§ 6.9 P.m.
§ Lord Mackay of Ardbrecknish
My Lords, I beg to move that this Bill be now read a second time.
It gives me great pleasure to propose that the Building Societies Bill be read a second time this evening. The Bill has strong support from societies themselves, and from their representative organisation, the Building Societies Association. I am pleased to say, too, that in another place Opposition parties co-operated fully to ensure its successful passage through all its stages on 10th March, and again on Monday of this week.
968 It is vital for the long-term viability and competitiveness of building societies that this measure completes its passage through both Houses before the election. So I am sure that all those who support building societies—and I know that there are many in your Lordships' House who do that actively as well as passively—will wish to facilitate its passage here so that societies can enjoy the benefits which it brings as soon as possible.
As noble Lords will know, the Bill has three objectives. The first is to increase societies' commercial freedom, so that they will be able to compete more effectively in providing a wide range of retail financial services, giving customers more choice. At the moment, societies' boards spend a lot of time examining with their lawyers whether a new service or product which they want to provide falls within their current powers. The new permissive approach that the Bill introduces will make such difficulties unnecessary.
Societies will no longer be in danger of finding themselves unable to participate in new developments in the areas where they operate. For example, the Bill will sweep away the qualified asset holdings regime which places stricter limits on smaller societies. Societies will also be able to conduct, in their own name, a range of commercial activities which at present require them to set up subsidiaries. The scope of a building society's principal purpose will also be extended so that lending to finance rented housing will, in future, be regarded as part of core business.
The second objective of the Bill is to update the prudential supervision powers of the Building Societies Commission, so that the reputation for safety and security that building societies rightly enjoy as the home for the savings of millions of members can be maintained in the new, more permissive regime that will exist in the future. Examples of the commission's new powers include the ability to require societies to restructure their business profile if, for example, considerable growth in one area begins to push it outside even the more generously defined limits in the new Bill. The commission will also be able to direct a society to merge or be taken over in extreme circumstances if that becomes necessary in order to protect savers' funds.
The Bill's third objective is to bring societies even closer to their customers by underlining their mutual identity and making it easy for ordinary members to play a full part in their affairs. Many building society customers appreciate their position as members and the extra relationship that that brings. One of the virtues of mutuality is that members count. They, and they alone, are the people for whom a society is run. But time moves on, and the Bill gives us the chance to identify new ways in which that relationship can be further improved by increasing the availability of information and enhancing members' ability to have a say in what their society does and how it does it. Under the Bill, borrowing members will be given broadly similar rights to investing members in deciding how a society is run. Members will receive a statutory right to call a special general meeting; there will be tiered and, in a number of cases, lower limits on the number of backers required by someone standing for election to the board, and the 969 period when a would-be director may submit a nomination has been extended. Any proposal to expend more than 15 per cent. of a society's own funds on a new business outside its core activity will also need members' approval.
This Bill is urgently needed. It has been the subject of extensive consultation with the industry, consumer groups and other interested parties. The Bill before your Lordships today fully reflects that. I believe that it is a balanced Bill. It leaves with societies and their members decisions about whether or not they want to remain mutuals—but, if they do, it gives them the freedom to extend their operations in new and exciting ways to their benefit and that of their customers. For those societies that have already decided to convert to PLCs, it offers relief from the costly requirements of the priority liquidation distribution right provisions in the 1986 Act and continues to give them five years' protection from takeover unless they choose to give it up either by a vote of 75 per cent. of their shareholders or, if they enter the takeover business themselves, by acquiring another authorised financial institution operating in the United Kingdom.
Building societies have a glorious past. The Bill gives them an assured future. With it, they will be able to carry into the next century those traditions of self-help and mutual support out of which the movement grew in this century. I commend the Bill to your Lordships.
§ Moved, That the Bill be now read a second time.— (Lord Mackay of Ardbrecknish.)
§ 6.14 p.m.
§ Lord Eatwell
My Lords, I should like to thank the noble Lord, Lord Mackay, for introducing the Building Societies Bill and to assure him that from these Benches we welcome the legislation. We regret that the Government did not see fit to introduce such an important measure earlier in the parliamentary Session; for this Bill affects the financial affairs of 17 million building societies members, and it affects the future of the building societies industry as a whole which has, without doubt, been one of the success stories of post-war Britain.
Home ownership has become a fundamental part of British democracy. There can be no doubt at all that it has been the mutual building societies which have played the predominant role in the growth of our property-owning democracy. It is a growth which the Labour Party enthusiastically applauds. I said that the Labour Party regrets that the Bill has appeared so late in the parliamentary Session. It is indeed regrettable that noble Lords will not have an opportunity to give such an important financial measure the careful and detailed scrutiny which it deserves.
Having got that gripe out of the way, perhaps I may emphasise the commitment of the Labour Party to do everything possible to support and strengthen the mutual sector. As organisations owned by both borrowing and depositing members, building societies can provide highly competitive financial services to their members. This Bill gives them the freedom to do just that. The removal of the prescriptive regime of the 1986 Act, and 970 its replacement by a permissive structure (suitably buttressed by the requirements on lending for house purchase, and the requirements on the acquisition of finance and by the regulatory regime, outlined by the Minister) provides a new secure base from which building societies can compete.
I must express some disappointment that the Government have not seen fit to enforce the two-year rule. There is a considerable danger of the building societies' movement being destabilised by speculative flows of capital in search of likely candidates for conversion. It is not good for building societies or for the financial services industry as a whole that that situation should pertain. I would be grateful if the Minister would reassure us that adequate safeguards are in place, and that new speculating members will not overwhelm older members who want their society to remain as a mutual.
The Labour Party enthusiastically supports the building societies' movement. The Labour Party also enthusiastically supports the extension of competition and choice in financial services. For those reasons, we are happy to support the Bill.
§ 6.16 p.m.
§ Lord Kimball
My Lords, one of the first public functions that I ever attended was when my father represented the Loughborough division of Leicestershire in another place. In 1943 I accompanied him to Loughborough for the opening of the first office that the Leicester Permanent Building Society opened outside the City of Leicester. On that occasion I was given one of the first numbered accounts that were available. I should tell noble Lords that it was an account which failed to stand up to the pressures of undergraduate life at Cambridge, and was soon emptied. Therefore, I have no real interest to declare beyond the fact that, as a Leicestershire Peer, I realise what a major player in the financial field the Alliance & Leicester Building Society is now. I also realise what an important and historic role the whole movement has played. I am sure that the Bill will strengthen the movement and will help building societies, as we know them today, to achieve a secure future. In that way, the Bill is helpful. I fully understand the Government's good intentions and the support of the Opposition in that respect.
However, I believe that an amendment to the Bill is necessary but, before discussing its substance, I should like, first, to raise a number of points relating to the legislation. My noble friend the Minister said that the Bill was urgently needed, but it has been lying about for some considerable time. Indeed, there was no reason why it could not have been brought forward at a sensible time so that we had a proper opportunity to look at all its clauses and the schedules attached to it.
In fact, the Bill has been lying about for over 10 years and we have now reached a situation where this important legislation is being rushed through all its stages. I should like to be assured that we will not make the mistakes that were made in the 1986 Act. One might have thought that the priority for all concerned this time would be to see the Bill through and ensure that we get 971 everything right. How are we to know that, when the Bill is being pushed through in this extraordinary manner, or are we about to inflict some more unsatisfactory legislation on the industry? I ask your Lordships to consider this carefully.
In addition there is another great failing in this Bill in that I believe certain aspects of it represent that thoroughly reprehensible principle of retrospective legislation. On Monday night this Bill of 47 clauses and nine schedules—none of which will receive detailed consideration—was pressed through another place. I believe that it is our duty to scrutinise this legislation properly. I do not see how we shall be able to do that today. If this Bill is so important, surely more time could be found for it after the general election. Both sides of the House agree that this is an important Bill. Whoever wins the general election, there is always a slack period from the opening of Parliament until a new government—
§ Lord Kimball
My Lords, there may not be, but I think your Lordships will agree that usually there is a period when people may even introduce mischievous legislation. I hope that after further consideration my noble friend will agree that the sensible thing to do is to withdraw the Bill now and come to an agreement that, after the opening of Parliament, and before other Bills are ready, we should get down to a month's sensible consideration of this Bill in all its aspects.
Shortly my noble friend Lord Brabazon and I will move an important amendment. However, the real reason for asking for this Second Reading debate is that we should realise that there is a certain amount of unhappiness in certain sections of the building society industry as regards this Bill. My noble friend will say that there was massive consultation before the Bill was brought forward. However, despite that, no agreement was reached on the particular points put forward by the Alliance & Leicester Building Society.
With those words of warning, I hope that if other objections are raised my noble friend will seriously consider whether it is right to push on with such haste on a Bill that could well be given proper and due consideration in May.
§ 6.23 p.m.
§ The Earl of Kinnoull
My Lords, in taking part in this Second Reading of the Building Societies Bill I should first declare an interest in that I have the honour to be a director of the Woolwich. I speak of course in a personal capacity and am not putting forward any Woolwich policy. I add that I fully supported its decision to go down the plc route, which recently received overwhelming approval from its members and, I believe, offers an exciting future.
Times have changed dramatically over the past few years in the financial services market. Banks, building societies and insurance companies are all competing as never before to maintain or to gain their market share, 972 largely to the benefit of consumers. Almost every week one sees a new and innovative financial product being launched, and the industry becomes almost as bewildering as the air travel fares jungle if one wishes to fly abroad. One thing appears certain; namely, that the financial services industry will contract in significant numbers in the future through either friendly or hostile mergers or takeovers. Mutual building societies or mutual insurance companies are not immune from that competitive world. One could cite the Scottish Amicable in that regard.
Building societies are valuable targets for banks or financial institutions with their large membership and often considerable spread of branch offices. A great deal of profitable cross-selling can be achieved with new financial products from their large base of members. All of us, I am sure—as we have already heard—have admired the valuable role that mutual building societies have played over the past 150 years not only in providing mortgages for millions of members and helping to increase home ownership, but also in providing a safe haven for their precious savings. It is a special movement and has played a most valuable role in our society. No investing member has ever lost a single penny through investing in a building society. One cannot claim the same for other financial institutions. One might ask why that is. The answer is that if a society runs into difficulties the movement generally will stand behind it and perhaps a large society will take over the problem. The Woolwich has had a proud record of such action in the past. This valuable movement, caught up in a highly competitive and changing market-place, deserves in my view—as my noble friend Lord Kimball said—the most careful parliamentary scrutiny as regards any new framework that is designed for societies to operate in during the next decade.
I regret very much this poor procedure today, just before an election, which reduces this important Bill to being treated like some unattractive horse deal to be whistled through this House in one day. One has to ask what is the urgent rush. My noble friend asked exactly the same question. Why could not both main parties give an undertaking to introduce a Bill giving Parliament a right to scrutinise the new powers?
I appreciate that the provisions of the Bill have been thoroughly discussed, as my noble friend said in his introductory speech. They have been thoroughly discussed within the industry. I pay tribute to the Building Societies Association for the work it has done in that regard. Nevertheless not all opinion is unanimous, as my noble friend said and as those of us who have received briefings from the Alliance & Leicester can see.
I support the general tenor of the Bill. It seeks to modernise the operational envelope within which the mutual building societies can operate in the future. That largely meets the current criticism of the limitations of the 1986 Act and will no doubt help societies to compete in tough financial markets. I have no quarrel with that. My quarrel concerns the future, and the danger that a contracting industry is faced with as regards hungry predators jockeying for position to snap up societies.
973 Those predators are likely to be banks and insurance companies rather than building societies—because, of course, building societies fit so well into their plans.
My honourable friend the Minister in another place gave some assurances last Monday that the mutual building societies are not sitting ducks waiting to be snapped up by City predators. I must say that I do not share her confidence. We could have added to the Bill some additional defence to enable the genuine mutual societies to operate with stability. The problem she did not address is how one counters a leaked bid from a large predator which is immediately taken up in dramatic form by the media, which list in detail the benefits to members. The bid will probably value the society way above its existing performance in the form of a knock-out bid. It would take a very skilful board and advisers to counter such tactics, to remain credible, and to keep the confidence and support of members. The evidence does not support any complacency on the part of mutual societies that they are immune from the market-place.
I find unfortunate the timing of the announcement by my honourable friend the Minister of a change in the protection clause for those societies already declared to be proceeding down the plc route. First, to confirm last March that there would be no change in the protection clause when aware of the four societies moving down the plc route, and then to change the rule at virtually the last minute, was somewhat confusing. I am not sure that this move will have much effect in deterring carpet baggers.
Certain reasonable compromise amendments were put forward in another place and rejected on the ground of lack of parliamentary time. I think that such a parliamentary pickle is a poor reflection on the need to provide the best possible framework that building societies deserve to take them safely into the next century.
§ 6.30 p.m.
§ Lord Brabazon of Tara
My Lords, I am grateful to the Minister for his explanation of the Bill. It was only after considerable thought within the final hours of this Parliament that I decided to speak in the debate, and to do so from a starting-point of considerable sympathy with and support for the objectives of the Bill and the efforts of the Government to complete their legislative goals with time pressing.
I come to this issue having had some experience in a former existence as a Treasury spokesman. I took the Building Societies Act 1986 through this House. I am glad to see my noble friend Lord Stewartby in his place. He was the Treasury Minister with responsibility for that Bill at that time; and we worked well together, if I may say so.
There was recognition then that building societies needed greater commercial freedom within defined limits to be able to compete more effectively in the increasingly competitive financial services market. I am pleased to see that the Bill necessarily updates and improves on that job.
974 As has been said, building societies are an extraordinary creation founded on the collective savings of individuals and families of often modest means. In the last century few would have predicted that they would become the central part of the financial service providers that they are today, with the most distinctive brand names on the high street among their number.
Quite rightly, the Bill seeks to broaden the financial scope of building societies while maintaining their fundamental character. As a result of the Bill we should see greater accountability to members and the removal of some of the restrictions imposed by the 1986 Act, while the fundamental purpose and character of mutual building societies are maintained. To that extent, the Bill is the product of diligence, consultation and not a little good fortune with the legislative timetable.
Perhaps the Bill is an apt demonstration that, however much consultation a Bill may go through, changes introduced at the eleventh hour may upset the good work undertaken and have adverse consequences.
I stress that the Bill, which is in many ways one for the industry and ultimately for the good of the consumer, must be based on consensus. It is not a flagship Bill defining the Government's mission. It is not, I believe, an electorally sensitive Bill. It therefore falls on all our shoulders to ensure that the Bill contains consensus measures, particularly given the shortage of time, to iron out any wrinkles.
To a large degree, the Minister can claim great credit. The Bill has been seriously canvassed since 1994. A draft Bill was published in March 1996. Comments on the contents were submitted from many parties including many building societies; and there was a good deal of disappointment when the Bill did not appear in the Queen's Speech.
Having said that, we now have before us a Bill of 47 clauses and 9 schedules which we shall take through all its stages this evening. It was introduced into this House only yesterday, having received a three-hour Second Reading in the Commons on 10th March, with Committee and remaining stages taking place only two days ago, on 17th March, again in under three hours.
I was alerted to a potential cause for concern by representatives of the Alliance & Leicester building society; and for the avoidance of doubt I should emphasise that I have no connection with any building society and am neither a borrower nor a lender with one. I shall expand on that cause for concern at Committee stage, but should point out that I met them only last Thursday. I have also had the opportunity to speak on the point to my honourable friend the Economic Secretary, for which I am grateful. But there has been little time for building societies or other financial institutions to make their points to noble Lords. It is all very well having lengthy consultation with the industry—that is good, but not at the expense of leaving Parliament out of it. I must ask my noble friend the Minister, as did my noble friends Lord Kimball and Lord Kinnoull, whether it is really necessary to rush this Bill through at the speed with which it is being taken. I remind my noble friend that when I took the Building Societies Act through this House in 1986 in Committee
975 we had to have something like 200 drafting amendments before the Bill was in the right shape. Some of those amendments were moved by me for the Government, and some by one of my noble friends on behalf of the Building Societies Association. Altogether the amendments amounted to some 200 before the Bill was right. I only hope that my noble friend can assure the House that this Bill is really well drafted and will not lead to the kinds of problems that would have resulted had the previous Bill been rushed through. With those words of caution, I welcome the general principles of the Bill.
§ 6.36 p.m.
§ Lord Ezra
My Lords, I had submitted my name for inclusion on the list of speakers but for some reason it was not included. It has been suggested that I speak in the gap. I do so briefly.
I make it clear from these Benches, that we, too, support the thrust of the Bill. We think it timely and important. We fully support the mutual movement. We think that the changes which the Bill proposes to make the regime more permissive, rather than the prescriptive regime of the 1986 Act, are wholly desirable. We believe that if the mutual societies feel, with the support of their members that they want to demutualise they should be able to do so. Broadly, therefore, we are in agreement with the Bill.
However, there are two issues on which I hope the noble Lord will comment when he replies. Both have already been mentioned. First, I refer to the two year rule. That led to considerable discussion in another place at Committee stage. There is the feeling—to some degree I share it—that the handouts which have been proffered as a result of demutualisation have led to a good deal of speculative movement in the membership of the mutual societies which is contrary to the spirit in which those societies were originally established. The two year rule was intended to limit that but in practice the arrangements appear now to be that each society decides for itself the limits that it places on the handing out of the benefits arising from demutualisation. I should have thought that it was a situation which requires clarification. I share the views expressed by the noble Lord, Lord Eatwell, on the subject.
Secondly, I sympathise with the views expressed by the noble Lord, Lord Kimball, the noble Earl, Lord Kinnoull, and the noble Lord, Lord Brabazon, on the modification of the protection clause. While I agree with the modifications proposed, there is a retrospective element about them. That is causing, I think rightly, concern among certain societies. Those societies decided, on the basis of the existing protection clauses, to demutualise. This now puts them in a difficult position. I know that some are pondering seriously what they should do next. I very much hope that in dealing with the amendment to be introduced later at Committee stage the Government will be able to suggest some way in which at least the retrospective element in the proposal, which is otherwise acceptable, can be introduced. Apart from those two comments, I support the Bill.
§ 6.40 p.m.
§ Lord Mackay of Ardbrecknish
My Lords, I am grateful to those of your Lordships who have spoken for the general level of support for this Bill. My noble friend Lord Brabazon of Tara mentioned the time it took for the 1986 Bill. When I was thinking about what I might have to do in this Session of Parliament I reckoned that perhaps if this Bill was introduced at the beginning of the Session I might get a few more hours of parliamentary time under my belt and another large notch, if I can so describe it, on my gunbelt, to use the jargon of the western. Instead, I suspect I shall only be able to make a very tiny notch there. However, perhaps your Lordships might be relieved at that because some of your Lordships might feel that I already spend more than enough time at the Dispatch Box—and certainly may feel that the clan does, if today is anything to go by.
Can I start by answering a question put by my noble friend Lord Kinnoull: what is the rush? I believe that that was also a point put by my noble friends Lord Brabazon of Tara and Lord Kimball. The reason for the rush is that there has been extensive consultation, to which I shall refer later; but the Building Societies Association was very keen for the Bill to go ahead now. They did not wish us to wait until after the next election.
This is one of the first Bills to be published as a draft in advance, and is part of our initiative towards better legislation. The very fact that it has been published in draft means that there has been quite a long time in which to discuss and amend it. I hope that that goes some way towards explaining to my noble friend Lord Brabazon why, unlike some other Bills, this Bill is probably less in need of detailed scrutiny and amendment than some others that have been brought before to your Lordships' House.
The Bill was announced in 1994, in the review of the Building Societies Act. It was stated that the Government were contemplating a Bill of this nature. That was followed by consultations on the framework. The draft Bill, which I have already mentioned, was published for consultation in 1996 and the revised Bill was published in December 1996. We introduced it as soon as we possibly could. As your Lordships may recall, back in the autumn there was speculation about this Bill forming part of the Queen's Speech. Unfortunately, it did not manage to achieve its place in the main timetable, so to speak. However, I think that my honourable friend Mrs. Angela Knight made it clear that we would seek any opportunity to introduce the Bill and try to get it through in this Session, if that was possible. That indeed has been made possible with the agreement of both Opposition parties in this House and in another place.
We have received very useful and thoughtful comments over quite a long period of time from the building societies themselves, private individuals, professional organisations and a number of legal practices. We are very grateful to all those who responded for devoting time and resources to consider a Bill which at the time was actually not assured of a slot in the parliamentary timetable. They raised new issues 977 and brought a range of different perspectives to bear on the legislation, and we are indeed very grateful to them for their help.
Perhaps I may now deal with one or two matters and leave the point about the five-year protection until the Committee stage when we deal with the amendments, if that is agreeable to my noble friends, rather than repeating an argument in a very short period of time.
My noble friend Lord Kinnoull asked how a building society resisted a leaked bid from a predator. The noble Lord, Lord Eatwell, asked what safeguards there were for societies against speculators. The primary safeguard is that only the board of a society has the ability to put transfer proposals to the members. If the board intends to remain mutual, neither speculators nor would-be purchasers can compel it to act against that decision. I hope that that explains the defensive position of a building society.
The main point that was mentioned concerned the two-year rule, and perhaps I may say just a few words about that. The 1986 Act forbade the distribution of cash bonuses to share-holding members who had been shareholders for less than two years and to borrowers; but it has been held by the courts not to rule out certain flat rate distributions of free shares to less than two-year members. The societies and others have asked Parliament to go back and change this rule, which is what we are addressing at this moment. There are a number of reasons, but perhaps I can give two of them. The first is that a society which wishes to convert or to be taken over already has the discretion, by choosing a qualifying date for bonuses, to rule out recently arrived members if it chooses. I do not think it is for government to dictate to a society which members it should rule in or rule out. I think the societies should have the freedom to make that decision.
The second point I wish to make is that the law, as it has been interpreted by the courts, has now stood for something like eight years. During that time we have seen a number of societies convert or be taken over. Indeed, in terms of the number of members, it has been a very much bigger shift than any we are likely to see in the future. I think that a change made now regarding possible future mergers or takeovers would be seen to be unfair and incomprehensible by that society's members and indeed by the wider public, when we compare this situation with what has happened in the round of conversions that we are already seeing coming to an end.
I suspect that if the Government had decided to rule out any distribution to a member of less than two years, then, should another society decide to convert, the Government would be immediately under pressure to bring those people in by means of a change of rule. We should not forget that people open building society accounts and take mortgages from building societies in quite considerable numbers. Either they are looking for a new home for themselves or for their savings. I understand that there is quite a lot of movement between building societies and with new people opening accounts. If I read the newspaper advertisements correctly, the building societies 978 themselves indulge in very aggressive campaigns to persuade us to shift our savings from one building society to another, or indeed to shift our savings into the building societies from some other place. And of course they also advertise their services as people who are prepared to lend money. I am not sure whether or not at the beginning I should have declared a small interest, as a very small and very modest person who will perhaps gain a little from the Halifax conversion. However, unfortunately, it will not keep me in a life of luxury. We all know that building societies are keen to attract new members and I do not think that there is any evidence that people have joined building societies on a sort of speculative venture that they might shortly thereafter gain from any conversion.
I said earlier that I would leave the question of Clause 41 and the five-year protection to the debate we shall be having on the Committee stage of the Bill. I hope that your Lordships will feel that that is a sensible way to proceed in the circumstances.
I should like to say that it is pleasant, in the last debate of this Session, where the noble Lord, Lord Eatwell, and I are exchanging compliments, to say that I agree with the point he made on the importance of the mutual building societies and the important role they have played in extending home ownership in this country, and equally the important role they have played in providing many millions of people with a savings haven in which they can invest their money safely, whether for special events or indeed for retirement. I am very pleased that I have been able to come forward with a Bill which has met, apart from one or two problems that I have addressed already and the ones we shall address at the Committee stage, with such support from all sides of the House and especially from the noble Lord, Lord Eatwell.
It is not usually my fate, as your Lordships will know, to find such universal support from all sides of the House for legislation I bring before your Lordships. However, in this case, if I may say so, I think the building societies have thoroughly merited the support that your Lordships have given to them. I hope that your Lordships will give this Bill a Second Reading.
§ On Question, Bill read a second time, and committed to a Committee of the Whole House.
§ Then Standing Order No. 44 having been suspended (pursuant to Resolution of 18th March):
§ 6.50 p.m.
§ Lord Mackay of Ardbrecknish
My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.
§ Moved, That the House do now resolve itself into Committee.—(Lord Mackay of Ardbrecknish.)
§ On Question, Motion agreed to.
§ House in Committee accordingly.
§ [The LORD ELLIOTT OF MORPETH in the Chair.]
§ Clauses 1 to 40 agreed to.979
§ Clause 41 [Protective provisions for specially formed successors]:
Lord Brabazon of Tara moved Amendment No. 1:
Page 58, leave out lines 5 to 9 and insert—
("(a) a company or a subsidiary undertaking of the company acquires the whole, or substantially the whole, of the business of a mutual financial institution;").
§ The noble Lord said: In moving this amendment, which stands in the names of the noble Lord, Lord Kimball, and myself, I shall speak also to Amendment No. 2.
§ This matter was referred to at Second Reading. The problem with the changes to the five-year protection rule caused some degree of consternation among the converting building societies when the Minister announced the plans to change them. I hope that my noble friend the Minister will confirm that there was no mention of changes to the five-year protection in the draft Bill of March 1996. No mention was made until my honourable friend the Economic Secretary answered a Question for Written Answer on 5th November last. In the meantime, societies such as the Alliance and Leicester had long since announced their plans to recommend conversion to their members, which is a lengthy and costly process. The society was advised to encapsulate the proposals in a transfer document to be sent to its voting members. That document was scrutinised by the Bulding Societies Commission before release to ensure that there were no inaccuracies or falsehoods in that most important prospectus.
§ That document recognised that the society would be given protection from takeovers for five years after conversion. Only then, well after the document was sent to members and votes were being cast, did the Economic Secretary to the Treasury announce a fundamental turnround. It cannot be reasonable that we in this Chamber are willing to legislate in a way that leaves 2.4 million people to take the consequences of having voted on a financial proposal which we have made invalid.
§ The Alliance and Leicester, like other converters, will have to diversify, alter its structure and acquire other financial services companies in order to grow and survive after conversion. This Bill will fundamentally alter the terms of that conversion after a decision has already been taken by its members. That is what the Alliance and Leicester means by the impact of this Bill being retrospective in effect. After close examination, I concur with that view.
§ I remind noble Lords that we introduce retrospective legislation with the greatest foreboding. We have a double responsibility to ensure, if we are to pass legislation which on other occasions would be given more consideration, that we do not make rash decisions in haste. I draw noble Lords' attention to the problems of over-hasty legislation. We have passed anti-terrorism legislation swiftly out of urgency but that should be a rare occurrence required in extreme circumstances. One only has to look to another place to see a dangerous dogs Bill going through its remaining stages, a Bill which seeks to rectify failings of the Dangerous Dogs Act 1991 that was passed with undue haste.980
§ The amendment that my noble friend Lord Kimball and I propose rightly strikes a balance. After all, the Bill, with great support from all sides of the Chamber, seeks to protect and enhance mutuality. That is a fitting objective. But the constraints imposed by Clause 41 go further than protecting the mutual building societies. They impose a straitjacket on the commercial freedom of converted societies with no obvious merit. These amendments protect mutual building societies, friendly societies and mutual insurers. They seek a consensual way out of the problems created by Clause 41 without upsetting or affecting the central thrust of the Bill.
§ Therefore, I urge the Minister and the Committee to support the amendment and indeed to welcome the compromise. Without it, we take away rights from the companies that are converting without an opportunity for them to adjust their plans so late in the day. I hope that by accepting this amendment we shall spare future governments the task of revisiting this area of policy again in the near future. I beg to move.
§ Lord Stewartby
I begin by declaring an interest as a non-executive director of the Portman Building Society, which has no intention of converting itself into a public limited company. Also, and more relevantly to what I want to say now, as my noble friend Lord Brabazon reminded the Committee, I was the Minister responsible for the 1986 Act. It is in that former capacity that I should like to make a few remarks on these amendments.
Perhaps I might also be permitted one or two introductory remarks about the nature of the legislation, which is specifically relevant to this amendment. I did not speak at Second Reading as I should have had to repeat myself on two occasions during the progress of the Bill. When the legislation was introduced in 1985, I was very worried that it might not last even 10 years because of the pace of change in financial markets. I am quite pleased that it has in fact, although becoming progressively more out of date in the past few years, enabled a very remarkable change in the building society movement to take place during that time.
We need to remember that before that Act, building societies were in a very much more primitive condition, largely depending on Victorian legislation. So Section 101 of the 1986 Act, which is the nearest equivalent to Clause 41 of the present Bill, was a very necessary protection for societies which wished to convert. Up to that time they had not had any opportunity of diversifying their activities or becoming more competitive over a range of financial services, which would enable them to stand on their own feet. If they had become public companies without the five-year protection which we built in at that stage, it would have been a turkey shoot. They would not have been sufficiently diversified or had sufficient experience of the competitive market place in a wide range of areas to ensure their independence for very long.
Therefore, the 1986 Act brought in a considerable range of additional permitted activities for building societies. But the difference between that Act and the present Bill is that the 1986 Act was a prescriptive piece of legislation. It laid down what building societies could 981 do in addition to what they had previously been able to do, whereas the new Bill is substantially a permissive piece of legislation which places some constraints but does not try to specify all the individual activities that a building society can undertake. That is a very big difference in the nature of the two Bills. Perhaps I may say in parenthesis that it is one of the reasons why the previous legislation was so complicated and needed so much attention in this Chamber.
But I must ask myself, if I were now the Minister responsible for a new building societies Bill 12 years later, whether that five-year protection provision would still be necessary at all, whether or not it was qualified; because during the intervening time, building societies have been able to take advantage of the provisions of the 1986 Act to become much more widely based financial organisations, which are themselves rather competitive, even if they retain their mutual status. So the point made by the Alliance and Leicester about this clause has to be seen against that background.
If there is a need for protection now, I believe that that need is much less than it was 12 years ago. I am not entirely convinced that it is still a need at all. But my main concern about this amendment is that it would produce an asymmetrical situation for converting societies. They would be in a position where they could he predators but nobody could take them over. We have to look beyond the building society movement and ask whether that is the kind of structure that we want to build into the regime for substantial quoted companies. I am not persuaded that it is. On those grounds alone I would oppose Amendment No. 1 I do not say that the Alliance and Leicester does not have a point; it has something of a point for the reasons raised by my noble friend. But my judgment, having been through the whole process in great detail 12 years ago and having considered all these issues of protection and vulnerability, is that the case is not strong enough to override the distortion which it would bring into the market place as a whole.
In respect of the retrospective argument, it is not really true that a provision which is not yet in force and will only come into force after the passage of the Bill, when it is enacted, can be regarded as being retrospective. If a Bill had been brought forward, say early in the next Parliament, which contained provisions of a similar kind to those in the Bill before us today, it would have been perfectly in order for Parliament to amend it or, indeed, for Ministers to include in it provisions of this kind. But it would still have been within the five-year period from the flotation of the Alliance and Leicester. One specific society could not reasonably argue that there was an embargo for five years on this House or another place introducing a measure in the form in which it is drafted in the Bill. The amendment therefore ought not to proceed, quite apart from the situation of the Bill itself; that is, that there is a general view for it to proceed and the passing of amendments would put that at risk. I hope that the Bill will succeed. The Committee would be wise not to accept the amendments.
982 Perhaps I can conclude by saying that I am pleased to note the general support for the Bill from my noble friend Lord Eatwell, and other Members of the Committee who have spoken. I have a great respect for the building society industry. It has made a major contribution to British life over a period of more than a century. I did my best 12 years ago to enable it to go through a rapid period of transition and change. I am pleased to have the opportunity to be here at the initiation of what I hope will be another successful period in its existence.
§ 7 p.m.
§ Lord Kimball
I rise to support Amendment No. 1 and I hope my noble friend will find it possible to accept it. It protects mutuality; it will better treat converters, and better serve the interests of the savers.
If the architects of the 1986 Act supported the concept of a five-year protection period as being necessary for the converters, it seems illogical to change the vision so radically now. The protection is necessary for converters to reach a critical mass in the market place. That is because building societies have been legally restricted in their activities.
The part of the Bill that proposes to remove protection from a converting society, should it take over an authorised institution, goes too far. Even the Building Societies Association did not propose such a wide-ranging clause when it made its original submission in June 1996. I hope that my noble friend will be able to give a sympathetic reply to the amendment.
§ Lord Ezra
At Second Reading I spoke briefly about this issue. I said that I had nothing against Clause 41 as now drafted; but I was concerned about the element of retrospection. Certain societies took the effective decision to convert under the assumption that the existing protection rules would continue. This is something that raises doubts in our minds and I shall be glad if the noble Lord, in replying, will take that into account.
§ Lord Mackay of Ardbrecknish
In addition to my noble friend Lord Brabazon of Tara, who took the 1986 Bill through this Chamber, I am now faced by my noble friend Lord Stewartby who had to look after it in those days in his capacity at the Treasury in another place. I am delighted that they both believe the 1986 Bill needs updating and changing, otherwise I might have a rather difficult feeling going up and down my spine with the two authors of the 1986 Act, which I am changing so radically, sitting behind me. I am glad for their support in general and turn to Amendment No. 1 and the issue of the five-year protection rule.
The converting societies knew that we planned to introduce a Bill. My noble friend Lord Brabazon of Tara pointed out that initially the five-year protection point was not contained in it. They were able to see all the non-confidential responses to the consultation process which we held last year and it was clear early on in the process that the five-year protection was a matter of concern. The Alliance and Leicester was represented at 983 the meeting of the Building Societies Association Council held last June when the BSA response calling for changes to the five-year protection rule was finalised. The converting societies therefore knew last June that the Building Societies Association Council was calling on us to make the changes that I am now presenting to the Committee.
With that as the background perhaps I can say that the clause as it stands, unamended, will give a converted society the five-year protection in which it may consolidate its position, and may grow by acquisition of assets—such as mortgage books—and by acquisition of companies which are not authorised financial institutions, without any effect on that protection. The protection will lapse only if the new bank carries through an acquisition of an authorised institution, or if a high proportion of shareholders support a resolution to waive the protection.
Amendment No. 1 would let the new bank mount unlimited acquisitions of its immediate competitors—other Plcs in the financial sector—provided it did not bid for mutual institutions. For example, this bank could take over a former mutual insurer, which would have no protection following conversion, but such an insurer would be forbidden by law from making a bid for the new bank. Moreover, despite recent developments, takeovers of mutual institutions are very rare indeed. The vast majority of takeovers are of Plc structures as, no doubt, are the majority of takeovers that a new bank would undertake. So the effect of this amendment on the new bank would be that it could more or less carry on as planned, fully protected for five years. The umbrella of that protection would be widened to cover all the institutions acquired as well.
The amendment would therefore perpetuate the unfair advantage the five-year protection confers. As my noble friend Lord Stewartby said, the five-year protection was initially included in appreciation of the fact that at that time the building societies had not yet had an opportunity to widen their base, to bring new products into the range and to become conditioned to the more competitive market place prior to any conversion. They therefore needed time to learn and adapt. Now the building societies operate in a much more competitive market place and some of the powers in the Bill will help to improve their competitiveness in the market place.
My noble friends and, indeed, the Alliance and Leicester itself, made much of the retrospective nature, as they claim, of the Bill. I understand the point that is being made but, strictly speaking, it is not retrospective. It will be enacted after the Bill passes. My understanding of retrospective legislation is that it is legislation which takes effect prior to the passage of a Bill. In fact therefore it is not retrospective.
In any case, even for a society like the Alliance and Leicester which is going through its conversion—in fact it made an announcement today about the next step—the loss of the five-year protection is in its own hands. It can only be triggered by the successor company's 984 decision either to make an acquisition or by 75 per cent. of all shareholders agreeing to support a resolution to drop the protection.
I do not believe the changes are unfair. I think it would be unfair to leave the converted societies—some are actually banks in the FTSE 100 and are powerful institutions—in this very privileged position. I understand the point my noble friends are making about the Bill being retrospective. But, strictly speaking, as we all understand it, it is not retrospective. Indeed, if one were to take the view that one could not do anything after the date of a new Bill being enacted that affected decisions which had previously been taken, it would be hard for a Government to make any changes in the financial sector because they could always be claimed to be affecting decisions which people had already taken; "and if they had known at the time, would they have taken them?". I suspect that even if the Alliance & Leicester had known at the time, it would probably still have taken them. Who am I to judge that? But certainly the vote it got to make the move was fairly substantial.
Perhaps I may put it this way and name terms to your Lordships. Under the amendment the Alliance & Leicester or any other plc would be discouraged from, for example, taking over the Airdrie Savings Bank, which is one of the few of that kind left, because it would lose protection. However, it could look at the Airdrie Saving Bank's bigger brother in Edinburgh and attempt to take over the Royal Bank of Scotland and yet retain its protection. In those circumstances, the Royal Bank of Scotland would be forbidden from mounting a counter bid. That is a serious distortion of everyday competition among the financial service providers. Put like that, I hope my noble friends will see that it is quite unfair that major institutions should be ring-fenced in a one-way ring-fence. They can do things out the way but no one can do things in the way.
While I understand the argument my noble friends have made, when one looks at the new scene, it would be quite unfair in the circumstances I have put for the Airdrie Savings Bank to be safe and the Royal Bank of Scotland not to be safe. There does not seem to be too much logic in that, especially when the Royal Bank of Scotland could not counter bid or put in a bid for any of the new converting building societies—now banks. It is not the intention of the clause to expose them necessarily and immediately to competition or to a bid. The protection is still there. If they do not bid, no one can bid for them. That is a reasonable protection which they will have to take into account if they decide to make a bid for any other financial institution. In addition to that, if someone suggested that they might bid and the shareholders themselves, by an overwhelming majority—75 per cent. of them voting—agreed to drop their protected status, that is wholly reasonable as well.
I appreciate that we would have liked a longer Committee stage in order to look at other aspects of the Bill. However, I know that this is one aspect, along with the two-year rule, which I hope I have explained, that has concerned at least two of the building societies which are converting and has concerned some of my noble friends and some Members of another place. I particularly think that the example I gave was a 985 graphic one. I hope that explains why I believe the amendment would not be sensible. We should leave the Bill as it is. There is limited protection for a converting building society. If it wishes to drop that protection, it must make a positive decision either to do it by a vote of the shareholders or to drop the protection by bidding to take over another financial institution.
I hope that explains the position to my noble friends. I thought that my noble friend Lord Stewartby clearly explained the same case from the experience he had in 1986 and what he has seen develop since. I trust therefore that my noble friend will feel able to withdraw the amendment.
§ Lord Brabazon of Tara
I am grateful to my noble friend for his reply and I am grateful to all Members of the Committee for taking part in the debate. As my noble friend Lord Stewartby said, this is a change to the protection which was offered originally. It is natural that if a building society converts and if it is to progress its business, it will have to make changes to the way it operates. One of those changes may be to make a bid for a financial institution. My noble friend made a comparison between a small savings bank and the Royal Bank of Scotland. As far as I see it, the operation of Clause 41 will not even allow it to take over the tiniest financial institution without losing its protection.
My noble friend said in his speech in reply to the Second Reading debate that the Bill was warmly supported on all sides of the House, including by my noble friends on this side of the House. It is indeed true that the Bill is warmly supported. What we are criticising is the speed with which it has been brought forward. It will have spent under three weeks in both Houses. I should certainly qualify my support for the principles of the Bill and I would have been much happier if it had been brought forward at a more leisurely pace so that both Houses could have examined it a good deal more closely. It has been pointed out to me that the Delegated Powers Scrutiny Committee of this House has looked at the Bill and has found that it contains no fewer than 10 Henry VIII clauses. It has let that go. Nevertheless, it is a point that might be made.
However, the purpose of the amendment was to protect the other mutual societies—whether building societies, mutual insurance companies or whatever. I have listened carefully to my noble friend's reply. I certainly do not propose to divide the Committee on the amendment at this stage of the Parliament, especially as I have had no indication from the party opposite of its views on the amendment. I do not know where it stands on the amendment. I can only assume that it does not support the amendment; otherwise it would have said so. On the other hand, nor did it say that it opposed the amendment. Never mind. With those few words, I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ [Amendment No. 2 not moved.]
§ Clause 41 agreed to.
§ Clauses 42 to 47 agreed to.
§ Schedules 1 to 9 agreed to.986
§ House resumed: Bill reported without amendment.
§ Report received; Bill read a third time.
§ Lord Mackay of Ardbrecknish
My Lords, I beg to move that the Bill do now pass. In doing so, perhaps I may thank those noble Lords who have taken part in this short debate. I appreciate the points made by my noble friends about the shortness of the debate and I thank them for their understanding. This also gives me an opportunity to thank the noble Lords, Lord Eatwell and Lord Ezra, not only for their co-operation on this Bill but for their interesting views—I would not go so far as to say co-operation—on some of the other Bills and in some of the other debates on economic matters.
The noble Lord, Lord Ezra, has had a distinguished career in British industry and I have always listened with some care to all the points that he has made and attempted to answer them as best I could. In matters of economics I have occasionally felt, facing the noble Lord, Lord Eatwell, something like the enthusiastic amateur facing the professional. I have learnt a lot, not just from the noble Lord in his capacity as an economist, but also from the team of academic economists who are usually ranged behind him when I stand at the Dispatch Box to answer debates and pilot financial matters through your Lordships' House. I shall not ask noble Lords even to tempt me to say which of the academic Lords opposite I prefer when it comes to proffering advice on economic matters. At this stage of the Parliament that would be far too divisive.
My task is to say to the noble Lord, Lord Eatwell, how much I have appreciated the debates that we have had. Not much quarter has been given in them, but they have been conducted in a good-humoured debating spirit. I am not entirely sure whether translating economists from academia and putting them in charge of the real economy would be a sensible move for the British public, but that is something they will have to decide on 1st May. Sufficient for today is my gratitude to both noble Lords for the part they have played in the debates we have held in this House. Speaking for all three of us, I hope that we have educated, amused and stimulated your Lordships, at least on some occasions.
§ Moved, That the Bill do now pass.—(Lord Mackay of Ardbrecknish.)
§ On Question, Bill passed.