept of mutuality.
I declare an interest as a member, but not an officer, of the all-party group on building societies. I am also a member of several building societies. I voted no to the National and Provincial takeover by the Abbey National and to the Leeds takeover by the Halifax, and I was one of the 3 per cent. who voted no to the conversion.
At the appropriate stage, I shall take the advice of the hon. Member for Gloucester (Mr. French) and remove my custom, but, if the shares are to come, I may as well take them first; I make no bones about that. I have been a Halifax customer for many years and I feel that I may as well take the shares even though I disagree with what has been done.
The hon. Member for Bournemouth, West (Mr. Butterfill) referred to the Building Societies Act 1986. He underlined the view of those of us who were in the House when that legislation was passed: we thought that it was a bold step forward and a challenge to the general concept of building societies at that time. Indeed, I remember saying that I was conservative on building societies and wanted them to remain as they were, because they had a good record over many years of service to both lenders and investors. I wanted banks to be banks, and estate agents to be estate agents.
Times have moved on rapidly, however, and I accept that we are in a different world, so I fully support the view that we must change and that, if building societies are to be able to compete and indeed to remain as mutuals as we move forward to the 21st century, we must enact the Bill.
I share many of the views and concerns about the Halifax expressed by the hon. Member for Gloucester. According to its figures, 3.5 million of its customers are not entitled to a handout as a result of its conversion, and I have heard that it could be as many as 4.5 million. Even 3.5 million is far from an insignificant number.
100 In 1986, the Halifax gave various briefings to Members of Parliament, and there was no doubt that, if we had had to bet on which building society would be the last to consider conversion, we would have chosen the Halifax: no society was more committed at that time to the spirit of mutuality. I do not know whether the board is guilty or whether it is Mike Blackburn, whom I criticised for leaving the Leeds and then taking it over in a so-called merger while at the same time recommending conversion, but, at the end of the day, the chief executive cannot act alone and must secure the board's approval. I greatly regret what has happened.
The Bradford and Bingley building society rightly says:The legislation will create a more permissive regulatory regime and is welcomed by those societies which, like the Bradford and Bingley, intend to continue operating as mutual organisations. It will provide societies with greater operational flexibility and enable them to compete on a more equal footing, as mutual organisations, with banks and other institutions.The briefing also mentions that there are 13 million building society members, 2,500 branches and that many staff are employed, especially in the provinces.
It has been rightly said that the Building Societies Act made the banks more competitive and responsive to customer needs. The hours that banks open may have been influenced by the fact that they have to compete with building societies; they have had to change their approach. Some building societies were complacent, sat back and assumed that things were all right. The 1986 Act, what is happening now and the way that things have moved, may also have made building societies shake off the dust and recognise that, if they are to survive, they must be competitive in the marketplace. No harm has been done from that point of view.
The Building Societies Association states that it and theremaining 72 building societies have welcomed the introduction of the Bill.The association makes an important point on competition and notes:A survey in the March edition of What Mortgage found that out of 72 lenders, the top 25 in terms of offering best value for money to customers were all mutuals.It is significant that the mutuals led the way with better deals for mortgages and for investors.
I regret that the Bill does not, as several hon. Members, have said, deal with the two-year rule. It is not unreasonable that people should have been members for two years before they can benefit from a conversion. The Nationwide says:Although, in principle, we would support a move to amend the Bill by inserting a two year clause to protect societies against speculators, our over-riding concern is for the Bill's passage to be eased so late in the parliamentary session.We all recognise that time is short and that the Bill must get through the other place if it is to get Royal Assent before the general election. I hope that an attempt will be made next Monday when we debate its remaining stages to introduce the two-year rule. I would support that. If such an attempt fails, I, like the Nationwide, would accept the Bill as it stands.
Clause 41 deals with protection, the 15 per cent. rule and the five-year rule. If societies convert and become predators, they should lose protection. The protection is not dissimilar to that which existed for the Trustee Savings bank. Share dealing in that commenced on 101 10 October 1986. The Trustee Savings Bank Act was passed in 1985. The initial threshold imposed a maximum holding restriction of 5 per cent. of the company's equity. After 29 September 1991, that was allowed to rise to 15 per cent. There are parallels. There were originally many small shareholders, but, when protection went, that changed rapidly. As soon as the 15 per cent. rule came in, it was not a question of when it would be taken over, but of who would take it over. Ultimately, it became part of the Lloyds group, which had already taken over the Cheltenham and Gloucester building society.
The biggest predator to date must be the Abbey National building society, which made an unfriendly bid for the National and Provincial building society. I know that society well because it was formed by the merger of the Burnley building society and the Provincial building society. It was supposed to be a merger, but it was more like a take-over, because everything was cleared out from Burnley in only a few years.
The National and Provincial society rather lost its way. At one stage, it was going for conversion; then it was to merge with the Leeds—funny that the Leeds should come into it yet again. Finally, it said that it was committed to mutuality. It sent its customers many documents about mutuality. It held a meeting across the road for Members of Parliament so that Alistair Lyons and Lord Shuttleworth could brief us on its commitment to mutuality.
Then, suddenly, out of the blue, came the bid from Abbey National. The National and Provincial did not want to accept that bid and said that it wanted to consider other bids. Nobody ever got to know what those other bids were and, ultimately, the Abbey National was allowed to take that building society over. It is funny, is it not, that Alistair Lyons is now the executive director of Abbey National and chief executive of its subsidiary, Scottish Mutual Life, while Lord Shuttleworth is the deputy chairman? They did all right out of it, but was it what the customers wanted?
I said at the time of that vote that it was bound to go through. The hon. Member for Gloucester hit the nail on the head, because when so many people face the chance of getting £1,000 or whatever it happens to be, it is only realistic to accept that they will vote yes. At the time of the Abbey National takeover, more than 46,000 of my constituents were entitled to a pay-out in cash or in shares because of the Burnley building society connection. I have no doubt that they voted yes for obvious reasons.
I believe that we want to see building societies remain mutual. I believe that the Bill represents a fair balance, which allows building societies the freedom to move into the markets in which they need to compete in order to survive. I recognise that they must provide customers with the services that they want and must be able to compete with others who are already able to provide such services. I believe that the Bill will enable those societies to remain mutual if they so wish, and I hope that the 72 which are mutual will choose to remain so.
I support the Bill. As I said earlier, I hope that we shall amend it to bring in the two-year protection, because it is totally wrong that people should travel around the country and invest money in societies here, there and everywhere, when their only interest is in trying to get a windfall payment. They have no interest in the respective building societies and what they do.
§ 9.6 pm
§ Mr. Austin Mitchell (Great Grimsby)
I should begin with a declaration of interest, although given that it concerns a building society, I calculate that the rate will be fairly low.
I tried to raise a serious point at the start of the debate, Madam Deputy Speaker, when I asked your predecessor in the Chair whether hon. Members about to benefit from distributions should declare that in their speeches. He replied that hon. Members know the rules of the House. It is not a rule of the House to declare building society accounts. Nor is there a rule about declaring distributions that hon. Members have not yet got, but they could have a vital bearing on the debate.
The Alliance and Leicester, for example, wants clause 41 to be modified so that it can be protected if it takes over anything but a building society. That building society is about to embark on a major distribution from which many hon. Members will benefit. I suspect that more Labour Members than Conservative ones will, because we are more likely to put our money in building societies than are Conservatives, who are prepared to go for the bigger returns. The distribution by the Alliance and Leicester could have a bearing on hon. Members' judgment about whether clause 41 should be modified. I therefore think that it is right to declare such an interest, especially as the total distribution is estimated at about £18 billion. It is so big that, at one time, the Conservatives hoped that it could be expedited because they believed that it could influence their election chances. It will obviously influence hon. Members' views on the Bill.
I should like to declare my interest in the Halifax building society. My parents came from Halifax, so it was a tradition that their children should be given a Halifax share account, as it was called then. I have had that account ever since. I will now benefit from that local association. However, in common with my hon. Friend the Member for Burnley (Mr. Pike), I voted against demutualisation, and voted against merger with the Leeds.
It was a sad day when I saw all those solid Yorkshire folk shuffling into the meeting, looking like people at the "Antiques Roadshow" who had just been told that their antique was worth a thousand quid. They had all been bought by the lure of the money. The ancient Halifax cry, first popularised by Wilfred Pickles, went up: "Give us the money, Barney." Their desire to get their hands on the distribution coloured their judgment. It did not colour mine. I shall keep my account in the Halifax until I get the money; I shall then transfer all the money in the account to the Bradford and Bingley building society, which will stay mutual and which is doing far more to provide an effective service to the benefit of its customers. That is my declaration of interest.
I hope that my withdrawal of the Mitchell millions from the Halifax will bring that building society to its knees to punish it for betraying the mutual principle. Like my hon. Friend the Member for Burnley, I deplore the rush to demutualisation. I should have liked the Bill to do more about that and to retard and penalise the rush to abandon mutual status because the mutual principle is good. I am one of only two people in the Chamber to have survived the Standing Committee on the 1986 Bill, where the principle was described as "socialism in action". It might have been old Labour in action, but it is a good principle—a principle of local self-help and of support for members to purchase houses.
103 The strength of building societies was built on those roots—the involvement of members and local self-help—and that strength remains. It has been built up over the years—100 or, in some cases, 150 years—by the investment of previous generations of members and it is simply being dissipated as shareholders are effectively being bribed with their own money to accept the principle of demutualisation. They are encouraged by the example of the gains made by people who bought shares in privatised utilities. That has produced a culture of shareholder greed in which shareholders have no loyalty to the building society or company but "Give us the money, Barney" becomes the universal cry.
That culture is encouraged by the top brass of building societies— the directors and top management—who see light at the end of the tunnel. They see that they can do well for themselves: they can become survivors in a merged organisation and, more important, they can put up their own salaries to levels in other enterprises. They feel that mutual status is a drag, especially on their salaries. They want that drag eased, so they encourage the move to demutualise. That move is also encouraged by the example of the directors and top management of privatised utilities. The greed that stems from that privatisation procedure has permeated and undermined the culture of the mutuals.
No good can come of this. Good can come to the City, which takes huge fees for advising on the process of demutualisation and the launch of shares, but no good can come of it from the point of view of building society customers, who will have to pay higher rates—albeit only slightly higher—for their mortgages. Moreover, those who invest in demutualised societies, as is the tradition in the Halifax, will receive slightly lower rates of return on their investments. The dividend drain that will now be embarked on by those companies must be financed. It is a steady and remorseless drain on all British companies. In order to buy support from the market and increase the value of their shares, building societies will be forced to embark on a dividend drain from which mutuals are free.
The Nationwide says that it is committed topassing on to its customers the money that would otherwise be used to pay dividends to shareholders".If the money is used for that purpose, customers will get a better deal from a mutual society than they will from a demutualised company.
As my hon. Friend the Member for North Warwickshire (Mr. O'Brien) said, it is important to note that the top 25 of the 72 companies that, according to a What Mortgage? survey, offer better value, are mutual companies. Their customers—members, shareholders and people taking out mortgages—get a better deal, and demutualisation undermines that. It means new status, new dangers.
Building societies that have demutualised are wandering away from what they are good at, what made them strong and what they know well: the housing market. I agree with the hon. Member for Christchurch (Mrs. Maddock) that building societies should provide support for rented accommodation, because they know the housing market. They are good at that, and if it ain't broke, don't fix it.
104 There is a remorseless drive towards diversification. Diversification is a risky business. The 1993 research by McKillop and Ferguson showed that societies that diversified the most had the lowest return in profits, because diversification was a drain. It has led to several disastrous mistakes, which could have been avoided by sticking to the principles of mutuality and the business that building societies are good at, rather than trying to play big bankers.
I agree with the fears that were voiced earlier. Building societies will be lured away from their provincial roots and status in places such as Halifax, Leeds, Bradford and Burnley to play bit parts in the City of London. They want financial gain and they want to be big players in that market. They will lose out, because they will be battered and skinned by the competition.
Building societies that are considering demutualisation or have demutualised, and their shareholders who vote for it, should take what happened to the TSB as a warning of the dangers involved. It was a virtual disaster. We passed privatisation legislation in 1985 and the TSB received a huge dowry, which it promptly squandered. It was the most ruinous process, because it tried to play a game that it was not used to, was not equipped for and had no skills in, and the bank and its shareholders lost out disastrously. The Bill should have done more to protect mutual status.
I was inclined to object to the speed with which we are passing the Bill, because I hate rushed legislation. When the pressure groups, as well as the spokesmen for the three main parties, say that we must pass the legislation with speed, I get suspicious and think, "Hang on, what's at issue?" However, I have been persuaded by my hon. Friend the Member for North Warwickshire that the Bill should be supported, because it will slightly ease the pressure to demutualise, which is now so strong in the movement.
Building societies that are considering demutualisation will think twice if, once they are demutualised, they will be deprived of the ability to be protected if they take over another financial organisation. A building society that is thinking of demutualising will be a plc and will be a small player in the new market, so it will need to merge with others. Even then, it will still not have the critical mass and will be vulnerable to takeover, especially by foreign banks and financial institutions that are trying to get a foothold in this country. I think that clause 41 will be a deterrent. The Halifax, of course, is too large to be worried, but the provisions will weigh with some of the building societies that are currently considering demutualisation. It certainly weighed with the Alliance and Leicester, which is now trying to amend clause 41 in a way favourable to its interests.
Because of that, I feel that—somewhat reluctantly—we should support the Bill. I would have liked us to devote more consideration to it: I would have liked us to consider what could be done to protect mutual status. Like my hon. Friend the Member for Burnley, I would have liked a two-year rule to act as a deterrent to those who wished to take advantage of the tides of money that are currently washing around looking for accounts in companies that might demutualise where there is a quick profit to be made. The essence of investment should involve a wish to stay and work with the company involved, rather than just rushing in and out to get a quick buck. I think that two years' membership should be the minimum requirement before people benefit from the distribution.
105 Unfortunately, the deepest instinct of British shareholders is to take the money and run. The two-year rule would check that tendency, and we should bear that in mind in our consideration on Monday. I favour that modification above all because it would help the mutual societies to compete by allowing them more flexibility. It will provide a slight deterrent to demutualisation, and I believe that we should encourage building societies to believe that the mutual principle is vital. That is why I am delighted that 70 building societies are determined to remain mutual. I hope that they will be encouraged. That system is crucial to a diversified, pluralistic lending sector and to competition in the market from all kinds of institution.
I think that mutual building societies can give their customers a better deal—including those who take mortgages—and, above all, conserve the interests of their members, including the smaller members in their locality, far better than huge, impersonal institutions that try to play at being banks.
§ Mr. Jon Trickett (Hemsworth)
Like a number of other hon. Members, I shall speak in defence of the principle of mutuality, for a number of reasons. First, let me pay tribute to the Economic Secretary to the Treasury who, I believe, firmly intends to restore the balance—or, at least, to establish a level playing field between the mutual building societies and public limited companies.
I wish to speak—even if I do so only for a few minutes—for a number of reasons. First and most important, as a putative Yorkshire nationalist, I must point out—as my hon. Friend the Member for Great Grimsby (Mr. Mitchell) might have done—that many building societies were born in Yorkshire and developed great financial strength there, particularly in my home sub-county of the West Riding. I still insist on using that term. Building societies such as the Leeds Permanent, the Halifax, the Bradford and Bingley and the Leeds and Holbeck—there are a number of others—provided much-needed support for working-class people living in difficult circumstances, and enabled them to acquire their own homes. They also provided a significant amount of employment in large cities in the West Riding. That is much appreciated, especially nowadays, when many of the more traditional industries are dying.
My second reason for speaking is that, in a sense, the building societies represent a peculiarly British solution to the problems involved in home ownership, and I think that every hon. Member would applaud that. About two thirds of people in Britain today own their homes: I am told that about 15.9 million homes are either owned or in the process of being acquired. As a society, we can take pride in that, and I think that we are well advanced relative to countries in Europe and elsewhere.
The building society movement and, above all, the principle of mutuality, allowed our people to make significant gains over the decades in acquiring their own homes. Building societies were the people's solution to the problem of how to acquire their own homes, and possibly to escape from some of the worst excesses of slum landlordism, particularly before the first world war.
My third reason for rising to defend mutuality is the principle of mutuality itself. Much has been said about it. I do not wish to add to what has been said about the 106 co-operative principle—that each account holder and customer in a building society shared, through the mutual principle, in the direction of that society—save perhaps to claim, or to lay stake to the claim, that that perhaps was one of the first examples of the stakeholder society in practice. I shall return to the principle of mutuality or stakeholding in what I say about the Deputy Prime Minister's recent tirade, which has already been referred to.
The fourth matter I wish to raise can be demonstrated with some precision: the financial advantage that mutuality offers to people who own accounts. Examples have already been mentioned this evening. A What Mortgage? survey demonstrated that the top 25 of 72 surveyed mortgages were offered by mutual societies—a significant factor. The Mail on Sunday was able to demonstrate even more graphically the significant differential that is offered by a mutual society relative to a plc. There was a £200 benefit to be gained from taking out a £50,000 mortgage in the past year with the Yorkshire building society—as a Yorkshire nationalist, I probably should refer to a Yorkshire building society—relative, for example, to the National Westminster bank. That is not an insignificant amount of money. The difference in price must be to do with the fact that plcs must provide for dividends to be remitted to shareholders. The mutual principle demonstrates, even today, the advantages that our forefathers and foremothers probably were able to identify when they created building societies.
I worry, too, about the mutual ethos to which many of the mutual societies have declared they will remain attached when they move to plc status. Some hon. Members have said that they wish to conserve the mutual ethos that has been so important to the building society movement over the decades. Every customer is a stakeholder in a mutualised building society; ultimately, the driving force behind a plc is the shareholder. When a building society is demutualised, every stakeholder is given shares but, significantly, there is a rapid, almost cataclysmic, diminution in the number of stakeholders immediately after the shares have been issued.
We have discussed the Abbey National building society. At the date of conversion, there were 5.5 million shareholders. Every stakeholder was given shares and put on the register. In February, their number had effectively halved to 2.7 million. That was a rapid diminution in the number of people able to give direction to that building society.
Financial institutions are looking to the accretion of larger and larger shareholdings. My office was in contact with the Alliance and Leicester today. It estimates that 25 per cent.—a quarter—of all the stakeholders who receive shares will dispose of them immediately. The word immediately is being used from day one. That means that 2.4 million people with a stake in that building society and the ability to give it direction and secure its objectives will immediately dispose of their shares. That constitutes significant disinvestment.
§ Mr. Trickett
My hon. Friend makes a telling point. I am worried that institutions are already circling over 107 the no doubt juicy prospect of demutualisation. I am also worried that our generation, the so-called me generation, is able to dispose of assets that were built up over many generations and which were supposed to be passed to future generations.
The Minister says that she wants to establish a level playing field and to restore the balance between the mutual societies and the plcs. I take her at her word.
I am as worried as my hon. Friend the Member for North Warwickshire (Mr. O'Brien) about the article by the Deputy Prime Minister in The Mail on Sunday. The right hon. Gentleman is supposed to be the great communicator. I understand that part of his job description states that he is to co-ordinate presentation of Government policy. He is the great presenter, the great communicator. On the eve of the Second Reading of a Bill that is supposed to defend the mutual principle, how can he write an article lauding the process of demutualisation and not mention the mutual principle, its defence or the Bill? That is quite extraordinary. There is either a clear conflict in the Government, which would explain precisely why the Bill has been significantly delayed, or the great presenter, the magnificent communicator, has somehow failed to communicate precisely what the Government are doing.
I have said that mutuality is a prime example of stakeholding. I draw the attention of hon. Members to a sentence, which has not been read to the House, from the article by the Deputy Prime Minister. He states:We don't have to put up with phoney Left-wing jargon about stakeholders.That is a direct attack on the principle of mutuality and building societies. How else could that article be represented and how could the delays be explained other than by tension and possible conflict within the Government?
Despite the reservations that I have described, I have no doubt that the Bill, timid as it is, is worth supporting and that, on Monday, we can have detailed discussions in Committee.
§ Mr. William O'Brien (Normanton)
I had not intended to take part in the debate; I have listened to the contributions and support much of what has been said and I hope that the Bill has a smooth passage. However, a couple of issues give rise to concern.
Almost every hon. Member who spoke referred to the five-year protection period. The Minister said that there has been extensive consultation on that matter. Many people have been involved in the consultations or have been approached for their views on how the Bill should proceed. I imagine that the five-year rule was one of the most controversial matters to be debated. In meetings of the all-party building societies group, we have heard speakers from building societies and twice from the Economic Secretary to the Treasury, and the issue of the five-year protection period has always featured high on the agenda. We must consider that matter.
I hope that sufficient time will be allowed to examine the five-year protection period in greater detail when we consider amendments dealing with it. Some hon. 108 Members fear that, once we reach the later stages in the Bill's passage, either the guillotine will come down or the Government will use steamroller tactics to push through their proposals without allowing a fair opportunity to debate any amendments.
In its briefing material, the Building Societies Association states that the fate of the five-year protection period is one of the most important issues. I think that the association is more aware than many others of the causes of and remedies for the problems dealt with in the Bill. I therefore take great note of its briefing material.
The two-year rule is another controversial issue. It has been discussed widely, and views on it were expressed during the consultation period. I hope that we will also be allowed sufficient time to consider the implications of any amendments tabled on that matter. I think that the rule should be continued, to obviate the progression of carpetbaggers—who have gone from one building society to another to make a quick buck and windfall—should more societies lose their mutuality, as has happened more than once.
We should be fair to those who are genuine members of building societies and who believe in mutuality. My colleague, the hon. Member for Gloucester (Mr. French), who is chairman of the all-party group, explained the importance of mutual association in building societies. I believe that the two-year rule will give comfort to those who, like me, believe in building societies. I also believe that it will ensure that we are not taken for a ride, and that the 72 remaining building societies are not used to extract easy money should future demutualisation occur.
I hope that the Minister will take note of the concerns expressed in this debate by hon. Members from all parties, and that sufficient time will be allowed in Committee to consider the two key issues in depth: the five-year protection period and the two-year rule.
§ Mr. Nick Raynsford (Greenwich)
We have had an extremely good and interesting debate on issues of importance to the future of building societies and, indeed, mortgage lending. I add my voice to all those who have paid tribute to the important contribution that building societies have made over the past 150 years or so to enhancing opportunities for people to obtain houses and finance for those houses, thus supporting the extension of home ownership to a level approaching 70 per cent. of the population.
That important contribution has made it possible for people of modest means in all parts of the country to obtain the advantages of owner-occupation which would otherwise not have been available to them. That particular contribution grew out of the commitment of building societies to meet the needs of people in their area when those societies were small, local organisations representative of their small communities. Gradually, over the years, the building societies have grown in size and inevitably their role has changed. Nevertheless, there has been that consistent commitment to meet the needs of the population, which has found its expression in the principle of mutuality. Tonight, we have heard hon. Members express their strong support for that principle and its maintenance. I think we can all echo that belief in the importance of mutuality.
We are especially concerned that societies that are seeking to change from mutual status to, essentially, the status of a bank should be free to do so, but not on terms 109 that give them an unfair advantage over societies that remain mutual. One of the important changes proposed in the Bill is in clause 41. It is an amendment to the five-year rule which creates a proper and fair balance between the interests of societies that have chosen to convert and those that have chosen to remain mutual. It is clearly insupportable for societies that have chosen to remain mutual to find that they can be picked off by societies that convert and seek to defend their interests by acquiring mutual societies during the five-year period in which they themselves cannot be challenged.
§ Mr. Butterfill
I do not think that that has been suggested by any of the converting societies. They are happy to concede that they would lose that status if they were to bid for a mutual society, on either a contested or an uncontested basis. Will the hon. Gentleman explain why the five-year rule, which was thought to be very important in 1986, is no longer relevant and, indeed, no longer desired by his party?
§ Mr. Raynsford
The hon. Gentleman knows full well that the situation has changed considerably in the intervening 10 years. During that time, the number of societies considering conversion has increased, while the number that might choose to remain mutual has decreased significantly. The hon. Gentleman is familiar with the subject, so he will know that many societies are clear about the fact that, if the five-year rule were not to be amended as proposed, there would be a serious erosion in the number of societies, which would be picked off for precisely the reasons that I outlined. I hope that the hon. Gentleman will give his full support to clause 41 which, in its current form, will ensure fairness so that societies that choose to remain mutual may do so and those that choose to convert may also do so, but without obtaining an unfair advantage during the transitional period. The provisions of clause 41 create that framework. I hope that the hon. Gentleman will support them.
During the debate, we have heard some interesting conjecture about the Deputy Prime Minister. Why he chose the opportunity of a column in The Mail on Sunday the day before the Bill was due to have its Second Reading to set out a straightforward paean of praise for the act of conversion is a curious mystery that only he can answer. It has not gone unremarked, and cannot have been unnoticed by the Economic Secretary who, just when she is presenting a Bill to ensure proper protection and support for mutual societies, suddenly finds the ground cut from under her feet by her deputy leader.
I remind the Economic Secretary of the Deputy Prime Minister's language in the article, talking about the windfall gains from conversion. He says:16 million people will benefit from these windfall gains. This outcome flows directly from the Government's policies, its determination to deregulate business and promote competition".The Deputy Prime Minister is unquestionably setting out a prospectus for conversion. Nowhere in the article is there the slightest reference to the virtues and merits of mutuality.
The hon. Member for Gloucester (Mr. French) said that, if the Deputy Prime Minister had really opposed the Bill, it would not be before the House. The Deputy Prime Minister has proposed a number of measures in the past that he no longer proposes so enthusiastically. He used to 110 propose the use of capital receipts to get more housing investment: he urged that councils should plough back their capital receipts into building more houses; he has changed his tune on that. We have heard of his support for Europe and his enthusiasm for a move towards a single currency; he has changed his tune on that, as well.
I do not know the explanation for his curious antics, but what is set out in The Mail on Sunday is very poor fare for the Bill's advocates. The defence of mutuality is in far safer hands with the Economic Secretary than with the Deputy Prime Minister, who, in an article published the day before the Second Reading debate, could not bring himself even to mention the word "mutuality", let alone to praise it.
We have had a useful and valuable debate, with excellent contributions from a number of hon. Members. I single out in particular the contributions of my hon. Friends the Members for Feltham and Heston (Mr. Keen), for Great Grimsby (Mr. Mitchell), for Hemsworth (Mr. Trickett) and for Burnley (Mr. Pike), as well as those of the hon. Members for Christchurch (Mrs. Maddock), for Bournemouth, West (Mr. Butterfill) and for Gloucester.
The Bill is necessary and timely. It is unfortunate that it is being rushed through in the last minutes of this Parliament, but it is necessary to ensure the future of mutual building societies. It sends a powerful message that the principle of mutuality is too important to be sacrificed in the interests of the Deputy Prime Minister. We must defend mutuality. The passage of the Bill will be an important statement of the House's commitment to that principle.
§ Mrs. Angela Knight
With the leave of the House, I should like to speak a second time in this important debate.
I congratulate all hon. Members who have taken part in the debate. I am pleased that they all support the Bill. I should like to pick up on some of the points raised, starting with the speech of the hon. Member for North Warwickshire (Mr. O'Brien), who made a number of extraordinary comments. After giving us a history lesson, he waxed lyrical on a subject on which other Opposition Members have concentrated—the article in The Mail on Sunday by my right hon. Friend the Deputy Prime Minister.
I can only presume that Opposition Members concentrated on the article because they had nothing decent to say about such an important Bill. They should read the article because, quite frankly, their interpretation of it, or their spin, in the modern parlance, is misleading. I can only conclude from the points that they have made that they are against the decision to convert by the members of converting societies. Therefore, they are against 16 million people receiving shares in converted societies.
I can only say that the message that has come loud and clear on a number of occasions from the hon. Members for North Warwickshire and for Greenwich (Mr. Raynsford) is that the Labour party is clearly against 16 million people receiving a windfall.
§ Mrs. Knight
On a number of occasions, I have heard from the hon. Gentleman and from Opposition Back 111 Benchers those exact comments misinterpreting the contents of the article by my right hon. Friend the Deputy Prime Minister.
§ Mr. O'Brien
I am grateful to the Minister for giving way, as I would not want her to misrepresent our position. In no way have we criticised those who have decided that their building societies should convert. That is a matter for them. We have always adopted that position and we wish them well in that conversion. The hon. Lady should stop throwing around little bits of abuse, as she did earlier, and deal with the points in the article, which was an attack on mutuals. It was a call for conversion and the Minister must deal with it.
§ Mrs. Knight
The article was not an attack on mutuals. If the hon. Gentleman maintains that position, he is misleading the House and the country.
I found it surprising that that was all the hon. Gentleman had to say on the subject, except that apparently the Government have taken too long in bringing the Bill to the House. We have carried out a first-stage consultation and made changes accordingly under the powers in the 1986 Act. We have continued listening to the societies in order to make the changes that they want in the Bill. The Bill was introduced the day after it became clear that the Opposition parties would co-operate. We have moved very speedily and I look forward to continuing co-operation in Committee.
My hon. Friend the Member for Bournemouth, West (Mr. Butterfill) made his usual useful speech on a subject of which he is a well-known master. We have one or two disagreements which we have discussed before. Let me expand briefly on the two-year rule and the five-year protection that were mentioned by most hon. Members who spoke in the debate.
Let me turn first to the two-year rule. At present, converting societies can distribute shares to members of less than two years, but they do not have to do so: the choice is theirs. The Act operates in that way not because Parliament passed it that way but because it was changed as a consequence of cases taken by societies themselves. That is why the two-year rule exists in its current form.
The key issue is how best to help societies with the problem of speculation and carpetbaggers. I am sure that no hon. Members are in favour of carpetbagging, which results in the societies feeling destabilised in some respects and overcome by the number of people queuing up outside their doors. However, one chief executive recently told me that the influx of customers was the best free advertising that the society had ever had.
At present, societies have powers to react and many have taken a range of measures to minimise the disruption of business caused by a flurry of new customers. They can take two principal actions against speculation: first, they can say loud and clear that they plan to remain mutual and, secondly, they can take the simple steps available to them to prevent speculation from continuing.
§ Mr. Austin Mitchell
The third method that the hon. Lady did not outline is to up the level at which people can invest. Some societies are demanding minimum investments of £1,000. Why is it not possible to put an overall rule in the Bill that people can participate, decide and vote on such issues only on the condition of two years' membership?
§ Mrs. Knight
I shall answer the hon. Gentleman briefly, as he will be aware that time is ticking away rather quickly. It is quite correct that, when societies have been faced with speculation, some have increased the limit that an individual has to subscribe in order to become a member. They have then dropped the limit back down. They have also restricted membership in some instances to a very localised basis, but then relieved those restrictions. That is the normal operation of the marketplace. I do not want to interfere in their business practices.
§ Mr. Butterfill
How can a mutual society protect itself—whatever it does—from a hostile bid via shares?
§ Mrs. Knight
If my hon. Friend will bear with me a moment, I shall come to that point. At this point, I want to answer his earlier questions relating to five-year protection, which was raised by several hon. Members.
A converting society does not automatically lose its five-year protection. It loses such protection only if it takes certain specific steps. Thus, if it feels that it requires time to stabilise itself in its new form as a public limited company, it is protected for up to five years. If, however, it feels that it is strong enough and wants to go on the acquisition trail of another authorised financial institution, it is only fair on it, and indeed other participants in the marketplace, that it should lose its protection. The question relates not only to other mutual societies but to insurers and banks. The converting societies are big organisations. The Halifax will be the fourth largest bank in this country. Indeed, the Alliance and Leicester and the Woolwich would both be larger than the Royal Bank of Scotland and Guardian Royal Exchange, a well-known insurance company.
The key proposals in the Bill will allow societies to develop their financial services in the way they want while staying mutual. There will be more competition in the high street, which means better rates for savers and borrowers. Building societies will still have the unique close relationship with home owners and local people. I commend the Bill to the House.
§ Question put and agreed to.
§ Bill accordingly read a Second time.
Motion made, and Question put forthwith, pursuant to Standing Order No. 61 (Committal of Bills),
That the Bill be committed to a Committee of the whole House.—[Mrs. Angela Knight.]
§ Question agreed to.
§ Committee tomorrow.