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8.13 pm
Mr. Douglas French (Gloucester): In the spirit of the intervention of the hon. Member for Great Grimsby (Mr. Mitchell), I declare an interest as a modest customer of several building societies and as the chairman of the all-party building societies group, which is of course unremunerated.
I greatly welcome the Bill, which is very important for the future of the building society sector. I greatly hope that it will pass through the House without delay. I also congratulate my hon. Friend the Economic Secretary on her persistence in bringing forward the Bill. I certainly dissociate myself totally from the conspiratorial interpretation of the hon. Member for North Warwickshire (Mr. O'Brien). I assure him that, had my right hon. Friend the Deputy Prime Minister been against the Bill, there is absolutely no doubt that we would not be here trying to give it a Second Reading because he would have made certain that his views had been properly heard.
I regard the Bill as a natural and logical step in building societies legislation. The original Building Societies Act 1962 prohibited building societies from offering almost any service unless it was a savings scheme or a mortgage. The legislation was developed in the Building Societies Act 1986, which introduced partial deregulation--allowing diversification into many other services including current accounts, credit cards, life assurance and unit trusts--and paved the way for societies to convert to public limited company status, without which the public would not be about to enjoy share distributions and would not already have received bonus distributions from societies' conversions.
Now that we are ready for a further tranche of deregulation, it is perfectly natural to get away from the still rather prescriptive nature of the 1986 Act and adopt the principle that a society can do more or less what it wishes--apart from that which is specifically excluded by the Bill. That is why, quite correctly, the Bill prohibits societies from trading in commodities, making markets in securities and involving themselves in derivatives--all of which we know are very risky, likely to lose money, likely to place depositors' assets at risk, and therefore not appropriate for a building society to engage in.
I very much welcome the retention of the special operating characteristics of some societies. It is perfectly right that they should still have to raise at least
50 per cent. of their funds from individual retail investors; it is perfectly correct that 75 per cent. of their assets will still have to be invested in loans on housing--although not necessarily for owner-occupation. That opens the way for more building society funding of the rented sector, which is a very sound judgment. The remaining 25 per cent. of their assets can be invested anywhere that they choose, subject to the overseeing of the Building Societies Commission--to ensure that the management of a building society has the necessary skills and financial expertise to make competent decisions and to ensure that it keeps out of areas in which it ought not to be because it does not have the skills.
I also welcome the fact that, to accompany the wider powers, there will be greater accountability of societies to their members. I noticed that, in the recent experience of building society conversions, there was much confusion among building society customers about the rights of those who had a proper share account and those who simply had a deposit account. It is desirable that that confusion should be cleared up. I am also pleased that there is confirmation in the Bill that, in future, borrowing members will have broadly the same voting rights as investing members. That helps to bring legislation into line with public expectation.
Another point about accountability which I welcome was made by my hon. Friend the Economic Secretary. If a society transfers its business to a public limited company, the proposals for enhanced remuneration of the society's directors will be subject to a separate resolution for members' approval. That will address the concerns of those who felt that to accept conversion to plc status, it was necessary to accept the whole package, including what some people might regard as robust consideration for the directors of the society when they become directors of the plc.
The most controversial provision in the Bill is the five-year protection from takeover, which my hon. Friend the Member for Bournemouth, West (Mr. Butterfill) mentioned. I have thought carefully about the subject. Some people believe that the potential loss of the protection if a newly converted society embarks on a takeover is unfair. I cannot come to the same conclusion. Newly converted societies do not need the same protection as when the 1986 Act was passed. Such protection would create two classes of public limited companies--those that enjoyed the five-year protection after conversion and those that did not. My hon. Friend would argue that it is necessary to provide some transitional relief because building societies would be going out into the big wide world without having had long enough to establish their services on a level footing with the banks. However, protection from takeover for five years would place the newly converted building societies in a different position from banks that have not been through the process, and would add a new unevenness between newly converted societies, some of which are large and substantial, and banks that could not claim the same protection.
Mr. Butterfill:
Can my hon. Friend name a bank or major insurance company that has been subject, in the
Mr. French:
I cannot, but that is all part and parcel of the risks that a society has to weigh up when making the decision to convert. If societies that may convert believe that the competition that they will encounter as plcs is greater than they can cope with, they should not convert. I cannot agree with my hon. Friend on that point.
It is not right if that conversion gives societies a protection that is not available to other institutions. A building society that does not enjoy the protection could be taken over by a predator, such as a former building society, which does enjoy the protection. That creates an uneven playing field between the newly converted building society, now a bank, and building societies that have not converted. In an extreme case--although I admit this is a theoretical example--the abandonment of mutual status could be a way to fend off a takeover. That is not acceptable.
The Alliance and Leicester has argued that protection should be lost only after a takeover of another building society, and not in the case of a takeover of any other financial institution. I have discussed the issue with the Alliance and Leicester, and I cannot see that such a halfway house would provide a satisfactory formula. The company that wishes to make a takeover bid, of a mutual or other institution, should not be immune from receiving a takeover bid itself. Again, that would create an uneven playing field. It would also mean that the business that was being acquired attracted immunity from takeover by yet another institution, because it came under the umbrella of a new bank that already enjoyed the protection. However one approaches the issue, it creates an uneven playing field and an illogical situation.
Mr. William O'Brien (Normanton):
The Halifax building society, which will shortly become a plc, has accepted that it will not enter into a takeover of a mutual building society on the principle of the five-year rule. In its application, the Halifax says that it would be wrong to have the right to take over a mutual building society after becoming a plc. Does that influence the hon. Gentleman's views?
Mr. French:
No. The Halifax building society is in a unique position because of its size. It is easy for the Halifax to choose voluntarily not to avail itself of the protection for five years because the number of institutions that would have the resources to take over the Halifax could be counted on one finger. The Halifax has not given up a practical protection that it would otherwise have enjoyed.
The Alliance and Leicester seems to be arguing that it would be retrospective to make the protection for five years conditional on not taking over another institution, but it should accept that the possibility has been under discussion for a long time. It is easy when changes are made on the introduction of new legislation--we see it with the Finance Bills--for those who are affected to jump to the conclusion that it has a retrospective element. All institutions that make significant decisions need to
keep their eyes and ears open and anticipate possible policy developments. They should not base their decisions on guesses that something is never likely to happen.
Mr. Peter L. Pike (Burnley):
The hon. Gentleman will recall that the Alliance and Leicester acquired the Girobank. The members of the Girobank, who are now customers of the Alliance and Leicester, have not shared in the windfall payments that it has made.
Mr. French:
The hon. Gentleman makes a good point and I will come in a moment to the subject of windfall payments.
My broad approach to the Bill is that mutuals need the legislation. It will give them greater operational flexibility. They will be better able to compete properly with the banks and will be better placed to respond to customers' needs. The Bill underlines the advantages of mutual status, which have been placed under pressure lately. Many people have expressed the view that the mutual movement is in its death throes, but the Bill will make an important contribution to ensuring that mutuality has a future. I support those who feel that the mutual movement, and building societies in particular, make a vital contribution to the financial services sector.
Some four or five, perhaps six, major societies have converted or will convert. It is reassuring to note that the remaining large mutuals have reasserted their absolute commitment to mutuality, including the Nationwide, the Bradford and Bingley, and the slightly smaller Portman and Birmingham Midshires societies. I take those commitments not only as statements by today's chief executives, but as commitments on behalf of those societies in the future. They have all said that they cannot envisage circumstances in which they would abandon mutuality, and they are committed to it. The Nationwide, for example, is committed to demonstrating to its customers, and prospective customers, that mutuality offers customers tangible benefits through more competitive mortgage rates and better-priced savings products. It is seeking to feed the benefits of mutual status directly back to its members--exactly the way of conveying to the public and to members of societies that mutuality in practice delivers tangible results.
The feeding back of the benefits of mutuality needs to be accompanied by a growth strategy by societies. Unless they can foresee an expansion of their business, the feeding back of benefits will in essence amount to giving back to members some of the profits that the society would otherwise have registered. The more societies dilute their profits in that way--even for sound commercial reasons--the cheaper they will be to a predator wishing to take them over. There needs to be a strengthening and a growth in the size and activities of mutual societies.
None of the societies which have declared their commitment to mutuality has made any statement that they would not at some future stage merge, because the merging of societies may well be a necessary requirement to ensure that they are strong and able to protect themselves against future predators.
Another benefit of the Bill is that it will make the relative attraction of plc status rather less. It gives operational freedom but makes the relative attraction of operating under banking legislation less obvious, as more can be done under the building society legislation. That is very important.
Issuing shares by societies which convert may be very good if one wishes to go on the acquisition trail, but it is not good if one is seeking to offer competitive mortgage and savings products. Typically, a bank pays about one third of its profits in dividends to its shareholders. In a society with a normal business profile, that is equivalent to about three quarters of a point of margin between mortgage and savings levels. That means that if a mutual society does not have to pay dividends to shareholders, it is able to offer products more competitively than might otherwise have been the case. In future, customers of mutual societies will be able to look forward to competitive deals on all products.
Mutuality is a trading status that we should never allow to perish, and I emphasise that the Bill does a great deal to reinforce it.
I would like to say a few words about the manner in which some building societies have chosen to convert to public companies. It is sad that some of the societies currently converting--in what seems to be a headlong rush to become plcs--seem to have forgotten the very ethos of mutuality which, for more than 150 years in some cases, has brought them commercial success and has given them their enviable image. Some societies seem to have forgotten that they started life trying to look after smaller savers, making sure that they treated all customers fairly and trying to return to members the benefits of membership of a mutual society.
As a prime example of such an offender, I cite the Halifax building society. I very much hope that no society seeking to convert in future will approach the task as the Halifax has done in the past few months. When the Halifax prepared its flotation, it decided to leave out of the distribution several million of its customers, including people who were disabled and who could not sign their own accounts. This was a fundamentally flawed judgment. It was deeply offensive to those left out and, indeed, to some who were included, and who as a result would get more than they would otherwise have received.
The Halifax first tried to justify its extraordinary decision by blaming the existing state of the law. That was incorrect, because nothing in the Building Societies Act 1986 would cause it to take such action. It went on to say that the disabled people--who were second-named account holders--were not members and therefore could not be included in the share distribution. That again was incorrect, because the 1986 Act gave a converting building society the power to include in a share distribution whoever it decided to include. The next excuse was that it was too difficult, administratively complex and would present practical difficulties that the society could not solve. In truth, however, there were a number of simple ways in which the dilemma could have been avoided.
When the Halifax was asked if it felt that its formula was unfair, it replied that it regarded the scheme as perfectly fair. Incredibly, it tried to justify the formula on the grounds that no one should pick out the disabled as a group that had been left out because, in truth, the society had left out a number of other categories as well--as if that somehow justified the sad judgment. To cap the insults, the society went on to claim that many disabled
people had been included under the distribution formula, and any change to the arrangements would mean that some 8.5 million people would be upset by a delay.
The Halifax then announced 97 per cent. support for the scheme--almost universal support--when the only people whose votes it was counting were those likely to be recipients of the distribution. Those not likely to be recipients did not have a vote, so it is hardly surprising that the proposal received near-unanimous support. What is so distressing about the conduct of the society was that its directors--who are doing nicely out of the conversion--seem to have forgotten that they are today's guardians of the assets of that society, which have been built up from the loyalty of customers over 150 years. The directors have a duty to pass benefits to customers and to be fair. In short, the Halifax building society has betrayed its founding fathers and the ethos of mutuality.
Even at this stage, the Halifax could redeem itself by making a statement of intent that it will put on the agenda of the new board of the public company a resolution to allow the shareholders to decide whether they wish to make an ex gratia payment to the disabled people left out of the formula. Company law allows for that to be done now, and I very much hope that the Halifax will come to the right decision. It could follow the lead set by the Northern Rock building society and set up a charitable foundation to ensure that the very people left out of the distribution are helped via a donation to relevant charities. It is not a substitute for ensuring that all customers and members receive their rightful distribution, but it would at least go some way to making up for the appalling judgment exercised by the Halifax building society. Certainly, the Halifax directors ought to recognise that they should do something, not just maintain a stony silence. They might like to follow the example of the Alliance and Leicester, which, shortly before this evening's debate, wrote me a letter as follows:
"It is intended that an item will be placed on the Agenda of the PLC Board after flotation, to seek approval in principle for the provision of funding for an appropriate charitable donation to disabled persons, or to a charity or charities on their behalf, subject of course to the approval of the company's shareholders."
That shows a willingness to do the right thing which has thus far been manifestly lacking on the part of the Halifax.
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