My Lords, this amendment modernises building societies legislation and enables them to compete on more of a level footing with banks.
In the Government’s founding document, the coalition agreement, we set out our commitment to,
“promote mutuals and foster diversity in financial services”.
This commitment underscores the importance that we attach to the contribution that mutuals make to the economy and shows our determination to support them.
Building societies play a central role in the mutual sector. They provide vital services for their members, taking savings deposits and providing mortgages. Indeed, the sector has come through the financial crisis in good health, and has been responsible for much of the new mortgage lending and lending to first-time buyers in the UK in recent years. Building societies also regularly outperform the other retail banks in terms of customer satisfaction.
The Government are keen to ensure that the sector continues to play an integral role in our financial services sector. That is why, in last year’s consultation The Future of Building Societies, the Government asked the building society sector whether there were any changes to the Building Societies Act which would remove unnecessary limitations or barriers to growth, while preserving the distinctive and traditional building society model. Following that consultation, the Government now propose to make several amendments to the Building Societies Act.
The amendments will, first, make it easier for building societies to communicate with their members electronically rather than by paper. This is obviously in line with what banks can do. Secondly, they will allow societies to create floating charges. At the moment, societies can create fixed charges, but are not permitted to grant security over fluctuating assets. This causes practical difficulties, because floating charges are commonplace in financial services. The ban was originally introduced in 1997 to prevent holders of floating charges taking control of a building society, but due to changes in insolvency law this threat no longer exists.
Thirdly, the amendments will change the classification of small business deposits for the purposes of calculating the proportion of a building society’s funding from wholesale sources. Under the Building Societies Act, no more than 50% of a building society’s funding can
be wholesale funding. This amendment will mean that a certain amount of small business deposits will no longer count as wholesale funding. The amendment will give societies greater freedom to source wholesale funding, and creates a bigger incentive for societies to compete for small business deposits.
Fourthly, the amendments will allow owners of deferred shares, which are a type of mutual capital instrument, to be eligible to receive shares or cash payment on a demutualisation, irrespective of how long they have held the shares. This will provide an exception to the existing rule that shareholders must have held shares in the society for at least two years. This exception is necessary to remove the risk that deferred shares which are categorised as tier 1 capital would be degraded to tier 2 capital on a demutualisation, because the holder was not able to be given shares. Fifthly, I should add that our new provision makes it clear that the restriction applies to any right to acquire shares by members, and not just rights to acquire shares in priority to others, as is currently the case. The existing provision has not worked as intended and the amendments also correct that.
Sixthly, the amendments will allow building societies to change their financial year to any day in the year, not just 31 December. That is in line with banks. Seventhly, they will remove the requirement for building societies to provide new members with a copy of the latest summary financial statement. There is no equivalent requirement for banks, and this will have cost benefits. Eighthly, they will remove the requirement for societies to disclose information in their annual business statement about officers who are not directors. Such disclosure is excessive, time-consuming and costly, and there is no equivalent requirement for banks.
Taken together, these amendments provide significant modernisations to the legislative framework for building societies, and I commend them to the House.