§ 5.35 p.m.
§ The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish) rose to move, That the draft order laid before the House on 16th October be approved [17th Report from the Select Committee].863
§ The noble Lord said: My Lords, as your Lordships may be aware, the Government completed their wide-ranging review of the Building Societies Act 1986 in February this year. The review was in two stages. At the end of the first stage, the Government announced three specific measures to extend societies' powers by first, allowing them to make loans to businesses, without the security of a mortgage on land; secondly, allowing them to own general insurance companies writing buildings and contents insurance and mortgage payment protection policies; and, thirdly, increasing from 40 per cent. to 50 per cent. the maximum limit on funds they can raise in the wholesale market.
§ The first of these measures came into force in April this year. The second will be contained in an order under the Building Societies Act, which it is intended will come into force in July next year. The third is one of the measures contained in this order.
§ Many of the findings of the second stage of the review are reflected in a draft Building Societies Bill, which is to be published for consultation early next year, with the aim of introducing new legislation during the life of this Parliament.
§ The Government are keen to promote economic growth, widen competition and enhance the future for building societies, by removing rules and regulations which place unnecessary burdens on them. The Deregulation and Contracting Out Act 1994 contained a number of useful amendments to building society legislation, allowing societies to issue deferred shares at a premium; to lend on security of land owned by a third party; and to participate in syndicated lending directly, rather than through a subsidiary.
§ This is the second order to be debated in your Lordships' House which has been made under the general order-making powers in the Deregulation and Contracting Out Act 1994. It represents a significant improvement in our ability to bring forward speedy legislation to ease the regulatory burdens on business.
§ The order has been comprehensively examined since it was first laid in draft form before both Houses of Parliament in May. The scrutiny committees examined the proposals most carefully and the Deregulation Committee in another place took evidence from government officials. We owe to the Deregulation Committee the amendment to Article 5(2)(a), which makes it clear that the day referred to in that article is the one on which Article 5 of the order comes into force and not the day on which the rest of the order does. Your Lordships will see that Article 5(2)(a) of the draft order has been amended accordingly. Both the Deregulation Committee and your Lordships' own Delegated Powers Scrutiny Committee have since reported that they are now content with the order and made no further proposals for amendment.
§ Turning to the detail, Article 3 will remove the restriction on building societies acquiring and holding premises outside the United Kingdom for the purpose of the business of a subsidiary or other associated body.
§ Article 4 will increase from 40 per cent. to 50 per cent. the maximum limit on a building society's non-retail funds and deposits. It will also give building 864 societies the power to exclude certain liabilities such as permanent interest bearing shares, which may be aggregated with reserves for capital adequacy purposes, from the calculation of this limit.
§ Article 5 will remove the statutory obligation on building societies to meet the liabilities of their subsidiaries and certain other associated bodies incurred on or after the date on which the article comes into force; it does not affect those relating to obligations entered into before that date.
§ Article 6 will remove the current requirement for the auditor's report to be read before the annual general meeting of a building society.
§ Article 7 will remove the duty on the seller of land mortgaged to a building society to send the particulars of the sale of a mortgaged property to the mortgagor, where it has reason to believe that he will not receive it. If the mortgagor has left a new address, there will be no problem. But if he has not and the society knows that he no longer lives at the address of the property it has just sold, there is no point in sending a letter.
§ All of those proposals are sensible in themselves and together they add up to a worthwhile package of measures which will enhance the efficiency with which societies can go about their business. I commend them to your Lordships. I beg to move.
§ Moved, That the draft order laid before the House on 16th October be approved[17th Report from the Select Committee]. —(Lord Mackay of Ardbrecknish.)
§ 5.45 p.m.
§ Viscount Chandos
My Lords, I welcome the introduction of this order by the Minister. These are modest measures to amend and update the 1986 Building Societies Act, an Act which your Lordships may conclude has been generally successful. In the past decade building societies have been allowed to adapt, modernise and compete in the fast-moving retail. financial services industry of the time. But we have successfully avoided any replication of the disasters that occurred in the United States savings and loans industry in the previous period. Your Lordships may be interested to know that the costs borne by the US Government of bailing out the savings and loans industry exceeded, at least in nominal terms, the cost of fighting the Vietnam war.
There is widespread popular support for building societies from people as both depositors and members. Even after the Abbey National converted to a PLC and became an authorised bank, it was careful not to include the dreaded word "bank" in its name for fear of driving away potential customers.
There is particular support for building societies from these Benches, first, because of the diversity of the status of the business provided by a mutual society. Corporate status has much to recommend it, but it is not the only status that can lead to the efficient management of business. It is worth noting that mutuality for a building society is not necessarily as easy to justify in terms of the benefits provided to members as is true in the case of life assurance societies where the long-term 865 nature of the contract that applies between the company and the policy holder or member of that society more easily benefits from the mutual status and the absence of third party capital. To protect the mutual status of building societies therefore may require specific effort. But ownership by the customers for the customers is a principle to which these Benches adhere particularly strongly and one that is supported by the country at large.
Almost the most important benefit in the building societies industry at the moment is the great regional strength that exists among societies. Unlike so much of the rest of the financial services industry, which is concentrated first and foremost in London and then to a considerable but lesser extent in Edinburgh, the building societies industry has enormous strength, particularly in the North East. Therefore, while we support in principle the continuation of mutual status, we are in no way opposed to change in the light of the rapid changes that we see in the retail financial services industry.
Building societies must be allowed to change and they should then take advantage of deregulation. A degree of consolidation among societies is necessary and desirable to create institutions of a size able to compete effectively with banks and other corporate entities. The paramount objective that we would seek in any new measures to regulate or deregulate the building societies industry would be, first, the fostering and promotion of competition and, secondly, the maintenance and enhancement of the regional base of the industry.
If we test the changes proposed against those objectives, the most important measure is that contained in Article 4, which would permit the wholesale funding that may be undertaken by building societies to increase from 40 per cent. to 50 per cent. and the exclusion of capital instruments such as permanent interest-bearing shares from the calculations. The creation of PIBS was crucial in allowing the maintenance of mutuality in many cases as a source of third party capital to allow societies to maintain their growth without conversion to public limited company status.
The second most important change is that contained within Article 5; that is, the repeal of Section 22 of the 1986 Act to create a level playing field between the building societies and the banks that have corporate status to allow the subsidiaries of the building societies to stand on their own feet. It is worth bearing in mind in this case that there would remain tight controls over the type of business that may be undertaken by those subsidiaries. At the same time there would remain the strong moral obligation to support those subsidiaries that apply to companies, even if there was no legal obligation to support them.
The other issues are even less controversial. The ownership of land overseas is a reasonable step to allow building societies, to the extent that they wish, to develop business outside the UK. The article which allows the auditor's report not to be read at the annual general meeting reconciles the practice for building 866 societies with those applying to limited companies under the 1989 Companies Act. While that is a sensible development in formal terms, one hopes that it in no way reduces the concentration of the boards of building societies or their members on the rigorous auditing of the societies' activities.
Finally, while the requirement to notify mortgagors of the sale of land may give cause for some concern that it may disadvantage the consumer, I believe that the Building Societies Commission will take care to ensure that consumers are adequately protected.
This modest measure has the support of the Opposition Benches and we commend the order to the House.
§ Lord Harris of Greenwich
My Lords, the noble Viscount, Lord Chandos, has said that this is a modest measure. Indeed it is. It is also a desirable measure. It has been examined by the Deregulation Committee of the House of Commons and by the Delegated Powers Scrutiny Committee of this House. They have seen no objection to it. That being so, it has our blessing.
§ Lord Mackay of Ardbrecknish
My Lords, I am grateful to both noble Lords for their welcome to this measure. Modest though it may be, it is also important. Perhaps I may welcome the noble Viscount once again to the Front Bench. I am not sure that we are going to make a habit of meeting across the Table almost on a weekly basis—I suspect that we may be. We perhaps did not agree last week, but I am delighted that we are agreeing this week.
The most important point is one which the noble Viscount made. These measures—or at least some of them—help to ensure that the building societies will not be placed at a disadvantage when competing with the banks. Building societies have undoubtedly performed a major role so far as concerns customers by, for example, being much more competitive in their opening hours and therefore allowing their customers to get at them much better than the banks at least used to do, although I think the banks are changing their policy in response to the competitive pressures from the building societies.
The noble Viscount said that Article 5 in particular deals with the question of a level playing field between the two. Currently banks do not have an obligation to stand behind associated bodies. This article will put building societies in the same position although, as he rightly also pointed out, in practice the good name which the bank or building society may wish to retain will probably mean that they will wish to stand behind subsidiaries, at least in most cases.
There is also tight control about what type of subsidiaries they can have. As the noble Viscount pointed out, although Article 4 extends from 40 per cent. to 50 per cent. the amount of capital that can come from elsewhere, it ensures that at least 50 per cent. of the capital continues to come from the members. That is an important aspect of building societies. I am grateful to both noble Lords for their welcome to the order. I commend the Motion to the House.
§ On Question, Motion agreed to.