Financial Mutuals Arrangements Bill

Public Bill Committee, 25 April 2007.

David Taylor (Labour, North West Leicestershire)

It is hoped that the Committee will conclude consideration of the Bill at this afternoon’s sitting. If that is not possible, before we adjourn I shall invite Sir John to move a sittings motion specifying the date and time of our next meeting. In the event of a third sitting, I do not intend to call starred amendments.

Clause 1

David Taylor (Labour, North West Leicestershire)

With this it will be convenient to consider Government amendments Nos. 7 and 8, and Government new clause 1.

John Butterfill (Conservative, Bournemouth West)

First, may I say what a great pleasure it is to serve under your wise chairmanship, Mr. Taylor? We are looking forward to an interesting debate. Secondly, I wish to express my personal thanks for the co-operation that we received in the drafting and, indeed, extensive redrafting of the Bill from Treasury officials, who have been most helpful throughout. I thank also those lawyers representing the Building Societies Association, and Mutuo. Without their combined effort, we would not be where we are today.

When I first presented the Bill, I little appreciated how legally complex it was likely to be given the large number of interactive former measures that it will affect. At the moment, we have a slight problem in that one particular group of mutuals—the mutual insurance companies—is effectively excluded from the provisions of the Bill. However, I am hopeful that we may find a way to overcome that problem in the future. Everyone concerned has made a splendid effort and I am very grateful to all of them for their help.

Edward Balls (Labour, Normanton)

It is a pleasure to serve once again under your chairmanship, Mr. Taylor, although for the first time in a Committee of this nature. I also thank Treasury officials, the staff and experts from Mutuo and the Building Societies Association, and particularly the hon. Member for Bournemouth, West, whose leadership and determination to see such important reforms through to the statute book have been demonstrated in recent months.

We had a full and substantial debate on Second Reading when we aired the wider issues surrounding the important role that the mutuals sector plays in our economy and the reason why such flexibilities are needed in order to allow building societies and wider mutuals to operate on a level playing field. I repeat what I said on Second Reading in paying particular tribute to the hon. Gentleman’s work. The Government support the principles that underpin the Bill, and we will endeavour to do everything that we can to see it through to the statute book.

There is no deviation from the principles that underpin the Bill, but since Second Reading, extensive and detailed discussions have taken place to ensure that it can be made operational and effective, given the corporate company and wider European legislative framework in which it is necessary for the clauses to operate when they become law. The Bill introduces amendments to building societies legislation on the wholesale funding limit and the position of members in the event of an insolvency. It also updates other mutuals’ legislation to transfer the ownership of a different type of mutual society as a subsidiary company. As I have said, taken together the measures will strengthen the competitive position of mutuals and benefit their members.

New clause 1 amends section 7 of the Building Societies Act 1986 to give the Treasury the power to increase the limit to the proportion of funds that may be raised from sources other than individuals’ shares. As I said on Second Reading, that power should reside with the Treasury and would be operated with full consultation with the Financial Services Authority.

Currently, societies must raise at least half their funds from shares held by their individual members. The remainder can be raised from other sources—generally wholesale funding. The power will allow the Treasury to increase the external funding limit up to 75 per cent. However, the Treasury will be able to use that power only if it also makes an order under new clause 2, which I will come to in a moment. The new power will be subject to affirmative resolution.

New clause 1 also amends section 5 of the Building Societies Act 1986, which defines the “principal purpose” of a building society to be making loans secured on residential property which are funded substantially by its members. The new clause gives the Treasury a power to amend that principal purpose requirement to reduce the extent to which loans are required to be funded by the society’s members. That is to bring the requirement in line with changes to the funding limit. Again, that power is subject to affirmative resolution. Government amendments Nos. 7 and 8 make appropriate changes to the long title.

Increasing the funding limit will increase the amount of “wholesale” funding that societies may use, giving access to cheaper funding and creating a more level playing field with banks. That change was recommended by the 2004 Miles review of the UK mortgage market. The figure of 75 per cent. leaves a significant element of member funding.

On Second Reading, the hon. Member for Bournemouth, West made it clear that he was in favour of using the negative resolution procedure for the various orders that will be necessary to implement the Bill. We have considered that point carefully during the drafting of amendments, and I have discussed the matter with him personally. We believe that all the main implementing orders for the Bill should be made under the affirmative resolution procedure, in line with the usual procedure for Henry VIII powers.

The powers conferred by the Bill allow the Treasury to make significant amendments to the primary legislation governing building societies and other mutual societies. Having considered those matters carefully, we believe that Parliament should have the opportunity to debate the changes in the light of consultation on the detail of the policy.

John Butterfill (Conservative, Bournemouth West)

I am happy with the new clause with one possible exception: the affirmative resolution procedure. The way in which building societies and others will be affected is sufficiently well established by the Bill that it will not necessarily require the affirmative procedure, which will delay the implementation of various parts of the Bill and involve much greater parliamentary work. I do not think that the provisions deal with matters that necessarily require the further scrutiny that one would normally ascribe to the affirmative procedure. Nevertheless, it has been very encouraging that any differences between us have been on a procedural matter rather than on the principles behind the Bill. Those on both sides of the House, and indeed all parties in the House, feel that we should try to get the Bill on to the statute book and implemented as soon as possible. The amendments are self-explanatory and sensible. I have no difficulties at all with the new clause.

Vincent Cable (Liberal Democrat, Twickenham)

I welcome you to the Chair, Mr. Taylor. I apologise to the hon. Member for Bournemouth, West for not being present when he introduced his Bill, which I strongly support. It seems to be a very important piece of work. It has been endorsed by the relevant bodies, particularly the Building Societies Association. I wish it well, and again apologise for not having been here to make the more general points about it.

Although the Government amendments are fully in sympathy with the Bill, they are very substantial, and I should like to raise one broad question: how important and pressing are the funding limitations? That is an important question, because it determines whether we need to make explicit the raising of the limit from 50 to 75 per cent., or to make it open-ended, and whether the legislative provisions need to be rapid, easy or more leisurely.

I got two different interpretations or answers from my background reading on the Bill. On the one hand, Northern Rock gave evidence to the all-party group and argued that its ability to transcend the funding limitations by demutualisation had been a critical factor in its success as a commercial organisation. It had been able to grow rapidly and therefore to cut the spread between its borrowing and lending rates, which were originally the key attractions for mutuals because they do not have to pay dividends. Northern Rock made the point that the funding limitations had been a crucial part of its thinking about the business model that it adopted.

On the other hand, as I understand the evidence, few if any mutuals—we are talking primarily about building societies—have taken advantage of the 50 per cent. that they are currently allowed. Why have they not done so if it is a binding constraint? I raise that question for the reasons that I mentioned; the answer determines precisely how urgent the process needs to be.

I also wish to refer to the procedure set out in the Treasury’s new clauses, which make it clear that the Treasury rather than the FSA will be the point of determination. Perhaps the Minister will spell out the reasoning behind that decision. As someone who has dealt with both bodies, I can understand that it is probably a sensible decision in this context. I have never found the FSA to be sympathetic to the problems of mutuals. I dealt with the FSA extensively on insurance matters, and it clearly regarded mutuals as an irritating detour from their preoccupations with the City—it was not interested in the idiosyncrasies of the mutual movement. Perhaps that is the reason why the approach has been taken, and the Treasury is too polite it out. There might be some value, however, in the Minister explaining briefly why Treasury rather than the FSA should be the locus of decision making.

In conclusion, I shall reiterate what I said at the beginning of my remarks: as someone who was involved in the campaign to stop the collapse of the building society movement through demutualisation in the late 1990s, I think that the arrest of the slide is valuable. Positive initiatives are now being taken to strengthen the legislative basis of mutuality, and I welcome the Bill as an important component of that process.

John Butterfill (Conservative, Bournemouth West)

Perhaps I can deal with the hon. Gentleman’s first point and the Minister can deal with the second. It is my understanding that the hon. Member for Twickenham is correct in saying that most building societies are managing adequately within the existing limits. However, there is a considerable degree of sentiment that says that that will not remain the case for much longer. This is a fast-moving area and the competition is becoming ever more threatening towards building societies, so they will need to move quite quickly. If the situation developed, building societies would look to the Government to introduce a Bill of this nature, which might take quite a long time given the heavy timetable to which the Government are always subject. This Bill gives us the opportunity to deal with the situation now, in anticipation of those needs.

Nicholas Winterton (Conservative, Macclesfield)

I say to my hon. Friend that I fully support the brief argument that he has just advanced in response to the hon. Member for Twickenham, who speaks with distinction for the Liberal Democrats. As a sponsor of the Bill, I have made some inquiries in my constituency. A major mutual, the Cheshire building society—and a good society it is—is based in Macclesfield and a smaller building society, the Vernon, operates in my constituency, although it is based in the Stockport constituency. They are supportive of the Bill, because they see it as a moat or defence for the long term. I believe that the Bill’s objectives are thoroughly desirable.

I think that I understand the Treasury’s intention in tabling the amendments and the new clause, and I am prepared to go along with it, because this is one way of getting the legislation on the statute book and, as my hon. Friend said, that needs to be done soon. Perhaps the Treasury is being a little bit over-careful, but the amendments do not detract from the Bill. Like my hon. Friend, who has worked so hard to advance the Bill, I am happy to accept the Treasury’s amendments and the new clause.

David Curry (Conservative, Skipton and Ripon)

Over-caution on the part of the Treasury is always to be welcomed, since we so rarely see it manifested. Like my hon. Friend, I welcome the Bill and am happy with the amendments.

I just wish to say that the Skipton Building Society in my constituency is one of the big ones and is hugely important. It is the biggest employer in Craven. Practically no voluntary activity in Craven gets under way without the support of the building society, and schools that bid for specialist status do so with its support. In terms of voluntary society and corporate responsibility, it is difficult to find another example of so many depending on one institution. Preserving its status and enabling it to continue to be able to do the things that it does in the community is crucial. That is the basis of my support for the Bill.

Edward Balls (Labour, Normanton)

I entirely agree with the comments of the hon. Member for Bournemouth, West, who replied to the first of the two questions asked by the hon. Member for Twickenham. When we debated this matter in detail on Second Reading, I said that I was pleased that my party had achieved cross-party support. By saying “cross-party” I meant not simply the Labour party and the Co-operative party, but support among Opposition Members as well.

The speeches that we have heard from the right hon. Member for Skipton and Ripon and the hon. Member for Macclesfield, supporting the Bill and the values and principles that underpin the role that mutuals play in our society, are welcome and important in respect of constituencies throughout the country. Mutuals and building societies are playing the role that the right hon. Gentleman has just mentioned, and if we can take action to help them do so, either through direct Government legislation or by backing such a Bill as this, it is right and proper that we do so.

I apologise to hon. Members if they feel that the Treasury has been over-cautious in its desire to ensure full and proper parliamentary scrutiny and accountability, but I say to the right hon. Gentleman that this is the way that the modern Treasury seeks to proceed, and it will continue to do so whenever possible.

Nicholas Winterton (Conservative, Macclesfield)

My right hon. Friend the Member for Skipton and Ripon made an excellent case for the work that mutual building societies do in the community. They are hugely involved. To assist the Economic Secretary, his colleague the hon. Member for Staffordshire, Moorlands (Charlotte Atkins) is fortunate to have the Britannia Building Society in her constituency, on the borders of my constituency, as it is a huge employer that is massively involved in the community, not only in north Staffordshire but in Cheshire as well. We need to praise the role of the mutual building societies, which do a lot of wonderful work, much of which is unsung.

Edward Balls (Labour, Normanton)

I agree with the hon. Gentleman that we must do more to promote the role that mutuals play. On the example that he gave of Britannia’s important role in taking over Bristol and West, it is taking forward remutualisation in the building society sector. As I said on Second Reading, it is a matter of pride for the Treasury and for mutuals and co-operatives throughout the country that the substantial majority of child trust funds—a Government innovation with cross-party, or rather imperfect cross-party support—are being provided by mutuals and friendly societies. That is an example of the mutuals sector not simply resting on its values and history, but providing leadership in a new development, which is being followed by countries around the world.

As I said, the hon. Member for Twickenham asked two questions. It is good to see a member of his party in Committee, given the unfortunate absence of the Liberal Democrats on Second Reading, to cement fully the broader cross-party support that we want for the Bill. The hon. Member for Bournemouth, West set out fully the reason for taking the power to raise the funding limit, which has been pressed for and supported widely by the industry. Over the next year or so, we hope to consult in detail with the FSA and the societies to ensure that we get the precise number and details correct when we introduce the order, for which the Bill paves the way. There will be consultation; but as I said, there has been widespread support.

The second question raised by the hon. Member for Twickenham was discussed extensively, in fact, on Second Reading. Indeed, following a wide range of very supportive speeches from both sides of the House, my hon. Friend the Member for Hackney, South and Shoreditch asked me in an intervention why the Treasury, not the FSA, was taking the power in the amendments. I explained that, having consulted the hon. Member for Bournemouth, West and the FSA, we took the view that, although the latter is the regulator of individual institutions, the responsibility for setting the overall framework in which that regulation occurs is a matter for the House and the Government.

Accountability for getting that legislation correct lies with the House. We therefore took the view that the Treasury in the House should propose the framework and take the powers and that scrutiny should occur in the House. I assure my hon. Friend the Member for Hackney, South and Shoreditch and the hon. Member for Twickenham that that is being done in full consultation with the FSA, and with its agreement. I hope that that will not present difficulties in the Committee today.

Clause 2

David Taylor (Labour, North West Leicestershire)

With this it will be convenient to discuss the following: Government amendment No. 6.

Government new clause 2—Power to alter priorities on dissolution and winding up.

Edward Balls (Labour, Normanton)

New clause 2 will give the Treasury the power to amend the Building Societies Act 1986 to ensure that, in the event of a building society insolvency, any assets available are distributed equally between creditors and members. That will change the current position, in which creditors have priority over members. The power may also be used to make transitional provisions to cover, for example, debts entered into before the changes take effect. The power will be exercised under the affirmative procedure—again, for the reasons that I outlined when I introduced clause 1 to the Committee.

The current position puts members at a disadvantage. In the event of insolvency, they are entitled to their deposits in savings accounts only when all creditors have 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 will enable the Treasury to deal with them individually, which it was not practical to do in the Bill.

It is important that transitional provisions ensure that the rights of creditors in respect of debts entered into before the commencement of the order are unaffected by the change. The power is also exercisable under the affirmative procedure. As the use of the power would be a significant change to insolvency law, as applied to building societies, the views of the Insolvency Service and others will be sought before exercising the power.

John Butterfill (Conservative, Bournemouth West)

I very much support the proposal, but it is important to put it in context. No building society has failed for at least 40 years—it is therefore an extremely unlikely event—but the new clause addresses a moral issue: is it right on an insolvency that small retail depositors who are unsophisticated in financial matters should be subordinated to the wholesale capital markets who are extremely sophisticated players? Redressing that is quite long overdue.

Clause 3

David Taylor (Labour, North West Leicestershire)

With this it will be convenient to discuss the following: Government amendment No. 9.

Government new clause 3—Transfers to subsidiaries of other mutuals.

Government new clause 4—Transfers to subsidiaries: distribution of funds.

Edward Balls (Labour, Normanton)

I pay particular tribute to the hon. Member for Bournemouth, West, not simply because of his leadership on matters of mutual policy, but because of his wide experience in the House, including as an excellent Chairman of the Standing Committee that considered the Finance Bill last year. His knowledge of procedure is second to none, and the fact that he ensured that we voted correctly was appreciated by hon. Members on both sides of the House, myself included.

New clause 3 will give the Treasury the power to modify legislation relating to the transfer of the business of building societies, friendly societies and industrial and provident societies, to make those transfers easier. The modifications will apply where the transfer is from one mutual society to a company that is a subsidiary of another mutual society. The Treasury may also use the power to ensure that members of the transferring mutual society, and new customers after the transfer, are given certain membership rights in the owning mutual society.

The Treasury may also make other changes that relate to the transfer—for example, to prevent a change in ownership of the new subsidiary company for a specified period. Where the power is used to modify primary legislation, or to modify the rules on subsidiaries, it will be subject to the affirmative procedure. But it may also be used to modify secondary legislation—for example, transfer regulations made under section 102 of the Building Societies Act 1986—in which case the negative procedure will apply.

These amendments are intended to lighten the burden on financial mutual societies where they transfer ownership from one type of mutual to another. The wider opportunities for a more diverse range of ownership in the sector will help it to compete both internally and in the wider financial sector. The Treasury will also consult on the appropriate means of restricting further transfers of ownership outside the mutual sector, so that the procedure does not become a back-door means of demutualisation. That is likely to be achieved by placing a time bar on future transfers of ownership.

John Butterfill (Conservative, Bournemouth West)

Again, I very much support the clause. It goes to the heart of the Bill. It has been anomalous that mutual financial organisations can merge with one another only by one of them first losing its mutuality, which rather defeats the whole object of mutuality. It is a key part of the Bill that these arrangements will enable those transfers to take place, without the loss of the important principle of mutuality.

As I indicated earlier, there is one area where I am disappointed and that is the position of mutual insurers. I understand that their omission is due to possible concerns about European Union law relating to companies. I think that only seven companies are affected by that, and it may yet be possible, with the wit and ingenuity that is available to us, to table a further amendment on Report, so that they could be included. If that were possible, I would welcome it, but I do not want to hold up the progress of the Bill in its entirety on that issue.

Edward Balls (Labour, Normanton)

Just to reply to the point made by the hon. Gentleman, we have considered carefully whether mutual insurers could be included in this part of the Bill. As I explained on Second Reading, this is an area that has raised more substantial difficulties for us than other aspects of the original proposed legislation. Mutual insurers are difficult to define as a category. Many of them are friendly societies, which are already covered by the Bill; others are governed by private Acts of Parliament, and so could not be covered in a public Bill. Changes in that regard would have to be made in those private Acts under the private Bills procedure. The remaining mutual insurers are companies limited by guarantee. We have considered whether the Bill could be extended to companies limited by guarantee that are also insurers. However, as insurance is regulated on a Europe-wide basis, we would have to allow the same procedures to apply whether transfer is through a subsidiary of a body corporate in another member state, which is similar to a company limited by guarantee.

The work that we have done in consultation with the hon. Member for Bournemouth, West and his advisers has continued to throw up a range of problems. For example, it would be difficult to specify in UK legislation what rights members of the transferring mutual society should enjoy in the holding company established in another member state. That is one example of a range of difficult definition issues that we have not been able to solve. So far, that has meant that we have been unable to come forward with proposals in new clause 3 covering mutual insurers.

However, I take on board the hon. Gentleman’s plea that we should keep trying. I am happy to go back today and take a further look at these matters, and to see what more can be done. I will write to members of the Committee in a day or two to inform them whether we can continue those discussions. If it were possible to come back with an amendment in Report, we would do so, although I fear that simply to investigate the matter further and see whether that was possible would take some days. I do not know whether the timetable will give us the space to do so, but we have no principled reason for excluding mutual insurers. If we could table an amendment on Report, we would. We would need some time to do the work to see whether that was possible.

I shall keep in touch with Committee members, but if we are unable to make progress, we will continue to need to discuss the issue beyond the life of this Committee and this Bill. It is not off the table; if we can make progress, we will. It will take some days to look at the matter, but I do not rule out an amendment on Report.

Clause 4

Edward Balls (Labour, Normanton)

I beg to move amendment No. 4, in clause 4, page 5, line 4, leave out ‘Financial Mutuals Arrangements’ and insert

‘Building Societies (Funding) and Mutual Societies (Transfers)’.

David Taylor (Labour, North West Leicestershire)

With this it will be convenient to discuss Government amendment No. 5.

Edward Balls (Labour, Normanton)

New clause 4 applies if the terms of a transfer from a mutual society to a subsidiary of another mutual society includes a distribution of funds or bonus. Any such distribution must be approved by a resolution of the society that approves the transfer, whose terms will be set out in secondary legislation. If the distribution exceeds certain limits, it must be approved by resolution of each society concerned. Those limits will be set by the Treasury in an order.

The aim of the amendments is to ensure that similar procedures for approving distribution of funds apply where the new procedure is used as currently apply in the case of mergers between building societies. The mutuals sector will be consulted on whether to adopt that approach in the implementing order, and amendment No. 9 would make an appropriate change in the long title to reflect new clauses 3 and 4.

Edward Balls (Labour, Normanton)

I should have said in my earlier remarks that Government amendment No. 5 makes a technical change to clause 4 on commencement powers. Amendment No. 4 gives a new short title to the Bill—the Building Societies (Funding) and Mutual Societies (Transfers) Bill.

New Clause 1

New Clause 2

New Clause 3

New Clause 4

David Taylor (Labour, North West Leicestershire)

We come now to Government new clause 5.

Edward Balls (Labour, Normanton)

It was our intention to consult the Channel Islands and the Isle of Man about new clause 5 before exercising the power, but given the time available, it has not been possible to complete those consultations satisfactorily. The new clause would not have a material impact on the Bill or the sector, so it is not my intention to move it.

Nicholas Winterton (Conservative, Macclesfield)

May I congratulate my hon. Friend the Member for Bournemouth, West on introducing the Bill and on the huge amount of work that he and his advisers have put in? At the same time, may I pay tribute to the Treasury and the Government for accepting the merits of the Bill? My hon. Friend might have been the fuse that activated the Government to produce this legislation, which is long overdue and very beneficial to the mutual movement. I have discussed the matter with him and I am truly amazed at the amount of work that he has put in. I also thank the Treasury for the way in which it has co-operated with him in putting the basis of good legislation on the statute book.

David Taylor (Labour, North West Leicestershire)

I intend to treat that as a point of order.

Edward Balls (Labour, Normanton)

Further to that point of order, Mr. Taylor. From the Government Benches, may I echo the comments of the hon. Member for Macclesfield? In essence, the legislation, which we will report to the House following today’s debate, takes forward the original proposals of the hon. Member for Bournemouth, West, and it follows a great deal of detailed consultation and discussion. We are very grateful to the hon. Gentleman and his advisers, Mutuo and the Co-operative party, and to the Treasury and Financial Services Authority advisers who have worked with us to translate the principles, concepts and intention into legislation that we will take forward if the House supports it on Report and Third Reading, and through the work of subsequent Committees and secondary legislation. We are very grateful for the hon. Gentleman’s work and leadership.

In reply to the hon. Member for Macclesfield, let me say that we are currently undertaking a broad-based review of the legislation in this field. There are necessarily limits to the amount of parliamentary time that the Government can make available in these areas. Where we have had time, we have used it, but we rely on the ability of private Members to make proposals, when they have the opportunity to do so, that we can support. There have been a number of private Members’ Bills in recent years that have substantially improved the legislative environment for mutuals and co-operatives in our country. This Bill is in that tradition, and the Government have not been brought reluctantly to the table. On the contrary, this is an established way of legislating and one that we fully support and encourage. However, success depends on the leadership and hard work of Members of this House. We are very grateful indeed to the hon. Member for Bournemouth, West for the leadership he has shown, which has enabled us to take forward a substantial improvement in the legislative framework for mutuals across our country.

John Butterfill (Conservative, Bournemouth West)

Further to that point of order, Mr. Taylor. I wish to reiterate my gratitude for all the co-operation received from members of the industry, the Building Societies Association and friendly societies. I am especially grateful to the Treasury, which has, as the Minister said, done a great deal of work and research on the matter before us, and really put itself out to deal with it expeditiously. It did not have a great deal of time in which to produce such complex legislation, and I am very grateful to it, as I am to the Committee members who have turned out to support me. Indeed, I am grateful to all the parties in the House for supporting the Bill. It is rare that one gets every party in the House supporting a Bill, and I am very grateful to them for it. It pleases not only me, but the Portman building society in my constituency, which is one of our largest employers, and the Liverpool Victoria friendly society, which is the largest friendly society in my constituency. Both are exemplars of involvement in the community and support for community organisations, including at least two charities with which I am personally involved. I am very grateful to them.

Nicholas Winterton (Conservative, Macclesfield)

Further to that point of order, Mr. Taylor, may I say on behalf of the Committee how much we appreciate the courteous and quiet way in which you have administered the Committee and managed our affairs? It has gone very smoothly, much due to your diligence and courtesy.

David Taylor (Labour, North West Leicestershire)

I am most grateful for those remarks.