Building Societies (Insolvency and Special Administration) Order 2009

My Lords, I am grateful to those who have contributed to this debate. I will start with my noble friend Lord Kirkhill because it is important to realise that we are talking not about abstract concepts, statute and legal complexities, but about a real society with a long, proud history and a strong membership in Scotland, which has played an important role in the Scottish economy. I sincerely hope that it will continue to do so as part of the stronger Nationwide and as a consequence of the ultimate resolution of the social housing business. It is attractive to believe that the behaviour of the Dunfermline Building Society was a consequence of increased competitive intensity from the Royal Bank of Scotland and HBOS. I am not entirely persuaded that that is the case. I certainly do not think it excuses the failures of the society. Quite simply, the society decided two or three years ago to increase its scale by acquiring books of mortgages from investment banks and others which had warehoused such mortgages, and, at what turned out to be rather a poor time in the cycle, to increase its exposure to commercial property development and lending. As a consequence, it began to suffer problems in terms of its capacity to comply with its threshold conditions. These problems were exacerbated by some rather disappointing experiences, to put it mildly, in connection with a major information technology programme, which did not deliver the results that the board had anticipated. It would be nice to say that this was due to the external pressure of competition, but the ultimate resolution of how to address that competition lay in the hands of the board and management of the Dunfermline Building Society. The noble Lord, Lord Kirkhill, was right, however, to indulge us with his observations in respect of the Dunfermline, given his particular closeness to that society over such a long time. I will endeavour to answer the many questions asked by the noble Baroness, Lady Noakes, who has excelled her reputation for the detail of her questioning. If I fail to answer them all, I will, as always, write to her, or she will jump up and remind me that I have missed some. First, we need to remind ourselves that this society found itself in very tricky situations, as the noble Lord, Lord Newby, said, when we passed the Banking Act 2009. I doubt if any of us expected that it would require action quite as quickly as this, or that it would be the first building society in the queue. It is good that we had that legislation in place, and it is important to remember that we can continue to say that no retail depositor with an FSA-regulated entity has suffered a loss as a result of the difficulties the banking industry is facing. That is one of the reasons we are seeing a distinct recovery in confidence in the industry. The noble Baroness asked about the use of the 28-day affirmative procedure. Why were orders not made earlier and why was the consultation not started earlier? The Treasury’s intention was to consult fully on these orders. However, this order was prepared to be used, if needed, on a contingency basis, and it speaks well of the Treasury that it prepares on such a basis. We had to deal with insolvency and special administration in respect of an institution which found itself in considerable difficulty, as a result of which these instruments were made. HMT can use the 28-day procedure once for each power and this is, therefore, the only opportunity to use it. I can assure the noble Baroness that, from my perspective, there is no question of officials or Ministers sitting on their hands or playing fast and loose. There is every intention to have an open and transparent consultation, carried out in accordance with best practice. The assurance I have already given to the House—that we will come back with the consequences of that consultation—is not a vague promise to revisit the issue but rather a clear statement that it will be the intention to inform Members of the House of the process and outcome of the consultation. If the consultation is open and transparent, it should be apparent to noble Lords that there is no sleight of hand involved, and that it is an exercise that is carried out with appropriate sincerity of intention. Questions were asked by the noble Baroness about the involvement of the Banking Liaison Panel. I remember that, in our debates on the Bill, questions were asked about whether the minutes of the Banking Liaison Panel would be published. My recollection, although I will check Hansard, is that we said this was probably a matter best left to the panel to determine whether it felt its operations would be facilitated by full publication of the minutes or some other form of advice of the progress of its work. I am not in a position to give the noble Baroness an answer as to what work the panel has been doing, but I will make it my business to inquire and ensure that she and the noble Lord, Lord Newby, are informed. Questions were also asked by the noble Baroness and the noble Lord, Lord Newby, as to the membership of the panel and whether it was appropriate to consider matters relating to building societies. I agree with both questioners that building societies are not just another form of bank; they are rather distinct, and specific legal requirements and practices relate to them. The Banking Liaison Panel should, therefore, ensure either that its membership has that experience as a part of the panel’s ongoing process, or that it co-opts or secures such specialist support as might be necessary to facilitate its contribution to the consultation. I have just answered another of the noble Baroness’s questions on whether the Banking Liaison Panel will be involved in the consultation process. I certainly expect it to be involved, but not alone. The noble Baroness asked why the Treasury made orders under this procedure after the Banking Act passed, and whether the Treasury would seek to use any more 28-day powers. The two instruments were made within one and a half months of the Banking Act receiving Royal Assent. A normal and proper consultation under Cabinet Office guidelines should take three months. Furthermore, we consulted the FSA, the Bank of England and the FSCS in drawing up these instruments. We are drawing up a consultation document on both the orders with a view to consulting on them before the Summer Recess. The noble Baroness asked also whether it was a matter of consultation in arrears and what form the consultation would take. I think that I have already indicated that I envisage the consultation taking three months and starting before the Summer Recess. The Treasury will consider responses in the normal way and will make amending orders if appropriate. An open and transparent consultation process would quickly disclose whether the Treasury was guilty of being fast and loose with the consultation process, or whether it had taken it seriously. My experience of being involved in consultation processes and seeing the Banking Liaison Panel at work is that we are prime beneficiaries of such processes and the work of the panel. I see no reason why we should not continue to benefit from the advice and be informed by the consultation and the panel. The noble Baroness asked why the power to initiate insolvency process is reserved to the FSA rather than the Treasury. I admire her talent for spotting opportunities for intrigue and deft footwork by the Treasury, but I assure her that that is not the case here. The insolvency process does not give the Secretary of State a role in relation to building societies, unlike companies. The Treasury does not consider that it has a role here; it considers that this role is appropriately performed by the FSA. However, the noble Baroness has raised a question which has set me thinking about this, and we will consult on it as part of our process, because there is merit behind her question in respect of the appropriate mechanism. I shall invite my colleagues to ensure that that is covered in the consultation process. The noble Baroness asked about the Banking Liaison Panel and its role in respect of the orders. The panel, as I have already said, will look at the orders. It has already had its first meeting, and the noble Baroness is no doubt aware that there is now a page on the Treasury website where, in due course, the panel will publish further information on its work. I would again be very happy to write to her and the noble Lord, Lord Newby, advising them when that website becomes more active and worth logging on to their favourites list on their Google search engine or whatever mechanism they use. The noble Baroness asked about the FSA Handbook changing. The FSA Handbook is always available on the FSA’s website, and the FSA must publish all rule changes in instruments, so that there is a method by which they are readily accessible.