§ 5.50 p.m.
§ The Earl of Strathmore and Kinghorne rose to move, That the draft order laid before the House on 3rd June be approved [21st Report from the Joint Committee].
§ The noble Earl said: My Lords, the purpose of the order is to continue for a further five years the power of the Building Societies Commission to require a building society to apply for renewal of its 745 authorisation. That power, provided by Section 41 of the Building Societies Act 1986, was originally intended as part of the transitional arrangements relating to the new prudential regime introduced by that Act; hence its initial limitation to a five-year period after the passage of the Act. However, it has proved to be a useful and flexible power with an application beyond the transitional period and is well worth maintaining as part of the commission's regulatory armoury.
§ Building societies are unable to raise money from members or to accept deposits unless authorised to do so by the Building Societies Commission under Section 9 of the Act. At the time the Act came into force, existing building societies were given deemed authorisation as it was not considered worthwhile to require all societies to apply for authorisation. However, the Section 41 power provides an important safeguard. If the commission has reason to believe that a building society's business is or may be conducted in a way that may not adequately protect the investments of shareholders and depositors, the commission can direct the society to apply to it for renewal of authorisation.
§ The type of situation in which the Section 41 power is useful and necessary is where, over a period of time, the commission has a number of grounds for doubts about the adequacy of the way in which the building society conducts its business and where the society does not respond sufficiently to the normal persuasion process of supervision. The state of a society may not be such as to justify the imposition of conditions on the society's authorisation by the commission, but the commission may still have underlying misgivings about the way in which the society is run. This is an effective but nevertheless entirely non-contentious piece of legislation. I beg to move.
§ Moved, That the draft order laid before the House on 3rd June be approved [21st Report from the Joint Committee].—(The Earl of Strathmore and Kinghorne).
§ Lord Graham of Edmonton
My Lords, we on this side of the House approved the original legislation and the reason for bringing it forward, so we certainly raise no objection to its extension. However, perhaps the Minister will take the opportunity to acquaint the House with the extent to which the powers in the Bill have been called into use. He said that adequate protection was provided, and he referred to the requirement for and the value of this piece of legislation in regard to dealing with those building societies which do not take the action necessary to allay the commission's underlying doubts. He must have some statistics regarding the extent to which the power in the Bill has been used. There must be a body of evidence collected over the past five years which shows that it is needed, that it has been effective and that, as a consequence, an extension is required. I understand that the Minister may not be able to provide that information; but I should be surprised if he cannot do so as it is an obvious question and he must be well briefed on it.
§ The Earl of Strathmore and Kinghorne
My Lords, I thank the noble Lord for his comments. The power may be used only once within a period of five years for any particular building society. The society has up to six months to put its house in order, if that is necessary, before it seeks to satisfy the commission that it is fit to continue to be authorised. The procedure allows the commission to reach a decision on the basis of a more fundamental and wider review of the prudential position of the society than is possible in the normal course of supervision.
The Section 41 power has so far been used only once, but it is of greater value than that would suggest. As with other prudential powers, the society would often prefer to do what is necessary without having formal legal procedures invoked. In conclusion, the Section 41 power is a useful part of the commission's range of prudential controls and one which merits continuance for a further five years.
§ Lord Graham of Edmonton
My Lords, I am grateful for the Minister having come armed with the answer. I agree that the fact that the power has been used only once is a good indication of its deterrent effect and that it encourages building societies to take the necessary steps to avoid its use.
§ On Question, Motion agreed to.