Building Societies Act 1986 (Hansard, 2 February 1988)

§ Mr. Lilley

The review of schedule 8 to the Building Societies Act 1986, which I announced on 2 October last, had two purposes. The first was to examine whether schedule 8 could be recast so that it proscribed particular activities within certain broadly specified powers instead of banning everything except narrowly specified powers. We believe that this can be done and I shall be bringing the necessary order before the House in due course.

The review also considered societies' request, through the Building Societies Association, for a substantial extension of their powers. The Government recognise that the gradual step-by-step extension of powers previously envisaged would not be appropriate. Societies need to know the broad scope of their powers for some years ahead in order to make sensible long-term commercial plans. Different societies will want to exercise different powers, and each individual society will probably want 10 diversify into only a small number of new areas. The Government therefore propose a wide-ranging extension of powers, while ensuring through supervision of business plans by the Building Societies Commission within overall limits on non-traditional assets that individual societies exploit their new powers at a prudent pace.

The mainstream business of societies is, and must remain, that of raising funds from the public for lending on house purchase. But we believe that it is right that societies should be allowed to undertake activities which either complement their mainstream business or which will enable them to compete more effectively by providing the wider range of financial services which customers expect of financial institutions. Societies will, as at present, 539W continue to provide services primarily to the personal sector rather than to companies. But I have decided that societies should also be allowed to:

(a) take an equity stake in both life and general insurance companies;
(b) undertake fund management including management of unit trusts generally (rather than just for the provision of pensions, as at present);
(c) take an equity stake in stockbrokers;
(d) offer a wider range of banking and housing-related services than hitherto.

There will be some limitations on these new powers. It would not be appropriate for societies to become involved as stockbrokers in market-making nor would it be desirable for societies to become fully exposed to the risks inherent in general insurance business. The draft orders which I will bring before the House in due course will set out the proposed restrictions to these powers.

Many of these new activities are supervised under either the Insurance Companies Act 1982 or the Financial Services Act 1986. These arrangements will continue and appropriate arrangements to co-ordinate supervision will also be put in place.

I also propose two other changes under the Act.

First, societies have represented that the limit on unsecured lending to individuals, currently £5,000, is too low. This limit covers personal loans for such items as furnishings as well as car loans and credit card limits. The limit will be increased to £10,000. This will give societies greater scope to compete for retail customers. The Building Societies Commission will ensure that societies continue to have adequate credit assessment and exposure monitoring systems.

The second change concerns asset limits. As societies develop into new activities already permitted under the Act, plus those opened up following this review, they will wish gradually to increase the proportion of their assets which are not residential mortgages. I propose therefore to bring forward an order shortly which will provide for a progressive increase in the limits on non-traditional assets. This will enable societies to plan for expansion into non-traditional activities at a measured pace. The order will provide for an increase in the class 2 and 3 limits to 17½ per cent. and 74½per cent. respectively in January 1990, to 20 per cent. and 10 per cent. respectively in January 1991 and a further increase to the maximum extent possible within the primary legislation–25 per cent. and 15 per cent. respectively—in January 1993.

The orders necessary to implement these changes will take time to prepare, in consultation with the Building Societies Association. I hope to be able to lay the draft orders before the House before Easter. I recognise that some societies are anxious that they should be able to adopt their new powers in their spring AGMs. We will proceed with all the speed that we can and provide societies with as much information as possible as drafting proceeds. But early adoption may not be possible. It will be important to ensure that the complex secondary legislation is carefully and correctly drafted.

The proposals are a substantial step forward in building society development. They will give societies the freedom to develop and compete across a wide range of financial services business.