It is a very great honour and privilege to be able to present the Bill to the House. As hon. Members will be aware, I am deputy chairman of the all-party group on building societies and financial mutuals. I am pleased that our chairman, the hon. Member for West Bromwich, West (Mr. Bailey) is in the Chamber this morning, and I pay tribute to what he has done to promote the well-being of the sector and to the work of the all-party group, which recently commissioned a detailed survey of the benefits of mutuality for the British economy. There is no doubt that those benefits are considerable. The mutual sector as a whole plays a vital role in British society, and more than 19 million British individualsone in three of the populationare members of one or more mutual societies. That is a considerable number, and it compares favourably with other forms of economic participation and mass membership. For example, there are 8 million more members of mutuals than there are listed owners of shares. Mutual organisations have more than three times as many members as trade unions, and 20 times more than political partiesalthough nowadays that is not terribly difficult.
There are about 9,000 industrial and provident societiesa term that covers all organisations registered as co-operatives, community benefit societies and credit unions. They range from the Co-operative Group, which employs more than 60,000 people, to football supporters trusts, which may not employ anyone. In total they hold assets of over £65 billion, have almost 10 million members and employ about 100,000 people. There are 60 building societies in the United Kingdom, and collectively they have more than £300 billion worth of assets and employ around 50,000 members of staff. They have about 2,150 branches, 22 million individual investorsalthough some investors have accounts with more than one building societyand almost 3 million borrowers.
Friendly societies are the longest established and most numerous type of mutual insurance providers. The larger societies are members of the Association of Friendly Societies, which has 57 societies that hold funds of £15 billion for 5 million members. Not all mutual insurers are registered as friendly societies. Some of the largest mutual insurers are registered as companies, but all have a strong democratic mutual structure dedicated to offering the best deal to their members, rather than external shareholders. These societies collectively represent £8 billion in premiums, which accounts for 6.8 per cent. of the non-life market and 6.4 per cent. of the life market.
The contrast between a mutual and a company can immediately be seen when we look at how mutuals distribute the profits of their business. They do not pay dividends to shareholders, so they are able to operate on much narrower margins than plcs. That means that, all things being equal, they can deliver better value for
their customers. They can also influence quite considerably the pricing policy of their competitors. For example, pressure from building societies was the main factor preventing banks from charging for access to cash machines, and a very creditable and successful campaign that was.
profitability of the banking sector is inversely proportional to the market share of mutuals within the banking sector.
The reputation of the mutual sector is such that one of its leading lights, the Co-operative Group, is the most trusted brand in the UK in the eyes of consumers. That was established in the 2006 research undertaken by the National Consumer Council and AccountAbility, which showed that that group was more trusted than any other high street operator.
Mr. Andrew Love (Edmonton) (Lab/Co-op): Does the hon. Gentleman agree that mutuals are always at the top of the best buy tables for financial services, such as the cost of mortgages or the rate for savings? Is that not why the public trust them so much?
Sir John Butterfill: Indeed. We are presenting the Bill with a view to strengthening the mutual sector and removing some of the disadvantages that it faces under present legislation. It is extremely important that we recognise the value that the mutual sector gives to its customers and to the economy as a whole, and the fact that because of historical circumstances it is rather inhibited in what it can do.
I am fortunate that in my constituency, Bournemouth, West, we have some of the leading financial mutuals. We have the UK headquarters of the Liverpool Victoria friendly society, the largest of all the friendly societies. We also have the Portman building societys headquarters, which is at present the fourth largest, although it is about to merge, if its members agree, with the Nationwide building society. That will become by far the largest building society in the United Kingdom. Indeed, the merger will make it big enough to be extremely competitive with all the major plcs in the banking and lending sector.
The building society movement has come of age. I remember that back in 1986, not long after I was first elected to this place, we deregulated the building society movement. We had a good debate on that deregulation, which I keenly supported, and it did a great deal to set the building society movement on the right course. We were also right at that time to consider that building societies as financial institutions did not have experience in the capital markets, did not have experience in unsecured lending and did not generally have the sort of banking experience that the clearing banks had. Therefore it was right, for the protection of members of building societies and the public as a whole, that some constraints were imposed on the degree of access that building societies could have to the financial markets.
That is precisely what we did. We set for building societies a maximum gearing levelborrowing against the assets that they had, deposited by their membersof 50 per cent. Over the years that has worked pretty well. Indeed, until now it has been possible for building societies to operate reasonably adequately within the constraints imposed in 1986. However, the time has come when we need to free them up somewhat more.
One of the things that my Bill will do is change those 1986 limits and take them up to higher levels of permitted access to the capital markets. That will be dealt with by means of regulations brought forward from time to time by the Treasury. It is no secret that we are talking of 75 per cent., with which all the building societies have said, through their trade body, that they will be entirely happy; I do not think there is a single dissenting building society.
James Duddridge (Rochford and Southend, East) (Con): Will my hon. Friend explain how the figure of 75 per cent. was reached, and whether he thinks that the Financial Services Authority and the Treasury will increase that amount in the longer term?
Sir John Butterfill: It is not foreseen that the level will need to go beyond 75 per cent., which is probably the maximum prudent level envisaged. The Bill will enable the regulations to be made by the Treasury from time to time.
Hon. Members will see that the Bill is somewhat complex. It is an enabling Bill, allowing the Treasury from time to time to make changes, as it thinks conditions demand and as it considers prudent. The role of the FSA is important in that. In general, the fact that the Bill is enabling, allowing the Treasury to make from time to time orders that can be dealt with by negative resolution, means that it will be flexible legislation, and we should not have to revisit these matters in future through primary legislation. That is extremely helpful for the sector, and this is the right way forward.
As I said, the legislative position is not currently a constraint on most building societies, but there are concerns that as the markets change and things go forward in future, it may become a constraint. It is therefore advisable to take action now that will give freedom of regulation for the future.
Mr. Love: The hon. Gentleman will be aware of the Miles report of 2004, which investigated the movement into longer-term fixed rate mortgages and highlighted some of the real concerns for the funding of organisations, such as building societies, that are based on members capital. The move to more wholesale funding would be one appropriate way in which that difficulty could be resolved should we move in that direction.
Sir John Butterfill:
The hon. Gentleman, with his usual perspicacity, has anticipated my next point. The Miles review, which was commissioned by the Treasury in 2004, raised that very issue. The prospect of an increased demand for long-term fixed rate mortgages, which we are now seeingbecause of the increase in house prices, the much more difficult affordability with
traditional short-term interest rates and the longer terms of mortgages now coming through into the marketmakes it important that the current constraints should not adversely affect the market. The building societies that may wish to embrace the new fixed-rate policies have emerged, and if we do not have primary legislation now, it could inhibit the entire operation of the mortgage market.
The removal of the constraint means, as I say, that the building societies would be in a position to meet whatever changes emerge in the marketplace over the next few years, rather than having their response to market changes constrained by legislation that might by then appear out of date and unnecessarily restrictive. This in no way forces building societies to move in the direction of non-retail funding, and many may choose not to do so, but it gives them the opportunity to do it in the most cost-effective way, funding possible mortgages for their borrowing members. There is no doubt that if building societies were not able to meet the demand, other institutions would take that opportunity.
If the Bill receives its Second Reading today, it may be necessary to move an amendment in Committee to provide the Treasury with an order-making power, to move the non-member funding limit into secondary legislation, and for the non-member funding ratio to be increased to a fixed level of 75 per cent. That is a matter for the Committee, but I thought that I should mention it now. It is not likely to be a significant constraint for the future.
Another consideration is the position of the members of a building society and their relationship with the capital markets from which money may be raised. In response to the increased limits, we want through the Bill to help and give reassurance to the members of the societies, so that in the event of a winding up they will rank pari passu with the other creditors. The reason for that is that people who put money into building societies tend to be relatively small investors, not particularly sophisticated in these markets, and who regard a building society as probably the safest and most convenient place for their money. It is therefore appropriate that, because they are not as sophisticated as people who buy shares in banks, for example, they should have an extra degree of protection.
As I understand it, the Treasury is perfectly happy that that should occur, the societies are very pleased about it, and, interestingly, the capital markets have said that they do not think that this will affect the rate of interest that they charge building societies. I had thought that they might want one or two extra basis points in order to agree to this, but all the indications are that they regard the building societies as so safe and so well run at the moment that they are not likely to increase the charge. One of the main purposes of the legislation is to allow very cheap mortgages to be offered, and that will not be affected by this alteration of priorities, which is entirely desirable. Again, it will be dealt with by means of a Treasury order from time to time, but that is the right way forward and an entirely appropriate safeguard for rather less sophisticated savers.
That is all dealt with in the second part of the Bill. No investor in any building society, since at least 1945 and probably well before that, has ever failed to get
their money back before a distribution is made to others. Over the last 60 or so years, building societies have been among the safest of institutions in which to invest.
All the building societies are covered, along with other institutions, by regulations issued by the Financial Services Authority and by the financial services compensation scheme. Under the scheme, savers are entitled to 100 per cent. compensation for the first £2,000 invested, and above that, they can claim 90 per cent. for the next £33,000, making a maximum claim of £31,700. No building society has ever been in a position requiring the FSCS arrangements to be invoked, and the predecessor arrangements that existed before the Financial Services and Markets Act 2000 were never invoked for building societies, either. Part 2 of the Bill therefore covers a highly unlikely circumstance.
None the less, it is necessary to describe the two different types of investor in building societiesthe depositor and the investing member or shareholder. Depositors, which are usually financial institutions, are not members of the society and are mostly institutions that operate in the wholesale markets that we talked about earlier. They have no say in the running of the building society. However, the ordinary man-in-the-street investor in a building society does become a shareholder, and, as members, such people have the right to receive information about the activity of the society, including the summary financial statement, notification of the annual general meeting and any special general meeting. They can also vote in elections for the board of directors, and frequently have done so, partly because of the activitiesundesirable activities in my viewof carpetbaggers in the recent past. Provided that correct procedures are followed, they can propose motions or even stand for election themselves. Again, some of them have succeeded in that objective.
The depositors are not members of the society and have few of the rights of shareholders. They need not be notified of the annual general meeting, as they are not entitled to attend or vote at that meeting, and they are not automatically sent a copy of the summary financial statement, although generally copies of the document are available from the societies if they ask for them.
In theory, depositors have more security than shareholders, but in practical terms the distinction is largely irrelevant. Under current arrangements, the depositors would get all their money back, but under the Bill, if there were a shortfall the shareholders would not suffer in comparison with the others.
The Building Societies Act 1997 imposes restrictions on the categories of deposit accounts that an individual may hold with a building society and, apart from a number of exceptions, individual investors may have only share accounts with societies. Those exceptions, where customers may still open deposit accounts, include current accounts; client or trustee accounts; qualifying time deposits; deposits at overseas branches; and where the society has announced publicly that it intends to transfer its business to a company. Currently, as I said, most depositors are the big wholesale investors.
The proposals in clauses 1 and 2 will strengthen building societies and enhance the operation of the mutual movement. Clause 3 addresses the transfer of engagement rules. This is a huge opportunity to strengthen the mutual sector. For many years, mutuals in the UK saw themselves as part of their own mini-sector, such as co-operatives, building societies or friendly societies. More recently, they have been seen as part of a larger reality called the mutual sector. Indeed, that was reflected in this House when the original all-party group on building societies expanded its scope, and its title, to become the all-party group on building societies and financial mutuals. That was because we identified the fact that the mutual sector was a movement in itself, with levels of ethics that were greatly appreciated by the general public and levels of performance that were generally better than the performance of the incorporated sector.
Sadly, membership of the mini-sectors within the mutual movement has continued to shrink, through a combination of demutualisation and business consolidation. Consequently, mutuality is seen as a declining business form, despite its great appeal and its value to consumers and customers. The Bill seeks to increase the strength of the mutual sector.
Mr. Love: Does the hon. Gentleman agree that it is palpably unfair that any type of mutual can convert into a company format, but a mutual cannot convert into another type of mutual? That simply cannot be right. We ought to create a level playing field, so that if people want to choose another mutual format, it will be as easily available as the corporate format.
Sir John Butterfill: As always, the hon. Gentleman is absolutely right. That is the whole purpose of clause 3. As we stand at the moment, it is not possible for a member of one mini-sector to amalgamate with a member of another mini-sector without one of them demutualising, which defeats the point of the exercise. We want to enable those sectors to merge, provided that they are all mutuals as defined in the Bill, and to do so without losing the mutuality of each of the members. That would create cross-fertilisation between the mini-sectors and help to allow the boards of mutuals that are considering their future status to offer their members alternatives to demutualisation. The capacity to grow, perhaps by merger, is at the heart of clause 3.
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