§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Robert Ainsworth.]9.34 am
§ Mr. Andrew Love (Edmonton)
I am fortunate to have secured this debate literally on the eve of the announcement of the conversion ballot for the Nationwide building society, the largest mutual organisation in the country. It is therefore an appropriate time for Parliament to take stock of the current position, and to look to the future of mutual societies.
It is difficult to underestimate the contribution that mutual organisations have made since the formation of the first friendly society more than 200 years ago. Whether we look at the self-help welfare state that was created by the friendly societies in the inter-war period, the home ownership revolution brought about by building societies or the empowerment of full-income consumers by co-operatives, we can see that the self-help and mutual movement has had a dramatic impact on the lives of ordinary people in this country. It continues to do so.
The movement also influences Government—most recently, in the search for the elusive third way between the unfettered capitalism of the 1980s and the straight socialism of the past. I believe that mutuality is synonymous with the third way.
That fact was underlined in a recent article in the New Statesman, by a commentator who dubbed the so-called third way "mutualism". Ministers have vied to define its objectives. The Green Paper entitled "New Ambitions for our Country: A New Contract for Welfare" explicitly supports that policy when it states:Mutual organisations should play a greater role in the provision of welfare in the next century.That statement relates partly to the failure of the financial services industry to act as a guardian of our savings and our pensions. It is also grounded in the belief in both the limitations of state provision and the unacceptability of privatising the welfare state. Thus mutual organisations are the sensible third way forward.
In a recent speech, the Minister for Welfare Reform suggested the development of approved welfare providers whose central requirement would be that they were owned and controlled by their members—that is, that they be mutual in both character and definition. The Government clearly support the principle and practice of mutuality, yet many mutuals face sustained attack, partly because of their success. How can that be? I believe that it relates to the failure of the Building Societies Act 1997 to provide any safeguards for societies against the activities of 1034 carpetbaggers and the impact that that that has on their businesses. As a result, their very mutuality is, or will be, perceived as a hindrance to their future success.
Before considering that issue, I must comment on the value of mutual organisations in the financial services marketplace. The consumer benefits from access to the services and products that mutual organisations provide. Societies offer choice to the consumer, and they are popular. Although the remaining societies constitute only 27 per cent. of the mortgage market, they have lent more to customers in the past year than the big banks combined.
Survey after survey confirms that building societies come top in terms of customer service and friendliness. They provide diversity through their different structures and different objectives. Mutuals are able to take a longer-term perspective, as they are not driven by the need to boost their share prices continually, or to maximise dividends to their shareholders.
Many societies are regionally and even locally based, which brings them closer to their customers, and many play a significant role in the local community. There is a building society head office in each of the 12 regions of the United Kingdom, where they are an important source of local employment, living standards and decision making. Building societies provide stability in the market—not for them the false attractions of property speculation or secondary banking.
History shows that banks with excess capital are tempted into unwise investments. As a result, no savings have been lost in building societies this century. Thus building societies are truly prudential organisations, but, most importantly, they provide competition to the banks and other institutions in the financial services sector.
Building societies have a margin advantage, which allows them to offer cheaper mortgages, or savings accounts that pay more on average. The difference between the interest that they receive on mortgages and that which they pay out on savings ranges from 1.2 to 1.7 per cent. The equivalent margin for their demutualised rivals ranges from 1.9 to 2.5 per cent.—a considerable advantage. That was commented on recently by none other than the chairman of the Building Societies Commission, who explained:As Mutual Societies do not have to pay dividends to external shareholders, they will always have a margin advantage over banks".However, mortgage lending is generally considered to be low-risk and, as a result, low-return—not a natural market for profit-maximising companies. In a recent survey, the Consumers Association compared a range of core products—savings accounts, TESSAs, mortgages and overdrafts—and found that consumers would have been nearly £1,600 better off over a five-year period with a building society than with a bank.
Building societies also act as a competitive restraint on the banks. Without them, banks would charge customers even more for their mortgages, and pay even less to their savers. The question posed in this debate is: how do we preserve for future generations the right to those cheaper mortgages and higher savings rates? That is particularly relevant as the building society sector has been undergoing rapid change in the past few years, culminating in the conversion of five of the largest societies last year. Although that still leaves 70 societies with more than £130 billion in assets, the recent windfall 1035 gains to members have created a climate that threatens the very mutuality that allows members to vote themselves that benefit.
It is clear that societies, which must survive in a cut-throat, competitive market, cannot continue to be diverted from their core business activities to defend their mutual status. If those attacks continue—even if unsuccessfully—societies will probably be faced with the unpalatable choice of continuing to defend their position against increasing odds or accepting that it would be better for their business and for their other stakeholders to convert on their own terms. That would reduce the number of societies to below the level that would make for a sustainable mutual sector, and would inevitably lead to its elimination from the financial services market.
Many of us would argue that there is a systemic interest in maintaining mutuality, not because it is an inherently superior form of organisation, but because there is a need for a mixed ownership structure in the financial services sector for the reasons that I have already outlined. If that is accepted, mutuality becomes a public policy issue, and the Government and Parliament must take an interest in ensuring that consumers do not lose as a result of the continued conversions. How can that be done while protecting both member control and democracy, which are the unique selling points of mutual organisations?
Societies are looking for fairness, not favours—the creation of a legal framework that will allow them to compete on a level playing field in the financial services sector. The Minister has already shown the way by raising the threshold for conversion to 50 per cent., but fundamental decisions about the future of a mutual society—the most important decision that a member can take—should require a significant level of support before demutualisation. After all, converted societies can be subject to takeover only if 75 per cent. of shareholders vote to confirm that action.
As recent events have shown, the rules on the election of candidates to boards of directors are set at a level that can easily be exploited by a small band of eccentric or dissident individuals. The democracy of a mutual organisation should be protected against frivolous candidatures, in the same way as Members of Parliament are protected in general elections.
To be nominated a Member of Parliament requires 10 electors in an average constituency of 67,000 electors, which is one for every 6,700. Nationwide, the largest mutual, has just under 5 million members; the Bradford and Bingley has 2.2 million members. To be nominated a member of Nationwide requires only one nomination for every 100,000 members; and to be nominated a member of the Bradford and Bingley requires only one nomination for every 44,000 members.
Are not building societies being significantly disadvantaged by allowing their equivalent to the Monster Raving Loony party to continue to disrupt their activities? To put it another way, is it unreasonable to set the threshold for candidates around a level that the nation finds acceptable for its democratic elections?
Membership of a society should be for those who have an interest in its activities, not for those who are only interested in asset-stripping the society for their own benefit. During the past year, 1.3 million new members 1036 have joined Nationwide. They could undermine the majority of longer-standing members who voted overwhelmingly to maintain the society's mutual status at last year's annual meeting. To gain ownership rights in a society, an applicant should have been a member for a minimum period. That returns societies to their original ideal of requiring their new customers to save with the society before gaining membership or its benefits.
In addition, the protections of a society's legal status are being eroded in the current campaign. The resolution submitted to the annual general meeting of Nationwide by a proponent of demutualisation means in practice that the decision to convert can now be approved as a result of a straightforward majority of those voting. It is difficult to see how the society could resist the moral pressure, despite the fact that the strict legal requirements have not been met.
Is it reasonable to make societies go through the disruption and uncertainty that is inherent in the frivolous campaigns now being mounted? They have the ability to stand every year with impunity and with little financial outlay, yet the cost to societies in terms of mounting a reasonable defence and in terms of disruption to their business in enormous. I understand that last year's campaign for Nationwide cost some £2 million, and it will cost even more this year. It is not unreasonable to suggest that the framework of regulation should provide stability, and ensure that societies cannot be held to ransom by a small and unrepresentative group of people who have no commitment to the objectives of the mutual organisations of which they are members.
Mutual societies have been with us for more than 200 years, and have more than 100 years of expertise in the savings and mortgage markets. If they and their expertise are not to be undermined, action will be necessary to deal with the difficulties and disruption that threaten their future existence.
§ Mr. John Greenway (Ryedale)
I am delighted to speak after the hon. Member for Edmonton (Mr. Love), and I congratulate him on securing the debate and on its exquisite timing, given the Nationwide ballot that takes place tomorrow. He hid his light under a bushel, because he has successfully chaired the all-party building societies group since being elected to the House last year. It has been my pleasure for the past seven years to chair a sister group, the all-party insurance and financial services group, and I have greatly enjoyed working with him. I agree with much of what he said, and he went over some of the ground that our group has covered in recent years.
Before I continue, I should remind hon. Members of my interests in the insurance broking profession; they will inform what I have to say, rather than be of any direct benefit to insurance brokers and intermediaries.
The all-party insurance and financial services group addressed mutuality twice in 1996. I have been able to return to what we discussed in preparation for the debate, because the briefing papers prepared for the group by Price Waterhouse were published in a bound volume. We considered the building society mutualisation issue, and concluded that mutuals have an extremely important role to play.
Our general conclusion was that there is a need for a mixed economy, and some of the smaller building societies in Yorkshire such as the Skipton, the 1037 Scarborough, the Leeds and Holbeck, and the Yorkshire were especially helpful in addressing our thoughts. The hon. Member for Edmonton mentioned the Bradford and Bingley; one could filibuster for half an hour by reading out all the names, but there is no need to do that today.
The hon. Member for Edmonton was exactly right to say that the record shows that smaller societies are giving a better return to savers and a more competitive mortgage rate to borrowers than many of the larger societies. I have had my mortgage in Yorkshire with the Halifax for 21 years; in London, I am with the Cheltenham and Gloucester, which offered an extremely competitive deal when I took out the loan on my current house. The important point for hon. Members is that, if all the mutual societies were stripped away, demutualised big banks and building societies would result in a less competitive market, especially if all the business ended up in the hands of the few.
It could be argued that there are too many societies—the same argument applies in life assurance—but, overall, we should be in no doubt that the markets for savings and for mortgages would be less competitive if all the smaller societies disappeared. That is why I agree entirely with the hon. Member for Edmonton that it is a matter of public policy that there should be a structure for those societies to flourish.
The outcome of tomorrow's Nationwide vote will help to determine whether the Building Societies Act 1997 is adequate. I pressed the previous Government to go further, and to take stronger action against the carpetbaggers. Sadly, we were not able to prevail in the argument, although, as the hon. Member for Edmonton knows, his predecessor as chairman of the all-party building societies group, Mr. Douglas French, did a great deal to further the argument and the legislation.
Mutuality also extends into life assurance, pensions and friendly societies. Five of the top 10 life assurance companies in this country are mutuals, and mutual companies have always been especially strong in the with-profits field of business. There have been arguments in the recent past about whether societies such as Standard Life, the National Provident Institution, Friends Provident and so on will be able to survive as mutuals. It is to their credit that they have made it clear that that is their wish.
In the case of Norwich Union, different factors were at play, because it owned one of the largest general insurance companies, and its real value could never be realised for its policyholders. Its demutualisation was extremely successful, but it showed that there is no clear way in which everyone should go: there is a need for some societies to remain mutual and for some to enjoy the benefits of plc status.
The argument on mutuality for life assurers is more complex than for building societies, and we must be aware of some dangers. The first is that history shows that several mutual life assurance companies got into difficulty and were absorbed by other mutual societies. For example, Friends Provident absorbed the United Kingdom Provident Institution some years ago. Although that shows the strength of the industry as a whole, it also shows that mutuality in itself is not a guarantee of success. There is still a requirement for proper management and efficiency.
One reason why many mutual life assurance companies have not performed as well as they should is because their new business costs have been far too high. They have 1038 tried to get more business, but have neglected the effect of that on the overall performance of their with-profits fund. I think that my remarks will be dear to the heart of the Economic Secretary to the Treasury: whether a company is mutual or plc—there is potential for combining them—it is crucial to bring down the cost of new business to more sensible levels, so that members and policyholders derive the true benefit of their investments.
A great deal of inefficiency in the life industry was obscured by the old life assurance premium relief, which was abolished in 1985. There was a great hue and cry in the industry when the relief was abolished—it was said that that would be the end of everything—but abolition made the industry more efficient. In whatever form companies exist, the taxation arrangements within which they have to do business are important—I know that the Economic Secretary appreciates that.
I want to sound a slightly controversial note: the scale of it remains to be seen, but there is a problem because policyholders of mutual life assurance companies will have to pay towards the cost of compensation for pensions mis-selling. I have raised this matter several times in the House, and I know that the problem arose under the previous Government, not this one.
People who belong to mutual societies through buying a life assurance policy must take an interest in the way the society is run. There will undoubtedly be some squeals in a year or two about the extent to which some policyholders have to pay for the compensation arrangements for others. We must ensure that the arrangements under which the phase 2 review in particular is conducted are fair to all, and that we bear in mind the interests of policyholders who will not be compensated, but who will contribute to others.
What do we really mean by mutuality? Is it simply a matter of structure, or is there a philosophical argument? The philosophical argument has often been rubbished by City commentators, who have said that it has no real benefit.
A year ago, Loughborough university published an excellent paper entitled "Reflections on the Mutuality and Future of Building Societies", featuring research carried out for the Building Societies Association. The paper comments:Philosophical issues about the 'true nature' of mutuality are a diversion and are largely irrelevant: the key issue is whether mutuals do or do not add value efficiently for consumers.I agree with that.
I think that there is a philosophical argument. Mutual status can be about shared ownership—I know that the Minister has stakeholder pension funds in mind—but it is entirely conceivable that we may enter a phase in which mutual funds will be necessary if we are to gain the administrative efficiency that is so necessary to keeping down the costs of new business I mentioned. In such a phase, the funds would belong entirely to the policyholders, investors or future pensioners, but might well be administered and managed by plcs because of the size of the task involved.
Having worked in the insurance industry for a long time, I believe that mutuality is about the philosophy: it is about the way in which people do business, and about relationships. In the early days of the life assurance industry, and our great insurance industry—which has led the world in new developments for at least two 1039 centuries—the mutual philosophy, the philosophy of uniting to solve problems that could not be solved in any other way, characterised the companies as they were formed.
What has gone wrong in the insurance industry over the past 10 to 20 years is that, in many quarters, the drive to create new business has become more important than addressing the needs of members. Today's debate is important not just in regard to events today and tomorrow affecting the Nationwide building society, but in giving us an opportunity to see a wider picture.
As the excellent Loughborough university paper points out, in the end the argument will be about whether mutuality adds value. That argument is as much about efficiency as it is about offering the best returns. We should tell the financial services world that we believe the future lies in giving a better service to investors and policyholders, and we should bear in mind the need for structures of taxation and legislation that allow that philosophy to flourish. If we can achieve that, we can achieve for future generations of investors, pensioners and policyholders the better returns to which they are entitled.
§ 10.3 am
§ Mr. David Lepper (Brighton, Pavilion)
I congratulate my hon. Friend the Member for Edmonton (Mr. Love) on securing the debate at such an appropriate time.
Although we are discussing the future of mutuality, let me briefly remind the House that my constituency is the birthplace of one of its strands. In 1820, Dr. William King, Elizabeth Fry, Lady Byron and others set up the Brighton co-operative society and the Brighton provident society in West street, in the heart of my constituency. Last week, as a Nationwide member and mortgage holder, I visited the society's branch in that same West street in order to cast my vote.
There is no doubt that the notion of mutuality has again captured the imaginations of a great many people in the past three or four years. Last year, more people voted in the Nationwide ballot than in the Welsh referendum. I am glad to say that, in both cases, I agreed with the result of the vote, and I hope that the same will be true of the Nationwide ballot whose results will be announced in a day or so.
The hon. Member for Ryedale (Mr. Greenway) spoke of the philosophy of mutuality, and it seems to me that the notion of mutual trust is at the heart of that philosophy. Although I do not agree with everything I hear on "Today", I was interested by the results of a survey commissioned by the BBC earlier this year on behalf of that programme. People were asked which kind of organisation they would most trust to help them to choose the best mortgage for their circumstances. Of those who responded, 8 per cent. chose converted building societies, 23 per cent. chose traditional banks, and 44 per cent. chose the existing mutual building societies. It is vital for us to keep in mind that element of trust, as well as the financial and regulatory framework that we are rightly considering this morning.
It is, I think, no accident that some of the larger public limited companies have assumed a veneer of mutuality through the spate of loyalty cards and club cards that we have seen over the past year or so. They are playing on 1040 that important theme of mutual organisations: the notion of being—dare I use this term?; I shall, as we have talked about the third way—a stakeholder.
Like, I suspect, a few other hon. Members, I come from a generation for whom the divvy from the Co-op was an important part of the household finances. In matters of insurance, my generation turned not to the huge insurance companies, but to the Oddfellows, the Buffaloes or the Foresters—the mutual friendly societies that, in many working-class homes, formed the basis of the household economy, along with the Co-op.
My hon. Friend the Member for Edmonton mentioned the welfare reform Green Paper. That paper, along with many of the other discussion documents that have been published, offers a future to the friendly society and the mutual organisation as we look to the reform of the welfare state and the pensions system.
I am sure that many other hon. Members were inundated last year, as I was, by the plethora of unwanted faxes churned out by shady organisations spending their time spotting the building societies that were likely to be the next converts, and advising people how to make a killing straight away. All the faxes that I received went back where they came from, but I am interested in one aspect of the challenge to the mutual building societies that we have seen over the past few years.
In one respect at least, it has been good for them. I thought a little before saying that, but I think that some societies were in danger of becoming complacent, and they have had to think rather more imaginatively than they might otherwise have done about the service that they offer their members—not just about attracting new customers.
Building societies have risen to that challenge remarkably well, which is why, in the nine months to June this year, they captured 40 per cent. of the new lending market. In 1997, 13 of the 15 cheapest lenders were mutual building societies. Between 1992 and 1997, eight of the top performing TESSAs were offered by mutual building societies. They offer competitive mortgages and competitive rates to savers.
I welcomed last year's announcement by the Economic Secretary on the requirement for a 50 per cent. turnout, and perhaps we should consider whether that should be even higher. The Government should turn their attention to the issue of the required number of nominees for directors of mutual building societies, and to the qualifications that we would expect of nominees for directorships, although I am not sure how that could be arranged. We need to ensure that they are in tune with the ethos of the organisation that they seek to guide by becoming directors.
I hope that the mutuals will have a bright future. We have been reminded that friendly societies have similar arrangements. Moreover, the Automobile Association is one of the leading mutual-type organisations because of the way in which it structures its relationship with its members. The mutuality field is wide.
I await with anticipation the results of the vote on the board of Nationwide and on whether it should consider converting. I hope that the vote will be against conversion, because that would give a clear message to other building societies and other carpetbaggers. It would put to rest, for a few years at least, the threat to mutuality, and would allow the mutual building societies to get on with the job that we all want them to do.
§ Dr. Vincent Cable (Twickenham)
I congratulate the hon. Member for Edmonton (Mr. Love) on securing this debate, and on leading an effective all-party campaign. He has maintained the support of hon. Members from all three parties for the building society movement, and that has been a substantial contributory factor to the mature level of debate about this issue in the country. It is helpful that he has chosen to debate not just building societies, but the mutuality principle at large. The hon. Member for Ryedale (Mr. Greenway) captured the broader issue very well.
I shall perhaps be a little controversial, because I have been struck by the paradoxical approach of the new Government. There is a genuine enthusiasm for mutuality. Members of the Government, such as the Minister for Welfare Reform, clearly believe passionately in the principle, and recognise its effectiveness in attacking many social problems. They understand the culture in which the principle of mutuality grew up. I have heard the Economic Secretary speak about her roots in the west of Scotland, and she clearly understands how the movement originated and its strengths.
However, the Government have often fallen over backwards to avoid doing anything that could be seen as overly sympathetic to the mutual institutions. Whether that is because of the conservatism of the Treasury or pressure from the banks, I do not know. There are several ways in which the Government could be a good deal more proactive in support of mutual institutions.
The case for building societies has already been well made. I emphasise that building societies are not a quaint, old-fashioned relic. We are not talking about institutions that should be preserved for the museum of financial institutions, but about institutions that are very effective in the marketplace. They offer highly competitive returns to their depositors, and competitive rates to borrowers because of the small margins on which they operate. In the past year, they have considerably increased their market share in a competitive marketplace, without subsidy or preference.
The dangerous assumption has been made that, because building societies have been very competitive in the mortgage market, they are strong enough to hold off pressures from carpetbaggers. Building societies have a particular, built-in, institutional weakness. Unlike plcs, which raise capital from the marketplace through new issues, building societies expand through accumulating reserves. That pot of gold attracts people who want pay-outs today rather than to think of the long term. Those reserves are inherently vulnerable, so it is important to have a system of regulation that recognises their vulnerability.
The previous and the present Governments have made a genuine attempt to strike a sensible balance between protection and exposure to pressure from members. I suspect that the balance may be wrong, but we shall see in the next day or so what has happened. The Government have taken a calculated risk. We hope that they are right, but it is possible that they have gambled wrongly.
If Nationwide goes down in the next 24 hours, it is clear that the other two big societies, Bradford and Bingley, and Britannia, will not survive much longer. Most of the smaller societies will be acquired fairly quickly by the banks. Within a relatively short time, there will be 1042 little left of the building societies movement. Let us hope that that does not happen, but there is a very real risk that it will.
If it does not happen, I hope that the Government will think again about some of the measures that have been suggested by building societies to protect them from carpetbaggers. The Economic Secretary deserves some credit for having partially responded to the problem, by changing the thresholds. Some of the other measures proposed are still as relevant as ever.
It is possible to have too much democracy. Hon. Members would not want monthly or yearly general elections. That would no doubt increase democracy, but it would not necessarily make for better democracy. It would not make for better democracy if people were able to stand for Parliament without putting up a deposit. There must be hurdles. We are talking about quality as well as quantity.
Some of the riders suggested by building societies are appropriate. I say that with some caution, because I happen to have in my constituency the headquarters of the Building Societies Members Association, which is concerned about building society democracy, and frequently complains about building society managers ignoring members' rights. That is an important dimension, but even taking that into account, further regulatory provisions are required to prevent building societies from being too easily rolled over by carpetbaggers.
The hon. Member for Edmonton has suggested some provisions, but the key ones are to raise the number of people required to nominate board members, and the number of people who can introduce a resolution. It would still be a relatively small number—a few hundred rather than 50—but they would be important additional provisos. Increasing the time gap between people becoming members and voting in an election is another small change that could be crucial in shifting the balance within building societies. I hope that the Economic Secretary will have a fresh look at such provisions, especially if the building societies survive this ordeal by fire
The Government should also examine the regulatory and tax provisions that apply to other mutuals. One of the most depressing features of this year's Finance Bill was the rather abrupt way in which the Treasury dealt with the taxation provisions applying to friendly societies. They are a small part of the savings market, but they are very important for low-income savers, especially those for whom the traditional instrument is the £20-a-month, long-term, 10-year, insurance-linked savings bond. Many working-class families have traditionally used that as a way of setting aside money for a rainy day.
Under current tax provisions, the tax-free allowance is low. Prompted by the Association of Friendly Societies, I suggested during debates on the Finance Bill that that should be raised. It was raised slowly under the previous Government, and the present Government should be more ambitious. My suggestion was slapped down on the grounds that it would involve cost, although that is almost certainly wrong, because the introduction of tax-free savings increases the amount of taxable savings in the friendly societies. Whatever the technicalities, the Government should look closely at the matter. Friendly societies are important and should be encouraged, especially in the new environment of individual savings accounts.
1043 The regulation of friendly societies should be examined. The constituency of my hon. Friend the Member for West Aberdeenshire and Kincardine (Sir R. Smith) contains the first ever friendly society, the Braemar. He has said that such societies are small, and deal with small savers. The regulatory costs for serving such savers are prohibitive, and far in excess of the amounts involved. The system of regulation is often heavy-handed. It was probably introduced with good intentions, but it is not properly applicable to institutions such as friendly societies. I hope that the Government will look at that.
Another type of mutual society has not been mentioned today, but it deserves scrutiny. Credit unions are important in the United States. There may be good reasons for the movement's greater size there, where the banking and building society movements did not develop as they did in Britain. Credit unions are underdeveloped here, and they could be much bigger. The Government should examine the regulatory system under which they operate. There were changes in, I think, 1996, when the previous Government raised the savings threshold for credit unions. The National Consumer Council has suggested that that could be creatively updated and revised.
The hon. Member for Ryedale (Mr. Greenway) spoke about life assurance companies. Building societies, credit unions, friendly societies and life assurance companies are different aspects of the mutual movement. The Government and previous Governments have tended to look at the problems piecemeal. By way of the Prime Minister's social exclusion unit or through some such all-embracing body, the whole issue of mutual institutions could be examined in the round. Their tax and regulatory treatment could be studied comprehensively to see whether mutuality could be boosted. That should not be done by giving them unreasonable protection, and they should certainly not be protected from market competition, but we should see whether a much more friendly environment can be created. I hope that the Economic Secretary can lift the issue out of the narrow Treasury, regulatory and tax environment, into a much broader context.
§ Mr. David Lock (Wyre Forest)
I congratulate my hon. Friend the Member for Edmonton (Mr. Love) on securing the debate, and on his work on the all-party building societies group.
I should like to declare three interests. First, I have a private pension with Equitable Life. I chose that company because I wanted profits from investments to be returned to members, rather than being given to shareholders with no other interest in the society. Secondly, I am secretary of the all-party occupational pensions group. Such pensions are provided by a mutual association which has provided an enormous amount of benefit in this century, and suffer from many of the problems that are faced by building societies. Thirdly, I am currently undertaking an Industry and Parliament Trust fellowship with the Nationwide building society. [Interruption.] I have no inside information on the vote. As I am sure hon. Members know, the Nationwide is not conducting the count: it is being scrutinised externally.
1044 Like many hon. Members who have been on other IPT fellowships, I am grateful to Nationwide staff for their time, care and patience. I am sure that hon. Members will appreciate that, at this time, the Nationwide staff are busy, but they explained their organisation to us, told us what makes it tick, and gave us an insight into a complex and impressive operation.
The public rely on mutual organisations, particularly building societies, to conduct some of the most serious financial transactions of their lives. Those people are in it long-term, and without the building society movement there would not be the present property-owning democracy. However, as hon. Members have said, that is being prejudiced by the get-rich-quick philosophy of the 1980s, which is still with us in the shape of the demutualisation carpetbaggers.
§ Mr. Kerry Pollard (St. Albans)
Does my hon. Friend agree that, after the last major demutualisation, there was so much money sloshing about that it distorted the retail economy? We may still be suffering from that, and perhaps that major input of money has caused interest rates to be slightly higher than they might otherwise have been.
§ Mr. Lock
My hon. Friend is right. I understand that the windfall produced a cash injection larger than that stimulated by any Budget since the war.
People who invest in building societies are exercising choice, rather like the choice that is exercised in investing in a greyhound. If they watch it going around the track a few times and decide that they do not like how it runs, they should not try to vote to convert it into the hare. They have invested in a greyhound, and they are stuck with it.
Such reasoning applies to executives and board members, as well as to members of societies. If people want to join the board of a financial organisation that focuses on maximising profits to shareholders, they should get themselves elected to a bank. For people who are on the board of a mutual organisation, no amount of free shares, share options or other freebies should encourage them to abandon the basis of the organisation to which they have been elected.
I do not accept the business case for conversion. Other hon. Members have set out the grounds for that, and I shall not go over them. There is a compelling business case, now being demonstrated in a competitive market, that mutual organisations have the edge. For example, the current standard bank variable rate is 8.95 per cent., but the building society rate is about 8.1 per cent. That is because the costs of converted building societies are increased by about 40 per cent. by the need to pay savers. I would prefer those moneys to go back to investors. In June last year, the Paymaster General said:Abbey National, which was the first mutual society to convert, has largely maintained its customer profile."—[Official Report, 23 June 1997; Vol.296, c. 653.]Despite demutualisation, experience to date is good. Since that time, the outlook has not been so rosy, because money is flowing into the mutuals, attracted by their competitive advantage. It is interesting to note that the chief executive of Abbey National bank plc was quoted as saying at about that time:there is no long-term future in the mortgage market".1045 It is not surprising that the bank takes that view, because it seems that it simply cannot compete.
There is another reason for the importance of building societies, and it relates to their local and regional functions. To get a mortgage decision from some banks, it is necessary only to make a call on an anonymous phone line, answer a series of questions, and, regardless of one's personal position, family or area, get a decision that is generated purely by computer. Building societies have a local focus, and are adaptable.
There is a third difference, and it is in the way that building societies do business. They are owned by their members, and any profit belongs to the customers. They are judged on their services to customers, not on the profit made for the organisation. I can give an example of that from the time that I worked with the Nationwide. It was approached by some mortgage brokers and asked whether it would promote a certain policy. The brokers presented it to the society on the basis: "Your members want this protection, and there will be a reasonable premium, but the payout will be very low, so you and I will be able to make a considerable profit."
Had the building society been a bank, it would have been prepared to accept that deal. However, as it was owned by its members, it said, "So you want us to promote a policy to our members which is not actually in their interests or to their benefit. Although they may think they need this cover, you and I know that the payouts will be low, which means that there is no value in it for our members. No, we are not prepared to do that." That is the crucial difference in the way that membership affects business decisions.
I appreciate the fine balance that the Government must ensure between proper financial regulation and encouraging the mutual market. I echo much of what my hon. Friend the Member for Edmonton (Mr. Love) said. The Government should not be tempted by the fence—sitting on it is not appropriate, for the reasons given by the hon. Member for Twickenham (Dr. Cable)—particularly the competition between the carpetbaggers and the long-term interest.
I invite the Government to consider four areas. The first is the number of members needed to kick start demutualisation.
§ Mr. Lindsay Hoyle (Chorley)
Does my hon. Friend agree that there is a danger of pure short-term greed prevailing over long-term loss of customer choice? In my constituency is one of the smallest building societies in Britain, the Chorley building society. We are worried that, if people cash their chips overnight, that will be the end of customer choice in my area, because the society is too small to become a bank. I am sure that that is also true of societies in other constituencies.
§ Mr. Lock
I agree with my hon. Friend. The Government need to raise the number of members needed to kick-start demutualisation.
The second area is the number of people needed to nominate to a board, which is also low. Thirdly, there is the turnout needed for success. Unions in the workplace need a 40 per cent. turnout, but only 25 per cent. is needed to sell off someone's financial heritage. The percentage should be raised. There should be a time limit on anyone 1046 who votes in a ballot. Selling off long-standing assets should be the privilege only of those members who have had a long-standing interest in the society.
§ Mr. Tony McNulty (Harrow, East)
In my brief speech, I want to concentrate on the bandits who call themselves demutualisers. I need no excuse to include in that Murray Financial, from which the right hon. Member for Wokingham (Mr. Redwood) gets £12,000 a year. Out of courtesy, I notified the right hon. Gentleman that I might have a little chat about him this morning.
Ken Murray, who launched Murray Financial, is an old hand at banditry. He set up the Cairngorm investment trust and J. P. Cairngorm. Despite the view of the right hon. Member for Wokingham, the company is a bandits' trust for demutualisation. An article in the Financial Times last September stated that Cairngorm claimed that theimminent restructuring of the UK financial services sector will be the biggest single money-making opportunity in the UK over coming years, and will provide enormous potential for profit for those who have the vision to take advantage of this change.
§ Mr. Purchase
I will be brief. I congratulate my hon. Friend on raising this matter, and I want to add to the sum of his knowledge. Birmingham Midshires building society is a victim of the very tactic referred to by my hon. Friend, and it needs strongly to resist it.
§ Mr. McNulty
I thank my hon. Friend for that information. I am aware that that building society is based in Wolverhampton, despite its name.
The Financial Times said that those bandits, through their advertising, are targeting the general public rather than institutional investors. It says that they offerhandsome financial inducements to financial advisers who recommend the trust to clients. The words 'mug punters' spring to mind.Effectively, they are the financial boot boys of the 1990s, doing in just as crooked a way what the pension mis-sellers were doing in the 1980s. They should be declared as such. It would be a travesty for anyone on the Opposition Front Bench to have anything to do with them.
Mr. Murray has said:There are over 100 sizeable financial institutions. In 10 years, there will be six to eight.The clear implication, especially for mutual building societies, is that he wants his gravy, he wants his cut from demutualisation, he wants it now, and he does not care about the services rendered by the mutuals, about their strengths or about their virtues. His plan is to asset-strip and wreck, and he is now focusing on the mutual societies.
Unfortunately, the trail of City cronies with the blood of mutual societies on their hands does not end at Mr. Murray's doorstep. The right hon. Member for Wokingham will be assisted in his future conquests of consumer choice by two other expert hands. His fellow 1047 directors at Murray Financial include Philip Court, the former chief executive of the Birmingham Midshires building society—
§ Mr. Deputy Speaker (Sir Alan Haselhurst)
Order. The hon. Gentleman is sailing close to the wind in his references to the right hon. Member for Wokingham (Mr. Redwood). I remind him that, if he wishes to launch a full criticism of another right hon. or hon. Member, he must do so by substantive motion, not in the way that he is doing now.
§ Mr. McNulty
I appreciate that, Mr. Deputy Speaker.
In addition to Philip Court, who was also involved in Cairngorm with Mr. Murray, the directors include Chris Jones, a former executive with the Cheltenham and Gloucester building society, which is now part of Lloyds TSB. One has already overseen the demutualisation of a building society, and both have insider knowledge of how they operate. Both are, in effect, demutualising henchmen, out for a quick buck and no more. They could not care less about the services that mutuals provide.
Other connections could be made. The company directors' register lists a number of companies, principally in Glasgow, called Murray—Murray this, Murray that and Murray the other. I do not suggest that they are all linked to Murray Financial, but one of them, Murray Enterprise, has as one of its directors a Mr. C. Jones—who may or may not be related to the C. Jones who was formerly of Cheltenham and Gloucester building society and who is now a demutualisation bandit. Murray Enterprise is part of a reputable group in Scotland, part of which is chaired by the newly ennobled George Younger. He also happens to be chairman of the Royal Bank of Scotland. That is fine; I am not suggesting—
§ Mr. Deputy Speaker
Order. The hon. Gentleman must bear in mind that, when he is referring to a Member of the other place, he should call him the noble Lord. The stricture that I applied in the case of the right hon. Member for Wokingham also applies to Members of the other place.
§ Mr. McNulty
I fully accept that, too, Mr. Deputy Speaker.
All that I will say in passing about the Royal Bank of Scotland is that it has just recently confirmed a £4 million overdraft for the Conservative party.
Perhaps we should not worry unnecessarily about the record of Cairngorm or Murray Financial, because they are not particularly good at what they do—but they do it on the back of money they take from private investors. If they are not pension mis-sellers, they may be the Barlow Clowes of the 1990s. Either way, they are corporate charlatans. They are raising funds with the aim of wrecking mutual societies.
I say to Conservative Members who dabble with mutual society wreckers that they may prefer to join a new Brit pop band that happens to be called Redwood, rather than the predatory bandits from Murray Financial, who, as demutualisers, come bearing gifts but ultimately want to asset-strip and no more.
1048 It is a real pity that any hon. Member is remotely involved in such disreputable business. No one is suggesting that any hon. Member has used their position to change the policies of the House—
§ Mr. Deputy Speaker
Order. The hon. Gentleman must not by clear implication accuse another hon. Member of disreputable behaviour. It would be proper for the hon. Gentleman to withdraw that remark, or to make it clear that he did not intend to make such an accusation.
§ Mr. McNulty
I certainly shall, Mr. Deputy Speaker. I was referring to the disreputable business of those companies; I would not impugn any hon. Member for behaving disreputably. I fully and happily withdraw the remark.
If anyone in the corporate sector wants anything to do with demutualisers such as Murray Financial, he or she should think twice. Demutualisers are not there to serve the interests of mutual societies' current or future savers. I heartily endorse what hon. Members on both sides of the House have said in this debate—long may mutual societies continue. I hope that the resounding vote at Nationwide shows the way ahead.
§ Mr. John Whittingdale (Maldon and East Chelmsford)
I should state at the outset that I have twice been a beneficiary of cash payments—once as a result of being a long-standing investor with the National and Provincial building society, and once as a result of being a policyholder with Scottish Amicable.
I congratulate the hon. Member for Edmonton (Mr. Love) on securing this debate. He, the hon. Member for Twickenham (Dr. Cable) and I have fairly recently emerged blinking into the daylight after considering the Finance Bill in Committee for eight weeks. It is a pleasure to be reunited again so soon.
In his time in the House, the hon. Member for Edmonton has already shown a close and informed interest in the future of building societies. Today, once again, he has cogently stated his case. I generally share his support for the institution of mutuality, and his wish for it to continue—although I am not quite sure that I am as gloomy about its prospects as some hon. Members who have spoken today.
This has been an harmonious and useful debate, although I regret the rather sour note that entered into it in the previous speech. Today is not an occasion to try to make cheap party political comments. The speech of the hon. Member for Harrow, East (Mr. McNulty) reflects badly on him, not on my right hon. Friend the Member for Wokingham (Mr. Redwood).
Mutual societies in the United Kingdom go back over 200 years. They were created by their members to help themselves obtain that most basic need—a house. As a Conservative, I instinctively support the principle of self-help. I believe that there could be a continuing role for mutual societies in the provision of welfare benefits more generally, as an adjunct to, if not a substitute for, the state. I am told by the hon. Member for Edmonton that such self-help may be some version of "the third way", but I have always regarded it is a sound Conservative principle. However, I do not wish to be drawn down the path of party political philosophy.
1049 Although there has been over the years a steady decline in the number of mutual societies—some were wound up as termination societies, whereas others merged—only in the past 10 years has the building society sector changed beyond recognition. There is no doubt that some mutual societies had become somewhat remote from their members. My hon. Friend the Member for Ryedale (Mr. Greenway) strongly made that point, and drew attention to the fact that some societies have concentrated more on trying to attract new business, consequently sometimes neglecting the interests of current policyholders. Consequently, the advantages of mutuality have perhaps become less apparent.
There is also no doubt that increasing competition from other financial institutions has put pressure on societies to offer a wider range of services to their members.
§ Mr. Gareth R. Thomas (Harrow, West)
If mutuality is such a sound Conservative principle, will the hon. Gentleman take this opportunity to dissociate himself from those who advocate demutualisation or associate themselves with demutualisers?
§ Mr. Whittingdale
As I shall say later, the merits or demerits of mutuality versus plc status are finely balanced. Although there are advantages in mutuality, retaining that status is a matter not for me but for a society's members. The position of both the previous Government and the current Government has been that the decision is for the membership. However, I shall expand on those points later.
The history of the change goes back only about 10 years. The Building Societies Act 1986 was the first legislation to allow building societies to become banks if they wished to do so, and it was a liberalising measure. It also allowed mutual societies to provide more services while remaining mutual. The Act led to the flotation, as we know, of Abbey National, Woolwich, Alliance and Leicester, and all the other societies that have converted. However, in each case, the decision was taken by the membership itself.
The attraction of releasing the capital—in the form of cash payments or shares—that was locked up in the societies was, of course, one of the principal motives for those voting in favour of a flotation. Although there is not necessarily anything wrong with such a motive, it is not the only reason for demutualisation—the pros and cons of which, as I said, are finely balanced.
The Building Societies (Distributions) Act 1997, which was passed with all-party support in the final days of the previous Parliament, has already been mentioned in this debate. Some hon. Members have said that that Act was intended to make it easier for societies to convert. However, it did not seek to influence members' decision, and further liberalised the rules governing building societies to enable them to compete more equally with other financial institutions. As the then Economic Secretary to the Treasury said on the Second Reading—in an accurate, if not entirely original, comment—the purpose of the Bill was to give societies a "level playing field".
In the same debate, the then Opposition spokesman said: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."—[Official Report, 10 March 1997; Vol. 292, c. 82.]1050 That position is, of course, right, and it has always been the position of the Conservative party. However, I entirely accept—as several hon. Members have said in this debate—that there is benefit in diversity in the financial services sector, to provide competition and choice for customers.
Mutual status brings advantages, and it is important to recognise them. My hon. Friend the Member for Ryedale mentioned the philosophy of mutuality, and that point was picked up by the hon. Member for Brighton, Pavilion (Mr. Lepper). Undoubtedly some investors regard mutual societies as a safer and more sympathetic haven for their money.
Mutual societies also have clear economic advantages. Professor David Llewellyn has compared the records of mutuals and plcs and—as the hon. Member for Edmonton said—stated that societies undoubtedly have a "margin advantage" due to the absence of external capital that has to be remunerated, allowing societies both to build up their reserves and to offer highly competitive mortgage and saving rates.
That advantage has been borne out in practice. As several hon. Members have said, the current margin spread is greater for societies that have converted than for those remaining as societies. Consequently, remaining building societies have been very successful in winning increased market share. Building societies are therefore fighting back effectively.
In the next 24 hours, we shall learn the outcome of the vote of the Nationwide membership. I was interested to hear that the hon. Member for Wyre Forest (Mr. Lock) is undertaking, or has just completed, an Industry and Parliament trust fellowship, and entirely endorse his comments on the value of those fellowships. It is perhaps surprising that the Nationwide vote is occurring only a year after the previous one, in which candidates wishing to demutualise the society were rejected. Although it would be premature to speculate on the result, like other hon. Members I hope that Nationwide members will once again firmly endorse the board's position.
Events at Nationwide demonstrate some of the problems that have been mentioned by every hon. Member who has spoken so far—the instability and uncertainty caused for mutual societies by perpetual pressure, often from a minority of investors, to demutualise and become a plc. We have heard stories about queues outside building societies, telephone systems being inundated with calls and the difficulties that has caused to genuine investors.
There are some safeguards. Some societies have tried to deter speculators by raising their minimum deposit levels, although that raises the danger that they will penalise legitimate small savers. The 1986 Act introduced the two-year rule that forbids the distribution of cash bonuses to shareholding members of less than two years and to borrowers. Nevertheless, I recognise the real concerns expressed by the remaining societies that they are potentially faced with unending disruption and instability caused by annual challenges from the proponents of conversion.
The Government have already raised the threshold for turnout for those voting in favour of conversion to 50 per cent., but that does not address the problem of elections in which candidates can be nominated by just 50 members. Societies such as Nationwide and the Bradford and 1051 Bingley have asked for greater protection. I have sympathy with them, but, in attempting to find a solution, we have to be careful not to diminish the accountability of the board to the members.
Mutual societies were created for the benefit of small savers, and it is essential that their interests and rights are fully protected. Members have already shown that they are prepared to back the judgment of their board and to take a long-term view. I have no doubt that they are better placed than anyone else to decide the future of the societies they own.
§ The Economic Secretary to the Treasury (Mrs. Helen Liddell)
First, I join hon. Members on both sides of the House in congratulating my hon. Friend the Member for Edmonton (Mr. Love) on securing the debate, and in paying tribute to his excellent work as chairman of the all-party building societies group. He has pursued the interests of building societies with great vigour, and I have regular contact with him.
By and large, we have had a measured and sensible debate about an issue of great public interest. I take no lessons from anyone about mutuality: I am unique in the House, as the only mutual bank is in my constituency. Airdrie savings bank, which I joined at the age of seven, is the last remaining mutual bank. The silver savings bank that I was given at the age of seven still sits on my desk. It still has money in it, because they will not take it out for me. So I take no lectures about mutuality. Like many hon. Members from working-class backgrounds, I know that the shilling-a-week man was a lifeline for many poorer households, and I have a great affection for friendly societies.
It is inevitable that much of the debate has been about building societies, given the events of the past 24 hours and the fact that we are looking forward to the result of the ballot on the Nationwide building society. Let me pick up a point made by the hon. Member for Maldon and East Chelmsford (Mr. Whittingdale). I do not have a crystal ball, so I do not know what will happen in respect of the Nationwide, but I emphasise that the decision will not be taken by Parliament or by the Government: it will be taken by the members of the society. That is the strength of mutuality. There is a very fine line between the interests of the members and the protection of the board.
The boards of building societies look after themselves rather well, and it is not out of line to allow the membership to challenge them. For example, board members of the Nationwide recently awarded themselves salary increases ranging from 26 per cent. to 49 per cent. Nor are they exactly on the minimum wage. The lowest salary is £250,000. Frankly, we must keep the issue in perspective. The boards want protection, but they must also respond to the anxieties of their membership.
Many hon. Members have suggested that the Government should intervene to protect societies from demutualisation. My hon. Friend the Member for Harrow, East (Mr. McNulty) made an extremely enlightening speech. I hope that many have taken note of the activities of some members in pushing for demutualisation of building societies.
However, the Government can do only so much to protect building societies. Frankly, building societies themselves have some responsibility for making the case 1052 for mutuality—a point that I have made to them repeatedly. Last November, when I raised the turnout threshold to 50 per cent., I stressed that every building society board that has recommended against conversion has been successful. I hope that that is repeated tomorrow, but the building societies must make sure that they take on board the requirement to provide the maximum service to their membership.
Before the hon. Member for Twickenham (Dr. Cable) wandered off—it is a good job hon. Members do not have to stamp time cards—he claimed that the Government had been nobbled by the banks over the 50 per cent. threshold. That is absolute and arrant nonsense. One reason for taking the decision to move to a 50 per cent. threshold was to discourage carpetbaggers.
I could have gone further and raised the threshold to 75 per cent., but the average turnout in respect of the Nationwide and other conversions has been 75 per cent. On the most recent occasion, 97 per cent. of the Nationwide members who voted were against conversion. If the threshold were 75 per cent., 74 per cent. of members voted and they were all in favour of conversion, the society would not be able to convert. That is not democracy. I realise that we have to do what we can to make the case for mutuality, but we must not do it by destroying mutuality.
A number of hon. Members have referred to the number of backers that are required before there can be a challenge. Let us get that into perspective. It took Michael Hardern two years to get the 50 backers he needed for the Nationwide elections last year. The key element has to be selling the case for mutuality.
The 1997 Act was supported by Labour in opposition, because we recognised that building societies must be given the opportunity to provide an even better service to their members. It gave building societies more power, greater supervision and more accountability.
There must be a careful balance. Of course there are carpetbaggers and rather eccentric people seeking to be directors of building societies. Let me make it clear that it is a matter for the board to act if it considers that any member applying for election is not fit to do so.
If the chairman of a building society board considers that a nominated candidate does not have the appropriate qualities to be a member of the board, he is fully entitled to inform members of his views. It is then for members to decide who they want to trust with the safekeeping of their savings, and the direction that they want the society to take. If an inappropriate person is elected, the Building Societies Commission can consider whether such a person is fit and proper to be a director of a building society.
Building societies are fully entitled to take such measures as the legislation or their rules allow to restrict account opening and preserve services to bona fide members, but there are dangers in that. We spoke about social exclusion. The hon. Member for Twickenham suggested, as if it were a brand new idea, that the social exclusion unit should look at friendly societies, but it has been doing so since last May. The friendly societies and the concept of mutuality, enlarging the access to financial services for low income earners, will continue to be a critical part of Government policy. If we are to move people from welfare to work, we must give them access to financial services, as that is the ladder out of social exclusion and poverty.
1053 Friendly societies are less well known than building societies, but they have a long and proud history. As I said, the shilling-a-week man continues to be important in the community that I represent. Friendly societies are regarded as social, friendly and honest. As the hon. Member for Ryedale (Mr. Greenway) said, they are trusted. It is about relationships, and they were built on the principles of self-help and mutual support. They are important institutions, and the movement is healthy. Total funds are more than £10 billion, and membership is estimated at more than 5 million. I am encouraged by the enthusiasm shown by the friendly society movement to play a part in welfare reform.
§ Mr. Ken Purchase (Wolverhampton, North-East)
Given the massive mis-selling of pensions that there has been, will my hon. Friend consider whether some companies are fit to be trusted to deal in the upcoming individual savings accounts? Will she give a leg up to mutuals on that?
§ Mrs. Liddell
I have already made it clear that we shall examine the performance of companies, mutual or not, on pensions mis-selling when we consider ISAs and stakeholder pensions. My hon. Friend the Minister for Welfare Reform is doing valuable work with the friendly society movement.
Credit unions are often the unsung heroes of the mutual sector. The Government are determined to give a new future to credit unions and co-operatives. They are at the heart of the third way—they are rooted in our history, but they hold the future for many people.
I commend the debate and look forward to the mutual sector increasing in strength. The Government will do everything that we can to ensure that.