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10.11 am

Dr. Vincent Cable (Twickenham): I congratulate the hon. Member for Edmonton (Mr. Love) on securing this debate, and on leading an effective all-party campaign. He has maintained the support of hon. Members from all three parties for the building society movement, and that has been a substantial contributory factor to the mature level of debate about this issue in the country. It is helpful that he has chosen to debate not just building societies, but the mutuality principle at large. The hon. Member for Ryedale (Mr. Greenway) captured the broader issue very well.

I shall perhaps be a little controversial, because I have been struck by the paradoxical approach of the new Government. There is a genuine enthusiasm for mutuality. Members of the Government, such as the Minister for Welfare Reform, clearly believe passionately in the principle, and recognise its effectiveness in attacking many social problems. They understand the culture in which the principle of mutuality grew up. I have heard the Economic Secretary speak about her roots in the west of Scotland, and she clearly understands how the movement originated and its strengths.

However, the Government have often fallen over backwards to avoid doing anything that could be seen as overly sympathetic to the mutual institutions. Whether that is because of the conservatism of the Treasury or pressure from the banks, I do not know. There are several ways in which the Government could be a good deal more proactive in support of mutual institutions.

The case for building societies has already been well made. I emphasise that building societies are not a quaint, old-fashioned relic. We are not talking about institutions that should be preserved for the museum of financial institutions, but about institutions that are very effective in the marketplace. They offer highly competitive returns to their depositors, and competitive rates to borrowers because of the small margins on which they operate. In the past year, they have considerably increased their market share in a competitive marketplace, without subsidy or preference.

The dangerous assumption has been made that, because building societies have been very competitive in the mortgage market, they are strong enough to hold off pressures from carpetbaggers. Building societies have a particular, built-in, institutional weakness. Unlike plcs, which raise capital from the marketplace through new issues, building societies expand through accumulating reserves. That pot of gold attracts people who want pay-outs today rather than to think of the long term. Those reserves are inherently vulnerable, so it is important to have a system of regulation that recognises their vulnerability.

The previous and the present Governments have made a genuine attempt to strike a sensible balance between protection and exposure to pressure from members. I suspect that the balance may be wrong, but we shall see in the next day or so what has happened. The Government have taken a calculated risk. We hope that they are right, but it is possible that they have gambled wrongly.

If Nationwide goes down in the next 24 hours, it is clear that the other two big societies, Bradford and Bingley, and Britannia, will not survive much longer. Most of the smaller societies will be acquired fairly quickly by the banks. Within a relatively short time, there will be

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little left of the building societies movement. Let us hope that that does not happen, but there is a very real risk that it will.

If it does not happen, I hope that the Government will think again about some of the measures that have been suggested by building societies to protect them from carpetbaggers. The Economic Secretary deserves some credit for having partially responded to the problem, by changing the thresholds. Some of the other measures proposed are still as relevant as ever.

It is possible to have too much democracy. Hon. Members would not want monthly or yearly general elections. That would no doubt increase democracy, but it would not necessarily make for better democracy. It would not make for better democracy if people were able to stand for Parliament without putting up a deposit. There must be hurdles. We are talking about quality as well as quantity.

Some of the riders suggested by building societies are appropriate. I say that with some caution, because I happen to have in my constituency the headquarters of the Building Societies Members Association, which is concerned about building society democracy, and frequently complains about building society managers ignoring members' rights. That is an important dimension, but even taking that into account, further regulatory provisions are required to prevent building societies from being too easily rolled over by carpetbaggers.

The hon. Member for Edmonton has suggested some provisions, but the key ones are to raise the number of people required to nominate board members, and the number of people who can introduce a resolution. It would still be a relatively small number--a few hundred rather than 50--but they would be important additional provisos. Increasing the time gap between people becoming members and voting in an election is another small change that could be crucial in shifting the balance within building societies. I hope that the Economic Secretary will have a fresh look at such provisions, especially if the building societies survive this ordeal by fire.

The Government should also examine the regulatory and tax provisions that apply to other mutuals. One of the most depressing features of this year's Finance Bill was the rather abrupt way in which the Treasury dealt with the taxation provisions applying to friendly societies. They are a small part of the savings market, but they are very important for low-income savers, especially those for whom the traditional instrument is the £20-a-month, long-term, 10-year, insurance-linked savings bond. Many working-class families have traditionally used that as a way of setting aside money for a rainy day.

Under current tax provisions, the tax-free allowance is low. Prompted by the Association of Friendly Societies, I suggested during debates on the Finance Bill that that should be raised. It was raised slowly under the previous Government, and the present Government should be more ambitious. My suggestion was slapped down on the grounds that it would involve cost, although that is almost certainly wrong, because the introduction of tax-free savings increases the amount of taxable savings in the friendly societies. Whatever the technicalities, the Government should look closely at the matter. Friendly societies are important and should be encouraged, especially in the new environment of individual savings accounts.

22 Jul 1998 : Column 1043

The regulation of friendly societies should be examined. The constituency of my hon. Friend the Member for West Aberdeenshire and Kincardine(Sir R. Smith) contains the first ever friendly society, the Braemar. He has said that such societies are small, and deal with small savers. The regulatory costs for serving such savers are prohibitive, and far in excess of the amounts involved. The system of regulation is often heavy-handed. It was probably introduced with good intentions, but it is not properly applicable to institutions such as friendly societies. I hope that the Government will look at that.

Another type of mutual society has not been mentioned today, but it deserves scrutiny. Credit unions are important in the United States. There may be good reasons for the movement's greater size there, where the banking and building society movements did not develop as they did in Britain. Credit unions are underdeveloped here, and they could be much bigger. The Government should examine the regulatory system under which they operate. There were changes in, I think, 1996, when the previous Government raised the savings threshold for credit unions. The National Consumer Council has suggested that that could be creatively updated and revised.

The hon. Member for Ryedale (Mr. Greenway) spoke about life assurance companies. Building societies, credit unions, friendly societies and life assurance companies are different aspects of the mutual movement. The Government and previous Governments have tended to look at the problems piecemeal. By way of the Prime Minister's social exclusion unit or through some such all-embracing body, the whole issue of mutual institutions could be examined in the round. Their tax and regulatory treatment could be studied comprehensively to see whether mutuality could be boosted. That should not be done by giving them unreasonable protection, and they should certainly not be protected from market competition, but we should see whether a much more friendly environment can be created. I hope that the Economic Secretary can lift the issue out of the narrow Treasury, regulatory and tax environment, into a much broader context.

10.22 am

Mr. David Lock (Wyre Forest): I congratulate my hon. Friend the Member for Edmonton (Mr. Love) on securing the debate, and on his work on the all-party building societies group.

I should like to declare three interests. First, I have a private pension with Equitable Life. I chose that company because I wanted profits from investments to be returned to members, rather than being given to shareholders with no other interest in the society. Secondly, I am secretary of the all-party occupational pensions group. Such pensions are provided by a mutual association which has provided an enormous amount of benefit in this century, and suffer from many of the problems that are faced by building societies. Thirdly, I am currently undertaking an Industry and Parliament Trust fellowship with the Nationwide building society. [Interruption.] I have no inside information on the vote. As I am sure hon. Members know, the Nationwide is not conducting the count: it is being scrutinised externally.

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Like many hon. Members who have been on other IPT fellowships, I am grateful to Nationwide staff for their time, care and patience. I am sure that hon. Members will appreciate that, at this time, the Nationwide staff are busy, but they explained their organisation to us, told us what makes it tick, and gave us an insight into a complex and impressive operation.

The public rely on mutual organisations, particularly building societies, to conduct some of the most serious financial transactions of their lives. Those people are in it long-term, and without the building society movement there would not be the present property-owning democracy. However, as hon. Members have said, that is being prejudiced by the get-rich-quick philosophy of the 1980s, which is still with us in the shape of the demutualisation carpetbaggers.


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