Building Societies (Funding) and Mutual Societies (Transfers) Bill

My Lords, I beg to move that this Bill be now read a second time. I start by paying tribute to Sir John Butterfill, Member of Parliament for Bournemouth, West, whose Bill this is, to the All-Party Building Societies and Financial Mutuals Group across both Houses, of which I was a founder member, and in particular the honourable member for West Bromwich, West, who is an excellent chairman, to Mutuo, which in a sense is the think tank for the mutual movement, and not least to Her Majesty's Treasury team in general and the Financial Secretary in particular. My own involvement in matters mutual goes back to my days as the leader of the London Borough of Islington. I think that last century I was its only Conservative leader. I was the director of a co-operative housing association, then, in another place, in the 1980s I took a particular interest in the friendly society movement and was one of the main activists for the Bill in 1992, and the significant changes that were brought about for the friendly society movement. Then later, after serving in that House, I became chairman of the Tunbridge Wells Equitable Friendly Society, now trading as the Children's Mutual. Mutuality and the mutual movement are big business in this country. More than 19 million British individuals are members of one or more mutual societies; that is one in three of our population. There are 9,000 industrial and provident societies with assets of £65 billion, 60 building societies with assets of £300 billion, and 57 larger friendly societies with £15 billion of assets. The contrast between a mutual company and other companies is how the profits are distributed. Mutuals do not pay any dividends to shareholders, so they are able to operate on much lower margins than Plcs. That means, all other things being equal, they can deliver better value for money to their customers. Every year we see that they do so in the annual tables on financial performance of all life companies and in the tables we see regularly for best-buy across a whole raft of financial instruments. More recently, pressure from building societies was the main factor which prevented banks charging for access to cash machines. However, inevitably, markets develop, society changes and, since the companies involved in the mutual movement want to compete, certain changes in legislation are required every now and again. Now is such a time and this Bill addresses three key needs. It is only an enabling Bill, with the detail to be done by regulation. That is not a format I normally like very much, but for these types of problems and opportunities it is a sound format. There are four primary clauses in the Bill, two of which deal with building societies and two of which deal with the whole mutual movement. The fifth clause is a title clause. Clauses 1 and 2 concern building societies alone. They arise out of the period in 1986 when building societies were deregulated and when there was concern to protect the financial situation of members. At that time, it was thought correct to set for building societies a maximum gearing level, borrowing against the assets that they had deposited by their members. That level was set at 50 per cent. Over the years, that has worked fairly well. Until now, it has been possible for building societies to operate reasonably adequately within these constraints. However, the time has now come to free them and to change that percentage. This Bill raises the 1986 limits. The level will be dictated by regulation, but it is fairly common knowledge in the trade that we are talking about increasing the level to 75 per cent, which should be more than adequate. As far as I know, every building society is in favour of the change. In addition, it is right that this Bill should take cognisance of the Miles review which was set up by the Treasury and concerned the changing nature of the mortgage market. For most of us in your Lordships' House who had mortgages, the mortgage market used to be of a particular nature. That has changed and is changing all the time. It is changing because of the change in house prices and a change in the ability of people to finance. It seemed obvious to a number of us that building societies may now wish to embrace the new fixed-rate policies that have emerged in the current market. We do not believe that it is necessary to continually seek from Her Majesty’s Government primary legislation to meet up with any difficulties that may arise. The removal of the constraint—the switch from 50 per cent to 75 per cent—means that the building societies would be in a position to meet whatever changes emerge in the marketplace over the next few years, rather than having to respond to market changes constrained by legislation that might by then appear to be out of date. Clause 2 concerns safeguarding the position of building society members, in particular their relationship with the capital markets from which money may be raised. In response to the increased limits that I have described, through the Bill we want to help and give reassurance to the members of the societies so that in the event of a winding up they will rank pari passu with other creditors. The reason for what may seem to be slightly preferential treatment is that people who put money into building societies tend to be relatively small investors, not particularly sophisticated in these markets, and who regard a building society as probably the safest and most convenient place for their money. All building societies are covered by the regulations issued by the Financial Services Authority andthe Financial Services Compensation Scheme, so therefore Part 2 is applicable to those regulations and the compensation that arises out of them. It is fair to say, however, that in recent times no building society has collapsed and we certainly do not anticipate any collapses in the future. Clause 3 is one of the two clauses dealing with the whole of the mutual movement, in particular outside the building societies. It addresses the transfer of engagement rules. This is a huge opportunity to strengthen the mutual sector. For many years, mutuals in the UK saw themselves as part of a mini-sector, as co-operatives, building societies or friendly societies. More recently, they have become involved in what we would call in toto the mutual sector. Indeed, that was reflected in the other place when the original all-party group on building societies expanded its scope and title to become the All-Party Group on Building Societies and Financial Mutuals. It is true that membership overall of the mini-sectors within the mutual movement has declined somewhat. That is partly because of demutualisation and partly because of business consolidation. Consequently, at this point mutuality might be seen as a declining business form, despite its great appeal and its value to consumers and customers. As things stand, it is not possible for one company in one of the mini-sectors to amalgamate with a member of another mini-sector without one of them demutualising, which of course defeats the whole purpose of the exercise. We want to enable those sectors to merge without losing mutuality and thus benefit from the great cross-fertilisation that would come about from such a joining together. That will allow stronger companies to arise, and perhaps by merger they will produce something really interesting in the friendly society/mutual insurance sector or whatever decides to combine. That is the whole purpose of Clause 3. To be frank, in comparison with the rest of the world, the UK environment at the moment is a little restrictive, or at least it does not encourage new corporate options for mutuals. We believe that that needs to be addressed. The Bill will give the Treasury a power to make orders to allow different categories of mutuals that want to do so to receive transfers from other categories of mutual society. It will allow the Treasury to treat the transfer of mutuals to other mutuals or their subsidiaries as if they were transfers between the same category of mutual. The only exception from this provision will be the credit unions, where the nature of their business would preclude them from participating in this type of transfer. In overall terms, Clause 3 is probably the most important in the Bill, certainly in terms of what we can do to strengthen the mutual movement as a whole. It will ensure that it is not gobbled up so that the advantages of mutuality and the mutual sector’s increasingly competitive edge over the incorporated sector can continue. I believe that the Bill will help to empower savers. As I said at the start, we should remember that19 million people are in this sector, which is about a third of the nation. The values that those people have as members and as savers support much that all noble Lords respond to. Saving, in its fundamental sense of investing, of providing for a secure future, is a crucial component to prudence. As such, it encompasses the wise provision of a home and of education and health services, as well as putting aside money for economic resources for investment and research and development. Put simply, savers benefit society because they think and act for the long term. Their values include sustainability, faith in the future and responsibility. I very much hope that your Lordships will give the Bill a fair wind. I commend the Bill to the House. Moved, that the Bill be now read a second time.—(Lord Naseby.)