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9.48 am

Mr. John Greenway (Ryedale): I am delighted to speak after the hon. Member for Edmonton (Mr. Love), and I congratulate him on securing the debate and on its exquisite timing, given the Nationwide ballot that takes place tomorrow. He hid his light under a bushel, because he has successfully chaired the all-party building societies group since being elected to the House last year. It has been my pleasure for the past seven years to chair a sister group, the all-party insurance and financial services group, and I have greatly enjoyed working with him. I agree with much of what he said, and he went over some of the ground that our group has covered in recent years.

Before I continue, I should remind hon. Members of my interests in the insurance broking profession; they will inform what I have to say, rather than be of any direct benefit to insurance brokers and intermediaries.

The all-party insurance and financial services group addressed mutuality twice in 1996. I have been able to return to what we discussed in preparation for the debate, because the briefing papers prepared for the group by Price Waterhouse were published in a bound volume. We considered the building society mutualisation issue, and concluded that mutuals have an extremely important role to play.

Our general conclusion was that there is a needfor a mixed economy, and some of the smaller building societies in Yorkshire such as the Skipton, the

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Scarborough, the Leeds and Holbeck, and the Yorkshire were especially helpful in addressing our thoughts. The hon. Member for Edmonton mentioned the Bradford and Bingley; one could filibuster for half an hour by reading out all the names, but there is no need to do that today.

The hon. Member for Edmonton was exactly right to say that the record shows that smaller societies are giving a better return to savers and a more competitive mortgage rate to borrowers than many of the larger societies. I have had my mortgage in Yorkshire with the Halifax for 21 years; in London, I am with the Cheltenham and Gloucester, which offered an extremely competitive deal when I took out the loan on my current house. The important point for hon. Members is that, if all the mutual societies were stripped away, demutualised big banks and building societies would result in a less competitive market, especially if all the business ended up in the hands of the few.

It could be argued that there are too many societies--the same argument applies in life assurance--but, overall, we should be in no doubt that the markets for savings and for mortgages would be less competitive if all the smaller societies disappeared. That is why I agree entirely with the hon. Member for Edmonton that it is a matter of public policy that there should be a structure for those societies to flourish.

The outcome of tomorrow's Nationwide vote will help to determine whether the Building Societies Act 1997 is adequate. I pressed the previous Government to go further, and to take stronger action against the carpetbaggers. Sadly, we were not able to prevail in the argument, although, as the hon. Member for Edmonton knows, his predecessor as chairman of the all-party building societies group, Mr. Douglas French, did a great deal to further the argument and the legislation.

Mutuality also extends into life assurance, pensions and friendly societies. Five of the top 10 life assurance companies in this country are mutuals, and mutual companies have always been especially strong in the with-profits field of business. There have been arguments in the recent past about whether societies such as Standard Life, the National Provident Institution, Friends Provident and so on will be able to survive as mutuals. It is to their credit that they have made it clear that that is their wish.

In the case of Norwich Union, different factors were at play, because it owned one of the largest general insurance companies, and its real value could never be realised for its policyholders. Its demutualisation was extremely successful, but it showed that there is no clear way in which everyone should go: there is a need for some societies to remain mutual and for some to enjoy the benefits of plc status.

The argument on mutuality for life assurers is more complex than for building societies, and we must be aware of some dangers. The first is that history shows that several mutual life assurance companies got into difficulty and were absorbed by other mutual societies. For example, Friends Provident absorbed the United Kingdom Provident Institution some years ago. Although that shows the strength of the industry as a whole, it also shows that mutuality in itself is not a guarantee of success. There is still a requirement for proper management and efficiency.

One reason why many mutual life assurance companies have not performed as well as they should is because their new business costs have been far too high. They have

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tried to get more business, but have neglected the effect of that on the overall performance of their with-profits fund. I think that my remarks will be dear to the heart of the Economic Secretary to the Treasury: whether a company is mutual or plc--there is potential for combining them--it is crucial to bring down the cost of new business to more sensible levels, so that members and policyholders derive the true benefit of their investments.

A great deal of inefficiency in the life industry was obscured by the old life assurance premium relief, which was abolished in 1985. There was a great hue and cry in the industry when the relief was abolished--it was said that that would be the end of everything--but abolition made the industry more efficient. In whatever form companies exist, the taxation arrangements within which they have to do business are important--I know that the Economic Secretary appreciates that.

I want to sound a slightly controversial note: the scale of it remains to be seen, but there is a problem because policyholders of mutual life assurance companies will have to pay towards the cost of compensation for pensions mis-selling. I have raised this matter several times in the House, and I know that the problem arose under the previous Government, not this one.

People who belong to mutual societies through buying a life assurance policy must take an interest in the way the society is run. There will undoubtedly be some squeals in a year or two about the extent to which some policyholders have to pay for the compensation arrangements for others. We must ensure that the arrangements under which the phase 2 review in particular is conducted are fair to all, and that we bear in mind the interests of policyholders who will not be compensated, but who will contribute to others.

What do we really mean by mutuality? Is it simply a matter of structure, or is there a philosophical argument? The philosophical argument has often been rubbished by City commentators, who have said that it has no real benefit.

A year ago, Loughborough university published an excellent paper entitled "Reflections on the Mutuality and Future of Building Societies", featuring research carried out for the Building Societies Association. The paper comments:

I agree with that.

I think that there is a philosophical argument. Mutual status can be about shared ownership--I know that the Minister has stakeholder pension funds in mind--but it is entirely conceivable that we may enter a phase in which mutual funds will be necessary if we are to gain the administrative efficiency that is so necessary to keeping down the costs of new business I mentioned. In such a phase, the funds would belong entirely to the policyholders, investors or future pensioners, but might well be administered and managed by plcs because of the size of the task involved.

Having worked in the insurance industry for a long time, I believe that mutuality is about the philosophy: it is about the way in which people do business, and about relationships. In the early days of the life assurance industry, and our great insurance industry--which has led the world in new developments for at least two

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centuries--the mutual philosophy, the philosophy of uniting to solve problems that could not be solved in any other way, characterised the companies as they were formed.

What has gone wrong in the insurance industry over the past 10 to 20 years is that, in many quarters, the drive to create new business has become more important than addressing the needs of members. Today's debate is important not just in regard to events today and tomorrow affecting the Nationwide building society, but in giving us an opportunity to see a wider picture.

As the excellent Loughborough university paper points out, in the end the argument will be about whether mutuality adds value. That argument is as much about efficiency as it is about offering the best returns. We should tell the financial services world that we believe the future lies in giving a better service to investors and policyholders, and we should bear in mind the need for structures of taxation and legislation that allow that philosophy to flourish. If we can achieve that, we can achieve for future generations of investors, pensioners and policyholders the better returns to which they are entitled.

10.3 am

Mr. David Lepper (Brighton, Pavilion): I congratulate my hon. Friend the Member for Edmonton (Mr. Love) on securing the debate at such an appropriate time.

Although we are discussing the future of mutuality, let me briefly remind the House that my constituency is the birthplace of one of its strands. In 1820, Dr. William King, Elizabeth Fry, Lady Byron and others set up the Brighton co-operative society and the Brighton provident society in West street, in the heart of my constituency. Last week, as a Nationwide member and mortgage holder, I visited the society's branch in that same West street in order to cast my vote.

There is no doubt that the notion of mutuality has again captured the imaginations of a great many people in the past three or four years. Last year, more people voted in the Nationwide ballot than in the Welsh referendum. I am glad to say that, in both cases, I agreed with the result of the vote, and I hope that the same will be true of the Nationwide ballot whose results will be announced in a day or so.

The hon. Member for Ryedale (Mr. Greenway) spoke of the philosophy of mutuality, and it seems to me that the notion of mutual trust is at the heart of that philosophy. Although I do not agree with everything I hear on "Today", I was interested by the results of a survey commissioned by the BBC earlier this year on behalf of that programme. People were asked which kind of organisation they would most trust to help them to choose the best mortgage for their circumstances. Of those who responded, 8 per cent. chose converted building societies, 23 per cent. chose traditional banks, and 44 per cent. chose the existing mutual building societies. It is vital for us to keep in mind that element of trust, as well as the financial and regulatory framework that we are rightly considering this morning.

It is, I think, no accident that some of the larger public limited companies have assumed a veneer of mutuality through the spate of loyalty cards and club cards that we have seen over the past year or so. They are playing on

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that important theme of mutual organisations: the notion of being--dare I use this term?; I shall, as we have talked about the third way--a stakeholder.

Like, I suspect, a few other hon. Members, I come from a generation for whom the divvy from the Co-op was an important part of the household finances. In matters of insurance, my generation turned not to the huge insurance companies, but to the Oddfellows, the Buffaloes or the Foresters--the mutual friendly societies that, in many working-class homes, formed the basis of the household economy, along with the Co-op.

My hon. Friend the Member for Edmonton mentioned the welfare reform Green Paper. That paper, along with many of the other discussion documents that have been published, offers a future to the friendly society and the mutual organisation as we look to the reform of the welfare state and the pensions system.

I am sure that many other hon. Members were inundated last year, as I was, by the plethora of unwanted faxes churned out by shady organisations spending their time spotting the building societies that were likely to be the next converts, and advising people how to make a killing straight away. All the faxes that I received went back where they came from, but I am interested in one aspect of the challenge to the mutual building societies that we have seen over the past few years.

In one respect at least, it has been good for them. I thought a little before saying that, but I think that some societies were in danger of becoming complacent, and they have had to think rather more imaginatively than they might otherwise have done about the service that they offer their members--not just about attracting new customers.

Building societies have risen to that challenge remarkably well, which is why, in the nine months to June this year, they captured 40 per cent. of the new lending market. In 1997, 13 of the 15 cheapest lenders were mutual building societies. Between 1992 and 1997, eight of the top performing TESSAs were offered by mutual building societies. They offer competitive mortgages and competitive rates to savers.

I welcomed last year's announcement by the Economic Secretary on the requirement for a 50 per cent. turnout, and perhaps we should consider whether that should be even higher. The Government should turn their attention to the issue of the required number of nominees for directors of mutual building societies, and to the qualifications that we would expect of nominees for directorships, although I am not sure how that could be arranged. We need to ensure that they are in tune with the ethos of the organisation that they seek to guide by becoming directors.

I hope that the mutuals will have a bright future. We have been reminded that friendly societies have similar arrangements. Moreover, the Automobile Association is one of the leading mutual-type organisations because of the way in which it structures its relationship with its members. The mutuality field is wide.

I await with anticipation the results of the vote on the board of Nationwide and on whether it should consider converting. I hope that the vote will be against conversion, because that would give a clear message to other building societies and other carpetbaggers. It would put to rest, for a few years at least, the threat to mutuality, and would allow the mutual building societies to get on with the job that we all want them to do.

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