Building Society PLCs: Deposit Protection (Hansard, 5 May 1988)

§ The Parliamentary Under-Secretary of State, Department of Transport (Lord Brabazon of Tara)
My Lords, a building society which converts into a plc will become an authorised institution under the Banking Act. As such, it will be subject to prudential supervision by the Bank of England and deposits in it will be protected under the statutory deposit protection scheme.

§ Lord Constantine of Stanmore
My Lords, I thank my noble friend for that helpful Answer. I am sure that he is aware of the concern of many depositors in mutual fund building societies that there will be a transition period when the societies become plcs which may render them vulnerable to management maladjustment or future government policies. Can he give depositors some firm assurance that their interests will be adequately protected when such transitions occur?

§ Lord Brabazon of Tara
My Lords, I believe that I can. As I said in my original Answer, the new companies will be regulated by the Bank of England. It is for members of buildings societies to decide whether they wish to allow their society to be converted.

§ The Earl of Kinnoull
My Lords, perhaps the noble Lord can remind us what percentage of members will have to vote in favour of such an arrangement.

§ Lord Brabazon of Tara
My Lords, the voting turnout level required for conversion to a successor company is 20 per cent. of the members. Of that 20 per cent., three-quarters of depositing members must vote in favour of the conversion. So far as borrowers are concerned, a simple majority of borrowers must vote in favour.

Lord Bruce of Donington
My Lords, will the noble Lord give some indication of what protection there will be for depositors who are also shareholders in buildings societies? Is there not a danger that under certain circumstances shareholdings will be devalued by a subsequent public issue of which the shareholders may not approve?

§ Lord Brabazon of Tara
My Lords, as I said, the shareholders will have a say whether the society 678 should convert in the first place. Following conversion, the shareholders and depositors will be subject to the Banking Act protection scheme.

§ The Earl of Swinton
My Lords, does my noble friend agree, especially in the light of the figures which he has given us, that it will be very difficult for a mutual fund building society to get the necessary number of votes from its shareholders to convert to a plc? Does he also agree that regardless of whether such a society stays as a mutual fund building society or becomes a plc, the greatest safeguard for investors in the institution will be sound financial management from the top?

§ Lord Brabazon of Tara
My Lords, my noble friend is absolutely right in saying that financial management at the top is of critical importance. As to whether it will be difficult for a building society to become a plc, we agreed the provisions during the passage of the Act. At that time we felt that that was the correct way to deal with the matter.

§ Lord Williams of Elvel
My Lords, what will happen if a mutual fund building society decides to become a plc through the appropriate majority and is not then recognised by the Bank of England under the Banking Act?

§ Lord Brabazon of Tara
My Lords, I believe that a building society will have to make certain that it will be recognised by the Bank of England as a bank before it goes down that path.

§ Lord Jacques
My Lords, is the Minister aware that many people who have given long service to building societies are disturbed by the developments of recent years because they believe that the success of building societies has been due to their specialisation?

§ Lord Brabazon of Tara
My Lords, that may be the case. However, the Government decided during the passage of the Act that it was time to allow building societies to take part in the provision of various financial services other than those which are their traditional activities. At the moment they are still confined in great part to the provision of home loans.

Lord Bruce of Donington
My Lords, will the noble Lord reconsider his earlier reply? Is it not the case that a building society might decide to become a plc without having any intention whatever of bringing itself within the Banking Act? In those circumstances some subsequent public issue would not be prohibited.

§ Lord Brabazon of Tara
My Lords, if a plc is to take part in banking activities, it must be authorised by the Bank of England.

§ Lord Jenkins of Hillhead
My Lords, is it not the case that recent developments have put building societies in a very difficult position? As the noble Lord indicated, becoming a plc means going through a difficult process which may well not succeed. If building societies do not become plcs, they will not be in the right position vis-á-vis the banks and will lose an increasing share of the mortgage market, as has been the case recently.

§ Lord Brabazon of Tara
My Lords, the Building Societies Act allows building societies to engage in activities in which they traditionally were not allowed to engage, as well as attracting more wholesale deposits. Even if they do not become plcs, they will still have more flexibility than was previously the case.