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

My Lords, I congratulate the noble Lord, Lord Naseby, on his introduction to the Bill. He speaks with vast experience in this area, and the House benefited from that in the way in which he outlined the measure. I thought he had achieved the almost unparalleled feat of persuading the noble Baroness, Lady Noakes, that the Government had got things just about right, but to my great consolation the noble Baroness sought to disprove that by indicating that there were areas about which she had anxieties that needed to be resolved by the Government. I shall set out to do that in a moment. Nevertheless, it is encouraging that the Bill has widespread support, and I noted the positive response of the noble Lord, Lord Newby, to it. I will also pass on the thanks of the noble Lord, Lord Naseby, to the Financial Secretary, who has certainly worked hard to assist with the Bill in ways that we hope will improve it. The House will be aware that significant changes were made for the benefit of the industrial and provident societies by the Industrial and Provident Societies Act 2002 and the Co-operatives and Community Benefit Societies Act 2003. The Bill introduces helpful amendments to the Building Societies Act, and for the benefit of other financial mutuals in line with government policy for the sector. I must attest to the fact that the Government have rather more enthusiasm about the sector than the noble Baroness, Lady Noakes, managed to evince in her contribution. I recognise her reservations on this occasion and am happy to identify that although the Chamber is thinly attended this afternoon, she is in a minority of one. The rest of us will glory in the achievement which the Bill represents. However, there is considerable work to be done. The Government are committed to the mutuals sectors. We are keen that building societies should be seen as an effective competitor within financial services. They have more than £300 billion in assets, £200 billion in mortgage assets and members’ savings of £190 billion. The potential for building societies which offer competitive services to their members will be significantly increased by the important changes made in the first two clauses. On Clause 1, it is clear that raising the level of wholesale funding would impact on members’ rights on the winding up or liquidation of the society because members’ shares are subordinate on a winding up. For that reason, the Bill introduces Clause 2 as it is clear that without it, Clause 1 could not be commenced. The new powers will be subject to the affirmative resolution procedure. We recognise that, as the noble Lord said, secondary legislation will play its part in implementing the measures in the Bill. The Government recognise that they will be sufficiently significant to require the affirmative procedure for that legislation. We welcome this opportunity to update the building societies legislation. Clause 3 and the associated Clause 4 are different from the other two, being of a far broader scope, as the noble Lord said. The aim, in attempting to facilitate transfers within the financial mutuals sector, is admirable. As many will be aware, the mutuals legislation is complex. The different Acts are not necessarily compatible with each other and there are issues in making the changes to law available to mutual insurers. The Government have been working with the promoters of the Bill to clarify the issues and introduce appropriate amendments in Committee. We hope that the Bill will go into Committee so that we can put forward amendments to strengthen it. A significant concern is that the clause should not provide an opportunity for demutualising by the back door. Measures were introduced in the Industrial and Provident Societies Act 2002 to align the rules on demutualisation for industrial and provident societies with those for building societies. It is important that that principle is maintained—we do not want any loophole created. I am sympathetic to the changes the Bill seeks to introduce. It has clearly been motivated by a recognition of the need to keep building societies in particular and the mutuals sector as a whole competitive. I note the noble Baroness’s reservations on this point; no doubt we will have the chance to debate them within the framework of this Bill and on other more significant occasions. The Government agree with the noble Lord that mutuals play an important part and should be encouraged, which is what the Bill does. We are sympathetic to the changes and reforms that the Bill hopes to deliver. They are consistent with our policy for the sector and our defined need to strengthen such societies’ contribution to the financial welfare of their members. The Government are very much behind the Bill’s broad objectives. I should like to examine one or two points in a little more detail. Clause 2 relates to the consequential rights of building society members on a winding up or liquidation. The intention is to place members on a par with other creditors, including wholesale creditors, in the case of liquidation or winding up. Currently, members’ funds would rank below those of other creditors. The position of such members’ funds has been a cause of concern to regulators for a considerable time, because, on the winding-up or liquidation of a building society, members could stand to lose more than the equivalent bank customers, although up to the statutory limits they would most likely have recourse to the financial services compensation scheme. This measure has the Government’s support on the basis that for Clause 1 to come into effect Clause 2 must also be in place. Clause 2 gives the Treasury power to amend the Building Societies Act 1986 to ensure that, in the event of a building society insolvency, any assets available are applied equally to satisfy creditors’ and members’ liabilities. The power may also be used to make transitional provisions, to cover, for example, the position on debts entered into before the changes take effect. The current position puts members at a disadvantage. In the event of insolvency, they are only entitled to their deposits in savings accounts, once all creditors have already been paid in full. That contrasts with bank customers who, because they are creditors of the bank, rank equally with other creditors. The power to exclude categories of special liabilities enables the Treasury to deal with these individually, which it was not practical to do in the Bill. It will be important that transitional provisions ensure that the rights of creditors in respect of debts entered into before commencement of the order are unaffected by the change. Clause 3 gives the Treasury powers to modify the law on the transfer of engagements from one type of mutual society to the subsidiary of another. There are currently legal limits on the permissible types of transfers between different mutual bodies. For companies operating in the listed markets, there are no such restrictions on the transfer of ownership. This measure seeks to level the playing field. It will also encourage cross-fertilisation in the mutuals sector and strengthen individual mutuals, as well as retaining the framework of mutuality to the benefit of the members who own the organisations. The Treasury will, of course, consult on the appropriate means of restriction of further transfers of ownership outside the mutuals sector, so that this procedure does not become a back door means of demutualisation. This is likely to be achieved by placing a time bar on future transfers of ownership. It will also consult on that important provision of the extension—possibly to as far as 75 per cent—to which the noble Lord referred in his introduction. That is an important part of the Bill. The precise percentage is open to consideration, and we will consult on that before decisions have to be made. We will table amendments in Committee to include mutual insurers in the scope of the Bill. That question was addressed specifically to me. We will also discuss the position with the Financial Services Authority, the regulator for the sector, and have the available information on reporting on mutuals. All in all, the Bill has passed through the Commons with widespread support. It has been introduced ably today by the noble Lord, Lord Naseby, and I am sure that he will pilot the Bill through its remaining stages, should it be successful today, with similar success. Certainly, the Government will propose amendments where we think they will strengthen the Bill in the objectives identified by the noble Lord in his opening speech. Accordingly, I am happy to give our broad support.