§ 4.58 p.m.
§ Order of the Day for the Second Reading read.
§ THE LORD PRIVY SEAL AND MINISTER FOR SCIENCE (VISCOUNT HAILSHAM)
My Lords, at a comparatively late hour I must confess that this is a comparatively substantial Bill: it has, indeed, 65 clauses and 5 Schedules. Nevertheless, it is not so formidable, I hope, as it appears at first sight, and though I cannot, I am afraid, much as I should like to do so, promise to be brief, I have at least some ambition not to be obscure. It is more than 20 years since Parliament passed any legislation on building societies and 20 years since this House even staged a major debate upon them. It is, I would say, therefore, timely that the Government have introduced a major Bill upon this topic. The Bill itself is a fulfilment of an Election pledge which I made myself at a moment of the campaign when the affairs of one building society threatened to become an Election issue. The possibility of legislation had been adumbrated in the last Parliament rather more than a year ago by the Economic Secretary to the Treasury and it was foreshadowed in the Queen's Speech.
It seems to have been towards the end of the eighteenth century that working men first saw the advantages of co-operating to help each other financially—and sometimes physically, as well—to build their own house. The early societies started by being, in effect, syndicates of perhaps no more than a few dozen people. They paid monthly subscriptions, and the 1005 subscriptions were used to pay for the building of a house for each member, one after the other in turn, the order in which the members obtained their houses being determined in some cases by drawing lots, in others by the payment of a premium in order to secure priority. When every member had had his house, which might take ten or fifteen years, the Society had achieved its purpose and was wound up. This early type of society is now called, in the technical language of the movement, a "terminating society". The original pattern changed, as time passed, in two main ways. In the first place, it was quickly recognised that it was not necessary to confine the payment of monthly subscriptions to people who wished to buy a house. By accepting subscriptions from people with savings to invest, a society could shorten the time for which members had to wait before they obtained their houses and could, at the same time, provide a safe and reasonably profitable investment for the increasing savings of the working people. Thus, from the beginning of the nineteenth century right until the present day, there have been two classes of members, the borrowers and the investors.
The other development followed between the 'forties and the 'fifties of the last century. This was the discovery that a building society need not be wound up or terminated when the original members have all built their houses. As the societies grew in scale and the proportion of investors grew, it became more sensible to regard a building society as a permanent institution. This is, indeed, the explanation why the word "permanent" appears so frequently in the names of some of the oldest and best loved of the building societies to-day. There are over 100 flourishing building societies, including many, of course, that are household names, which were established round about the middle of the last century and which have celebrated their centenaries since the last war.
Such, then, were the origins of the movement. It was very much a child of its time, a time of industrial revolution, growing wealth, steady widening of the ownership of property as of other forms of capital—features of the pre-Victorian and early Victorian age which we are a little inclined to forget in our recollection of the squalor, exploitation 1006 and poverty which characterised the same years. In the last century the societies have kept their character, but there have been changes in particular, changes in number and scale, rather than in essential structure. It was natural that the number of building societies should fall as the permanent societies gradually replaced the terminating societies and as the practical advantages of large-scale organisation and management made themselves felt. In 1890 there were almost 3,000 building societies. By the 1930s this had fallen to about 1,000, and there are now about 750. During the same period the size and strength of the societies were growing very fast. By 1919 assets had reached a total of about £70 million. By 1945 they were £800 million. But now they have reached nearly £3,000 million. That is nearly £60 for every man, woman and child in Great Britain. Five societies have assets of over £100 million each, and 46 of over £10 million There are over 4 million investors in the societies and over 2 million borrowers are buying their houses through them. This is the present scale of their operation. These are institutions which are playing a conspicuous part in the life of the British people.
I now come to the existing legislation. At first, each society adopted its own rules and appointed its own trustees to act for it. But so long ago as 1836 an Act of that year, still for some purposes in force, recognised the right to establish building societies and applied to them the provisions of existing legislation relating to friendly societies. The most important effect of this legislation was to provide that the rules of a building society should be certified by a central authority appointed by the Government. This authority was originally called the Certifying Barrister, but this rather peculiar name was changed in 1846 to the Registrar of Friendly Societies, by which name he is still called, and in 1874 he was given the additional and appropriate title of Registrar of Building Societies. It is interesting to note that there are still eight societies unincorporated, and operating, therefore, under the Act of 1836. They will do so still under this Bill, though, of course, they will have to observe the provisions of the Bill in their operation. Thus, more than a hundred years ago the rules of building societies already came under 1007 central supervision in order to see that they were conducive to the proper conduct of the society and that the interests of the members were properly safeguarded.
The most important change, and the next change, was made by the Act of 1874, which is referred to in this Bill as "the principal Act". This is still in force, and it is a remarkable tribute to the legislative capacity of our forefathers that they should have passed an Act the greater part of which remains to this day, and which has stood up so well to 86 years during which the country has undergone so many, so rapid and so extensive social and economic changes. The most important provision of the principal Act was to grant the societies a right of incorporation so as to make them corporate bodies enjoying legal personality and so relieve them of the necessity of appointing trustees. All societies registered under the 1836 Act were given this right and all the certified societies took it, except the eight to which I have already referred, and these are relatively small with assets in total of about £5 million.
The principal Act was then followed by two decades of rapid advance. But this same period saw a series of failures both among the smaller societies and, finally, in 1892, in one of the largest—which had been engaged in highly speculative building ventures, and several of whose directors and officers were afterwards convicted of fraud and other offences. Largely as a result of this a Parliamentary Inquiry led to the passing of the second of the more important Building Societies Acts, that of 1894, which tightened up the rules on the auditing and presentation of accounts, the rendering of information to the Chief Registrar, subjects to be included and covered by the societies' rules, and so forth. This is the second of the two Acts which still form the foundations upon which the present Bill is built. Indeed, they have been very little modified. There was a short Act in 1939 which resulted from a lawsuit known as the Borders case, which might be remembered by some of your Lordships, and in the same year the Chief Registrar was given certain additional powers by the Prevention of Fraud (Investments) Act which will become relevant as I come to 1008 develop the provisions of some of the clauses here. But otherwise the building societies legislation is still, in the main, what it was in 1874 and 1894.
This leads me to the need for the present Bill. After three quarters of a century it is inevitable that even the best-framed Act should need bringing up to date. Conditions change, and they are in fact quite different from those of 1894. In many respects the Acts are behind the comparable, if not parallel, company legislation. Techniques of accounting and auditing have undergone far-reaching development. Clauses 33 to 37 and certain later clauses of the Bill bring the statutory requirements up to date, partly by new and more exacting and effective provisions for the auditing of accounts, and partly by introducing provisions derived from the comparable Companies Act provisions. The societies themselves have changed, at least in scale and organisation, if not in their basic character. It is only to be expected that the provisions thought adequate 70 or 80 years ago, when the assets of the largest society in existence were less than £2 million, should be in need of some alteration when the largest societies have assets of hundreds of millions, and have members in every part of the country. I should say, therefore, that there was in any event a case for giving the Victorian legislation a more contemporary look.
But a more pressing need has arisen from the fact that a small number of societies have been undertaking business of a kind quite different from the traditional business of a building society. Here I must be careful not to refer to any cases pending before courts of law. Perhaps the best way I can approach the subject is to start by quoting this passage from the Chief Registrar's Report for 1956. In that Report the Chief Registrar said:There have been several cases in recent years where shareholders of an old-established building society have been repaid their investments by persons who wished to obtain control of the society for the purpose of using its name and date of establishment to encourage investment by the public on a much wider scale …Then he went onThe new directors of some of these societies authorise advances on mortgage to companies in which they have financial interests and also advances to themselves. In 1009 one such society comparatively large sums were spent on advertising and within a period of three years the amount of the assets of the society was increased over 400 times. There is nothing in the Building Societies Acts"—this was the Chief Registrar's comment—to interfere with this kind of transaction but prospective investors would be well advised to consider carefully the general financial and reserve position before investing in a society that has shown exceptionally rapid expansion after a long period of comparative inactivity.That is the end of the quotation from the Report, and it illustrates, I hope with propriety, the point I am seeking to make.
It is not, of course, that advances of the kind referred to are intrinsically wrong or even that they ought to be illegal. The provision of risk capital is a perfectly legitimate business which provides perfectly legitimate rewards. But it is wrong, at least in the opinion of the Government, that people who wish to raise capital for that sort of purpose should do so by trading on the good will and prestige which has grown up around the building societies, and bringing to those societies investors who may think that they are putting their money into a much less speculative kind of venture. We believe that if the practice were allowed to continue unchecked two consequences would be likely to follow.
In the first place a number of people who were under the impression that they had put their savings into an institution engaged in the business of lending money to owner-occupiers on mortgage, which should offer them a very large measure of security, would find from time to time that they had lost some, or all, of their investments. In the second place—and in the long run I would say far more serious—if there were, as we believe there would be, a series of events of this kind, it might be expected that a general loss of confidence might be engendered in building societies generally. This, I think it will be agreed, would be highly damaging to the public interest, and it would certainly be extremely unfair to the great majority of societies who are carrying on their traditional functions with great skill and with what I am told Sir Winston Churchill once characteristically and aptly described as "a happy blend of caution and enthusiasm." It was this consideration which 1010 led the Economic Secretary to the Treasury to announce in February, 1959, that the Government were considering the need for legislation. And it is largely to check the growth of such practices as I have described that we have brought forward this Bill to-day.
I now turn to the provisions of the individual clauses. Clause 1 is designed to secure that building societies, while not limited to the business of advancing money on the security of owner-occupied property, their traditional business, should at least concentrate upon it. I realise that the clause may look at first sight a trifle formidable. I think this is because it has not been found possible, either as a matter of law or as a matter of administration, to define satisfactorily an owner-occupier or owner-occupied property. This has made it necessary for the draftsmen of the clause to achieve their object by reference to what are called "special advances". But I believe that the House will find the clause really quite simple. The object of the clause is to provide that not more than a certain proportion of the advances made by a building society should be made in certain forms, which are designed in practice to exclude the normal advances to owner-occupiers.
These forms which are subjected to special treatment are: first, advances of more than £5,000 in amount; secondly, advances to persons who would as a result of a fresh loan owe the society, either directly or through nominees, more than £5,000 in total; thirdly, advances to a body corporate such as a company. These advances, as I have said, are described in the Bill as "special advances"; and in simple language what the clause does is to provide that at the end of each financial year a building society shall calculate the proportion which such special advances bear to the total outstanding advances of any kind. If the proportion is less than 10 per cent. then in the next financial year the society may make not more than 10 per cent. of its total advances in the form of special advances. If the proportion is between 10 per cent. and 25 per cent. then the permissible proportion in the following year is reduced from 10 per cent. to 2½ per cent. If the proportion is more than 25 per cent., then in the following year the society can make no special advances at all. At the end of the following year 1011 the calculation is made again for the next year; and so on indefinitely.
There is one exception to this procedure: this is when the building society desires to lend money to an individual or institution such as a housing association for the purpose of constructing houses or flats for letting. This is a form of enterprise which the Government wish specially to encourage in appropriate circumstances, whether it is carried out commercially or by housing associations or other non-profit-making bodies. The clause accordingly gives the Registrar power to raise the annual limits of 10 per cent. and 2½ per cent. which I have described for particular societies if and when he is satisfied that it is desirable to do so in the circumstances of that particular society and in order to facilitate the building of dwellings for letting.
I hope that I have given a tolerably clear description of the purpose of Clause 1, and of the way in which it is intended to work. There is, of course, a sense in which the proposed limits are arbitrary. There is no particular magic in the percentages prescribed. Our object has been to leave building societies with sufficient scope to make some proportion of their advances on commercial properties, as some of them find it desirable to do; but we wish to prevent societies from making this a major part of their total business. We think that few societies will, in fact, be hampered by this restriction. Recently published figures suggest that very few societies have less than 95 per cent. of their mortgage advances on the security of anything other than owner-occupied properties. This, of course, is well within the lower limit of 10 per cent. There are a few whose percentage is between 90 and 95 per cent., and even fewer below the 90 per cent. level. But, broadly speaking, we can claim that societies are not going to find themselves hampered by this clause from pursuing their business in the way in which they have found most suited to their traditional character.
My Lords, I come now to a group of two clauses, Clauses 2 and 3, which deal with the conditions which it is necessary to fulfil to set up a new building society. These are being tightened up. At present it requires no more than three persons and £20 to get a new society registered. 1012 We do not wish to make the conditions too stiff, but we think that these hurdles are too low and we propose to increase to ten the number of people who must get together to found a new society, and to require a minimum joint subscription of not less than £5,000, which must remain in shares of the society for five years.
Clause 4 prohibits a new society from starting to advertise until it has the Registrar's approval to do so. This is intended to protect investors. Perhaps I might mention in the same connection Clause 25, which gives the Registrar power to disapprove of a proposed name for a new society. There may be importance in this, as those of your Lordships who have been following recent cases may well judge. Most societies are, of course, named after the town or area where they were founded and conduct their business. A few of them acquired in our grandfathers' days rather more romantic names, which, if somewhat old-fashioned, are for the most part harmless, and may even be rather pleasing to modern ears. But there is, or at least there may be, a danger that a new society may be given a name likely to mislead the public into assuming, wrongly, either that it has some official status or that it is in some way connected with another well-known and respected financial or other institution. In our view, it is desirable that the public should be protected against misunderstandings of this sort, or even tricks, if tricks they be.
I would also draw attention to Clause 8. I quoted earlier from one of the Chief Registrar's Annual Reports in which he commented on cases when the shell of a building society carrying on little or no business had been used by a new management to expand rapidly a quite different type of business. In order to prevent evasion of the provisions relating to new societies, Clause 8 authorises the Chief Registrar to apply rather similar provisions to existing small societies, where it appears to him that such a course is in the public interest.
My Lords, I now come to two clauses which give the Chief Registrar power to take action if a building society appears to be running into difficulties. These clauses are intended to take the place of an existing provision, to which I referred earlier, contained in Section 11 of the Prevention of Fraud Act, which empowers the Chief Registrar to make 1013 an order, with the consent of the Treasury, prohibiting a building society from advertising or otherwise inviting deposits from the public. This power has proved fairly effective, although it has never, fortunately, been necessary to use it on a wide scale. Since 1939, when Parliament first entrusted the Chief Registrar with this power, orders have been imposed against 24 societies, most of them quite small. Such orders have usually been imposed where the accounts show an unsatisfactory financial position, or where funds have been lent on doubtful or inadequate security, or to finance undertakings in which directors of the society have themselves an interest. Since 1956, I am told, there have been 21 investigations which have resulted in eight orders being imposed and two orders being revoked.
While the existing powers have proved valuable, experience has shown that their use presents certain difficulties. One is that although the Chief Registrar can use them to stop a society from advertising, he has no power to prevent the society from receiving investments. Another difficulty is that the Chief Registrar is obliged to give not less than a month's warning of his intention to make an order, during which time, of course, the society is at liberty to make its own representations. In a serious case, however, a great deal of damage can be done in the space of a month. Finally, the making of an order under this clause has to be announced publicly. This is, or may be, a salutary warning to potential investors, but it is also likely to alarm existing investors who may wish to withdraw their funds on a scale which the society cannot meet. The imposition of such an order is therefore a drastic step which may have severe consequences both for a society and its members.
We propose in this Bill to replace the single power by two separate powers. The first, in Clause 1, is similar to, but goes a little further than, the present Section 11 procedure by empowering the Chief Registrar, with the consent of the Treasury, to prohibit a society from accepting further investments. It also enables him to petition the Court for the winding up of the society, if it seems to pay too little attention to the interests of existing investors after an order has been made. As at present it is provided 1014 that the Chief Registrar should give the society notice before he makes the order, and should receive and consider any representations which are made on the society's behalf. But it is proposed that the period should be reduced to a fortnight, since experience suggests that this period is adequate to enable a society to put forward its views, and it is thought that this will lessen the risk to potential or actual investors. Clause 5 also provides that the Order should be announced in the London Gazette. I would say that, in general, none of this differs greatly in substance from what is done at present.
My Lords, Clause 6, however, introduces a new, less severe, but swifter procedure, which is for use in cases where the making of an order under Clause 5 might be thought too drastic. It gives the Chief Registrar power, again with the consent of the Treasury, either to prohibit a society from advertising altogether or from including in its advertisements items which are considered undesirable or misleading. For instance, it might be disclosed after investigation that a society, while not insolvent, has been expanding so fast or has such a low level of reserves that it needs to consolidate its position before it can safely solicit more funds from the public. In such a case a Clause 5 order might well be harmful to the investors and to the society. Yet to take no action at all would be to put the general public at risk. In a case of this sort the appropriate course might well be to stop the society from advertising until its position had improved.
It is not intended that a Clause 6 order should be published, for the reason that it might be damaging to the interests of the society or its members. But it will, of course, be open to a society against whom a Class 6 order has been made, to announce of its own accord that it has been made. Again in this case it is the Chief Registrar who is required to give notice; but since the essence of the procedure is speed of application, the minimum period is one week. Another kind of case which might call for action under Clause 6 would be that of an old but recently revived society which is found to be laying undue emphasis in its advertisements on its original date of incorporation which, as your Lordships will now know, might be as long ago 1015 as the 1860s. In order to protect depositors from misleading advertisements of this kind, it might be as well to make an order directing the society not to refer in their advertising matter to their date of incorporation.
In this group the last clause is Clause 9, which empowers the Chief Registrar to make regulations of general application governing the contents of advertisements issued by societies. The proposed power extends equally to information which is to be included in advertisements and information which is to be included only in a certain form on certain conditions. I cannot this afternoon give your Lordships precise particulars of what may eventually be prescribed in regulations made under this clause, for they will have to be considered in due course. We have every intention of consulting representatives of the societies in the preparation of such regulations. But, by way of illustration, I would say that it might be desirable to require, in any advertisement which states the size of a society's assets, that the size of the reserves should also be stated, and vice versa.
I come next to Clause 10. This deals with investments. Under the present law a building society may invest such of its funds as are not immediately required for its business in any manner authorised under the Trustee Act, 1925. This effectively limits investment to gilt-edged securities and a limited range of fixed-interest securities issued by public bodies. This provision was never really much more than a matter of convenient statutory shorthand. I think it must be realised that the relationship of a building society to its members is in very many respects different from that of a trustee to a beneficiary, and the powers of investment granted to one may, but equally of course, may not, be appropriate to the other.
Your Lordships will remember that Her Majesty's Government have recently announced their intention of introducing legislation, probably in our next Session, to amend the Trustee Act and to replace the present Trustee List by a new and different concept of the powers and responsibilities of a trustee. Your Lordships may think we have been right, in these circumstances, to provide that we 1016 should bring to an end the statutory connection between the investment powers of building societies and of trustees and to provide, as we have done in Clause 10, for the making of an order prescribing the forms in which a building society may invest such funds as are not immediately required for carrying on the society's business.
Naturally, the preparation of the order must wait for some little time, since it cannot be made until Parliament has examined this Bill and it has received the Royal Assent; but, equally naturally, societies will want to know as soon as possible what we have in mind. It might be helpful, therefore, if I said that the broad intention is to prescribe the following forms of investment: first, National Savings securities, other than Premum Bonds. Secondly, deposits with local authorities at not more than seven days' notice where coupled with an undertaking to grant a mortgage if required. Thirdly, short-dated fixed interest securities (including local authority loans and mortgages) issued in the United Kngdom by Her Majesty's Government or by a public authority, nationalised industry or undertaking, or guaranteed as to principal and interest by Her Majesty's Government. Fourthly, short-dated fixed-interest securities issued in the United Kingdom by a Commonwealth Government or public authority or by the International Bank for Reconstruction and Development.
It is not the intention of Her Majesty's Government to authorise building societies to invest in equities, since this is clearly foreign to their proper business and is not in any case a suitable form of short-term investment. I have been told that a number of leading figures in the movement have expressed agreement with this point of view.
The second part of Clause 10 is designed to meet the possibility that a building society might try to circumvent the limitation of its powers, both of making advances to commercial bodies and of investment, by depositing its spare cash with a financial institution with which the society or its own directors might in some way be associated. Clearly, a building society must be able to hold money in a bank; but, equally clearly, it cannot be free to set up a colourable bank of its own in order to outflank the 1017 law on advances or investment. The clause accordingly provides that the banks in which funds are authorised shall be designated by the Chief Registrar with the consent of the Treasury. I need hardly say that there is no intention of using this power to disturb the normal relationship which exists between societies and their bankers.
It is perhaps not necessary to take your Lordships through all the remaining clauses, but possibly I should draw attention to Clause 11 which permits other societies to come to the assistance of a building society which is in financial difficulty by making loans to it; and to Clause 19 which enables a society to contribute to a mutual guarantee fund or to enter into a similar type of arrangement with an insurance company to protect investors. Both these clauses reflect the spirit of mutual assistance and co-operation which is deeply imprinted on the movement.
Then there is a series of clauses which make useful but minor changes in the law of mortgage as it relates to building societies; and after that we come to a group of clauses—most of those between Clauses 20 and 32—which are designed to strengthen the rights of members and depositors. For example, they are to be entitled in certain circumstances to inspect a register of members' names and addresses, their rights in relation to meetings are to be strengthened by the right to vote by proxy, and so forth. These reflect the fact that many building societies to-day have millions of members in all parts of the kingdom whose physical presence at meetings of the society would be as embarrassing as it would be surprising, but whose right to a say in the conduct of the society must be upheld.
Clauses 33 to 46 bring up to date and in many respects improve the requirements for keeping books and making up and presenting returns and accounts, and for their audit. The general scheme for the published accounts will not be very different from the present arrangements, but now societies will produce two documents: the first, a simple annual balance sheet and revenue and appropriation account, which they will be required to circulate to all members with a shareholding of £25 or more, accompanied by the directors' and auditors' reports; and the second, a more detailed annual 1018 return to the Registrar. This will also be available to members of the society on demand.
The annual return to the Chief Registrar, which in the past has included the annual accounts and balance sheet, has of course been in existence for many years, its form being prescribed by the Registrar under the Act of 1894. The purpose of the present clauses, which, as your Lordships will realise, in some respects follow the Companies Act, 1948, is to bring all these provisions into line with modern accounting methods and practice. Clauses 47 to 49 are intended to ensure that directors should not abuse their position for their personal advantage.
This brings me to the end of the Bill, since the remaining clauses are of a nature which would enable me to discuss them more profitably, if at all necessary, at another stage. But by way of rounding off my remarks, I should like to say that we believe that this is a well-conceived Bill. It is in no sense a panic measure, but we think it is needed in order to maintain public confidence in the building society movement. I do not believe that there is a single provision in it which will cause a normally well-conducted society any serious difficulty or inconvenience whatever. On the other hand, I hope that there are a number of provisions which will make it possible to thwart attempts to trade on the prestige which rightly attaches to the name "building society" in order to carry on some quite different kind of business in which the risks of loss are very much greater.
It may be said—I have already seen the suggestion in the Press—that this Bill puts a great deal of power into the hands of the Chief Registrar. I think that that is a fair comment, and it is a comment which requires careful examination. But ever since the days of the Certifying Barrister in the 1830s, experience has shown that control over bodies of this sort must, if it is to be effective without being unduly burdensome, include a certain—perhaps a large—element of discretion. Given the wide range of circumstance, with societies at one end of the scale, for example, with assets of £200 million or £300 million, and, at the other end of the scale, socie 1019 ties with assets of only a few hundred pounds, it is not surprising that it is not easy—and we should think it was impossible—to write all the necessary rules into an Act of Parliament. What we have done instead—and the system has, after all, proved its worth over more than a century—is to appoint a highly experienced individual with a competent staff and to give him wide discretionary powers within the general framework laid down by Parliament and subject to the approval, in his most important discretionary acts, of a Minister of the Crown: in this case, the Treasury acting on behalf of the Chancellor of the Exchequer. In this way a check is provided in a form which can be made the subject of public questioning or debate in Parliament. The fact that the Chief Registrar's decisions have over the past century in fact very rarely been questioned, and that he has proved in practice a friend and adviser as well as a watchdog on behalf of the public, suggest to us that this system, though it may be open on theoretical grounds to criticism, has the virtue which tends to appeal to the British people more than any other: it has worked well after experience and practice.
My Lords, I should only like to say in conclusion that while this is the Government's Bill, for which the Government must take full responsibility, it would be, I think, churlish on our part to conceal the fact that in its preparation we have had a great deal of assistance in the form of suggestions and advice from the bodies interested. I should like in particular to mention the Building Societies Association, the Halifax Building Society, the Building Societies' Institute, the Scottish Association of Building Societies and the Institute of Chartered Accountants. In one way or another, all these bodies have helped. We have not, of course, been able to accept all the suggestions which reached us, but the Bill is undoubtedly the better for the considerable amount of trouble which these bodies have taken to put their ideas forward. I must thank your Lordships for your kindness in listening to this somewhat lengthy account at this hour, and in the circumstances I now beg to move the Second Reading of this Bill.
§ Moved, That the Bill be now read 2a.—(Viscount Hailsham.)
§ 5.44 p.m.
§ LORD MILNER OF LEEDS
My Lords, the House is greatly indebted to the noble Viscount the Lord Privy Seal, first for the valuable historical account he has given the House as to the origin of the building society movement and the various Acts of Parliament and other steps which have been taken during the last 100 years. We are also greatly indebted to him for his clear exposition of the contents, or some of the contents, of the Bill now before the House. I would venture to say to the noble Viscount that it is not easy at first glance to comprehend the full consequences of the Bill, and we on this side therefore venture to hope that the Committee stage and further stages will not be hurried, in order that full consideration may be given by all concerned to the contents of the Bill and its consequences.
This is particularly desirable because, whilst the Bill has had a long period of incubation, noble Lords have had only a very few days in which to consider it; and of course, no comparable Bill on the subject has been before the House since what is known as the principal Act of 1874. If sufficient time is given, that will also give the Government the opportunity of having the consultations they propose. If I may say so, I speak as one with a lifelong professional and personal interest in building societies and also as a Vice-President of the Building Societies' Association, to which, along with other bodies, the noble Viscount gave some very proper credit for the help they had given in the preparation of this Bill. I have no special authority to speak for that Association, which of course represents almost half of all the societies in the country, and more than 80 per cent., I believe, of the assets of all the building societies; that is to say, 80 per cent. of the assets of all building societies are held by members of the Building Societies' Association. It is, of course, a purely voluntary body, having no mandatory powers, but the Association endeavours to bring about high standards of management and conduct. That is not to say that some societies outside the Association have not equally high standards—they have! I believe that the 1021 Association and its members and the great majority of building societies will undoubtedly welcome the Bill.
It is regrettable that the Bill was not brought in a long time ago; it ought to have been. And it is regrettable that it is brought in now, as we know, in the main—the matter has been brought to a head, at any rate—by reason of alleged malpractices on the part of a very small minority of building societies. I think that all of us who have an interest in building societies and speak on this Bill should emphasise that the great majority of societies are most efficiently conducted and carry on their business with the utmost probity and fairness to both investors and borrowers.
The noble Viscount has made a reference to the name "building society". Of course, nowadays—and it is probably too late to alter it—that is really a misnomer. Whereas, in the first instance, building societies would build houses for their various members on the basis of mutuality, that is no longer the case, and their principal function nowadays is, on the one hand, to act as a means whereby persons may invest comparatively small sums at interest, and whereby those sums may be advanced, principally to owner-occupiers, at interest and with the advantage to borrowers of repaying interest and principal by instalments extending over sometimes as much as 30 years. One would have liked to consider perhaps a change in the name "building societies," but that name has become so well known—and possibly their functions are equally well known—that I am afraid it is too late to consider that now. But certainly at times the name does lead the uninitiated to some misunderstanding.
My Lords, there is one curious feature with which to some extent the noble Viscount dealt; that is, that whereas some 50 or 60 years ago there were some 3,000 societies, there are now only some 740. That arises very largely, of course, by terminating societies passing out of existence; by small societies being taken over by larger societies or by amalgamations—frequently, though not necessarily in all cases, I think, a desirable practice. But the result has been a vast development of the building society movement, 1022 in size and strength; and, of course, considerable competition.
It has been said—it was said certainly up to a few years ago—that most of the monies invested in building societies came from the North of England and were lent out in the South. I am not sure how far that is the case to-day, but it was true some years ago. It was, I think, a tribute to the acumen and thrift of the Northerner. All the larger building societies, of course, have branches: the Southern societies have expanded northwards, and the Northern societies have expanded southwards. One wonders sometimes whether that expansion, and the competition thereby engendered, is really economic. However, I understand that in fact building societies do think it worth while. They feel that, by reason of the general spread of interest in building societies, the better living standards, the amount of money available for investment and so forth, it does pay them to have all these branches, even in the midst of competitors' camps.
I do not propose to detain your Lordships long; but, as we have heard, the principle of the Bill is to lay down conditions under which the undoubtedly beneficial work carried on by building societies can be continued, and to enable some control to be exercised over the formation of new societies—not, I think, a very frequent process in the present day—as well as over existing societies. In order to carry out that object with the continued full confidence of the public and of the building society movement (which I was glad to hear the noble Viscount say had made something like 95 per cent. of its total advances to house owners; which, of course, was the original object of building societies), and in order to ensure that building societies are wholly carried on in the public interest, it is necessary that extensive powers, as we have heard them to be, should be given to the Chief Registrar. Some of these powers he can exercise of his own volition; some of them he can exercise, apparently, by regulations which have to be approved; and some of them he can exercise only with Treasury sanction. There has long been a necessity for some such power to be conferred upon someone, and undoubtedly the Chief Registrar—whose office, as the noble Viscount has said, 1023 has for long had some control over building societies—is obviously the right person; and I have no doubt that he will be able quite adequately to carry out the powers conferred upon him by Parliament.
My Lords, the immense growth of the movement is also another reason for altering the law. It has been rendered necessary, having regard to the many complications which modern life engenders, to bring building societies into line with modern principles, as was done in regard to limited companies by the Companies Act of 1948. In pursuance of those various objects, this Bill imposes restrictions on lending; lays down minimum requirements on the establishment of new societies; gives new and somewhat revolutionary powers to the Chief Registrar, and makes new provision for the investment of surplus funds, together with a number of other rather more minor requirements. I was glad to hear the noble Viscount say that equities would not be included in the list of investments open to building societies. I should have thought that that was not the sort of investment which ought to be approved, in view of their constitution and their purpose. The control of advertisements is obviously a very desirable object, and there are very wide provisions as to the steps to be taken by the Chief Registrar in that regard. Most of the powers conferred upon the Chief Registrar are, of course, for the protection of the investor, and are made to avoid the speculative element which has existed in some recent instances in some forms of advance.
I do not propose to go into detail, for that can be done on Committee stage, but there are one or two other comparatively minor, though still important, matters on which I should like to comment. Some of the provisions in the Bill give additional rights, and rightly so, to investors. Inspection of the register is one very important right. In the rules of some societies I think that can already be done at the discretion of the directors; but, as I understand it, there will be a rather more direct right on the part of members to inspect, and presumably obtain or take copies of, lists of members of building societies. I know that objection is taken in some quarters to that, though I never quite 1024 know why. One tries to think of building societies as democratic institutions. I am afraid, however, that many of them are to a very large extent close corporations. One has heard of cases where a candidate has been put up for election as a director but has had no access to lists of members. He has been unable to communicate with them, whereas the existing board has had full opportunity, of which it has taken advantage in some instances, to communicate with members, which has of course ensured the election of the Board's nominee. Apart from other considerations, therefore, I think that that right conferred upon members will be of advantage, and it will at any rate give societies a rather more democratic look than some of them may have to-day.
Another valuable provision is that notices of meetings must be sent to members in writing. That has not always been the case, and still is not the case with some societies. Their rules provide that notice is adequately given by advertisement in the local paper. The movement is now large enough, important enough and wealthy enough to be able to do as the Bill requires and to send to members copies of the accounts, the directors' report and notice of meetings. It will be interesting to see, as the noble Viscount mentioned, whether that will result in greater interest and a larger attendance at building society meetings than has hitherto been the case.
Then there are valuable provisions with regard to the survey of properties—and I think this is a very useful and necessary provision indeed—whereby the directors, manager and secretary are prohibited from themselves formally surveying the property which is the subject of an application for a mortgage. As your Lordships know, when you ask for a mortgage the first thing you have to do is to pay a survey fee to the building society, who then employ a surveyor to survey the property and report to the board. There are societies whose directors are no doubt qualified surveyors and who, under the present law, are permitted to make those surveys. It would appear that that is not really desirable, and the Bill therefore provides that a survey should not take place by any of the directors, or by the manager or the sec 1025 retary, but should be carried out by an independent surveyor. I hope that will be insisted upon. That does not, of course, free the board from the final responsibility of accepting the individual's integrity and ability to pay the instalments and so forth, but it is undoubtedly a desirable provision.
Then the question has been put to us—and it is a serious question—as to whether building societies could not do more than is at present the case to protect purchasers, and as to whether a copy of the survey to which I have referred, which is obtained at the expense of the mortgagor, might not be given to him. I appreciate there may be legal consequences, but the present situation, where an applicant pays for a survey and the report is retained by the building society without the applicant being given the advantage of knowing what the survey has said in regard to the quality, standard or construction of the house which he is proposing to buy, is not altogether satisfactory. That is a matter which I think should receive consideration. I ought to mention perhaps that most reputable builders are members of the National Housebuilders' Registration Council and obtain a certificate to the effect that they abide by certain standards. Nevertheless, the question does arise as to whether some further protection might not be given to a purchaser.
This next matter is perhaps small in one sense, but not in another. One has read in the Press of complaints of discrimination by some building societies against, for example, married women, in some cases, and coloured applicants, in others. I doubt whether anything can be done in this Bill with regard to those questions, but one hopes that the building societies will bear them in mind.
As I have said, great responsibilities are placed on the building societies and, of course, not least on the Chief Registrar, but I feel that they are fully capable of carrying them out; and, as the noble Viscount said, any normal and properly conducted society will have no trouble in abiding by what is laid down. The public can be assured that most building societies are well conducted: their finances are sound, they render an extremely valuable social service to the community and to both investors and borrowers. Whilst one must reserve consideration of details and possible 1026 Amendments to the Bill, I believe that the building societies will welcome the Bill. They will recollect, one hopes, that they are receiving substantial privileges in the matter of income tax, in the conferment of trustee status—a matter in which I have taken an interest for some years—and in the recent provision by the Government of Exchequer grants to enable advances to be made in the case of pre-1919 houses. In return it would seem to be right that the conditions under which they operate should be modernised; that the management of the small minority who do not abide by the highest standards should do so, and that the interests of both investors and borrowers should be fully considered and protected wherever possible. Only so, in my submission, can the movement go forward to greater prosperity and usefulness and continue to enjoy the full confidence of the people of this country which it undoubtedly enjoys at the present time. We support the Second Reading.
§ 6.5 p.m.
§ LORD ELTON
My Lords, I wish to say a few words in support of this measure, perhaps from a somewhat different angle both to that of the noble Lord who has just made such an interesting speech and also to that of the noble Viscount who introduced the measure with all the lucidity and sparkle to which we are accustomed from him and which we so much enjoy, and on this occasion with an interesting and concise survey of early 19th century history in which I seemed to trace certain vestiges of the Greats School of which the noble Viscount was once a distinguished ornament. I should be the last to speak of the noble Viscount, or even to think of him, as prejudiced, but I suppose it is just possible that as a Minister he may be faintly predisposed to think with indulgence of a Government measure, and hope, therefore, that he may welcome a few detached words of support spoken on behalf of the building societies themselves.
I have the honour to be President of the Metropolitan Association of Building Societies, and since the noble Duke, the Duke of Devonshire, who is President of the parent Building Societies Association, has unfortunately been prevented from attending this afternoon, I have been asked by the Building Societies Association to convey to your Lordships 1027 the general support which it extends to this measure, which it regards as both timely and valuable. Indeed, the Building Societies Association has already given a good deal more than general support both to this embryo measure and to the legislation which has preceded it. The Act of 1874 to which the noble Viscount, Lord Hailsham, referred in a most interesting passage, has always been regarded by building societies as their Magna Charta, and although amended since then I believe on some six occasions it remains, as the noble Viscount reminded us, the principal Act. That Act of 1874 was itself largely founded on a draft Bill prepared by the Building Societies Association of that day, and I understand that there are some provisions in the measure we are now considering, as indeed the noble Viscount himself assured us in his final passage, which are based on suggestions which have been made from time to time to the Government by the Association.
This leads me to say at once that, although we can all recall certain unfortunate incidents, to which the noble Viscount, Lord Hailsham, referred with a lawyer's discretion—and I hope that as a layman I shall not be saying anything injudicious—nevertheless this Bill certainly does not represent hastily improvised wisdom after the event. It is not one of those measures, of which we can all remember examples, which elaborately enact the compulsory closing of stable doors some while after the horses have departed for an unknown destination. On the contrary many of the provisions of this Bill have been carefully thought out over several years and have, I understand, only been waiting on the exigencies of Parliamentary time for their enactment. It is the activities of a few building societies which have made the restrictive clauses in this Bill necessary. I dare say some of your Lordships may have noticed a leader in The Times newspaper of March 26 last which was headed "Restraint of the Right Kind"; and I think that no one connected with the Building Societies Association would quarrel with the comment on the Bill implied in that heading. The article continued:Societies which are members of the Building Societies Association have for long accepted a code which rules out excessive speculative activities. Not all Societies are in the Associa 1028 tion, however, and a few of those outside it appear to have regarded these self-denying ordinances as unduly restrictive.That puts the situation in a nutshell.
The societies which since 1945 have been lending a substantial proportion of their funds at high rates of interest to property companies have been few; they have either been new societies or old societies in new hands, and they have none of them been members of the Building Societies Association. If they must be regarded as wolves they have, at any rate, been, so to say, relatively lone wolves. They have been able to acquire considerable quantities of capital, partly by the high interest rates which their methods have enabled them to offer, but largely, I would say, by exploiting the touching confidence which the public reposes in the very title "Building Society", which it has come to regard as virtually a guarantee of safety.
As, I think, the noble Viscount who introduced the measure reminded your Lordships, there are 740 building societies, of which some 340 are members of the Building Societies Association. But, as the noble Lord, Lord Milner of Leeds, has just told us, the members of the Building Societies Association represent no less than 80 per cent. of the total assets of all building societies. Since the main purpose and function of the Association is to impose high standards of practice on its membership, your Lordships can readily realise how creative and how central a rôle in the spectacular and salutary development of building societies since 1874 must have been played by a society representing no less than 80 per cent. of their assets. I say "spectacular" because, as your Lordships probably remember, the assets which in 1874 totalled £18 million totalled at the end of last year no less than £2,900 million. I say "salutary" because, as your Lordships will also remember, not only have the building societies made an immense and invaluable contribution to national savings, but they have long since become the main agency for enabling ordinary men and women to become owners of their own homes. I am old-fashioned enough to believe—and I am sure many of your Lordships also believe—that in this age of rapid change, shifting standards and shallow roots, the wide extension of home ownership must make an invaluable contribution not only to 1029 the economic, but to the moral, stability of the nation.
Naturally the Association desires this spectacular and salutary progress to continue, and it welcomes the clauses in this Bill which are designed to ensure that the high standards adopted by the great majority of building societies should be extended to the minority which have so far not yet lived up to them. It also welcomes that section of the Bill which is designed to bring the law into line with the best modern practice. As has been clear from both the previous speeches, the clause of paramount importance is Clause 1, which sets limits on what the clause—for reasons which the noble Viscount explained to us—has had to call by the somewhat cumbrous title of "special advances".
We have heard the clause clearly expounded, and it is only necessary, therefore, for me to remind your Lordships that it sets out to put an end to the activities of that minority of building societies of which I spoke just now as lone wolves, and to restrict building societies in the main to the pursuit of what is their traditional as well as their proper function, which is, of course, the making of relatively small advances to men and women who wish to own their own homes. This restriction will not in any way affect the activities of the great majority of building societies, which already consistently devote more than 90 per cent. of their funds to precisely this end. When I tell your Lordships that the average advance made by building societies is £1,750, you will, I am sure, recognise that this is convincing evidence that building societies do already overwhelmingly concentrate on serving the man of moderate means.
All the provisions of Clause 1, therefore, are warmly accepted by the Building Societies Association, although some misgiving has been expressed as to the wisdom of enacting for an indefinite period this precise figure of £5,000. It has, after all, to be recalled that the figure of £5,000 dates back (I believe I am right in saying) to the Act of 1894, in which it was provided that mortgages of over £5,000 must be published in a special schedule in a building society's accounts. That is 66 years ago, and the value of money, as well as the size of building societies, has altered greatly since that time. I suppose it is just 1030 possible that the value of money may change somewhat in the next 66 years, so that it might be worth while considering at a later stage whether it would be well to insert some statutory machinery for altering this figure of £5,000 at some future date, if it should be found to be desirable.
There follow a number of clauses designed to confer new powers, and I think we must say sweeping new powers, on the Chief Registrar. These powers will not affect the activities of members of the Association, but in the opinion of the Association they are desirable for the protection of the public, since the public to which the building societies specially appeal has not much experience or skill in the art—or, as an earlier age would have put it, in the mystery—of investment. Therefore, the Association does not in any way oppose—in fact it welcomes—the extensive additional powers which are proposed for the Chief Registrar. But it does consider—and it has asked me to tell your Lordships this—that in some instances there might be some statutory right of appeal, and this is felt particularly in respect of Clauses 5 and 6. That may be a matter as to which your Lordships' opinion might be tested at a later stage. The Association particularly welcomes Clause 11, which the noble Viscount fully explained to us, the clause which gives power to a society to help another society which may have got into financial difficulties through circumstances over which it has no control and which may prove to be of a purely temporary nature. Finally there follow a number of clauses designed to bring the law into line with the best modern practice, and in general these are fully supported by the Association.
I have been asked, however, to say that it views with considerable concern Clause 24; that is the clause which provides that in certain circumstances the register of members' names and addresses may be inspected. Your Lordships may feel that there is little reason to object to that clause because, if I understand it aright, you cannot obtain leave to inspect this register of names and addresses unless you can show that you wish to do so in order to correspond with your fellow members on some subject of importance. But I am told that this is a small-town difficulty. I am told that the secretaries 1031 of building societies in a number of small towns have represented very warmly that if once it comes to be believed that the tradition of secrecy of building society membership is at an end, and that in certain circumstances you may be able to find out whether Aunt Jane or Cousin Tom have a holding in a building society, then Aunt Jane and Cousin Tom will either not take up a holding or will dispose of their holdings as rapidly as they can. The secrecy of the membership has been compared to the highly valued secrecy of a Post Office savings book. It is the view of the Association that there should be a right of inspection only if a member is unable to exercise his right of withdrawing his holding, or if a society appears to be in difficulties, or if it seems likely to be taken over by another society.
I have tried as briefly as I could to convey the warm general support which the Association extends to this Bill, subject to a few minor reservations, most of which I have indicated; and I think I could not perhaps do better than quote the first sentence in a little periodical leaflet issued by the Association, which I happened to see this morning:This is a good Bill. It is a pity it was not introduced before".Finally, for myself, I would only say that although, or more probably because, I am an Independent in politics I believe most deeply in a property-owning democracy, for a property-owning democracy is the surest safeguard against oppression, whether from the Left or the Right. I have always understood that belief in the virtues of a property-owning democracy has been one of the cardinal tenets of the Conservative creed from the days of Disraeli to those of Churchill, and I am therefore very glad to have been able to congratulate a Conservative Government on introducing a measure which seems likely to do much to safeguard that most salutary principle.
§ 6.25 p.m.
My Lords, while speaking on this Bill I think I should, as is the custom of the House, declare my interest in the matter as having been for some years chairman of a moderate-sized building society. For that reason I have some larger interest in the Bill, and I would join with the noble Lord 1032 who has just spoken on behalf of the Association in giving it their complete welcome—perhaps more complete than he has suggested. A lot of people who have been concerned with building societies have for many years been very unhappy at some of the events about which we have heard, and would, as has been said, have welcomed the introduction of this Bill some time ago, for the reason that some things tend to give a bad name to the whole collection of building societies when they have been done largely only by a very few members. It is the good name of the building societies which is their main asset. A building society, we like to say, is run in a very businesslike way. It is not, I think, to be compared with a business. The customers are looked upon as members, whether borrowing members or investing members, and there is a genuine interest in what happens among the members. There is a wish to help in the provision of small houses by finding the money for them, and one has entirely different feelings than one would have in an organisation such as was engaged entirely on commercial matters.
This Bill has for its objects almost entirely the protection of members who invest in building societies' shares. Those who borrow are protected by the terms of the mortgages and by the ordinary law of the land. Societies, I think, spend a good deal of their time and thought in trying to find the best way of protecting the investment of the members who lend money to them. One of the inherent safeguards, from their point of view, is the small size of the average loan, which has been referred to and the large number of borrowers of small sums; and that is where I think the "special advances" proviso in Clause 1 is very valuable. Another one, paradoxically perhaps, is that the small size of the average loan is very important. Many societies do not like to take large sums as investments, because very often these large sums can go out in times of fluctuations of markets, and there may be a draw on the liquid resources of the society. And I think it is wise policy to restrict the amount of each investment as much as it is practical to do. The main protection the society can provide for its investors is by its accumulation of reserves, and there at once is another 1033 difficulty, because the liquidity I have referred to means keeping a good deal of money fairly short. That could not earn perhaps so much interest as the interest paid on the borrowing of it, and the more money is kept liquid for the needs of investors who wish to withdraw at any time, the less that money is working to accumulate surpluses to keep reserves; so it is rather a balancing act to decide between the two.
The principle of operation of building societies is perhaps rather peculiar, because they borrow short and lend long, which I think in the textbooks one is always advised never to do. But in the case of building societies it seems to have been working satisfactorily for a long period. Most loans are for twenty years, and borrowing is normally repayable in six months. I think that in most societies, at any rate in practice, money borrowed is repaid whenever the investor asks for it. So that again we come to the fact that the thing that matters most to a building society is that it should keep the confidence of the public and of its investors. In order to maintain its funds it must be able to offer the investing member a high enough rate of interest to make his investment attractive, and again to achieve stability and to give confidence. There are often times when other forms of investment appear to be more remunerative, and there are times when the amount of investment which accrues to building societies goes slower and there are times when investments come in faster. Here again is a need to keep a certain amount of liquidity.
On the matter of building up reserves, which I think is the really important thing that a society does for stability, there are one or two points on which this Bill has some effect, though not a substantial effect, and not, I think, enough to warrant serious criticism. The first point is on Clause 1, which deals with special advances. Societies have a standard advertised rate at which they will lend on mortgage. It is usually the rate recommended by the Association, but some societies, in fact, have different rates at which they will lend. On the other hand, it is common practice that advances which are not made to owner-occupiers are at a higher rate. In proper cases that is a salutary thing, because it is one of the means by which a small 1034 increase in reserves can be built up. There are a number of cases in which this is done, such as where a man who wants to borrow has a shop over a house. That is partly an owner-occupied house, but it is partly a shop, which is in a different category. It is proper that he should pay a higher rate. Then there are cases where it is advantageous to all parties that the society should lend to a builder on the security of his land. He can then sell the houses when they are complete and repay his loan. That is done by quite a number of societies. So there are a number of things properly belonging and appertaining to typically owner-occupier loans which have meant business for a society, and which could, and do, properly attract a higher rate of interest.
There are, of course, entirely different types of business, such as those which have been referred to earlier. These are not the sort of things which one would wish to encourage. But I should not like it to be thought that it is totally wrong for a building society to lend any of its money at a higher rate of interest. As to the limitation in Clause 1, it seems to me that the figure of £5,000 is about right, but I have some doubt whether there is any real validity in adding not only the condition of the £5,000 but the alternative one of the corporate body. I think that in fact the 10 per cent. proportion makes that point all right, but I do not feel quite so convinced that it is as much wrong, or, should I say, unwise or unethical, to lend to a number of corporate bodies who may be building houses for people to rent, as it is to lend a series of large sums.
There are other things which tend to make it difficult for societies to accumulate the reserve to which I have referred. One of them is the taxation problem. The noble Lord, Lord Milner of Leeds, said that societies had the privilege of a lower rate of income tax. It is the investors who have that lower rate of income tax; it is a special rate. The societies themselves pay the normal rate on the balance of their surplus and get no advantage in that way; and, unfortunately, they have the disadvantage of a 2½ per cent. increase in profits tax coming. There are also various items which will add, not greatly but slightly, to expenses and which tend to reduce 1035 the surplus accumulated every year. The keeping of the register and having it available; providing notices of meetings and giving copies of accounts to investors, and so on, are not big items, but they are worth noticing, because societies are not in the position of being able to save much and thereby to accumulate their reserves. The inflationary problem of the last few years since the war has not made that any easier.
Of course, another matter which appeared in the Budget is a little discouraging. In the national sense it is a good thing that the attractiveness of national savings has been increased, but for the building societies it happens to be unfortunate. I have often tried to analyse the reasons why investments in building societies fluctuate, as they do all the time. The only conclusion I have been able to come to is that they have varied relative to the attractiveness of various forms of national savings—so much so that a year ago the Government, having attracted a lot of money to national savings, found it necessary to pass a Bill by which they could lend money to building societies to be lent out on the older houses. If I may again refer to what the noble Lord opposite said, I would point out that that is not a grant; it is a loan, and it is repayable. Of course that does not affect this Bill at all. I was most interested to hear what the noble Viscount who introduced the Bill said about investment powers. I had hoped that the Bill would be able to specify what they were to be. From what he says, I think he is entirely right. I would say, however, that in the past the limitation of investment powers has meant that a number of societies have been in Government stocks and are showing, at any rate on their book values, considerable losses; so that it is natural for societies to think that it would be attractive to be able to go into equities and to make much more noticeable profits. I agree that it would be unwise to do so.
Many of the provisions which have been referred to in this Bill really bring the building societies' position much into line with that of companies under the Companies Act. I find no reason to criticise that. I do not think that it gives too much power to the Chief 1036 Registrar. The relations between individual societies and the Registrar and his office have for many years been cordial and satisfactory. I think that the way the office is run gives us cause to believe that we can expect it to be equally reasonable in the future. Under this Bill there are no extreme powers that I think need frighten anybody at all.
I should like to make one brief reference to Clause 13, which deals with the fact that directors, managers and secretaries are no longer to be able to provide a valuation on which a mortgage advance is made. I think it only fair to say that there are a large number of societies in which professional men qualified for the purpose are directors and do make valuations. I think that one ought to say that, while appreciating the importance of this clause, in many cases of which one knows there is not, and could not be, any criticism of those people who have done an entirely honest and straightforward job. But I think that the principle that there should be an independent valuation is right. After all, the directors of a society who authorise the loan must have a valuation by a professional man of independence. They must also make their own assessment of what the valuation is. They will not go above what the valuer says, but they may well be wise to, and often do, go below what he says. I think the important point there is that there should be an independent valuation, but that we should be careful to recognise that a professional valuation has for many years been done in many societies, with complete honesty and success, by their own people. There should not be any misunderstanding on that point, which applies to a large number of societies, particularly the smaller ones.
Clause 49 discusses the directors' duties. It says that directors must declare an interest; that they must behave in a certain way when matters arise concerning them. It says also that a return must be made showing loans which are made to directors or to companies or other organisations in which they are interested. I think that is a sound provision. I myself should not have minded something rather stronger than that, because I believe the recent troubles of which we have heard hinged largely on 1037 the fact that directors of those societies were personally concerned in these transactions. I should like to know whether it has ever been suggested that it should be ultra vires for building societies to make a loan to their own directors. I know that that is frequently done and is perfectly straightforward and all right. But as a means of avoiding disasters such as have happened on occasion, perhaps it might not be a bad thing to have such a provision. After all, building societies are very friendly with each other, and if a director of a society wanted a loan he could happily go to the end of the street in the town in which he lives and get a loan from some other society. I do not press that point, but I believe there would be little hardship if such a provision were included in the Bill. In general, I believe that this is an excellent Bill. As so often happens, it is a case of trying to legislate against transgressors without doing harm to those behaving properly; and in this case we seem to have been very much more successful than we are in many Bills.
§ 6.41 p.m.
§ LORD AUCKLAND
My Lords, I do not declare a direct interest in this Bill, but as a Vice-President of the National Union of Ratepayers' Associations, who guard some of the interests of those who use building societies for the purchase of houses, I should like to crave your Lordships' indulgence and say just a few words on the Bill. I think, in general, it is an intelligently conceived and very necessary Bill, and I agree with those who contend that it might well have been introduced earlier.
Building societies form much of the life-blood of a country's resources and they are among some of the oldest and most established institutions; and the fact that the general public must have a great deal of faith in those societies is surely borne out by the fact that in 1959 advances to the tune of £382,430,000 were made to purchasers by building societies, as against £260 million in 1958. Indeed, the recent events which have centred around one certain society do not seem to have discouraged persons from using this medium.
Most of the criticism I have seen of the Bill centres around the purpose of Clause 1, which limits to £5,000 the 1038 amount which can be advanced to any one person wishing to use a building society for the purchase of property. The Stock Exchange Gazette of April 1 makes this comment:The limit on the loans to individuals has almost certainly been fixed at too low a level. The £5,000 maximum means that a high percentage of loans on higher-priced private dwelling houses, shops with living accommodation, boarding houses, small dwellings and other similar types of commercial property will be unnecessarily restricted.As I see it, purely from the layman's point of view, with no specific legal knowledge, there is some substance in this argument; but I can see that by limiting the amount to £5,000, building societies will be enabled to lend money to a larger number of people wishing to purchase houses costing between, say, £3,000 and £4,000; and, after all, those people are perhaps the prime, users of building societies—for example, the young married couples. Speaking as one who bought his first house through a building society, I can vouch for the fact that, generally speaking, they give very fair treatment; and the comment which we sometimes see, that building societies do not bring their rates down enough, is, I believe, largely spurious, because with the number of people who are borrowing, this becomes very difficult.
I am particularly glad to see Clause 11 incorporated in the Bill, but it seems to me to need some elaboration. How long will there be a maximum period over which the loan must be repaid, and will the rates of interest be fixed? It also seems to me that there should be a certain amount of restriction to local societies. For example, if the Hastings and Thanet Building Society got into difficulties it could, perhaps, turn to the Eastbourne Mutual Society or vice versa, because they are societies which have a very friendly relationship one with another. This is an excellent clause, but it seems to me to need that little safeguard. The Chief Registrar, whom I have the privilege of knowing personally, and for whose ability anyone who knows him must have the highest regard, will, I am sure, keep an eye on this matter.
Clause 25, regarding advertisement, is another very necessary clause. Some of the less scrupulous societies which have set up as building societies—and they are very few and far between—have 1039 made some use of this kind of advertising. For example, it would hardly seem right if there were a society called the Cheddar Building Society that it should have a picture of a cheese on its printed material. I can see that if this clause was not applied, that kind of thing could happen and might cause havoc. I would agree with the sentiments of the noble Lord, Lord Milner of Leeds, who referred to the fact that the Bill does not concentrate sufficiently on the purchaser. After all, if it were not for purchasers, building societies would not exist; and those who invest in building societies must be dependent on their purchasers.
Generally speaking, I believe that surveyors do their job extremely well, but I would agree that there is a certain amount of secrecy. Why should not a person who has been turned down for a mortgage be entitled to gather from the surveyor what is wrong? There seems to be some difficulty in gleaning this information. Similarly there seems to be some discrimination against purchasers. The noble Lord, Lord Milner of Leeds, referred to women who wish to purchase houses. Here, again, I believe the limit of £5,000 to a purchaser may well help societies to be less discriminating in these days of relative prosperity. I think building societies could well afford to be more generous to that type of purchaser. But I would conclude by saying that this is a very well-conceived Bill and I would certainly support its Second Reading.
§ 6.50 p.m.
My Lords, I think that, on the whole, this is a good Bill, and I hope that Her Majesty's Government will get all the support which they require. Having said that, may I be allowed to criticise one clause in the Bill—namely, Clause 13? I must begin by declaring an interest. I am a director of a small but, I hope, thoroughly respectable building society on which trustee status has been conferred. Clause 13, in effect, prohibits a director from making a valuation of any property on which the society make a loan. I agree that no unqualified or inexperienced person, whether a director or otherwise, should ever make a valuation. I agree that no 1040 director should make a valuation of any property in which he has an interest.
Having said those things, I would then make a distinction in other cases. I have myself three co-directors who are very qualified and experienced surveyors and are held in the highest regard in their profession. They carry out the majority of the valuations of the property on which the society make advances. They know the district thoroughly in which they make the valuation, and their advice on these matters, which they eventually lay before the board, is most helpful in every way. There is no conflict of interest between their duties as directors and duties as valuers. In fact, their knowledge of the financial position and capacity of the building society is opposed to making excessive or unnecessary or undesirable valuations. I will not hammer that point any further, but I should like to propose an Amendment to Clause 13 on the Committee stage of the Bill. The Amendment is to the effect that a director may make valuations on which the society may advance money if he is authorised to do so by special resolution passed at the annual general meeting of the society, such resolution to last for a period not exceeding fifteen months, and the resolution to be reported to the Registrar of Friendly Societies. I hope that that is a reasonably good Amendment, and only modesty precludes my saying who has concocted it.
The only other matter to which I would refer is the meaning of "owner occupier". Many societies, including my own, make advances of money to a purchaser of a building which is divided into two self-contained flats. There is only one mortgage, but the purchaser occupies one flat himself and quite openly lets the other flat to a tenant; and we are in the habit of describing those properties as "owner-occupied". If we are wrong in doing so, I hope that the Government will tell us so, because we want to do only the proper thing. Having said that, I should like to thank the noble Viscount the Lord Privy Seal for the clear and fair way in which he has explained this Bill. I have been told that people go a long way to hear the noble Viscount talk. I was told the other day a perfectly true story of somebody who walked seven miles to church every Sunday in order to hear 1041 him read the lesson. I am not surprised. Personally, I should walk that distance, and a great deal more, to hear him explain this Bill, which I trust will, subject to my Amendment, soon be an Act of Parliament.
§ 6.55 p.m.
My Lords, I was very glad to hear my noble friend Lord Ridley say what he did about the Registrar; and if I may very humbly be allowed to, I should like to concur. The only point I want to raise is on Clause 13. I should like to point out that it depends on Section 12 of the principal Act, where it says:The duties of every director or member of the committee of management of a society shall include the duty of satisfying himself that the arrangements made for assessing the adequacy of the security … are such as may reasonably be expected to ensure … the adequacy of any security".And it goes on to say:Nothing in this section shall be construed as precluding a director or member of the committee of management of a society from approving such arrangements … for the assessment of the adequacy of such security by himself or any other director".Nothing is more convincing than personal knowledge. I want to assume that I am a director of a building society, which I am not, and I should like also to assume that I am a qualified surveyor and valuer, which I very nearly was at one time but which I now am certainly not. In those circumstances I read this Bill and I see that… a director or the manager or secretary of the building society shall not be qualified to assess the adequacy of security to be taken.Then it goes on to say:If a director of a building society fails to carry out his duty under … subsection (1) of section twelve"—that is the section I read first of all; it says he must take every step to satisfy himself the security is adequate—he shall be guilty of an offence".Of course, the obvious thing for him to do, if this Bill passes into law, is to do exactly what my noble friend Lord Ridley gave us a very good picture of. The society must employ an independent valuer of whose qualifications they are satisfied, and he values the property and presents them with a report. The best way in which a person in my supposed 1042 position can satisfy himself of that report is by going and valuing the property himself and seeing the thing with his own eyes and using his own professional qualifications, and then perhaps coming back and saying to his board that he thinks that their official valuer has taken too rosy a view of the property and he advises something a little less.
But observe what happens if he does. Subsection (4) goes on to say:or if any person who is disqualified under the foregoing provisions of this section takes any part in assessing the adequacy of any security to be taken for an advance by a building society, he shall be guilty of an offence".So under subsection (4), if he fails to take the best means of satisfying himself on the adequacy of the security it is an offence; and if he does take the best means—which is to go and see the property and read the official surveyor's report—again he has committed an offence. I do not think that those two things go together; I think they cut each other's throat. I hope that either we shall get a very lucid explanation or that the Government will consider re-wording that clause, if they do not feel inclined to accept the Amendment of the noble Lord, Lord Meston.
§ 6.59 p.m.
§ VISCOUNT HAILSHAM
My Lords, I think I shall be showing poor thanks for the very kind reception this Bill has had if I reply at length to the various speeches which have been made. But I should like to say to all the noble Lords who have taken part in the debate how much I welcome their contributions and the expressions of support which have come from every quarter of the House and from those Members of it who are particularly well qualified to give their opinions. I should also like to thank both the noble Lord, Lord Meston, and the noble Lord, Lord Elton, for their kindly references to myself. I can imagine that there are much better reasons for going to church than to hear me read the Lessons, but I was very grateful to the noble Lord, Lord Meston, for telling me the touching story of somebody who does go for this purpose.
My Lords, I think that really the Bill may be said to have escaped criticism except for the figure of £5,000 in Clause 1 and except for Clause 13. As my noble friend Lord Elton indicated, the figure 1043 of £5,000 in Clause 1 may one day become obsolete. I will draw my right honourable friend's attention to the question of making it possible under the Bill to increase that figure; but, on the whole, the policy of the Government is not to put too much discretion into Acts of Parliament where it is possible to write the terms more rigidly—and there is already a very great element of discretion in the Bill, which has already given rise to criticism. But I shall certainly and only too gladly draw that point to my right honourable friend's attention.
My noble friend Lord Ridley thought that, if the £5,000 limit (which he thought was about right) was kept, it was perhaps a work of supererogation to add the class of special advance which relates to advances to a corporation or company. That might very well be so in a large number of cases, but my noble friend had particularly in mind advances to companies for the purpose of building houses. That was the very reason which motivated the Government to introduce the exception to Clause 1, which gives the Registrar a discretion to raise the limit where the object is to build dwellinghouses—and that may be a justification for keeping in both categories.
Clause 13 has come in for both praise and blame, and I should think that probably it would be convenient to leave discussion on the policy of that clause until the Committee stage. The noble Lord, Lord Meston, has said that he would kindly introduce an Amendment and it can be considered then. I think it is right to say that not everybody in the building society movement takes the same view as the noble Lord, Lord Meston. I believe that is not the view of the Association with which the noble Lord, Lord Milner of Leeds, is connected and with which the noble Lord, Lord Elton, is connected. Moreover, I have received a private notice from at least one other noble Lord asking me, on behalf of the Government, to keep the clause in its present form. At all events, we will not prejudge that question: we will take notice of the expressed intention of the noble Lord, Lord Meston; and I will be sure to arm myself, not only to give a considered reply on behalf of the Government, but also to 1044 deal with the ingenious dilemma in which my noble friend Lord Saltoun sought to place me, but from which I shall not attempt to escape at the moment.
With those comments I should like again to thank those noble Lords who have taken part in the debate. I can assure my noble friend Lord Elton that expressions of support coming from outside the Government are doubly welcome. I do not claim to speak as a disinterested party in such things; and when we know that we have given a little pleasure and won a little approval, we are willing to bear with fortitude the criticism, which has also been expressed, that our action could have come earlier.
§ On Question, Bill read 2a, and committed to a Committee of the Whole House.