§ 7.5 p.m.
§ Lord Beaverbrook rose to move, That the draft order laid before the House on 19th May be approved [27th Report from the Joint Committee].
§ The noble Lord said: My Lords, with leave, and for the convenience of the House, I shall also speak to the draft Building Societies (Commercial Assets and Services) Order 1988.
§ The purpose of these orders is to restructure Schedule 8 to the Building Societies Act 1986, and extend the powers which that schedule gives societies to offer financial and housing related services. This follows an extensive review of these powers which the Economic Secretary to the Treasury announced in October.
§ The Building Societies Act 1986 was intended to allow societies to extend the range of services they offer while remaining mutual institutions, predominantly engaged in their traditional business of mortgage lending financed from retail savings. The Act did not seek to induce societies to abandon their traditional business and structure, but the Government believed that societies should be free to undertake activities which complement their mainstream business, and to provide the wider range of personal financial services which customers now expect.
§ The Act took effect in January last year, but it was clear by the autumn that societies were having considerable difficulty operating within the powers in Schedule 8 as drafted. The schedule was intended to give a precise list of the new services which societies could undertake, but in practice most societies wanted to use the powers in slightly different ways from that envisaged in the schedule, and they were constantly frustrated by legal technicalities. Market conditions were also changing very rapidly, and societies had begun to make representations for extensions to their powers in a number of areas.
§ The review was undertaken by the Treasury and the Building Societies Commission, in close consultation with the Building Societies Association. The main policy conclusions were announced in February, and the orders before your Lordships have been the subject of further extensive consultation with the societies.
§ Two other orders are relevant and will be required to implement the conclusions of the review. These are the Building Societies (Designation of Qualifying Bodies) Order and the Building Societies (Limits on Lending) Order. These are negative orders and cannot be made until the orders we are debating tonight are approved. But provisional drafts were placed in the Library of the House last month, along with a summary note of the provisions of all four orders, so that the package could be seen as a whole. 1654 All four orders will take effect together if they are approved by your Lordships at the end of August.
§ The orders will do two things. First, they will turn Schedule 8 inside out, so that instead of banning everything except narrowly specified powers, as at present, it will set out several broadly defined powers and list only those activities which are specifically prohibited. That, in itself, will provide societies with a more sensible and flexible regulatory environment in which to operate.
§ The orders will also, however, provide a substantial widening of societies' powers to provide financial and housing-related services. The Act was intended to provide scope for a gradual extension of the range of powers available to societies. However, it is clear from societies' first year's experience with the Act that this gradual step-by-step process is not appropriate. Although each individual society will probably only want to diversify into a small number of new areas, different societies will want to exercise different powers, and societies need to know the broad scope of their powers for some years ahead in order to make sensible long-term commercial plans.
§ The Government have concluded, therefore, that the right approach is to provide for a substantial widening of powers now, while at the same time limiting the speed with which any individual society can diversify into new areas. This restraint will be exercised, first, through supervision of business plans by the Building Societies Commission, and, secondly, by only easing gradually, over five years, the overall limits on societies' holdings of non-traditional assets. Societies will only be able to exploit the new powers at a prudent pace. They will, however, have a clear basis for their forward planning.
§ Turning to the orders, the main one—the draft Commercial Assets and Services Order—will replace Schedule 8 to the Act with a completely new Schedule 8 which will provide the following six broad service powers: banking services; investment services; insurance services; trusteeship; executorship; and land services.
§ A society will be able to provide any service within those general areas unless it is specifically precluded, or restricted, by other parts of the schedule. The main limitation will be that societies will continue to provide services primarily to the personal sector, and not to companies. Societies with assets of less than £100 million will be prohibited from engaging directly in some of the more risky activities. But subject to that, and to certain other limited restrictions, societies will be able to provide the full range of personal banking services which customers now expect; to undertake fund management, including management of unit trusts generally, rather than just for the provision of pensions as at present; to own or take an equity stake in a life assurance company; to take a limited stake in a general insurance company; and to own or take an equity stake in a stockbroker.
§ In the course of providing these new services, a society may need to hold new forms of commercial assets or to invest in, or support, new subsidiaries and associated bodies. Provision for the new assets is included in the commercial assets and services order. The order will, among other things, allow societies to acquire mortgage backed securities and similar 1655 instruments and provide temporary bridging finance for house purchase far more easily than at present. The new subsidiaries and associates will be provided for in the proposed negative designation of qualifying bodies order, which will also consolidate several previous orders made by the Building Societies Commission, to ensure conformity with the new powers.
§ The draft limits on the commercial assets order, which is the first affirmative order before your Lordships tonight, will provide for a gradual relaxation in the limits on non-traditional assets which constrain the rate at which societies can diversify. Although the limits will remain at their present level until January 1990, the order provides for automatic increases thereafter to the full extent permissible within the primary legislation by 1993. Few societies are close to the limits at present. But the order will give societies a clear, firm basis for planning any expansion of their services for the future. Finally, the negative limits on the lending order will raise the limit on a society's unsecured lending to individuals from £5,000 to £10,000.
§ There is one further point which will be of interest to your Lordships. The orders will considerably widen the scope of building societies' activities, and it is therefore appropriate to review the scope of the building societies ombudsman scheme. The Building Societies Commission will be consulting interested parties on this shortly.
§ These proposals will create a more sensible framework for societies and provide them with a clear basis for their future planning. They will give societies the freedom to develop and to compete across a wide range of financial services. And, most important, they will enable societies to provide a better, more flexible service to their customers, which is all that most societies wish to be able to do. I therefore commend the orders to the House and beg to move that the first order standing in my name be approved.
§ Moved, that the draft order laid before the House on 19th May be approved [27th Report from the Joint Committee].—(Lord Beaverbrook.)
§ 7.15 p.m.
Lord Bruce of Donington
My Lords, the House will be indebted to the noble Lord for having, as usual, presented the orders in a concise and extremely clear way. I am a little disappointed because it is necessary, as your Lordships will appreciate, for those who speak from these Benches to go through the orders with some thoroughness. This necessitates those of us who do not have a Civil Service machine behind us going through all the orders that are being amended and making detailed references to the Act itself. I am bound to say that it is a process that I found somewhat tortuous.
I am very glad that the present order has been laid. It finally clears up—at least I hope that it finally clears up—the construction of Schedule 8, because we had four orders in the course of last year dealing with the provision of services. We had one on 5th February, No. 172; we had another one on 19th October, No. 1848; we had a further one on 16th November, No. 1976, and a further one on 19th November, No. 2019. In addition to that, we 1656 had No. 1670 dealing with the banking institutions, and No. 1975 of 18th November dealing with limited credit facilities. All these have had to be traced right the way through to the Act itself. After a somewhat tortuous process, I am sorry to announce to the noble Lord that I cannot find very much to oppose in them, which for me sitting on this side of the House is rather unusual.
However, I have a few remarks to make upon the general purpose of the orders themselves. It is wise to give building societies broad, general parameters within which they can operate, making specific exceptions and prohibitions, rather than the other way round as in the original Act, approaching the matter from a negative standpoint. This, I agree, is a much better way of going about it.
Speaking generally on the extension of the provision of services which this order provides—and I hope that the noble Lord will be able to give us the assurance that we shall not have another one, at any rate after a short period of time, because we have now had enough and hope we have got it reasonably finalised, with the agreement of the building societies and the Building Societies Commission—we on this side of the House are in agreement with the extension of the provision of financial services. We approve that within the context of the banking situation as a whole.
Your Lordships will perhaps forgive me for reminding the House—and some of your Lordships may themselves remember it—of the time when one went along to a bank for an advance of money and, as long as one could prove conclusively that one did not need it, the bank would, in effect, grant a loan very willingly.
Times changed the moment the explosion of the OPEC countries happened, when masses of funds were made available to the banks, which thereupon found themselves with the embarrassing necessity, having accepted the deposits, of relending them. So we had a new picture where banks, which had hitherto been operating under the kind of restriction which I mentioned and the kind of attitude which I experienced personally, began to fall over themselves in competing to lend. This was a complete revolution in the banking industry. I do not want to stray too far from the orders, but your Lordships will be familiar with the way in which banks fell over themselves and competed with one another in South America and other places in order to lend money under the most dubious excuses so as to make a profit on the money that had already been deposited with them by the OPEC countries.
But I do not wish to open old wounds. Suffice it to say that the banks have taken advantage of this position, and we now have the situation where, for example, if one looks at a television set, one finds that one can get free holidays for a week or a weekend by undertaking to borrow money from a bank. One finds all kinds of television features in which the attractiveness of borrowing from banks is shown.
It is quite right that the banks should be subjected to a degree of competition by the building societies, which traditionally have a much closer contact with the people than some of the bankers operating within their old context. Indeed, on the basis of their reputation and their rather closer assocation 1657 individually with their investors and their borrowers, the building societies ought to be in a position to offer services.
Of course they suffered a minor setback. Your Lordships will be familiar with the privatisation of exremely large undertakings, when people withdrew their money from building societies in order to make investments, largely for stagging purposes, in the newly-privatised industries. I am very happy to observe that after the initial euphoria most ex-building society depositors decided to cash in and returned their deposits to the building societies. This is most agreeable and, as long as the Building Societies Commission fulfils adequately the functions that are given to it in the earlier part of the Building Societies Act 1986, there is an adequate safeguard for both the depositors and the borrowers.
In the existing provisions of service, I think that it is sensible that a power should be taken to provide bridging finance. There can be no doubt that hitherto one of the difficulties that has assailed people in the process of disposing of a house and buying another, or finding themselves as part of a chain of people who have to dispose of their houses before they are able to buy others, is the provision of bridging finance to cover the gap that inevitably takes place between the completion of both sets of contracts. I and my colleagues are all in favour of the building societies operating in that field. There seems to be no valid reason, if only in the sense of enlarging the competitive area, why building societies should not operate within the wider definition of services incorporated in the current order.
I am little troubled, as indeed your Lordships may be, about the provision of unsecured loans of up to £10,000 subject to suitable safeguards. Consumer credit at present is growing at an alarming pace. The extra billions that are being added to the current consumer credit bill sooner or later have to be repaid. I sincerely hope that circumstances will continue so that people are not subjected to undue stress in the repayment of their obligations. However, one remains a little anxious—particularly if one has been brought up in the tradition of neither a borrower nor a lender be—about the explosion of credit that has taken place in the country over the past few years on residential and commercial properties, with prices soaring as they are at present. I do not want to sound unduly pessimistic in this matter, but it seems to me that we have to prepare ourselves for some time when this inflated bubble may be burst. One hopes not; and one hopes that when that time comes, as in my view it will inevitably come, the building societies and indeed the banks will be able to deal adequately with that situation.
The only other anxiety that I have lies in the period that commences after five years when building societies will be able to undertake what is euphemistically termed "conversion", which means that they will be able to become plcs. I am not sure that the interest of the borrowers or the depositors will he served unless the Building Societies Commission, in accordance with its general powers, keeps a very close eye on this under Section 1 of the Building Societies Act to safeguard the interests of both the borrowers and the lenders.
I am well aware that on conversion to a plc it will be forbidden for any outside institution to take more 1658 than a 15 per cent. interest in the converted plc. This does not reassure me very much. With the new powers given to the building societies under the orders, which, if I may say so, are very detailed and have been very well drafted, I cannot see why it should be necessary for there to be conversion into a plc of any building society, which is based very largely historically and indeed at present upon a degree of mutuality and upon the individual interests of building societies. I am well aware that the Government take a completely neutral attitude in the matter: they apparently do not mind whether there is conversion or not.
Experience of flotation, of conversion into a plc, in these circumstances has not always been reassuring. One hopes that the Building Societies Commission will be very vigilant if it gives its consent—if indeed it is empowered to give its consent—to operations of this kind. At present the building societies as such are there for the joint interests of their depositors and their borrowers. The exertion of control by outside shareholders on flotation, comprising perhaps some of the big City institutions making a profit on top of that, may inhibit the operation of the building societies as we know them.
These are misgivings only. I voice them because I think it is proper they should be voiced. However, in general, and in view of the clear and lucid explanation given by the Minister in support of the Motion to adopt the orders, we on this side see no reason to oppose them; indeed, we agree with the purpose and texts in which they are couched.
§ Lord Beaverbrook
My Lords, I am grateful to the noble Lord, Lord Bruce of Donington. I am sorry that he was disappointed when he came to look through the provisions of the orders. All I can say is that I very much hope that I shall be able to disappoint him again in future. He asked for an assurance that this is the last stab at the matter. We do not expect further legislation on this scale for some long time, but the complexity of the orders is because they will operate within the enabling powers of the Act itself.
The noble Lord mentioned the risks by those involved in competitive lending, particularly in overseas loans that have not performed or that have been found to be virtually too risky and perhaps have not been repaid. The Building Societies Act places clear constraints on societies so that they themselves cannot get involved in such areas. Most of their funds must come from retail sources in the form of traditional share accounts, and at least 75 per cent. of the lending must be in first mortgages on owner occupied houses.
The noble Lord mentioned the dangers of sources of credit rising with particular regard to the increase of the unsecured lending limit to individuals from £5,000 to £10,000. The limit has to cover all unsecured lending to an individual, including loans for minor repairs and improvements, furnishings for a new house, loans for a new car and the limit on any credit card issued by the society to its customer. The present limit is felt to be too tight to make operational sense. The Government have therefore agreed that it should be raised. We do not believe that this will mean that societies will start making large unsecured personal loans. They are prevented from doing so. 1659 The Building Societies Commission will continue to ensure that societies have adequate credit assessment and control procedures firmly in place.
The noble Lord expressed some doubts about the prudence of converting from a building society to a plc. This is an area where the rules relating to the procedures that have to be gone through are very carefully set out, and include the number of members of the building society who have to vote, and the number of those who vote who have to be in favour. The Government have no views as to whether they should or should not convert. However, we believe that after they have converted there is no reason why any social purpose should just disappear. After all, social purposes exist in many businesses, not just in mutual funds. It is hoped of course that that would continue.
After conversion, and after a five-year period, the noble Lord asked: what will happen then? That is a matter for the new company's commercial judgment. But we cannot and should not presume that a company would necessarily enter into high-risk areas. Any society which converts will be subject to prudential control by the Bank of England. That does not disappear after five years; it is an ongoing means of control. I am grateful to the noble Lord. I commend the first order standing in my name.
§ On Question, Motion agreed to.