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Mr. Renton: Perhaps my hon. Friend can inform my ignorance. She is rightly talking about the importance of members in societies that continue to be mutual. What rights or possibilities have those members if, given the examples of the Alliance and Leicester and the Halifax, they would prefer their societies to convert into plcs so as

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to have the sort of windfall that members of the Halifax and the Alliance and Leicester building societies will receive?

Mrs. Knight: In terms of accountability, members of societies which wish to remain mutual will have a far greater amount of information about their societies, and that is good. Equally, it is undoubtedly correct that members will be able to make their views known to the directors of their societies. Of course, only the directors could propose to a society general meeting or annual general meeting that it should convert and become a public limited company.

I should tell my right hon. Friend the Member forMid-Sussex (Mr. Renton) that those are serious decisions. Some societies see their future as banks--we know their names only too well--but many others have undoubtedly served very well as mutuals. In recent articles, mutual societies have very clearly made the case for the benefits that they can offer to borrowers and savers by remaining mutual. I think that any member of any society must not only consider what might happen tomorrow but take a long-term view of their mortgage or savings with a society and attempt to attain benefits over the long term and not in the short term.

Accountability is part of the overall package, and it was a part of the points made by my right hon. Friend. It is important that a society should not change its strategic direction without consulting its members. Any proposal to expend more than 15 per cent. of a mutual society's own funds on the acquisition or establishment of a business outside the society's core activity of mortgage lending will require members' approval.

There are some changes to the mechanisms of conversions and of takeovers, although the broad framework and required threshold for voter turnout and support remain intact. Furthermore, if a society intends to transfer out of the sector and simultaneously to increase the remuneration of any director or other officer of the society, the members should be able to vote on that proposal separately from the main transfer resolution.

A special and important feature of mutual organisations is that customers are the members, with the right to vote on the society's resolutions. The Bill will provide that, in future, any individual who saves with a society will have a membership account. Societies will still be able to use deposit--non-membership--accounts for corporate accounts and, if they choose to, for those who want current accounts, deposits at overseas branches, qualifying time deposits or certain other services.

During the consultation and before the introduction of the Bill, there were calls for changes to the rules on distributions of bonuses on a conversion or takeover. The 1986 Act forbids distributions of cash bonuses to shareholding members of less than two years and to borrowers, although the courts have held that the Act does not rule out certain flat-rate distributions of free shares to members of less than two years. Societies and some others have asked that Parliament revisit and change that to rule out any bonuses for members of less than two years--which is often referred to as strengthening the two-year rule.

The Government do not propose to make that change, and I shall say why we have taken that decision. First, a society that wishes to convert or to be taken over already

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has a discretion, if it so chooses--by choosing the qualifying date for bonuses--to rule out recently arrived members. It is not for the Government to dictate to a society which members it should rule in and which it should rule out. It is for the society to make those decisions, and we have given societies the freedom to do so.

Secondly, the law as interpreted by the courts has now stood for almost eight years. During that time, a number of societies have proposed to convert or to be taken over. In terms of member numbers, a bigger shift has already occurred than is likely to recur in future. A change made now affecting any possible future conversion or takeover would be seen as unfair and incomprehensible by a society's members. I say in all seriousness that, if the Government made a change now to rule out any future distribution to members of less than two years, and in future should another society convert or be taken over, the Government of the day would be under unstoppable pressure to reinstate the current law.

A part of the Bill affects the position of building societies that become public limited companies by transferring their business to a specially formed company--by conversion rather than by takeover. Clause 40 abolishes the priority liquidation distribution right--the PLDR. The reason for abolishing it is that it is no longer valid, as the situation in 1986 is not the current situation.

Clause 41 deals with the so-called "five-year protection period" for converting building societies. The 1986 Act states that, during a five-year protected period after a building society has converted to plc status, the successor company is required to prevent any one shareholder from holding more than 15 per cent. of shares, effectively protecting the company against takeover. At the time that that provision was made, the situation in financial markets was very different from that of today. Moreover, the converting societies are substantial and strongly capitalised, and three out of four converters are likely to be in the FTSE 100 index.

I realise, however, that a converted society may need to take time to become established in its new form as a bank. We have therefore decided on a middle approach. I propose in most circumstances to leave in place the five-year protection. However, if a converted society, which is of course a new bank, wants to acquire other authorised financial institutions--such as another bank, building society, insurer, friendly society or investment business authorised under the Financial Services Act 1986--it will lose its protection. It quite clearly would be unfair on other financial institutions if one type of institution which is protected is uniquely allowed to go on the acquisition trail of another financial institution that is not protected.

The Bill is one of the first to be published in advance as a draft, and I believe that the benefits of that practice have been shown. I thank all those who have taken an active part in contributing to it. The legislation is an endorsement of mutuality, and it will take into the next century the best elements of self-help--which were the basis for the movement in the past century. The Bill gives mutual building societies an assured future, and I commend it to the House.

7.36 pm

Mr. Mike O'Brien (North Warwickshire): Labour welcomes the Building Societies Bill, which is at last before the House. It will benefit millions of consumers

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and building society members across the United Kingdom. For that reason, the Bill deserves--indeed, commands--widespread support, both inside and outside Parliament. Labour would not have drafted particular aspects of the Bill in the same way as the Government, and I shall outline those differences later. Overall, however, we want the Bill, amended or unamended, to become law before the general election. We will give it a fair wind in this debate on its Second Reading, and we will support its broad principle next week in Committee and in the debate on Third Reading.

Labour's position on conversion is that it is for members to decide whether they want their building society to convert or to remain as a mutual. Many new shareholders have substantially benefited from conversion. Of course we wish them well, if that is the course that they want to take. We also wish the converted building societies well in their new endeavours as banks.

The conversion process has also--perhaps paradoxically--helped mutuals, as it has awakened in them the need to be in close contact with their members. In recent years, the overall philosophy of mutuality has been revived--after some building societies had undoubtedly become a little remote. Therefore, the conversions, bonuses to members and changes in the market have had important benefits beyond providing a stimulus to the economy. However, there is a need for balance, and that is what the Bill is all about.

There is a public interest in maintaining choice in the market. The great strength of the British financial services industry is its diversity and choice. It provides access to investment and savings opportunities to millions of people. That choice currently includes the option to join a mutual building society, and it would indeed be regrettable to lose that choice.

Mutuals do not have to pay dividends to shareholders, and they therefore have an opportunity to use their assets to offer cheaper mortgages and better interest rates on savings. Some mutuals are already doing so. A recent survey in What Mortgage suggested that, of 72 building societies, the 25 best opportunities were with mutuals. One of the large mutuals--I will not advertise its name--told me that on a range of products it is offering 0.7 per cent. higher savings rates than its main high street competitors. Its standard variable mortgage rate is 0.2 per cent. below that of other market leaders.

Many would argue that mutuals play a unique part in securing good value for the consumer as well as the opportunity to join a self-help organisation and tap into the important heritage of mutuals. Of course, converted societies have their strengths too, but mutuals can arguably play an important part despite their smaller proportion of the building society sector.

Today, many believe that mutuality is in danger. Last week, I heard a speaker on, of all things, the "Thought for the Day" spot on Radio 4's "Today" programme graphically warn:


The warning was that there may be large bonuses for individuals now, but that that may reduce the choices for all savers and borrowers in the future.

Building societies were one of the great successes of the self-help movement among working people in Victorian Britain. Indeed, the first recorded building

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society, the Kettley building society, was set up in Birmingham in 1775, many decades before Queen Victoria, in what is now my locality. Like friendly societies and co-operatives, their motivation was mutual self-help rather than profit, although, of course, the profit was the way to pay good interest rates on savings. They served local communities and were accountable to their members. Most of us in the Chamber, like the vast majority of the British people, bought our homes with the help of a mutual building society. However, their success produced problems.

As markets became competitive, societies merged to reduce overheads. In 1900, there were 2,286 building societies; by 1950, the number had fallen to 819 and, by 1990, it was down to 80. The amalgamation of societies sometimes made them more remote from members. They had huge assets but could be unadventurous in using them. Their very reliability and stability were advantages in attracting customers but, in a few cases, constrained innovation.

Societies were also operating under a prescriptive regime, introduced initially in legislation in 1874 and then amended by the Building Societies Act 1986. That legislation restricted their operations under an out-of-date and highly restrictive regulatory framework. It prevented them from taking advantage of the new opportunities of an expanding financial services market.

In the late 1980s, some societies began to believe that mutuality had become a straitjacket. They wanted to provide a wider range of services for their members, and conversion was seen as the only option. Two thirds of the building society sector has converted. The process began in 1989 with the Abbey National flotation. However, one third of the sector remains mutual. It has £120 billion-worth of mortgages and 17 million customers and accounts for a quarter of the mortgage market. It should be protected from predators.

The good news is that many mutuals have risen to the new challenge. They are back in contact with members, offering competitive mortgages and savings rates. They are rediscovering the spirit of mutuality, and we should encourage that process. However, they still need greater freedom to serve their members. That means that the prescriptive regime of the 1986 Act needs to be amended.

Three years ago, Labour warned the Government that the future of mutuals would be in doubt unless they were freed from the shackles of the 1986 Act introduced by the Conservatives. We warned that choice and diversity would be lost, but the Government prevaricated and dithered. Promises of a new Bill were broken, but let me pay tribute to the Economic Secretary who, when she took on her current role, tried to press the idea of a new Bill.

The Government said that the Bill would be included in the Queen's Speech last November--indeed, they had promised it the previous November--but it was dropped at the last moment. Why? I suspect that someone decided that there were no votes in it and, at that point, Conservative leaders were interested only in trying to revive their sagging fortunes. However, there was always public interest in the Bill. The Economic Secretary recognised that. Labour forced the idea back on to the political agenda and demanded an explanation of why it had been dropped.

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To her credit, the Economic Secretary also fought for the Bill. It has been revived, but why has it taken so long to get to the House? We were told that a time slot was needed, but everyone knows that the House's business has been finishing early, certainly since Christmas, so why the mysterious delay? I do not doubt that the hon. Lady wanted the Bill. We both continued to press for it and now, at last, it is with us. It is very welcome.

The price of delay, however, has been uncertainty and the undermining of the mutual sector. One aspect has been long queues outside many building societies as speculators open accounts to bet on the next conversion. In response, some mutuals have put up their minimum account rates to £1,000 or more, thus freezing out the small investor. That cannot be satisfactory. Of course, it must be up to members to decide whether a society should convert: we would want them to have the choice, but long-term members should not have the decision made for them by mere speculators.

The Bill has its drawbacks, but we need to get something on the statute book soon. Labour wants to free mutuals to compete in the market. We regret the delay; we want the Bill passed, but we are disappointed by the failure to discourage speculation, which is not fair to long-standing members who have stood by their societies for years. We will give broad support to the Bill, and we want it passed before the general election.

Labour will support the Bill, but the question is, do the Government? Of course, the Economic Secretary has sponsored it--I do not doubt that she supports it--and we presume that the Government understood the inadequacies of the 1986 Act and sought to change it. Our understanding of the Bill was that it was intended to put mutuals on a level playing field with other organisations so that members would not need to vote for conversion, if only because the Building Societies Act 1986 imposed a prescriptive regime on them which denied them access to particular investment opportunities and new capital.

The Minister told us today that the Government did not seek to encourage building societies to convert or not to convert, but yesterday, the day before the Treasury introduced the Bill to protect mutuals from takeover and to reduce the need to convert to banks, the Deputy Prime Minister announced that he supported the 1986 Act and wanted to support conversion from mutuals to banks.

Writing in The Mail on Sunday, the Deputy Prime Minister says that it


The Deputy Prime Minister endorses the 1986 Act, which the Minister seeks to amend. He describes the transition from mutuals to plcs as "extraordinary and exciting", despite the fact that the aim of the Bill is to make it less necessary because, presumably, the Minister wants to see diversity and choice maintained, and that includes mutual building societies.

The Deputy Prime Minister, however, seems to be challenging the very basis of the Bill. The Mail on Sunday, hardly a Labour newspaper, calls it


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    Perhaps we have here an answer to the mystery of why it has been such a struggle to get the Government to bring forward the Bill.


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