§ 7.33 p.m.
§ Lord Trefgarne rose to move, That the draft order laid before the House on 22nd June be approved.
§ The noble Lord said: My Lords, under the Building Societies Act 1962, special advances are restricted to a maximum of 10 per cent. of all loans made in a year. A limit on special advances was first introduced in 1960 in response to certain speculative abuses which had developed in some building societies. The aim was to restrict loans which societies could advance other than for the finance of owner occupation. Because of 74 problems of providing a legal definition of owner occupation, however, special advances were defined as being all advances to companies and large advances to individuals.
§ This order increases from £37,500 to £60,000 the limit above which a sum lent to a person by a building society is treated as a special advance. Since 1960 this limit has been increased six times, the present figure of £37,500 being set on 1st January 1981. Setting the limit too low imposes a burden on societies' administration and can constrain societies in their competition with the banks for mortgage business. Too low a limit can also bring the system into disrepute because the control is seen as an unnecessary one in relation to its original purpose.
§ With the entry of the banks into the market there is no longer a mortgage famine and any credit-worthy borrower who wants one can get one. In the light of these new conditions, we consider it right to make the figure up to what is an appropriate prudential level. The Chief Registrar of Friendly Societies is satisfied that setting the figure at anything below £60,000 (which is equivalent to about two and a half times the average house price) is unnecessary on prudential grounds. Furthermore, the Building Societies Association has reassured the Government that there is no intention on the part of any society to reduce its lending at the lower end of the market. The average building society advance in the United Kingdom in 1981 was less than £15,000 and it is reasonable to expect that the vast majority of advances will continue to be well below the new limit. The societies make considerable efforts to ensure that first time buyers and those seeking smaller properties are helped to the greatest possible extent.
§ Although the effective date of the draft order is to be 1st September 1982, a building society will not be able to work to the new limit until its next following financial year. For most societies this will mean that they will be able to work to the new limit as from 1st January 1983. However, a number of societies, including two of the top five, have accounting years which end before 31st December and the order will, therefore, take effect for those societies for the year 1982–83.
§ Although this is an increase of 60 per cent. of the previous figure, that is, similar in size to the percentage increase made by the last Government in 1975, it does contain an element for forward provision to avoid the need for a further increase for several years and the consequent demands on parliamentary time. It will help building societies in competing with the clearing banks and particularly assist those smaller societies who need to make high value loans because of higher house prices in their areas. I invite the House to approve this order. I beg to moved.
§ Moved, That the draft order laid before the House on 22nd June be approved.—(Lord Trefgarne.)
§ Lord Houghton of Sowerby
My Lords, I wrote to the Minister to tell him of my interest in this matter. I am grateful to him for the explanation that he has given. This is, of course, not unexpected because the Chancellor of the Exchequer announced the intention of the Government to do this when speaking at the annual banquet of the Building Societies' Association a few weeks ago. It was one part of his speech that was received with obvious satisfaction. There are other 75 parts of his speech which were not so welcome—those parts being to remind the association that they had obligations towards a large number of members who had certain rights under the Building Societies Act and the constitution of building societies which must not be overlooked and which I am afraid do get overlooked in some of the operations of the mammoth building societies of today.
Talking of grassroots in building societies, probably I am nearer the grassroots than most noble Lords and existing directors of building societies or indeed existing members of building societies. My family and I—my father especially—go right back to the beginning of building societies and we know how they started, why they started and we have seen how far they have progressed. So I am rather anxious, as the noble Lord knows, to utter a cautionary word whenever I see the building societies going into the realm of financial institutions, yet depending the while on their beneficial position related to the kind of service that they were intended to give to people. The noble Lord has mentioned, as did the Chancellor of the Exchequer, that this will assist the building societies in competition with the banks—as though the building societies and the banks were rival institutions in this field, each deserving some help in competition with the other. I do not see it in that light at all; nor do I see any reason, frankly, why the building societies should press for the lifting of this limit on special advances in present circumstances. Why do the building societies want to go into this field of special advances at a level where normally building societies have never gone before?
This limit of £60,000 is a very substantial mortgage to grant on the purchase of an owner-occupied house. One feels this is hardly the semi-detached house in the suburbs of our larger cities, or indeed modest housing of any kind. This is tycoonery, and I am not sure that the building societies have any special claim to be lending money on advances of this size. I would have thought this was eminently work for the banks. After all, they can turn the tap on and off as money is available, without the sort of continuing policy of stability of building society lending.
So I question this. I know that the Building Societies Associations want it but I do not see that as a justification for granting it as readily as all that. After all, the present limit of £37,500 was decided upon only just over a year ago and one wonders why it is now lifted to £60.000. It certainly has not to do with the rise in the price of property. This is not a rise in order to keep updated the £37,500. This increase is being brought in in order to give the building societies a fresh thrust into a market which they fear the banks will get exclusively for themselves if they are not in it, and I really do not see why they should be in it.
As for the undertaking that the building societies will not reduce their lending at the lower end of the scale, what is that assurance worth? It is not the reduction of lending at the other end of the scale that we are worried about: it is the failure to increase it, I would have thought. That is where the help for home ownership really is needed, and while I understand the restrictions placed upon the total amount of special advances, to say that the building societies have given 76 an assurance that they will not reduce the lending at the lower end of the scale does not seem to me to satisfy any criterion regarding the position and policy of building societies.
We have in prospect a very important, and I hope, a significant review of the role of building societies and their institutional life. It may not come in this Parliament but it should certainly come very soon now, because the building societies are going far away from the intentions of their origin and from the conditions and privileges which the building societies Acts confer upon them because of their social value and because of their social policy. They are not in the market as moneylenders or as bankers; they are there to convert the savings of large numbers of people into home ownership of large numbers of people—a transfer of resources from millions of modest investors to the house purchase desires of millions of modest house owners. This is really the exchange level of the building societies—not between the small investors on the one hand and the £60,000 people on the other. That was not really the equation to be struck by building societies at all. And so, while I am not opposing this order—with the House in its present condition it is difficult to do anything else but be agreeable about it—at the same time, I think that an order of this kind related to building societies should not go as a matter of routine in your Lordships' House. I can only conclude by saying that, in my role as candid friend and vice-president of the Building Societies Association, not all that I say will be welcome to them but on the other hand I believe that perhaps a good deal of what I say may be good for them: at any rate I hope so.
§ Lord Ponsonby of Shulbrede
My Lords, I should like to say just a few words to add to the expert remarks of my noble friend Lord Houghton of Sowerby, and I should first like to thank the noble Lord for explaining the order. In fact, the noble Lord, Lord Houghton, has commented on many of its facets. I think I understand it correctly that in fact there is no intention of increasing the percentage of building society loans which may be made as special advances and therefore we are assured that the remaining percentage will be used by the building societies in their traditional role of making loans for house purchase.
In moving the order, the noble Lord explained why the category of special advances was introduced in the past. However, I may say that I was somewhat concerned that the noble Lord eventually had two contrary arguments about why there needed to be 60 per cent. increase in the amount at the present time. It is now two years since the previous order was made in 1980, and that seems to be something like a 30 per cent. a year increase in the amount of money which may be allowed on a special advance. The noble Lord said this figure had been hit upon because it included in it a provision for future inflation.
Therefore, he was trying to make out the case, on the one hand, that the increase was really in line with what had gone before and with all the increases that had been made at previous times. Yet, on the other hand, he specifically said that one of the reasons for this increase in the amount which could be made as a special advance was to enable the building societies 77 to compete more readily with the banks. I fail to see the force of that particular argument when put with the other argument which the noble Lord used which, as I said, was that it was basically to keep pace with inflation and to make allowance for future inflation. We do not oppose this order, but, as the noble Lord, Lord Houghton, has said, we think that a earful watch should be kept on this particular matter.
§ Lord Trefgarne
My Lords, your Lordships will forgive me, I think, if I do not repeat all the rationale I deployed a moment ago for this particular increase. I should like, if I might, to conclude simply with this point. The building societies find themselves in competition with the banks in the supply of mortgages. The fact is that the banks work without restriction of any kind in this area, and we thought it right, having regard to that, having regard to the degree of inflation which has taken place since 1980 and having regard to the need to avoid coming back to Parliament time and time again for modest increases in this limit, to set the level at £60,000 as the order provides.
I think that the point expressed by the noble Lord, Lord Houghton of Sowerby, about the supply of mortgages at the lower end of the market, is not one that need trouble him unduly. There is, of course, no fixed quantum of building society funds for mortgages. Their liquidity has recently been rising and I think that societies would certainly wish to increase their total mortgage lending, if they could. So an expansion of largeish advances would not mean any reduction in the level of smaller advances, which was the point concerning the noble Lord.
It may be of interest if I tell the noble Lord that, so far as the current year is concerned, we shall not have figures with respect to total advances in this category, but for 1981 the average proportion of special advances for all societies was only 1.5 per cent. So we are very well inside the 10 per cent. limit, which is, of course, a feature of this arrangement. I hope that that clarification sets the fears of the noble Lord at rest.
§ The Earl of Avon
My Lords, I beg to move that the House do now adjourn during pleasure until ten minutes past eight o'clock.
§ [The Sitting was suspended from 7.52 p.m. until 8.10 p.m.]