Building Societies (Hansard, 6 July 1994)

§ Mr. Nelson

[holding answer 27 June 1994]: In January, I announced a review of the Building Societies Act 1986 to explore the scope for a further liberalisation of the building societies legislation. The review, which was to be in two stages, was to look at the main restrictions of the Act, including the wholesale funding limit and procedures relating to mergers, conversions and takeovers.

The initial stage was to be concluded by the early summer and, if the case for making more extensive changes to the legislation needed to be explored, there would be a wider consultation in the autumn, with the aim of concluding the review by the end of the year.

The first stage is now complete and we have reached a number of conclusions:

Building societies have a valuable part to play in maintaining a competitive market in retail financial services.
They should be enabled to continue and develop that role.
The process of steady, orderly rationalisation within the sector should be allowed to continue.
The extension of societies' powers in specific areas needs to be accompanied by improvements in the accountability of their boards to the members.
Smaller societies have a particular part to play in their local communities.

Societies dominate housing finance and personal savings because they offer a high standard of service to their customers. Their low-cost operations represent keen competition for banks and other providers of financial services, to the benefit of consumers. They are among the few major financial institutions based outside London. They provide diversity and choice.

There is, however, a need to improve the accountability of societies' boards to their members. During the first stage of the review, a number of respondents pointed out that directors are under no obligation to inform members of takeover offers from institutions outside the sector. When a suitable opportunity arises, the Government intend to bring before the House legislation to require boards to inform the members, at the next general meeting, of any such non-confidential offers which they have received, in the same way as they must do now for merger bids from other societies.

In order to give societies the opportunities that they need to develop, the gradual process of extending the range of activities which they are permitted to undertake should continue. So I am announcing today a package of specific measures, which we propose to implement by secondary legislation, either under the Building Societies Act or by making use, after its enactment, of the general power in the Deregulation and Contracting Out Bill currently before Parliament.

The most important changes will be: an increase in the wholesale funding limit from 40 to 50 per cent; the granting of powers to establish subsidiaries to make loans 214W to incorporated bodies that are not secured on land; and the power to own a general insurance company offering buildings and contents, and mortgage payment protection insurance policies. All these changes will be subject to prudential control by the Building Societies Commission.

These changes will introduce a further element of competition into markets where societies have previously not operated, or have operated only as agents of others, and give them much of the additional flexibility which many have told us that they need. To allow societies to continue to play their part in this country's financial life, and to discourage destabilising flows of funds, on the basis of takeover rumours, the Government believe that it will continue to be necessary for there to be stringent statutory controls on takeovers by existing commercial companies—as was Parliament's intention in passing the 1986 Act.

Societies will continue to be carefully monitored by the Building Societies Commission and subject to competition law. The implications of the decision to allow societies to own general insurance companies will also be taken into account in the Government's response—promised for later this year—to the recent report by the Director General of Fair Trading which recommended the implementation of the provisions of the Courts and Legal Services Act relating to tying-in.

The Government have now decided that it would be useful to proceed with the second stage of this review, to examine further how best to promote the process of evolutionary change in the building society sector.

This stage will involve considering ideas for further improving the accountability of directors to members—in particular, whether it should be made easier to allow candidates nominated by the members to serve as directors, while continuing to ensure that boards have the necessary mix of skills and experience to do their job.

Meanwhile the Building Societies Commission will be finalising its new prudential guidance on boards and management and on a new requirement for a greater degree of disclosure in societies' annual accounts.

We will consider, too, a number of other specific changes to the legislation which have been put to us by the Building Societies Association. These include a review of the financial and other limits in the 1986 Act which can be altered only by statutory instrument; clarification of section 18 of the Act, dealing with powers to invest in subsidiaries; facilitating larger distributions of funds to members in a merger; a review of societies' basic lending powers, set out in sections 10 to 13; and giving societies the power to acquire mortgage debts directly, rather than through subsidiaries.

The Government also see merit in giving further thought to whether societies' powers could be more systematically streamlined—for example by replacing the current prescriptive provisions with a more permissive structure. At the same time, we would need to consider what constraints had to be retained to ensure that the main business of a building society remained the provision of residential mortgages, savings accounts and other financial services to its members.

Many of the changes to be considered in the second stage of the review will require primary legislation for their implementation and finding time for this will, of course, depend upon a suitable opportunity becoming available.

The Treasury will be issuing, during the summer, a consultation paper on the issues raised in the second, and 215W final, stage of the review, with the aim of concluding the review, in line with the timetable which I announced in January, by the end of the year.

In pursuit of our policy of more open government, I am placing a copy of the background papers, produced as part of the first stage, in the Libraries of both Houses.