§ 7.52 p.m.
§ The Earl of Kinnoull rose to ask Her Majesty's Government what has been the response to their Green Paper Building Societies: A New FrameworkCmnd.9316).313
§ The noble Earl said: In rising to move this short debate on the Government's Green Paper on building societies and their future framework published 10 months ago, I should like to thank in anticipation those noble Lords who have gamely indicated that they intend to take part, as I shall not have a chance later to thank them.
§ The timing of this debate at a relatively late hour after two heavy days on the Local Government Bill and after these two fascinating debates this afternoon was not my first choice, but, with the heavy programme for the rest of the summer, I suppose one should count one's blessings. I hope the debate will allow the Government to advise us about what reactions they have received during the consultation period which was completed by the end of November, as well as giving those of us interested in this subject a chance to add a view. There is no shortage of experience among Members of the House, but I see tonight from the list of speakers that it is a matter of quality rather than quantity of speakers.
§ At this stage I should like to declare an interest in that I am privileged to be involved in a society that is 35th in size in the movement. I am tempted to describe all its attributes, but I shall not because it might encourage others to advertise that they belong to the Woolwich or some other society, which I think might be counter-productive. I speak in a personal capacity.
§ Building societies are surely one of the most remarkable components of our financial system. From early days 150 years ago, when a few friends gathered in a coffee shop to pool their savings to form a mutual society to provide mortgages for members in a strict rotation, they have grown to the present stage when the largest societies are the custodians of billions of pounds of personal savings and need and require the most sophisticated equipment to operate efficiently. The whole scene is a remarkable picture of success. It is a movement which has achieved the most influence on home ownership and which provides the most trusted haven of personal savings, a movement that defies and has defied for years all normal banking rules about lending long and borrowing short. It is a movement which, unlike its equivalent in America—one thinks particularly of the recent Ohio situation—has never faltered in public confidence nor lost an investor one halfpenny of his investments since the last war, despite three society failures.
§ That is a proud record. To see the movement's progress, one only has to look back 25 years to 1960, when the total assets were £3 billion, whereas today they are over £100 billion. In 1960 the borrowers were 2 million; today they are 6 million. Home ownership has increased from 42 per cent. to 63 per cent. today. The only shrinkage has been in the number of societies operating, from 481 down to today's roughly 200. No doubt, with rationalisation and mergers and the new powers under review, the increasing pressure will be for further rationalisation. I hope that we shall never sink to the level of the clearing bank numbers. I believe in the value of the small society alongside the giants. It would be a sad loss if they were forced to disappear due to the competition.314
§ To the simple question: do the building societies need modern powers to operate in or a new framework as the Green Paper suggests? I think the answer is unequivocally, "yes". Many of the old existing powers were drafted, surprisingly enough, 112 years ago. They must have had wonderful draftsmen in those days. They were updated in 1962. We are now in a period of financial deregulation in a fiercely competitive market where banks and building societies are on much more of an equal footing, where the old cosy building society cartel has disappeared. The current restrictive legislation clearly frustrates the innovative qualities of societies and the role they could play. The Green Paper sets all that out very clearly.
§ In any discussion as to what role building societies should be allowed to play in the future—acting as a quasi-bank, offering overdrafts, offering services as estate agents, lawyers, insurance brokers or even insurance companies, developers and landowners—the obvious worry that springs to mind with the experience of the savings and loans associations in the United States is, what effect would this have on public confidence? Would the public lose the vision the societies offer, that of a haven for hard earned savings?
It is encouraging that from the foreword of the Green Paper submitted by my noble friend's right honourable friend the Chancellor of the Exchequer, one reads:
Our purpose is to ensure that the building societies continue primarily in their traditional roles—holding people's savings securely and lending for house purchase—while loosening the legal restraints under which they have operated for a century or more so that they can develop in other fields".
The suggestion in the Green Paper that 90 per cent. of building societies' funds should remain exclusively channelled towards the mortgage loan for the owner-occupier under what are deemed Class 1 assets is reassuring.
§ I believe that great credit should go to the Building Societies Association for the support it has given the Government, the movement and the consumer in helping to assist the Government in reaching some of the conclusions reached in the Green Paper. I hope that the Government have taken on board the association's worry about defining the category of Class 1 when it comes to legislation. It would not cover, as I understand it at present, the situation where an owner is living abroad and wants to buy a home over here for retirement, or for the clergy living in tied accommodation for retirement or any other person living in tied accommodation. It would not cover shops with living accommodation either. I hope that my noble friend will consider that carefully and perhaps comment later on that care will be taken not to make the Class 1 too rigid.
§ The remaining 10 per cent. of the funds either in Class 2 assets—that is, the fully-secured loans—or Class 3 assets—the unsecured loans—obviously give societies the chance to be innovative and to compete in the market. Of course, one knows that only 25 per cent. of societies will qualify for this, due to their size. I am sure that it will be very frustrating for the smaller societies and I think that other noble Lords may pick this up later on. Nevertheless, it is a judgment which the Government and the chief registrar will take. I suspect that it is a correct 315 prudential judgment; that you have to be a certain size to operate in the risk area.
§ Class 2 and Class 3 offer a number of important areas of operation which societies have been denied before. To me, the most important one is land ownership. It has been quite obvious, I think, for the last 20 years, that societies, if allowed to do so, could play a much more supportive role in the housing industry than they currently do. Areas which have been under discussion literally for years have been the urban renewal schemes, partnerships with local authorities, partnerships with private developers, promoting co-ownership housing societies or providing a valuable element to the rented sector as a landlord on a cost basis. Societies have seemingly suffered for years for the sins of the collapse of the Liberator Building Society in the 1870s and the State Building Society in the 1960s over the question of the ownership of land. Both societies failed for a single reason; that massive loans were offered to a highly-geared property company which collapsed like a pack of cards. I am glad that these skeletons have been abandoned by the Government and I welcome their intention to allow societies to make an effective contribution in this field. Under the "New Functions" section of the Green Paper, which proposes to allow societies a number of other areas of operation, I think it is obvious that cheque guarantee cards and small overdrafts are an essential element now in the competitive financial world where the societies meet with banks. I hope that that will be brought about in legislation. It is interesting to note that the external cash machines which are already in use with a number of the very large societies are proving very popular.
§ My Lords, the integrated housing service, incorporating estate agents, valuation and structural surveys and so on, offers, I believe, a minefield of conflict of interests. It is interesting to note that Lloyds Bank some years ago dipped into estate agency. No other bank has followed and I am not at all sure that Lloyds Bank's experience has been wholly successful. Insurance broking, on the other hand, and subsidiary insurance companies, I personally see as very much related to a society's work and should not offer such conflict. Of course, if I were an insurance broker, perhaps I should take another view. On the wholesale funds, the Green Paper suggests that the prudential limit should rise from the current limit of, I think, 5 per cent. to 20 per cent. This appears to be a big jump, but I must say that I personally feel that it is far too cautious.
§ Wholesale funds today are a relatively new experience for societies but they are clearly here to stay. They make a lot of sense because they are now the crinkles in the inflow of funds from the normal source—that is, the personal savings source—and they therefore can remove the periods of mortgage scarcity. In most cases, wholesale funds are not "hot" money as is the case with large deposits which can be taken away, plucked away, at a moment's notice to the embarrassment of any particular society. They are term money which can be properly planned and replaced without difficulty. I hope that my noble friend, when considering the framing of legislation, will consider that point.316
§ The Green Paper refers to the EC and invites comments on whether the British societies should operate in Europe. I know that the noble Lord, Lord Ezra, with his special experience, is to comment on this and I shall look forward to what he has to say. Perhaps I may say that my own view is that, as we are in Europe it would seem fairly illogical not to allow societies to operate if they so wish. I hope that my noble friend can touch on that later on this evening.
§ In all these changes suggested in the Green Paper, there is a very special and heavy responsibility that falls on the chief registrar. His prudential guidelines, his advice to societies, his monitoring of societies, will be quite crucial, particularly in the early period. I expect that his staff numbers will go up, understandably. I understand from the Green Paper that societies will have to meet all his costs and I hope that my noble friend can give an indication of what could be the likely charges. I notice that in the Green Paper there is no appeals procedure should the registrar come into conflict with a particular society over what operation they may or may not go into. I think that with this new era of widening powers, there would be a feeling of some unhappiness if there were no appeals procedure. I suspect that the chief registrar himself would welcome it and I hope that my noble friend will take that into account.
§ My Lords, finally, I would say that I welcome the Green Paper. It offers, I think, much-needed and refreshing new powers for societies. I hope that tonight my noble friend can give an undertaking that legislation will be introduced in the next Session so that societies can get down to planning their future roles and can meet the competitive yet stimulating challenge and so fulfil their role as successfully as they have in the past.
§ 8.7 p.m.
§ Lord Ezra
My Lords, the noble Earl, Lord Kinnoull, has raised a question of considerable significance and it is particularly timely as the Green Paper to which he has referred intimates that in due course there will be legislation, legislation which we all hope will recognise (as the noble Earl has emphasised and as the Green Paper itself mentions) the increasingly important role that building societies play in our way of life in this country. Since the early legislation, and even since the legislation of 1962, the societies have grown considerably in size and scope. Therefore, it is important that there should be this legislative review which is contemplated. The noble Earl has dealt with many aspects of their operations which need looking at; and most of those were, in fact, referred to in the Green Paper.
As he was kind enough to say, I should like to look particularly at the potential European aspect of their affairs because in the growth of their operations it seems wrong that they should not be enabled to participate in developments in the European Community. Due, however, to the 1962 legislation, and particularly to Section 1(1) and the reference to lending for freehold and leasehold property, a form of property not known on the continent, they are thereby prohibited from lending on the continent although they can of course raise money there. The position, fortunately, is being looked at very carefully at the 317 present time. The Green Paper itself in July when it was issued had a short paragraph on the subject, somewhat qualified, I may say, which was followed up in the response from the Building Societies Association in October by a much more positive view of the situation in which they gave the various reasons why they felt that they should be enabled to operate within the European Community. The reasons they gave I think are very valid. First of all, the whole objective of the Community is to provide free movement—free movement of goods, of services and of people; and there are people moving around. There are many people from this country who, for various business and other reasons, are living in other countries in the European Community and they would like to use the facilities with which they are familiar in this country for raising money for homes they wish to purchase.
On the other hand, there are many citizens of other Community countries who come here and obviously, living here, they would not unnaturally like to take advantage of some of the financial facilities which the building societies offer. Generally speaking and particularly if they are here for business or other reasons or are associated with the Community itself, they may only be here for a limited period and naturally they would like to feel that the benefits they can derive by raising loans from building societies can continue to apply when they return to their home countries.
Furthermore, a major factor, I think, is that there is a growing diversity of financial facilities available, and other financial institutions are able to take advantage of these opportunities; but, so far, the building societies are not. Therefore, it does appear that this is a matter which ought very seriously to be taken into account in the proposed legislation, and I hope that when the noble Lord the Minister replies he will be able to reassure us on that point.
There is indeed quite a lot of development in this particular field. Not only is there the reference made in the Green Paper and the response of the building societies, but since these two documents appeared there has been the publication of a draft directive by the European Commission in January and February of this year, which has set out the basis on which the Commission considers that cross-frontier mortgage facilities can be facilitated within the Community. They have, very rightly and very wisely, kept away from harmonisation. Harmonisation is a rock on which many good ideas have foundered. To try to get harmonisation of many disparate arrangements, particularly in the financial field, is a virtually impossible task within any measurable time. Instead, they have proposed that all the existing arrangements should be freely available, subject to suitable safeguards.
Of course, the extension of British mortgage facilities on the continent of Europe does raise a number of questions. These have been dealt with, I believe satisfactorily, by the Building Societies Association. There is the question of the exchange risk. This can be overcome by making sure that the books are balanced in each country in which they operate and that in fact the money is raised in the 318 country in order to lend it in that country. It would be quite wrong in fact for the British saver to feel that his money was being put at risk by being lent in some other country and when it was recovered in one form or another it could suffer because of exchange variation. So this could be overcome. There is also the question of supervision, but again that can be overcome, in my opinion, by combining the British requirements and the requirements of the host country, as indeed is proposed in the draft directive.
Therefore it seems to me that there is a clear need for the building societies, like other financial organisations, to be provided with this extension to their operations. It is after all a major objective of British Government policy within the European Community to create a real internal market; and so far this market has faltered somewhat, particularly in regard to services and financial facilities. This would be one way of securing an extension.
The effect of enabling such building societies as wish to extend their operations into the European Community as a whole would be to offer a wide choice of mortgage credit instruments to customers throughout the Community, including Britain; and I must say, on behalf of the building societies, that they have not flinched at the prospect of having other facilities offered over here. They are in a competitive mood. I believe they need to be encouraged and stimulated in that direction.
I should like to conclude by saying that I hope the legislation which the Government have in mind will take this whole question fully into account. In fact it is being looked at at this very moment by Sub-Committee A of the European Communities Committee. It has been looking at this question of cross-frontier mortgage credit and will, I believe, within the next month or two be producing its report. I hope the committee will be coming out with some positive conclusions. The effect of this extension would have two major benefits, to my mind. It would help to create a real internal market, especially so far as financial services are concerned within the European Community, and it could add quite substantially as the years go by to Britain's invisible earnings.
§ 8.16 p.m.
§ Lord Houghton of Sowerby
My Lords, from where I have been sitting an observer might have been forgiven for thinking that these proceedings were the Building Societies Association at prayer, because I see so many building society people around. I am one myself. The noble Earl who asked the Question is the chairman of a building society of which I am a member. I will not mention its name in case I am accused of parading a commercial. The noble Earl, Lord Selkirk, was chairman of the Building Societies Association for 14 years; and a very trying period of office he had. The noble Lord who has just left, I noticed, was also a director of a building society. That probably increases the respect that we are going to have for the subject under discussion, though I am bound to say that although I have been a member of a building society all my life I have never prayed for one, and I have mostly been a dissenter—because there are things to disagree with in the building society 319 movement and I think that at some time or other they will have to be expressed.
There is no doubt, of course, that the building society movement has made an amazing contribution to the progress of home purchase for occupation, but I do not think I noticed that the noble Earl, Lord Kinnoull, and certainly not the Chancellor of the Exchequer in his foreword to the Green Paper, mentioned the tax relief on mortgage interest paid. That is the key to the progress of the building society movement: because they have been able to offer mortgages the interest on which has qualified for tax relief. That goes right back to the beginning of our system of taxation, when the main source of income assessed for tax purposes was income from land; and relief on charges on property was traditional right from the beginning. Mortgage interest payable was one of them.
Tax relief on mortgage interest paid is so important and arouses so much political interest that the moment any political spokesman suggests that there might be a review of the taxation arrangements he is disowned and denounced in no time. This is the Ark of the Covenant: that people should be able to have tax relief on their mortgage interest payments.
When your Lordships come to look at it, house purchase for occupation is the best buy in the property market for a person of moderate means, and it is the best investment in conditions of inflation. I would ask your Lordships just to consider this. A person buying a house through a building society buys an appreciating asset. He pays for it by borrowing money at its current value; he repays it over a period of 20 to 25 years in a depreciating currency; and he pays interest which is subject to the current levels of tax relief, whatever they may be. No wonder that house purchase is popular and no wonder that it is a great boon to those who can take advantage of it! When people talk about a property-owning democracy, what they really mean is a nation of property-owning beneficiaries, because most of the owner-occupied stock of houses in Britain has been purchased on these favourable terms.
I am hoping that the noble Lord the Minister will be able to tell us where the Government have got to on their review of the present position of building societies. This Green Paper came out last July and the Government asked for comments on it, which should all be in by now, and they are probably wondering what next they are going to do. It would be interesting to know whether, so far as the Government have gone, they think that some further White Paper or document for discussion might be issued giving their more final views of the situation. They have asked for comments on a number of matters in this Green Paper, and it would be interesting to know what comments they have received and what conclusions they have reached upon them. That is important.
There are some curious things about building societies' activities that are not generally realised. One is that you would think, to listen to the political palaver, that the only people who matter in this whole outfit are those who are borrowing money. It takes three small investors to provide one mortgage. I have money in three building societies and I could not 320 finance one mortgage of average amount at the present time. There are many investors in building societies who are financing other people who are taking out mortgages of very considerable amounts indeed. I mention that because the investor is so frequently overlooked, as if the borrower is the only person who is entitled to political and social interest. The investor is usually a small person and there are some millions of such investors. I think that there are three times as many investors as those who borrow, and that ratio has to be borne in mind.
Another interesting point about building societies is the amount of money that they get in but pay out again. Eighty per cent. of the intake of building societies goes out in the course of a year. It would be very interesting to know who takes out the money. Are the building societies being used as deposit banks because they open on Saturday mornings? To what extent are building societies making a lot of money out of short-term deposits upon which they pay no interest at all?
There are some mysteries about finance, and the building societies are no less mysterious than elsewhere. A banking friend told me recently: "We do not make our money out of deposits. We make our money out of transactions, because we charge for them, and the more people who are putting money in and taking it out, and other people are taking it out and putting it in, the better we like it. We do not want people bringing in large lumps of money and saying `There you are. You can have it for 20 years'. That is no good. Let us get people who will listen to the television news about interest rates, or look at the financial columns of the popular press, and say 'It's about time we got out of this and put our money in that. It does not matter that it has been there for only five minutes. This is a better investment than that'."
This popular pastime of financial transactions needs some independent examination. Money is becoming a growth industry. The handling of other people's money is the biggest industry in Britain today. When we talk about services, what we mean is that there will be more people standing behind counters to take your money and pay it back again. There will be a large nucleus of resources in the hands of the banking institutions, upon which they will be able to gain substantial rewards without paying out in interest anything like them.
I do not want to take up more than another moment or two, because this is not a full-dress debate on building societies; I could promise a much longer speech for that. But I fear that all the talk about reforming building societies may lead to what is the very tag end of public interest; that is, the form which accountability shall take in the building societies. I do not think that this Green Paper gets it right. I hope that we shall not have a repetition of the Trustee Savings Banks Bill, which ignored the interests of depositors and found that the bank did not belong to anybody very much, so anything could be done with it that Parliament wanted.
I hope we shall not get that with building societies; though, of course, they have members and the Halifax could rent the Crystal Palace at any time they liked for a meeting of their shareholders, if they were indignant enough. But they are not indignant enough, because 321 they are not organised. The Building Societies Association is organised, the financial institutions are highly organised, but what about the members of building societies? Where is their voice coming from? Any institution that belongs to millions of people does not really belong to anyone, because you cannot concentrate a representative point of view as you have no democratic means of obtaining it. This is the problem.
Those who want a voice in running the affairs of building societies ought to be willing to pay for it. The franchise in building societies can be purchased at far too cheap a price, and the minimum qualification by way of a holding of building society shares should be much higher than it is. The Government propose to make it a £100 investment, which I think is far too low. The Building Societies Association have said that it should be £250, but they are just thinking in round figures. It may be that something higher than that would be justified as a qualification for a shareholder with a vote.
I think, also, that some consideration has to be given to whether we stick to this ultra-democratic basis of one man one vote, no matter how much you have invested in the institution. There is a case for giving (up to certain limits, at any rate) varying degrees of weight in participation related to the amount of assets held in the society. That is something worth considering in order to get people who are members of societies, who will take an interest and who have paid a reasonable amount for the qualification. The only alternative is to begin to have societies of building society investors and members and to try to get some democratic voice in that way. Anyway, that is a note thrown into the line of discussion.
The main difficulty about the functions of building societies is what they want to do in the other fields. What do they want to do? The Chancellor's foreword is almost unexceptionable, except that I regard the words,so that they can develop in other fields",as open to a question mark. It is their traditional role that is the important one. Development in other fields needs careful watching, because, believe me, there is nothing like the ambitions of the financial expert and the tycoon of financial power. He wants a wider area of activity. I do not blame him. He may be able to render better services as a result, but that will depend on what services he proposes to render which need to be given in that particular form and from that particular source.
Question marks remain, but I think that will have to do for a very short debate on an Unstarred Question. I am sure your Lordships would agree that when the time comes we shall have a jolly good time with building societies.
§ 8.30 p.m.
§ Lord Beaumont of Whitley
My Lords, I, too, should like to thank the noble Earl for having asked his Question tonight and certainly for enabling me to put to the Government a question I want to raise. In addition, this occasion has already provided an extremely interesting debate. I entirely agree with the noble Lord, Lord Ezra, on the points he was making 322 about the necessity of expansion and competition within the Common Market. I also agree, perhaps rather more surprisingly, with the remarks of the noble Lord, Lord Houghton of Sowerby, about the necessity to question the sacrosanctity of this cosy welfare state for the middle class made up from the tax relief on mortgages.
The question I want to ask is much more limited. The Green Paper followed on a report by the Building Societies Association on the future powers and constitution of societies which concentrated on extending the powers of those societies. The Green Paper also deals with that subject, but in many ways it would restrict those powers. When the Green Paper was published it included an issue not previously raised by anybody; it substantially proposed to restrict lending to owner-occupied housing.
It is claimed that such lending is the traditional preserve of building societies, but it is in fact a recent tradition. The original societies—about which the noble Earl, Lord Kinnoull, told us something—were exactly what their name suggests. They were small co-operatives of working men who clubbed together to buy land and build houses for their own occupation. After a while money started to be lent to other people to buy property. It seems that there are no records of the types of property involved, but in the late 19th and early 20th centuries there was a very low level of owner-occupation and most property was bought by landlords to rent out. There are ample examples of building societies in those days providing finance for landlords.
As a result of the State Building Society crash in 1959 legislation was introduced to limit the amount a society could lend to property speculators. This was done by producing a highly complicated formula restricting lending either on high-value mortgages or to limited companies. As is often the case—as is only too often the case—with this kind of "fire brigade" legislation, the formula was both complicated and inexact.
Co-operatives registered as friendly societies under the Friendly Societies Act are limited companies, albeit under different legislation from the normal commercial joint stock company, but loans to friendly societies became restricted as if they were property developers. We now have the irony, incidentally, of the Registrar of Friendly Societies supervising building societies and the statutory restrictions on lending to co-operatives, and also supervising the co-operatives, whose development he is, in his building society capacity, restricting.
In 1964 the Housing Act imposed separate and equally complicated restrictions. The Building Societies Association publishes a Guide to Building Society Finance in which it comments that:advances to housing societies are socially desirable but here, again, a due sense of proportion should be observed".I believe this really means to say that building societies pay lip service to housing associations but really do not want too much of it and so try to limit their development by stealth. Judging by the restrictions hedging such lending, clearly governments of various complexions have taken a similar view.
323 Turning now to the Green Paper, rather than easing such controls, the proposal is to tighten them. There will be a flat limit of 10 per cent. of lending which can be taken up by, among others, co-operatives and housing associations, plus lending to landlords, on agricultural land, on smallholdings, on shops with flats above, on business premises, on boarding houses, and for a whole host of other purposes for which small businessmen and businesswomen might require finance. This pushes small businesses into the hands of finance companies and other higher interest-charging concerns and makes it less likely that a business will become viable. It is a damper on business enterprise in general and on small businesses in particular, and goes totally contrary to the Government's purported policies in this area.
I am a patron of the small Ecology Building Society. I am not certain what a patron is, but I am one. The society was established to lend money for the promotion of a more ecological use of land and buildings. About 90 per cent. of its lending comes within the restricted category named in the Green Paper. For example, the society recently lent on a house in London in order to provide capital for its owner to build up a business selling recycled paper. The property itself is perfectly sound. The society never lends more than 80 per cent. of market valuation. Had the owner simply wanted to live in that house and draw state benefits, the Green Paper would be very happy and would smile on that proposition. But as the purpose is to promote small-scale industry and the saving of resources, the Green Paper frowns on it. To me that seems ridiculous.
The Green Paper itself permits a certain amount of unsecured lending for consumer goods or anything else the borrower may desire. Quite reasonably, there are restrictions on this type of lending, but I can see no prudential reason for restricting loans secured on property. It is true that the text of the Green Paper contains a remarkable statement at paragraph 3.14:Owning land and property is a high risk activity. Some involvement by building societies would be welcome but it needs to be kept within prudent bounds".Admittedly that was written in the context of property development, but can the Minister responsible really have read that sentence without wincing? May I assume that the Minister has not in fact given proper consideration to some of the contents of the Green Paper?
The style of the restrictions on lending, which would involve much form filling and calculation of percentages by organisations which would do better concentrating on lending money to people, suggests a Civil Service approach rather than a ministerial approach, and a bureacratic approach rather more than the approach that is traditional for the Conservative Party. The style of the restrictions on lending indeed suggests that cast of mind.
Can the noble Lord assure me that Ministers are fully aware of the implications of the Green Paper proposals and that they really have applied to them the philosophy of the Conservative Party? In many respects the limitations appear to be restrictive in a way that Conservatives would not normally wish them to be applied. I should particularly like to ask the 324 Minister whether the Government will take another look at this part of the Green Paper and think again before we have legislation thrust upon us.
§ 8.40 p.m.
The Earl of Selkirk
My Lords, I am grateful to my noble friend Lord Kinnoull for raising this Question. I regard this as a general, preliminary discussion of what is quite a considerable subject. Of all the developments which have taken place since the war, none is more impressive than the building societies. They have gathered money—I never quite know why—and they have provided a social service which, in my opinion, is second to none. Unless the people of this country are properly housed, all the rest of the social services are of a minor quality. I therefore think it is of no less importance in what we do next.
The general position, if I may give it in this way, is that after the First World War about 15 per cent. of the people in this country were owner-occupiers. The figure is now over 60 per cent. and the desire for owner-occupation is probably 90 per cent. Nobody has contributed more to that position than the building societies—and without Government expenditure. One may say that there is tax relief on mortgage interest, but it is nevertheless a tremendous achievement which must be recognised.
The Government have put forward proposals for extending the powers of building societies. I think that they are probably correct to do so. At present the building societies have at their disposal about £100 billion and I can think of nothing better than that this money should be used for the reorganisation and improvement of the centres of our cities. There is no greater social service than can be implied by that. The question is: how are we to do it? The Government have agreed on legislation. The first question I put to the Minister is: can he give an undertaking that legislation will be produced next Session? That is what we want. We are only having a preliminary discussion now, but this is a matter of great importance.
I shall mention only one or two points which I think are vitally important. First, I believe that building societies must have the right to own land. That is essential. From that proceeds the possibility of renting property. The greatest problem of our present housing position is the shortage of rented property. Whether one can make special provision to enable people to be able to occupy property, I do not know; but that is the first thing that is required—the power to occupy property.
Secondly—I am not certain whether this applies—I should like to encourage the restoration of "unfortunate" property in the cities. Most of the building societies' work is done in helping people to buy their property, but there is tremendous work to be done. To a great extent it is done by the housing associations. I refer to the restoration of property. The state of the inner sites of many of our greatest cities is a disgrace and the building societies are the main organisations which can improve the position. I hope that the building societies will receive additional powers which will enable them to do essentially the work which they started; started from the ground upwards, not from the top, and have done for over 200 years. Restoration of property is one of the essential 325 things where at the moment the societies are not doing quite enough. Many properties could, with advantage, be considerably restored.
I am glad that the Government have emphasised mutuality. Mutuality is very acceptable by both sides of the House. It has disadvantages—perhaps not having the facility which joint stock companies have—but I believe it gives great confidence. To be quite frank, building societies are not greatly inhibited by the element of mutuality, and I can see what it can do.
There is one aspect I want to mention and which the noble Lord, Lord Ezra, referred to; that is, that greater consideration should be given to overseas. People think that we are collecting money in this country and paying it into France. That is complete nonsense. What one would do, and all one would do, is put down seed money to start an organisation, collect the money from overseas and then make them benefit from the organisation which we have. Let us be frank about this. In the field of house building no country has invented a better system than the building society system. There are only a few countries which have it—Australia, New Zealand and South Africa—and they have been very successful. If we can persuade countries in Europe to do the same it will be an enormous advantage. It will not be a debit on our country. As the noble Lord, Lord Ezra, said; it will probably be an invisible export, though I cannot say exactly how it will work out. Our system has been developed with no Government assistance. It is not a Government matter. It has arisen from the soil and I believe that it could be greatly developed.
We have a great opportunity of formulating a new Act of Parliament which will cover this development. I believe it is of the utmost importance. I was particularly interested in what the noble Lord, Lord Houghton, said. He is intensely interesting, and he is very critical of building societies. He makes all his remarks especially interesting because he knows so much about the subject. I hope, first, that the Government will tell us that we will have a Bill; secondly, that they will give an assurance that they will give some consideration to adventures into Europe; and, thirdly, that they will ensure, above all, that building societies can own land which they can develop and thus offer rented property.
§ 8.47 p.m.
§ Lord Stoddart of Swindon
My Lords, I thank the noble Earl, Lord Kinnoull, for raising this very important and interesting Question. I must say, having heard the debate so far, that I feel a veritable Daniel in a den of building society experts. How I am going to deal with it, I simply do not know. Nevertheless, the discussion has certainly been a very learned one and we have all learnt from each other.
I was particularly interested in the remarks on mortgage interest of my noble friend Lord Houghton of Sowerby. He indulged in a certain amount of criticism of it and rightly said that if anyone dared to raise the matter, it was such a sacred cow that there would be a great outcry. That is true. However, in the light of what he said I have to make it absolutely clear 326 that so far as the Labour Party is concerned it believes that tax relief on mortgage interest should be continued; indeed, it will be continued.
Building societies are big business. Their total assets amount to about £86 billion. It is certainly not a declining industry, since in 1984 the building societies attracted more new savings and lent more money than ever before. There are over 25 million savers depositing over £7,000 million a year. The building societies attracted 50 per cent. of all savings in 1983. Indeed, as the noble Earl pointed out, they remain the most popular source of mortgages and they lend well over £11 billion a year. When the high street banks went into the house mortgage market they made no serious impact on the pre-eminent position of the building societies.
Clearly the building societies are not only very important financial institutions performing a vital social role in housing; they are also used and trusted, again as the noble Earl pointed out, by a large proportion of the population. It is true that since the breaking of the cartel they have become more aggressive in competing for the nation's savings. That competition has been heightened since the banks are now making their interest rates more attractive to the individual saver.
The problem is that the savings ratio has fallen dramatically from 12.3 per cent. of income in 1982 to 8.5 per cent. in 1983. Competition from a greater number of institutions for a falling proportion of savings has made that market all the keener.
For lenders that is good news, though the multiplicity of interest rates on offer is becoming quite bewildering, with savers being wooed by an extra 0.2 per cent. here and immediate repayment without loss of interest there. I watch that market myself, as no doubt do all noble Lords and others. For borrowers, on the other hand, the news is not so good. The likely long-term trend under those circumstances is for mortgage interest rates to be rather higher than they would be but for the new competitive era. I think we have to understand that.
It is not of course that I hold building societies responsible for high interest rates per se; I do not. The blame lies fairly and squarely with the Government and their doctrinaire approach to economic and financial management. But clearly the building societies are not content with their traditional role. They want to add to that role by undertaking new services and getting hold of a bigger slice of the financial market.
While we in the Labour Party believe that certain services would be complementary to those already provided by building societies, there are other activities in which they wish to engage about which we have serious reservations, and I must make that clear. There could be little opposition to the building societies providing conveyancing services with proper safeguards for borrowers, nor to an extension of their surveying service, and nor would there be any real objections to societies providing a simple cheque service to their depositors. Undoubtedly such a service is wanted by building society customers and would be convenient both to them and to the societies.
327 The question of whether or not estate agency services would be appropriate needs careful thought. There could be a conflict between the competing interests of the buyer and the seller; that could, indeed, arise. Although that might be overcome by hiving off such services and managing them completely independently of mainstream building society activities, one wonders what advantage there would be under such circumstances and how such a service would differ from that given by existing estate agents.
But those are minor, though important, matters. Our reservations arise from the proposals to allow societies to hold a proportion of their assets in unsecured loans, indulging in hire purchase finance, entering into insurance broking and underwriting and the ownership of land and property. Those are our reservations and it is about those things that we are rather worried.
It seems to us that there remains at present plenty for the building societies to do in the promotion of house ownership and the provision of a safe haven for personal savings. If the societies entered into a multiplicity of specialist activities, that could well affect their traditional role to the disadvanage of potential house owners and savers.
For example, the desire of the building societies, or at least the large building societies—because that is what we are talking about—to turn themselves into banks could be dangerous to their stability and could affect the availability of funds for house purchase. They simply do not have, certainly at this present time, the national and international expertise that the high street banks have. They do not have it and it would take them some while to acquire it, even if it were desirable that they should, and we are not at all sure that they should.
For over 10 years the societies have paid out more than they have received. In recent years the gap between income and expenditure has been bridged only by capital gains made on gilt-edged stock. That is how the gap has been bridged. That is not likely to continue, bearing in mind the new tax arrangements for the sale of gilts. The warning from the Chief Registrar of Friendly Societies that that situation cannot be allowed to continue should be heeded. Their venturing into the unsecured loans business and hire purchase finance is not likely to improve the situation. It would be tragic indeed if we saw at some future time building societies involved in a secondary banking crisis such as that which occurred in 1974. That would do great harm to the building society movement and to the building societies themselves.
It seems to us that insufficient thought has been given to the long-term consequences of building societies becoming banks and the implications for the continuing availability of adequate mortgage finance for home ownership.
§ The Earl of Kinnoull
My Lords, the noble Lord is of course aware that unsecured loans represent only 5 per cent. of the total, as set out in the Green Paper. He is painting a black picture, as if building societies will be irresponsible. But he appreciates that it is only 5 per cent., which is a very small amount.
§ Lord Stoddart of Swindon
Yes, indeed, my Lords. It was not my intention to paint a black picture. It was my intention to present the other side of the coin, and I think it is right that it should be put. Of course I understand that initially only a small proportion of the total would be involved in unsecured finance. But of course that proportion can and would be altered, as suggested in the Green Paper, by a simple statutory instrument and not by a Bill. Therefore that proportion could easily be put up. That is a danger which should be guarded against and about which we should have discussion when a Bill comes forward. But I understand the position as it is expressed in the Green Paper.
With regard to insurance brokerage and underwriting, the societies will again be entering a new and specialised world where large losses can accrue on certain types of insurance. We have quite recently seen that some underwriters have had their fingers burnt. Losses on fire insurance—an area on which presumably the building societies would wish to concentrate—have been reported. One is bound to ask what benefits are likely to accrue to borrowers and depositors from such activities and who would bear the cost of any losses should they occur. At this point in time the insurance business is risky, and I am not at all sure that it would be wise for the building societies to turn their hands to that.
I now turn to the question of ownership by building societies of land and property. I have to say first of all that I am almost touched—not quite, but almost by the Government's desire expressed in the Green Paper that the building societies should enter into the rented sector of housing. Bearing in mind that over the past six years the Government have been positively discouraging, indeed preventing, local authorities from building rented houses for general use, and have substantially reduced the stock of houses in the rented sector through the right-to-buy legislation, they really do have a nerve to come along now and shed crocodile tears about the desirability of the building societies to dabble with rented housing. The Minister must have had his tongue in his cheek when he directed that that section be written.
However, I do not want to be too critical of the Government this evening. On the credit side, the Green Paper points out the risky nature of such operations and the dangers involved in building societies becoming too closely involved with developers and property. The Government say, quite rightly, that some involvement by building societies would be welcome, but it needs to be kept within prudent bounds. We would say "Amen" to that.
There is a way in which the Labour Party believes building societies could safely enter the rented sector. It is through partnership with local authorities, many of which still own housing land which they cannot develop, due to Government restrictions on finance. Such arrangements would be beneficial to the building societies and the local authorities as well as to balanced housing provision. Of course the same or similar arrangements could be made with housing associations and the building societies could very well do a great deal in the promotion of co-operative housing.
329 Finally, I am concerned about the effects of the Green Paper proposals on the small building societies. By small I mean those societies classified in groups D, E and F by the Registrar of Friendly Societies and which account for 148 of the total number of 207 building societies. In other words, 75 per cent. of the total are in the smaller range.
These small societies have assets ranging from £2,675 million to a mere £7 million, compared with the Halifax's £16,782 million and the Abbey National's £14,312 million. It seems to me that the Green Paper is a charter for the big societies and one which will allow them to reorientate their operations towards money making, as mentioned by my noble friend Lord Houghton of Sowerby, partly perhaps at the expense of their social role in housing.
The Times, the Financial Times and the Economist have all run articles expressing the view that the minnows of the Building Societies Association would be unable to operate within such conditions through lack of muscle in the new fields of competition, and it is likely that they will be elbowed aside or swallowed up by the big boys. That has been the comment in responsible newspapers so far.
Thus, yet again the Government seem to be encouraging huge, monopolistic, centralised, bureaucratic structures within the building society movement which can only lead to a less personalised and inferior service to lenders and borrowers alike. In our view it is essential that the small societies should survive and it is imperative that a healthy infrastructure of small societies, with local roots, local loyalties and know-how should be perpetuated. It is encumbent upon the Government to say how they propose to ensure this under their proposals. We simply cannot allow the destruction of the smaller societies, and if this means giving them preferential treatment, particularly in terms of taxation, the Government must find the means of doing so.
While in this short debate it has not been possible to examine in the minutest detail every single facet of the Green Paper proposals, I believe that it has been a useful discussion. We shall all listen to the noble Lord's reply with great interest. We also hope that the real and genuine concerns expressed in your Lordships' House this evening will be taken fully on board by the Government when framing their legislation.
§ 9.5 p.m.
§ Lord Brabazon of Tara
My Lords, I should like to join with other noble Lords in thanking my noble friend for raising this topic tonight. We have heard some interesting, excellent and very well-informed speeches, which have ranged over many different aspects of the subject. The breadth of the debate shows how building societies now touch many corners of our national life. The Government's proposals for new legislation are not merely of narrow concern to the building society movement only; the issues they raise are of considerable importance to many people in many walks of life.
My noble friend has raised this matter at an opportune time. Some six months have passed since 330 the close of the period in which responses to the Green Paper Building Societies: A New Framework were sought. In that time the Government have made good progress in assimilating the views that have been expressed and in working up firm proposals for new legislation. While I am not in a position tonight to deliver final conclusions on that work, it is the Government's intention to make a firm statement in the early summer. The form of this statement has not been settled, but it may be that a full White Paper is unnecessary. However, I can assure my noble friend Lord Kinnoull, my noble friend Lord Selkirk, and the noble Lord, Lord Houghton, that it remains our objective to introduce legislation in the next session of Parliament.
The Green Paper represents one step in a process which has been under way for some time now. As building societies have come to assume a steadily larger place in the financial system and in the high street, so it has become clear that the 19th century legislation governing them is becoming increasingly out of date. This has become clear in several ways.
First, as many noble Lords have pointed out, there is clear evidence that the members of building societies are seeking more than just the traditional service. This is indicated by attitude surveys that have been conducted by the societies and others, and, indeed, by the use that is made of building society investments. For example, gross withdrawals as a proportion of average balances—broadly speaking, a measure of the turnover of money in building society accounts—more than doubled in the 1970s and have continued to increase since. This suggests that people use their building society savings more actively than perhaps they did in the past. The societies have in many cases responded by introducing new services, such as automatic cash dispensers, cheque cards, travellers' cheques, and the like. But they have sometimes had to exercise considerable ingenuity to stay within the confines of the existing legislation. That is a clear signal that it is time to take a fresh look at that legislation.
A second development has been the increasing desire of many larger societies to play a more active role in the provision of new housing, both for sale and for rent. It was only a few years ago that we used to hear allegations about building societies drawing red lines on the map around areas in which, so it was said, they would not lend. I cannot say what foundation there was for those allegations. But it is perhaps significant that we hear no such talk today. In stead, many of the largest societies have gone out of their way to affirm their commitment to extending the growth of home ownership yet further and contributing to the renewal of our inner cities.
Such commitments have been given substance in the willingness of building societies to lend to council tenants buying their own homes, and by the initiatives that some societies have taken in setting up housing associations. The Government have welcomed these developments. But, again, they have sometimes stretched to the limit what is permitted under the existing legislation. Here, too, there is a need to redefine the statutory powers of the societies so as to recognise the role that they are now playing and are capable of playing in the future.
331 A further important point is that the building societies form part of a financial sector which is in itself changing fast. As the Government White Paper, Financial Services in the United Kingdom, made clear earlier this year, fundamental changes are under way. The structure of the Stock Exchange is undergoing radical change. New ways of dealing in securities are growing up. New markets have appeared, from financial futures to Euro-bonds. New ways of marketing life assurance and unit trusts have appeared.
These changes are having a considerable impact on financial institutions generally and on their traditional markets. The building societies are inextricably bound up with the changes that have been taking place. We cannot be sure how the financial services market will evolve in the coming years. But we must ensure that the societies have the flexibility to respond.
These, then, are the principal reasons why new legislation is now necessary. But the Green Paper was also quite clear that we are not in the business of change for its own sake. The building society formula of, on the one hand, providing a safe home for small—and not so small—savers and, on the other, providing people with the finance to buy their own homes, has been a highly successful one. The changes proposed by the Government are very much around the edges. The core of building society business will continue to be in these traditional areas.
This will be given effect by the balance sheet limits proposed for the legislation. The most fundamental of these is that at least 90 per cent. of asset business will have to continue to be first mortgages on residential property. My noble friend Lord Kinnoull raised the question of the definition of what the Green Paper referred to as Class 1 assets. These are the means which are to form 90 per cent. of a society's business. I was glad to hear his welcome for that general proposition. In general they are to be loans to owner occupiers, but, as my noble friend pointed out, that concept requires careful definition. A good many representations have been made on this aspect of the Green Paper suggesting, as did my noble friend, that what was proposed was too rigid. The Government are still considering these matters. I cannot tonight anticipate their conclusions, but I can assure him that these representations are being considered most carefully. The other limits—the 5 per cent. limit on higher risk assets, and limiting liquid assets to one-third of the total and wholesale funds to no more than 20 per cent. of total liabilities—are also important.
The concentration on traditional business will have two effects. First, the societies will continue to be primarily providers of mortgage finance. I am sure that that is what noble Lords and others outside this House would wish. Secondly, it will mean that, although some of the new business will inevitably be rather riskier than traditional mortgage lending, it will be confined to a relatively small proportion of total business. Moreover, not all societies will wish to take on the full range of new powers available to them, although the scope will be there for those which so wish. At the same time, the prudential framework operated for the protection of investors by the Chief Registrar of Friendly Societies will be strengthened 332 and a statutory investor protection scheme will be introduced. Small savers will continue to be able to put their money into building societies with confidence.
In large measure, the Government's proposals have drawn upon those put out earlier by the Building Societies Association. We make no apology for that. It is clearly sensible that, when considering proposals for deregulation, careful heed should be paid to the aspirations of those affected. In some respect, the Government have not given the societies all that they have asked for. In others, we have gone beyond the BSA proposals and introduced new ideas of our own. But, overall, it is a package that has been widely welcomed in the building society movement.
As I said in my opening remarks, the societies cannot now be considered in isolation. The proposals have considerable implications for those who deal with the societies and may in the future find themselves in direct competition with them. The Government were therefore gratified by the very wide spectrum of organisations and individuals to have responded to the Green Paper. These have included the banking, insurance and construction industries, the legal, accountancy and surveying professions, consumer bodies, trade unions, local authorities, and many more. It would be foolish to pretend that every proposal in the Green Paper has found favour in all quarters. Different people naturally hold different views on what it is appropriate for the societies to be taking on.
Many of the detailed proposals will need to be scrutinised with great care. No doubt they will be discussed with considerable interest—perhaps animation in some cases. I hope that before too long your Lordships' House will have an opportunity to consider them in detail, and I look forward to the much longer speech of the noble Lord, Lord Houghton, at that stage. However, I do not detect great dissent from the proposition that the existing building society legislation is badly in need of an overhaul and that societies as a whole are now capable of taking more upon themselves.
Various noble Lords, notably the noble Lord, Lord Ezra, and my noble friend Lord Selkirk, asked about moving into Europe. As the noble Lord, Lord Ezra, pointed out, the Commission has published a draft directive, and a Select Committee of your Lordships' House is currently considering this important matter. Clearly, the Government will wish to see what the committee has to say before reaching final conclusions. However, in evidence to the committee the Government expressed a general welcome for the proposals. To that extent they have gone beyond the initial comments in the Green Paper.
The Government recognise that we are part of a Community where a common market in financial services is growing. The building societies must not be insulated from that process. While a good deal of further work needs to be done on the details, the Government think that the general approach must be a positive one.
My noble friend Lord Kinnoull asked me two specific questions about the registrars, and whether I can give him an indication of the charges and appeal procedures. I have noted what my noble friend said, 333 but I am afraid that at this stage I cannot give him such an indication. The noble Lord, Lord Houghton, suggested that the investors in building societies were being overlooked. I rather thought that the noble Lord, Lord Stoddart, answered that question for me, in that every time one opens a newspaper one sees competing advertising from building societies trying to persuade people to invest.
The noble Lord also mentioned the importance of members of building societies taking an informed interest in their business. The Green Paper suggested the wisdom of looking again at the qualifying shareholdings for voting in elections, and this is still under review. The noble Lord, Lord Beaumont, who I know is associated with the Ecology Building Society, mentioned that subject and the possible widening of the scope of building societies. As I have said, the Green Paper proposes that the primary business of a building society will remain the raising of funds from individual members of a building society for lending on security by mortgage of owner-occupied residential property. In keeping with present practices, 90 per cent. of a society's assets would be loaned on owner-occupied residential property. This has wide support. It is what investors in building societies expect to be done with their money.
Societies will also be permitted to follow a range of related activities, subject to the quantified limits on those involving either the acquisition of assets or incoming liabilities. The noble Lord suggested that my right honourable friend the Chancellor had not given careful consideration to the Green Paper. I can assure the noble Lord that my right honourable friend has, and his endorsement of the Green Paper, as quoted by my noble friend Lord Kinnoull, I should have thought made that quite clear.
The noble Lord, Lord Stoddart, gave us a very interesting exposé of what his party would do in, I hope, the unlikely event of them coming to power. However, I was encouraged that they would continue with mortgage interest relief in, as I say, that unlikely event. I believe that the noble Lord made one mistake which I should like to put right. He suggested that the Green Paper would allow building societies to take part in insurance broking and underwriting. There is no such suggestion in the Green Paper: broking, yes; underwriting, no.
The noble Lord also mentioned the smaller societies. As he is aware, the Green Paper proposes that the assets of building societies should be split into three classes: Class 1, mortgage loans to individual occupiers; Class 2, other forms of secured loan; and Class 3, new types of asset including unsecured loans and equity. We have already discussed the limits to which those classes would be subject. We regard the safety of investors' money as our paramount concern. In considering the range of assets, therefore, the Government have an eye to the management expertise and reserves of a society to enable it to deal with the new business arising from Class 3. Much of this would involve more risk and would therefore need to be covered by a proportionately higher free reserve than hitherto.
Accordingly, the Government proposed in the Green Paper that most Class 3 assets would not be 334 open to the very smallest societies. They suggested a threshold for this of societies with free reserves of less than £3 million. The full powers would be available to societies with total assets accounting for over 95 per cent. of those of the movement. However, I would not like the noble Lord to think that we would in any way wish to see the number of societies decline. It is just that we would wish to restrict these extra activities to the large ones.
The building societies are at the threshold of an exciting new stage in their history. While we cannot expect the transition always to be smooth, I am sure that the ultimate effects on the movement will be beneficial and invigorating. We have had an excellent debate tonight and many points have been raised which the Government will wish to consider carefully as final proposals are formed. It has been invaluable to have these views aired in this way at this time. If I have not responded to all the many interesting points which have been raised, no doubt noble Lords will take comfort from the thought that they will soon have ample opportunity for further discussion on them.
§ Lord Stoddart of Swindon
My Lords, before the noble Lord sits down may I say on the question of underwriting that I do not think I referred specifically to the Green Paper but what the building societies themselves wanted. Indeed, in the proposals from the building societies, at I think (f) in the list, they say:Societies should be permitted to underwrite insurance
§ Lord Brabazon of Tara
My Lords, I am sorry if I got it wrong, but I thought I was responding to what was in the Green Paper; and the Government, in the Green Paper, would wish to restrict them to broking and not underwriting.