Building Societies Act 1986 (Hansard, 24 February 1995)

§ Mr. Nelson

The Government have now completed the second and final stage of their review of the Building Societies Act 1986. A consultation document was issued last autumn, seeking views, in particular, on societies' accountability and powers. The Government are grateful to those organisations and individuals—some 72 in all—who responded. Their comments have helped to shape the outcome of the review. The Government have also taken careful note of the report on the building society sector,340W published by the Treasury and Civil Service Select Committee on 19 December. The outcome of the review is broadly in line with many of the Committee's conclusions.

The Government place great importance on the role of building societies as a safe haven for people's savings and the major source of housing finance in the United Kingdom. At the forefront of our minds has been the objective of creating more competition and accountability in the provision of retail financial services. In drawing conclusions from the review, we have sought to:

enable societies to expand the range of services they offer, while retaining their primary focus as providers of housing finance;
improve societies' accountability to their members; and
maintain a sound prudential framework.

On accountability, the Government consider that, although societies' present constitutional arrangements are, by and large 'satisfactory' more should be done to improve the information given to members and to bring greater transparency and fairness to the process of electing directors, so they will be bringing forward a 15-point package of measures, the most important of which will: improve the information given to members about their rights as shareholders on first joining a society; the state of their society, in the summary financial statements they receive each year; the duties of directors; and the nomination and election procedures, should they wish to stand for the board; remove the distinction between shareholders and retail depositors; give borrowing members wider voting rights; require elections to be held, even when the number of candidates equals the number of vacancies on the board, and the election results to be posted in all branches; require societies to seek the approval of their members before entering into a new area of business by making significant use of an existing power. The Government will, however, be giving further consideration to the possibility of permitting societies to adopt powers by board resolution once this new requirement takes effect.

The Government have decided not to proceed with a proposal put forward by the financial services deregulation task force as a candidate for enactment under the general power in the Deregulation and Contracting Out Act 1994. The proposal would have removed the requirement for societies to send notices of meetings and summary financial statements to all members. Although it would have brought cost savings, it was widely criticised in the consultation process, as being inconsistent with the objective of increasing societies' accountability to their members, so we have decided to drop the measure.

However, the Government have accepted another task force proposal: to increase, from 1 to 5 per cent. of the total assets of a building society, the maximum bonus which can be paid to its members in the event of a merger with a larger society, without having to have a vote by the members of the latter. This change will be implemented through secondary legislation made by the Building Societies Commission.

We will now begin discussions with the building society sector on how the main parts of the accountability package can best be implemented. In the first instance, the Government favour a voluntary code or charter, which could be introduced quickly and amended in the light of experience. When a legislative opportunity arises, the more important provisions can be put on a statutory basis.

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In order to allow building societies to develop and play their full part in the competitive provision of financial services, the Government believe that the current prescriptive legislative framework governing their powers should be replaced by a more permissive regime. The new approach would give societies the freedom—within their principal purpose—to pursue any activities set out in their memorandum, subject only to overall limits on assets and liabilities, and the prudential control of the Building Societies Commission. To retain their distinctive character as mutual housing finance institutions, the Government consider that societies should raise no more than 50 per cent. of their funds from the wholesale market, and that they should have at least 75 per cent. of their lending secured on residential property—mortgage loans to individuals, housing associations and private landlords. Further flexibility would be built into the new legislation to allow the 75 per cent. limit to be reviewed in future, if circumstances warranted it, but societies' housing-related business should continue to account for a clear majority of their assets. The additional statutory restrictions placed on the activities of small societies under the 1986 Act will be removed.

The Government will introduce legislation to amend the Building Societies Act when a suitable opportunity arises. In the meantime, we will continue to implement, by secondary legislation, the changes announced last July. These will: allow societies to lend to incorporated businesses; raise the wholesale funding limit to 50 per cent. and permit societies to own general insurance companies writing buildings and contents policies and mortgage protection plans. These measures, inter alia, will facilitate the provision of funding for small and medium-sized businesses and encourage the growth of private mortgage payments protection insurance—both key objectives of Government policy.

Finally, we have decided to bring the limits on dealings between societies and their directors into line with those applying under section 338 of the Companies Act 1985, as amended by section 138 of the Companies Act 1989; and to increase the limit above which certain shares and deposits must count as wholesale funding. These changes will also be implemented through secondary legislation.

I have issued a press statement today, giving full details of the review. I have also responded to the Select Committee report of 19 December. Copies of the press notice and the response have been placed in the Libraries of both Houses.