§ Order of the Day for the Second Reading read.
§ 4.14 p.m.
§ THE LORD CHANCELLOR (LORD MAUGHAM)
My Lords, I am afraid I shall be guilty of asking your Lordships' attention for a certain time while I endeavour to explain the measure now before you in moving its Second Reading. I am afraid also the subject is not so interesting as that mentioned in the Motion which is to follow. I must tell your Lordships at the outset, however, that the matter is one of first-rate importance and relates to an enormous number of people and an enormous amount of money. Perhaps I might tell your Lordships how vastly the business of building societies has increased since the War. In 1918 their assets were £68,000,000, in 1928 they had grown to £268,000,000, and the last figures are those for 1937, when the assets of building societies amounted to no less than £710,000,000. The borrowers were 1,400,000 in number, and they had borrowed sums amounting to £137,000,000. In these circumstances your Lordships will appreciate that the stability of these societies, the way in which they carry on their business, and the fairness and justice of their relations with those who borrow and those who lend are matters of first-rate importance.
My attention had already been called to certain aspects of the business of building societies before a case came on which is commonly known as the Borders case, which brought into prominence the relationship between particular building societies and one of the borrowers— 540 namely, Mrs. Borders. As soon as that action had progressed some little time, it became apparent that the building societies were faced with a contention of really first-rate importance with regard to their business which suggested that practically the whole of the building societies in this country were acting ultra vices in lending moneys beyond those they had legal power to do, by getting not only security of the freehold and leasehold property which their members desired to use by way of security for the loan, but by taking in addition to that collateral security either from the builder or from some other person. It was suggested that they had no legal power to do so. It is still claimed, I understand, by Mrs. Borders that that is so.
Judgment in the action was not given until February 13 last, but in the meantime it had become apparent that this was a matter that could not be left to be decided with the possibility of its being ultimately decided adversely to the building societies, because as a consequence the people who had entered into transactions with building societies would have been placed in the utmost jeopardy. Accordingly it was thought right by the Government to set up—and they did set up—a Committee of the Cabinet, assisted by an official committee of civil servants, who have continuously from that time considered the way in which building societies have been carrying on business for some time past. They have had many conferences with the joint committee representative of the whole building society movement, and in the course of the discussions other points, some of them of considerable magnitude, have received consideration besides those affected by the legal issues arising in the Borders case. The Government have also taken steps, or are endeavouring by this measure to take steps, to improve the general standard in respect of title which, in the main, comes into the question, and which would afford borrowers and intending householders a greater degree of security than it is possible for them by individual efforts to obtain.
The judgment, as I have already said, was given on February 13 last. That judgment, in fact, did not uphold the view that the actions of the building societies as between them and their members were ultra vires, but it did throw 541 out other doubts, including a doubt as to whether building societies were acting within their powers in entering into arrangements with the builders of the houses—that is to say, the builders who were engaged in developing and putting up houses on an estate with the object of the houses being taken over by members of building societies with the assistance of loans from the building societies. Further than that, I think some twenty other actions have been started with a view again, if possible, to succeed in establishing that the building societies are acting beyond their statutory powers. I think, therefore, your Lordships will agree that it is of the utmost importance that those matters should be set at rest, and that the enormous number of people who are interested in these transactions should know where they stand. Accordingly, this Bill was introduced into the House of Commons after a private member had first sought to deal with the matter. Perhaps I might tell your Lordships at once that this Bill was debated in the other place for ten days in Grand Committee. It was debated in an atmosphere in which all the differences of opinion were explored, and the Bill was, I think, improved. In the end it was passed without any Division in an atmosphere of general good will.
I am mentioning these facts partly in order that your Lordships should see the importance of the matter, and also because I want to say this. I have imposed upon me the task of speaking on or introducing certain Bills which in the present state of the world's affairs have not received that consideration which I, occupying the position I hold, could have wished; but this Bill has received a very great amount of consideration, and has been the subject of most careful thought and preparation. I need hardly say that the consideration which has been given to it has been entirely free from any notion of Party advantage and with a desire to deal impartially and wisely with the problem which the Bill solves. The Bill has emerged from the other place with certain improvements as a result of the very great consideration which it received in the course of passing through that place. There is one clause in particular to which I shall call attention, because I think it will tend to improve the standard of building of houses of the 542 character with which this industry is concerned without at the same time imposing a financial burden upon the industry. I think I may say that the Bill is in substance an agreed measure in the form in which it now comes before your Lordships, though there are certain persons who have their own views as to what building societies should do, which views are not shared by those who are well acquainted with the industry.
I have one other fact of which to remind your Lordships. It may be that some of your Lordships are not fully acquainted with the way in which building societies carry on their business in reference to what are called builders' pools. In the early days of building societies, when I was a very young struggling junior at the Bar, those societies used to advance up to 75 per cent. of the value of the property on mortgage to the member who was seeking an advance. It is an easy mathematical sum. Suppose the house was being sold for £1,000, it would be sold on terms of deferred payments ranging over a number of years. The purchaser had to find £250 himself, and the building society advanced the other £750 which the purchaser repaid with interest over a period, say, of twenty years. But in recent times the normal average transaction of the building society has been one of a somewhat different character, because many building societies advance not 75 per cent., but 90 per cent., or even 95 per cent., of the value of the house on terms of deferred payment.
For instance, if a house is being sold for £1,000 on terms of deferred payments the builder will guarantee the building society to the extent of a big proportion of the £250 which the person buying the house would otherwise have to find himself. Therefore the transaction takes this form. The building society advances to the purchaser £950 out of the £1,000 at which the house is being sold, leaving the purchaser with only £50 to find, but the builder of the house has arranged to guarantee the building society against loss so long as his guarantee is in force, and for this purpose the builder deposits in cash an amount which in normal cases would be about one-third of the extra sum advanced by the society. That system, I may say, extends probably to 60 per cent. of all modern cases. The purchaser 543 only finds about 5 per cent. of the amount of the purchase price, and he covenants with the building society to repay the whole of the mortgage by instalments to cover principal and interest, the instalments being sufficient to provide a proper return on the capital outstanding and to discharge the debt within a specified number of years. When that transaction is extended to a number of houses there comes into existence a species of builders' pool.
Under this arrangement the builder does not withdraw the amount of cash which he has deposited in the pool in respect of a particular house, but deposits a further sum of cash in respect of the next house that he builds, which is sold in the same way, and so on. The sum in the pool becomes an amount which is available for the building society to draw from in the event of any loss on any house which remains the subject of the builders' guarantee if a builder fails to comply with or fulfil his guarantee. The pool in the ordinary case covers a considerable number of houses, and in that way an estate is covered with houses. By this means large numbers of houses have been built for workingmen earning a fairly decent wage. Your Lordships can well understand that the Government are desirous of supporting any scheme by which workingmen can become owners of the houses which they occupy, and when this matter came before the Committees which have been dealing with the subject, the Government came to the conclusion, having regard to certain grievances here and there, and malpractices which they feared were being employed by some of the builders and building societies, that they should introduce this measure with five broad objectives in view. I shall mention them presently, but I want to say at once quite clearly that the great majority of building societies conduct their business admirably. I do not believe there is any substantial complaint to be made with regard to their dealings with the various persons who buy houses. But there are some which are not so good, and there is a growing competition between them.
When I go through, I hope shortly, the various things which this Bill is seeking to do, your Lordships will be able to appreciate the kind of practices as regards 544 which the Government are very anxious to safeguard the societies and the purchasers of houses and the persons—mostly working men—who entrust money to building societies out of which advances are made to those who are purchasers of houses. Building societies take additional security when they lend more than 75 per cent. of what I should call the value of the house. Consequently the first thing necessary to be done was to define the types of additional security which might be accepted by a building society, because there are some who take what we may call problematical security for the extra 20 per cent. they advance. It was also necessary to ensure that in the case of a builders' pool guarantee the guarantee should be a sound and adequate security. The next thing was this. The role of the builder who has a house to sell and that of the building society, which is mainly a lending institution, should be kept distinct. The person who is borrowing the money should not imagine that the builder is the same person as the building society or that his interest is the same.
Thirdly, as far as possible, it should be provided that building societies must take such pains as are conveniently possible to have the value of the security adequately assessed for the purpose of their loan, because your Lordships can understand that a building society which is in a bad way and wants to get business will perhaps make very rash advances on houses which are very unworthy of the advance in question. In the fourth place, the purchaser should be protected as far as possible from the misconception which the Government have found to exist in certain cases as to the nature of the transaction, and that in particular he should not be led to believe that the building society has given a warranty with reference to the nature of the house and the way in which it was built, which it is not in a position to give. The building society does not build the house. Although it is called a building society, it is not a builder of houses; it is a lender of money. The house is built, it may be, by a speculative builder, and the matter does not come before the building society until the house is largely erected, and accordingly the building society has not the opportunity of watching the erection of the house from the beginning to the end.
545 Lastly, if the borrower falls into arrears with his payments, and the building society decide to realise the security and to sell the property, as it is entitled to do under the terms of the mortgage, it must be made to do so for the best price that can reasonably be obtained in the circumstances. The reason of that is that it has come to the knowledge of the Government that there were cases in which certain societies—by no means the good ones—when they found a borrower in arrears, were apt to accept a price for the house just sufficient to repay them the amount of the advance. That, of course, to a person trained like myself in an equity school is a perfectly dreadful thing to do. The fair thing to do is to get the best price you can for the unfortunate mortgagor. Accordingly they thought that a special provision to that effect ought to be put into the Bill.
Those are the things which it is sought to accomplish by the Bill, but there is one other thing which I should like to mention at once, and that is the provision which is to be found in Clauses 5 and 6, which attempts—I hope it will be found successful; of course it is only an attempt at present—to diminish the risk of jerry-built houses being erected in this country to the detriment of purchasers from the working-and from other classes. The way in which that has been done is this. The Bill contains provisions enabling the Minister of Health to approve a body which will issue certificates in respect of houses erected by those builders who accept its standards. It will be required that those houses should be independently inspected on several occasions—I think it is suggested not less than five—and the builder who obtains certificates from the body in question will be required to guarantee that he will make good defects which become manifest within a reasonable period of time. This arrangement is to be backed by the private body itself, so that if the builder should unfortunately default, the person who has bought a house will have a remedy. Where societies enter into a pool agreement with a builder who is erecting houses thus certified, the Bill permits those societies to give the builder substantially better terms than those which are laid down in respect of similar transactions with other builders—namely, those builders who do not obtain certificates from the body in 546 question. The result is that in substance the better builder is going to get better treatment under this Bill, and there is hope that as soon as that body gets going and people know the advantages of certificates, the people who require houses and who are purchasers under the mechanism supplied by building societies will take advantage of that device.
That is the general view of the Bill which I am asking your Lordships to consider, and I shall deal very shortly with some of the clauses, because I am bound to say that some of them are a little difficult for the layman to understand, though the meaning and effect of them are really, with few exceptions, exceedingly simple. Clause 1 validates what has been done in the past and, so to speak, puts an end to the difficulties which were raised in the Chancery action to which I have referred. Clause 2 deals with the future in cases where the building society wishes to advance sums largely in excess of the proper sum which would be advanced on the security of the freehold and leasehold property alone. That is done by providing in Part I of the Schedule a list of the types of additional securities which the building society may accept as the basis for a larger advance than what the Bill describes as the basic advance. The selection of the classes of additional security was based upon the view that the additional security must be of a safe type and that the inclusion of a security in the list can be shown to be necessary to avoid disturbances in the current and the really quite healthy business that most respectable building societies now carry on.
I may mention that Clause 2 contemplates advances to members only. Building societies also make advances to people who are not members, but with regard to those advances Clause 4 prohibits the taking of additional securities, so that they must only be advances of the basic type. In the case of a pool agreement there are complexities and the Bill goes further into detail. It prescribes the minimum requirements which such an agreement must fulfil in order that additional advances may be lawful. These requirements appear in subsection (4) of Clause 2 and in Part II of the Schedule, and are in fact in fairly close accord with what I may describe as the best practice of the best and most prudently-managed societies. Set out in 547 the wording of a Parliamentary Bill they seem unpleasantly complicated, but as a matter of fact they are not really anything but simple provisions, and for the moment I do not think I need trouble your Lordships by going through them.
Then there are cases where building societies have been in the habit of entering into arrangements for large advances with big public security companies, such as, for instance, a railway company which has desired to facilitate the provision of houses for its employees. We do not want to interfere with that type of transaction. Certain housing associations are promoted to facilitate the acquisition of houses by certain professional classes, such as teachers and civil servants, and those associations have been in the habit of giving guarantees. The Bill deals with that matter in Part II of the Schedule by enabling, largely, agreements to continue to be made upon the Chief Registrar's approval being forthcoming. I may say that I anticipate no difficulty at all in such cases. There are also cases where the excess advance is given upon an insurance company's guarantee. That, again, is a matter with which we do not want to interfere, and the Bill enables the Registrar to permit it to continue provided that he is satisfied that it is in accordance with the main provisions of the Bill.
Then there is the important question of the amount of time which is to be given to the borrower to repay the loan. Of course it is an inherent feature of this type of mortgage that the early payments are largely payments of interest and the reduction of the capital debt in the early stages is slow. If the mortgage period is too long, it may be that after a certain number of years the house will depreciate in value more quickly than the capital debt will be reduced. Accordingly it is very greatly to the interest of everybody concerned that the time for repayment should not be too long. Some years ago, and in particular when I dealt with matters of this sort, a fifteen-year period was the general rule. During the last twenty years, however, there has been an increased tendency to lengthen the period, and it is not uncommon in these days for the term of repayment to be twenty-five or even thirty years. The better opinion, I think, among all those 548 concerned, except some who are willing to do what I cannot help thinking is speculative business, is that thirty years is much too long. The Bill provides in Clause 6 that in ordinary pool agreement cases the period of repayment shall be not more than twenty years, except—now comes in one of the advantages of having a certified house, which, as I mentioned to your Lordships, you may get under the machinery of Clause 5—that if you get a certified house the period of repayment may be twenty-three years. There seems to be no objection to extending the period a little in the case of houses in respect of which the certificate has been obtained.
There are also certain other advantages, which I need not enumerate, in cases where the provisions of Clauses 5 and 6 have been brought into play and the house is a certified house. I should mention further that there is a provision in the Bill under which it becomes the duty of the building society to take care with regard to obtaining the valuation of the house before an advance can be made. There are also provisions which make it impossible for the directors of a building society, by the provisions of the Building Societies Rules, to contract out of the obligation to use their best endeavours to obtain the best advice that can reasonably be obtained in respect of valuing transactions. There are also provisions as to notice under Clause 8, and certain provisions as to warranties and representations, and the latter have been carefully designed so as to prevent the borrower being led to regard the society as making or being deemed to make a warranty to the purchaser that the purchase price is reasonable, or that the amount advanced is an indication of the fact that the house is fully worth the 100 per cent. on which the loan is made, unless the society so intends. No statement of that kind, made by a builder or other interested person, should in any case be given. Clause 9 deals with that matter.
Clause 11 of the Bill restricts the giving of commission to a builder by the society. It has been found that it is the practice of building societies to give commissions to builders for introducing business and that has been found not to be a very desirable practice. Accordingly in future no such commission can be given or claimed. I think I have now given your Lordships a fair account of the 549 Bill and I have referred to the more important at any rate of the provisions which it contains. I need not say that I shall be very glad to give any further information should it be desired, but with the statement I have made, I hope your Lordships will be satisfied that the Bill is worthy of your consideration and one which may properly be read a second time. I beg to move.
§ Moved, That the Bill be now read 2a.—(The Lord Chancellor.)
§ 4.53 p.m.
§ LORD ADDISON
My Lords, I think your Lordships will agree that the noble and learned Lord has explained a very complicated and long overdue measure so as to make a great deal of it clearer than it otherwise would have been. I must say, having been concerned in the early days of the development of housing after the War, that one wishes that it had been possible to do something more in Clause 1 than what is, in effect, a whitewashing arrangement for a good many things which never ought to have occurred. I suppose it is unavoidable, but it must be regretted. We have seen, in a good many parts of the Metropolitan area, the worst features of speculative building of poor-class property that this country exhibits. I think, myself, that a good many of the houses which have been built under these combined arrangements promoted by building societies and builders in some parts outside London will be little better than slums in twenty years, if not earlier.
We have heard of cases of shocking materials being put into these houses, and I am only surprised that the legal actions, which really provided the spur for the introduction of this Bill, did not occur before. Tens of thousands of poor people have suffered in silence, or have grumbled to their neighbours, not being able to do anything. By these operations they have been induced to buy houses at considerably enhanced prices, and have let themselves in for weekly payments spread over many years, and long before the expiration of those years the expense of repairs will be a very substantial addition to the rent which they have been called upon to pay. There are one or two points which go to the foundation of the case which perhaps later on the noble and learned Lord will explain more at 550 length. So far as I understand, it is now proposed, under Clause 12, that in regard to the value of a house which is to provide the basis of the advance, or of the amount of the mortgage which the mortgagor will incur, it shall be the duty of every director or member of the committee of management of any society to satisfy himself that the arrangements made for assessing the adequacy of the security to be taken in respect of advances to be made, are such as to ensure that the security shall be assessed by a competent and prudent person. It seems very shocking that after these hundreds of thousands of houses have been built we should have to wait as long as this before it became necessary, by Statute, for a society to have a valuation made by what is described as "a competent and prudent person."
§ THE LORD CHANCELLOR
The noble Lord will understand that that is the usual practice, but it has not been obligatory before.
§ LORD ADDISON
It is the practice, of course, of all decently conducted firms, but it has not been the universal practice. Otherwise we should not have had the scandals with which this Bill is called upon to deal. And we do know that in fact in many districts the values given have not been assessed by a competent and prudent person, but have been fixed much higher than they ought to have been. People have paid a great deal more than the houses are worth, and by this combination of operations between the building societies and the speculative builders people have been called upon to pay a debt amounting to 95 per cent. of a value which has been fixed at a much higher figure than it ought to have been fixed at and, as the noble and learned Lord explained, it has often happened that in many districts outside London these repayments have had to be extended over twenty-three, twenty-four, and even twenty-five years. Yet one sees advertisements of places where anyone who has any sound knowledge of building knows that the houses will be in a dilapidated condition long before the twenty-five years are up, unless the unfortunate persons who have been persuaded by this combination of interests to buy these houses have been 551 able to spend a lot of money on repairs. The same applies, I think, to all the provisions of the Bill, particularly those which restrict the payment of commission, which is a form of mutual understanding which has crept into this scheme of house purchase, by which tens of thousands of poor people are being perpetually cripped by the inflated prices that they are called upon to pay and the long periods over which the payments are spread.
I am sure every one of us is glad to do what he can to facilitate the passage of this Bill. It has long been overdue, and as a former Minister of Health I feel a share of responsibility for not foreseeing the extent to which this scandal has developed—because it is a scandal, and it is no good pretending it is not. It has been very widespread. I am only too glad that at long last it is being dealt with. I hope that the Minister of Health will do all he can to make Clause 5 (I think it is) effective so that it may be widely used, and will place every possible premium upon builders coming within the class of good builders, which it is designed to promote.
I am afraid that just now, under the present conditions of the world, this kind of speculative building is under a cloud, partly because the market has, I think, been over-satisfied in some districts, but mainly because so many people, in different parts of the Metropolitan area especially, have begun to find that the weekly payments to which they are committed, plus repairs to keep their places in anything like a decent state of repair, have imposed upon them a burden which is becoming widely known among their friends and neighbours, and people are becoming more shy than they were of entering into these transactions. Well, it is all to the good that the brake should be put on. I sincerely hope that this Bill will be effective in preventing the further spread of this type of improper building, but I am quite sure that some future Minister of Health will find himself saddled with serious responsibilities in either replacing or restoring slums which have been re-created in our extra-Metropolitan areas, and which, if we had all been as wideawake as we ought to have been, should never have been built. For our part, we welcome the Bill, and 552 will do all we can to hasten its passage into law.
§ 5.3 p.m.
§ LORD MANCROFT
My Lords, this is a useful, although very complicated Bill, and I wish to welcome and support it. I shall make no criticism at all of any of its clauses. I suppose that many noble Lords, like myself, have followed word by word the discussions which took place on this Bill on the floor of the other House and while it was being moulded and improved there in Committee. I must express my admiration for the way in which the Bill has been examined there by all Parties, so that it is now in the improved condition in which we have had it handed to us. I am sorry it has not come here at an earlier date, but that cannot be helped.
I should like to offer some observations. In order to protect myself against its being said that I have offered hostile criticism about the great building societies, I will say this, that those of your Lordships who have had the privilege, as I have had, of doing municipal work in their own native districts, will know, as I do from experience, the beneficial results of these societies helping working people to obtain their own dwelling houses, to find for themselves what is the finest form of investment, that is to say the roof above their own heads, and at the same time to find for small investors a safe investment for savings. Further house building, especially in an old city such as that with I which I am connected, means further health, and that is a public benefit. For the most part, as my noble and learned friend on the Woolsack has said, these building societies have been managed by honourable men, who have tried to do a public duty, and have done it, to the benefit of their fellow citizens.
But I am bound to say that I myself was very surprised to find, during the discussions in another place, that there were unworthy practices by what were described as "sharks," and that a type of building society work was going on of which I had no suspicion, and of which the general public have never been aware. This Bill seeks to put an end to those practices and it will strengthen the good societies. I may say, however, that I do not think the great majority of building societies need give one single thought 553 to this Bill; their normal conduct is so straightforward and so proper that they need not consider the provisions of this Bill. They practise the spirit of those provisions of their own accord in the normal course of their transactions.
I ask your Lordships to forgive me for talking about what may be a tiresome and uninteresting subject. But one must never forget that, as my noble and learned triend on the Woolsack has pointed out, a sum in the neighbourhood of £700,000,000, representing in most cases the savings of working people, is at stake in these societies. It is of the utmost importance therefore that all of us should endeavour to see that this money is protected, that the houses are good and of honest value and that the general principles of the building society movement are carried out in a wholesome and useful way. I do not wish to delay the passage of this Bill; on the contrary I wish to do all I can to hasten it forward. I wish however to make an observation or two in the hope that what I say may perhaps contain the germ of something useful to any Government which may be deciding to deal with building society problems, and at the same time will perhaps convey a hint to the building societies, so that they may of their own accord put their house in order.
The Bill will certainly put a check upon the mushroom type of building which certain new "shark" societies—dare I call them wolves masquerading in sheep's clothing?—have imposed on the public Jericho-built houses sold at too high a price. This Bill will help to strengthen the honest societies and check the sale of badly constructed houses, as the noble Lord opposite has said. I hope this will be so because in old cities where there are, already unfortunately, too many slums, Jericho-built houses, within a not very long period will develop into more slums. My noble and learned friend on the Woolsack has drawn attention to one clause, Clause 11, which will check the operations of builders' touts, and stop collusion, and prevent badly-built houses being passed on to inexperienced purchasers. I was recently surprised to hear that there is a type of concern which this Bill will certainly check, and which ought to have been checked years ago. Here you have a concern formed of congeries of not very straightforward people who, however, are 554 within the law, operating a property investment trust, a so-called building society (it is a building society in law but it was not established primarily for the purpose of promoting thrift), a land company, and an estate management business, all run under the same auspices. These are not concerns which help the people whom we want to help. These are concerns for fleecing people, by selling badly constructed houses at unjustifiable prices, and financing the transactions by loans which may possibly entangle the purchaser besides depriving him of some of his savings.
The noble Lord, Lord Addison, spoke of his anxiety for those concerned in providing money to the building societies so that the building societies may finance working-men's houses at good value. I do not put much weight on the advantages of the valuations to which the noble Lord referred in his speech in that connection a moment ago. He spoke about—it is the usual formula—competent and prudent persons who make valuations. I do not pay much attention to people who call themselves prudent and competent valuers. It was my duty in the other House to take part in debates where we had to write off from public funds large losses under one of the Acts, I think the Agricultural Loans Act, which arose annually out of valuations made by "competent and prudent persons." When these properties were foreclosed by officials of His Majesty's Government much loss was often made. The value of a perishable thing to-day is no sure guide as to what its value may be many years hence. For that reason I do not pay too much attention to the accuracy of valuations of working-class dwellings by "competent and prudent persons" as to realisation ten years hence.
Of the suggestions I have to make, the first one is this. I am not criticising the Bill at all. I am trying to bring to the notice of your Lordships points which I believe will improve the general legislation relating to, and guide and strengthen the operations of, building societies. The system under which two or more building societies of equal or comparable size can amalgamate is faulty. At the present moment, as far as I can read the Acts of 1874 and 1894, there must be a majority of three-fourths of the shareholders, holding two-thirds of the shares, before amalgamation can take 555 place. That is too restrictive. I am not lawyer enough to say, but perhaps the noble and learned Lord on the Woolsack can say, whether a matter of that kind comes within the scope of this Bill. I do not think so, but some sort of legislation should be forecast in the future to allow small or medium-sized building societies to come together and amalgamate more easily than the two Acts of 1874 and 1894 will permit. And for this reason: I would ask your Lordships to look for example at the cotton trade. A small building society restricted to a cotton district might find itself in difficulty if there was distress among the persons who owe it money—that is, people who have loans on their houses. If the eggs of that particular society were not all in the one basket in the cotton area, if the loans of that society were spread out more widely and ramifications extended into, say, a prosperous wool or shoe industry in an adjacent district, the society would be on a broader basis and less likely to get into trouble if there were distress in the single area for its loans.
Then again, quite apart from the reduction in overhead charges because of the administration of larger total loans, you would do away in some measure with unwholesome competition, underbidding, bad risks, bad business. Further, if you gave the societies power and opportunity to amalgamate more easily, you would give them a bigger area in which to collect funds, and in districts where they are well known. Such a proposal has another repercussion. The more funds you can attract into a sound building society, the less chance there is that the inexpert people who have put funds in it will lose their savings in some wild-cat or unsound scheme. That is in the general interest of public thrift. The public cannot put savings into a better or sounder organisation or investment that a building society, therefore amalgamation is an advantage to the public. You obtain a larger area over which to collect and lend funds.
The next point I would like to make is this. As a man who has been connected with trade all his life, I do not like a practice by which building societies, small and large, may allow themselves to be financed, if such is really the case, by means of hank overdrafts. I know the societies must disclose to their depositors that they have ovedrafts. But is it their 556 habit to disclose and explain clearly enough to the inexpert person who deposits with them what they have in bank overdrafts? It is an undesirable practice. Banks ought not to lend their customers' money for long or fixed periods, so they retain the right to call the money in. I ask myself what would happen if a building society had a considerable overdraft with a bank when a national crisis occurred, and the bank needed to recall, and did recall, its loan to the building society. One must never forget that building society investments—that is, house property—are mostly long-term investments. A society might have great difficulty in realising quickly these investments in house-loans in order to pay the bank overdrafts; and besides it must also be remembered that in some cases the depositors' money has been obtained on the promise to repay it at short notice and even on demand. Although there is nothing at all reprehensible in this bank overdraft practice, it is one of these things with which building societies might find themselves faced and with evil consequences in time of national calamity or even in time of monetary stringency and in peace time.
Further elaborating that point as one of my suggestions, I maintain that every society should of its own accord hold not less than 10 per cent. of its assets in liquid form. I would go further and say that the proportion of liquid assets to the total deposit liability should be somewhere in the neighbourhood of 20 per cent. and kept in a separate trust fund. That would be an improvement. I know quite well that if the building societies had to put so large a portion of their assets into trustee securities, the earning power of these securities would be very little—the return would be very much less than if they were invested elsewhere. That must be taken into account, and a just balance must be made in the rate at which interest is obtainable from the borrower or even reduced to the lender. On the other hand, whatever extra cost the societies or the borrowers on houses may suffer, there is additional security given to the lender—to the people who find the money for the benefit of those who wish to buy their houses and extra stability to the societies. Let me say that one must never forget that lending long and borrowing short is a sure way to disaster. Here von have a possible case 557 where the societies may have to pay money back quickly which they borrowed at short notice and have lent on long term on the security of mortgages on houses which are difficult to realise quickly.
My next point is this. The Ministry of Health have to my knowledge set up a model series of by-laws to guide local authorities in their supervision of the building of houses in their neighbourhoods. These model by-laws are good; but I am under the impression that many local authorities do not operate them. They should be used by local authorities to avoid Jericho-built houses at every operation, from the foundations to the windows, from the gutters to the roofs. There is no reason why they should not be used. Probably the explanation is laziness. The Ministry of Health has gone to the trouble to produce these model by-laws, and one of the points that might be taken into consideration at some future time is that no houses should be allowed to be built and financed under this measure or any amendment of it unless they conform to model by-laws provided for the use of local authorities by the Ministry of Health. Indeed local authorities should be compelled under penalty to operate the model by-laws.
The last point I have to make is this. Most of these building societies were originally conceived and brought to fruition in religious buildings. They were primarily constituted as organizations of thrift, good feeling and self-help. But they are not merely philanthropic institutions to-day. There is an element, a justifiable element, of profit in them, which has stimulated their development and usefulness. That profit element of the building societies system has been quite justifiably pushed along by an element of self interest on the part of the managements. Those who manage the societies receive quite properly an income, and earn their living from making a successful organisation out of the building society with which they are connected. I looked through the last Report of the Registrar of Friendly Societies some weeks ago, and I think that the total annual amount which the management takes—I do not find any fault with it—is as much as £4,000,000 for running the societies.
558 I wonder whether the noble Lord, Lord Addison, realises that £4,000,000 is taken in fees and salaries for directors, managers, staffs, auditors, plus, perhaps, some further types of remuneration of which I have no knowledge. There is no provision in this or in any earlier Act as to the way the accounts of these societies should be given to the members of the society. They have to be sent in to the Registrar of Friendly Societies, and they are sent in in a lump sum, and you cannot tell who is getting this money or in what detailed division. The returns refer to directors' remuneration, and fees of staff and auditors, but they do not tell in detail what the directors are getting. Directors are quite entitled to get fees for their work, but the returns do not tell what the fees are. They do not tell either what a director or a manager may be getting other than fees, if anything, they do not tell what is paid for management salary or for valuation fees if payable to a director. I cannot specify other possible payments because I do not know what they are. There are other legitimate ways of obtaining legitimate payments which would not be called directorial fees. These are often not disclosed in annual reports, in detail, given to members of a society. There is no provision for insisting that these details should be given to members or depositors; unless the society itself makes rules to that effect. There is in Building Society Acts no provision as to the election or re-election of directors.
I think my noble friend Lord Stamp will have some sympathy with me on this following point. There is no legislative control as to who should be elected a director or by what means, or what age he should be. The proceedings are governed by rules of the relative society. One of the resultant facts about building societies is that they may if they please have men of even 75 years of age as directors and there is nothing to stop them except the self-made rules. I am nearly 70 myself; I think men of that age are not of much use upon management or directorial boards of trading companies. Matters alter very quickly in this world to-day, economically and financially, and the boasted experiences of a man of 75 are to-day worthless. The man of that age has experiences which he ought to forget and learn new experiences—but he 559 is usually too rigid mentally. You do not want experience that was gained 35 years ago. There should be every inducement and opportunity of electing a man whose views are up-to-date. Old men stand in many organisations in the way of the election of men with up-to-date experiences, because methods of election do not facilitate the election of younger men with up-to-date knowledge on the building society and most other boards.
I think that some compulsion—I do not like to use the word "compulsion," but some arrangement should be made in any future Act to provide that the rules of any building society should contain provisions to show the members and depositors what the directors, the auditors and the management staffs are getting in detail, and showing also what the directors are getting other than by way of directorial fees or salaries. Under Section 148, I think, of the Companies' Act, 1929, we now know there is a gap or loophole whereby a director who receives fees can avoid showing the total that he really gets by having himself also made a managing director. That will have to be dealt with in any amendment of the Companies Act. In the same way it will be necessary in years to come to put some provision in legislation connected with building societies to provide that there shall be a full disclosure of the fees or salaries the directors and managers are getting, and that the rules of each society should, of themselves, provide that frank and candid disclosure should be made. My noble friend the Lord Chancellor will remember that earlier in this year I took some action, which he was good enough to support, about publication and circulation of the management accounts of unit trusts; and he carried out a suggestion that I ventured to make to your Lordships by which we have let some light into what a trust management did or could get and how.
I ask your Lordships' pardon for trespassing on your patience, but I venture to make these observations in order to draw your attention, and the attention of departmental officials, to points that I think would help even to improve a system which is of great value to the country. In the hope that these suggestions 560 may be considered for future action I beg leave to support the Bill now before the House.
§ 5.28 p.m.
§ LORD STAMP
My Lords, when we remember that there has been a development of the building society movement from domestic and parochial concerns to a national force of social and financial importance, it is a matter of surprise that so long a period as forty-five years should have elapsed since Parliament was last called upon to legislate for building societies. This in itself may be regarded as a tribute to the satisfactory manner in which on the whole the societies have been operated during this interval. Now this Bill tends to bring the practice of the societies in certain important respects up to the standards of the best administered institutions, and for that reason it may be considered to merit the approval, though that approval I think needs to be qualified in certain minor respects, of your Lordships.
There has been a publicity in connection with certain particulars and certain aspects which has tended to put matters rather out of focus. As we have learned this afternoon, the chief inspiration of the Bill was a certain law case which mainly turned upon the question of the validity of collateral securities. Now it has never been seriously suggested that the societies, any more than any other lending institutions, were economically ill-advised or morally indefensible in fortifying their loans by means of collateral security. What doubts there may have been regarding legal admissibility were due to the rather unimaginative and ambiguous phraseology of the legislation of 1874. But even so, Government precedent of recent years has seemed quite effectively to set any doubts of that kind aside, for various Governments in successive Housing Acts have recognised the principle of loans in which the property was not the only security and which were in part subject to some external guarantee. The societies' practice in accepting collaterals is merely extending this recognised principle with, I think, adequate protective safeguards in the case of the best managed institutions. This method of fortifying by collateral has been a most essential condition of the societies' post-War expansion. It would have been quite impossible without 561 it and the social service that they have rendered in connection with postwar housing achievements has to some extent—indeed to a considerable extent—turned upon it.
The Minister of Health recently applauded the erection of the four millionth house since the Armistice. The reaching of this notable milestone—and the improvement in housing standards which, I think, on the whole it signifies—has been largely due to the building societies. Their resources have made it possible, at any rate to the extent of at least one half. They have advanced £1,500,000,000 over the post-War years, and these loans have been mostly to the owner-occupier class, so that in doing this they have made an important contribution to social and political stability. And they have done this without recourse to any form of State assistance or subvention. Thousands of the new owner-occupiers would have been deprived of the opportunity of sharing this improved housing standard, and the benefits of eventual unencumbered ownership, if the societies had only been able to make advances unsupported by collateral, because very many of these people, although they have settled incomes, have little capital resources. It was to help cases like that that the practice of advancing with collateral was evolved.
It was a technique, and I think a helpful technique, which smoothed the field to ownership. It is, therefore, the reverse of an instrument of exploitation which, to judge by some of the comments made, one might infer it to be. It has been the means of encouraging the decent, hard working and thrifty to be still more decent, hard working and thrifty. So far from being an object of censure, I think as practised by responsible institutions it has been an entirely satisfactory device. There is no legal pronouncement against it, and, as I have endeavoured to show, when properly managed—as it has been in the majority of cases—it has been of great social value. This Bill now universalises the procedure in this matter, and in that regard it is to be heartily welcomed. If the building societies have not, to use the word, exploited a particular technique, it is because as they are mainly constituted any form of exploitation is essentially foreign to their tradition, to their whole character and purpose. They mostly owe their origin, 562 as has been said already, to little groups of working men and women who created them for service and not for profit. It is merely the scale of their operation which has changed and in most cases not their character or their tradition or the fundamentals of their method. Most of them have the characteristics of public utility undertakings and their aim is simply to bring a reasonable income into proper relationship with reasonable outgoings and so preserve a financial stability. They are just the channel by which the small saver is enabled to lend to the small borrower and they have been on the whole both well and efficiently served.
The Registrar of Friendly Societies has again and again commended the societies upon the economical basis on which they conduct their operations. On that point I would like to refer to what the noble Lord, Lord Mancroft, said. I think the best societies do give very considerable details about their outgoings—the various fees to directors and other officers and so on. At any rate they are very closely watched in regard to the percentage they bear to the whole operations of the particular society concerned. Should they be outrunning any proper proportion, the fact would stick out quite clearly to all, and would prompt questions which can always be asked, and are asked, quite freely in the annual meetings. What I do think we are entitled to say is that any question relating to the ages of directors and their remuneration or the requiring of any kind of publicity should be general and apply equally to all kinds of industries concerned. There is no reason for selecting this particular class of concern for that kind of legislation. A long experience—and these people have a very historical background which goes back to the latter part of the eighteenth century—has given them an ingrained tradition of public service, and the more you know of the worthy directors of these societies the more you realise that it is this tradition of public service which is a safeguard to the investor and the borrower alike.
In the main the Bill tacitly recognises these facts, but there are several respects in which it reflects traces of harsher and less well-informed criticism. These are chiefly evident in the restrictions proposed, notably in the prohibition of the payment of commission in certain con- 563 ditions, the limit placed on the amount to be loaned, and the imposition of a maximum number of years for which the loan may run. These place a movement which has been happily free from any kind of restraint under specific control. I am not objecting for a moment to the principle of the restrictions. The principle may be perfectly right. The question is that of selection—whether it is right that legislation should confine itself exclusively to one type of mortgage institution, whether in so doing it may not open the possibility of intensified competition from other institutions that are not similarly restrained. If you have these restraints upon commission and restraints of various kinds applicable to only one type of mortgage institution, and there are other institutions which are operating solely for profit in this field of mortgage advance which are not similarly restrained, it may be that these provisions, being selective, may nullify the object of the Bill.
Those institutions are free to wage competitive warfare without any effective Parliamentary or departmental control. There are obvious dangers in any one-sided discrimination of this kind. I am advised that there are already signs that some of the less reputable companies in other fields of finance are seeking to deflect some of the business hitherto satisfactorily handled by building societies through the exploitation, to use that word, of the differential advantages which they will now enjoy. We had occasion to refer on another Bill to the difficulties that arise from selective legislation, and the only qualification I would make to approval of this Bill is that the provisions are not wide enough, that while they may be advantageous and justified in bringing the standard of the slower, less efficient and less scrupulous up to the standard of the best managed society, that alone is not enough. It is necessary that any investigations and any restrictions should be applied to all.
§ 5.39 p.m.
§ THE LORD CHANCELLOR
My Lords, I should like to thank noble Lords who have spoken for the approval which they have given to the Bill after, it is quite plain, very careful consideration of this measure. I would also say that the matters to which the noble Lords, Lord 564 Mancroft and Lord Stamp, have drawn attention will be very carefully borne in mind by His Majesty's Government. With reference to the point which the noble Lord, Lord Stamp, mentioned, that there may be competitive bodies who will jump into the possible breach caused by this Bill, I can tell him—what he probably knows—that again and again that has been found to be the fate of precautionary legislation of this character. You stop the possibly dishonest person from doing something which is greatly to the detriment of the public by a particular measure, and he and his adherents at once discover some other way in which they can achieve their object. All the time the Government have to the best of their power to watch anything of that kind, and they have to stop the other cracks which have become evident in the precautions which ought to be taken to prevent fraud and unfair dealing.
I do not think it would have been possible in this Bill to deal with all the matters to which the noble Lord, Lord Stamp, has referred. I think it would require a measure of a very different character, and probably one which would have been much more difficult to draw, difficult as this measure has proved to draw, because in a wide measure which would prevent all forms of improper dealings by persons who lend money for the purposes of housing or building it would be difficult to prevent interference with legitimate enterprise. However, it can be done, and if it is found that these dishonest persons mentioned by the noble Lord are taking advantage of the provisions of this Bill and introducing fraud and improper and disloyal competition, then I can assure him that the Government will intervene and endeavour without delay to produce another Bill which will prevent the consequences which he rightly pointed out are possible consequences of this Bill.
The Government are well aware of the importance of this matter, as I hope my introductory remarks this evening proved, and the dangers and risks which noble Lords have pointed out will be watched. There are a number of people who are closely in touch with the building of houses in this country and the methods under which they are being built. These things cannot be done in a corner; the facts will be available and remedial 565 measures will be taken. I thank noble Lords for the speeches which they have made on this Bill.
§ On Question, Bill read 2a and committed to a Committee of the Whole House.