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At the moment, the situation is ridiculous. It emerges not out of any devious means of trying to restrict building societies and other mutuals, but out of the original legislation that set them up. The Bill will deregulate the sector and the various pieces of legislation that apply to it so that mergers can take place across the boundaries. For example, it is not currently possible for a building society and a friendly society to merge. One could take the other over only through the demutualisation of the other, which would be crazy. If the Liverpool Victoria friendly society in my constituency wanted to merge with a building society, it could not now do so. Similarly, a co-operative society could not merge with a mutual insurer. Those restrictions are petty, and restrict and
restrain the growth and strength of the mutual sector, which is why the Bill seeks to eliminate them.
The technical term used in the Bill is engagements, which has nothing to do with putting rings on fingers. At the moment, engagements can be transferred only if the two bodies involved are in the same category. Such events are dealt with under the Building Societies Act 1997 and the Industrial and Provident Societies Act 1965. There are different voting thresholds for transfers between societies and for those who want to demutualise. In some casesfor example, industrial and provident societiesthe thresholds are higher. The threshold under the Friendly Societies Act 1992 is the same for any transfer. The Bill would rationalise that situation, largely through the power to make regulations in the future.
In comparison with the rest of the world, the UK environment currently restricts, or at least does not encourage, new corporate options for mutuals, which compares unfavourably with external competitors. For example, there are huge mutual businesses that operate group structures elsewhere: in France Crédit Agricole is a huge mutual, in the Netherlands there is Rabobank, and in Germany there is DZ bank. Seeing the mutual sector as a series of ring-fenced mini-sectors is too restrictive for the remaining businesses, and it militates against consolidation and strong mutuals.
Apart from the damage that that restriction does to the continuance of mutuality, the higher voting thresholds can also lead to higher windfall payments being paid to members in order to secure their votes. That involves the bribery of the membersthe carpetbagger syndromewhich can happen only through the higher thresholds. That ultimately reduces the capital value of the business, and it is against the long-term interests of members who want to stay with the business post-transfer and continue to enjoy the benefits of mutuality.
The Bill will give the Treasury a power to make orders to allow different categories of mutuals that want to do so to receive transfers from other categories of mutual society. It would allow Her Majestys Treasury to treat the transfer of mutuals to other mutuals, or their subsidiaries, as if they were transfers between the same category of mutual. Under the Bill, a building society could be transferred to a subsidiary of an industrial provident society that is qualified to take deposits under the same rules that allow thresholds that pertain to transfers from building society to building society. The same principle could be established for transfers from building societies, industrial and provident societies, friendly societies and mutual insurers. The only exception to that rule is, of course, credit unions, where the nature of their business would preclude them from participating in this type of transfer.
I believe that that would be an important amendment of the law, which would assist in the cross-fertilisation of mutuals and strengthen the sector with very little legislative change. With the order-making power established, we can envisage Her Majestys Treasury consulting either separately or collectively on changes.
I thank the hon. Gentleman for being so generous this morning. With consolidation taking place across the whole financial services sector, if the
mutual part of that sector of the economy is to compete with those consolidated businesses, it needs clause 3 to be able to achieve that effectively. Is that not one of the main reasons clause 3 is so important to the Bill?
Overall, the proposal in clause 3 is probably the most important thing that we could do to strengthen the mutual movement as a whole and ensure that it is not gobbled up by the private sector for profit, but continues to be able to offer to British citizens all the advantages of mutuality and the mutual sectors increasingly competitive edge over the incorporated sector. I very much hope that hon. Members will give the Bill a fair wind and allow it to pass through to the Committee stage.
Mr. Adrian Bailey (West Bromwich, West) (Lab/Co-op): Let me start by congratulating the hon. Member for Bournemouth, West (Sir John Butterfill) on securing his position in the private Members ballot. From the perspective of the chair of the all-party group on building societies and financial mutuals, I am very pleased that he took up this issue, for two reasons in particular. First, it is recognised across the House that he has unparalleled expertise and experience in this area, so the Bill could not be in better hands. Secondly, although he was too modest to say so, he has had previous experience of navigating private Members Bills through the House. We therefore have the benefit of somebody with considerable financial expertise allied to a certain navigational skill, which, as we all know, is most necessary to guide private Members Bills through the rocks and obstacles that lie ahead of them.
The hon. Gentleman made several kind comments about me. Perhaps I should make it clear that prior to coming to this House I had 18 years experience in the co-operative movement. The values that underpin it are somewhat akin to those that underpin the mutual movement. The Co-operative party has had long-standing political representation, and I am one of those representatives.
The mutual movement has always been slightly different. When it hit the problem of privatisation 20 years ago, one of the reasons it had such difficulties was that its unique ethos, structure and value system, and its worth in the marketplace, were under-recognised. The public perceived it to be little different from the banks, and its members could not see why they should not go along the privatisation route. As a result, a lot of mutuals privatised and became banks. Happily, what remained of the mutual sector responded positively by clarifying the benefits of mutuality in the provision of financial services. Since then, there has been, if not a renaissance of mutuals, then certainly a consolidation of their position in the market and an increased recognition by the financial press and consumers of the unique role that they play in the provision of financial services.
Arising out of that experience, we have the all-party group, which has about 170 Members from both Houses and, obviously, from all parties. It is one of the largest all-party groups, which reflects the esteem that the movement enjoys within the House.
The genesis of the Bill lies in two inquiries that were held by the all-party group and in the Miles report, which has already been mentioned. The all-party group carried out its first inquiry in 2004. Its purpose was to explore and demonstrate the role of the mutual sector in the provision of financial services. It had a Select Committee structure whereby the group interviewed representatives of the movement and of other financial services sectors, as well as commentators.
The inquiry reached two key conclusions. First, institutions in the mutually owned corporate structure, being owned by the customers rather than the shareholders, offer certain natural advantages over other financial institutions. The crucial advantage is that they do not have to pay dividends to shareholders. An estimate by the Building Societies Association has put the cost savings derived from that advantage at as much as 35 per cent. One can have a cost advantage but still not be efficient. Happily, however, one of the other key indicators of efficiency demonstrated that in providing services to customers the margin between mortgage and savings rates in the past year was typically 1.09 per cent. for mutuals and 1.5 per cent. for plc banks. That is a clear indication that the cost advantage is reflected in the value of service provided for the customer.
Secondly, the mutual sector, merely by having a presence in the financial marketplace, provides competition that prevents the plc banks from becoming too shareholder-focused, which means not only that it provides better value for its customers but that the non-mutual sector has to pay more regard to its customers and to compete. The mutual sector benefits not only its own customers but consumers requiring services across the whole sector.
After the first inquiry, it was decided that it would be logical to hold another to assess whether members of the former mutuals that had demutualised had been better served by that process and whether the value of the windfalls that they received after privatisation had subsequently been outweighed by higher costs or lower returns on investment. Again, the group carried out the inquiry in a Select Committee style, interviewing representatives from the mutual sector, from companies that had not demutualised, and from other interest groups, including campaigners for privatisation. The second report, entitled Windfalls or Shortfalls, was written independently by the Association of Chartered Certified Accountants. It demonstrated that the mutual sector, including building societies and life assurance companies, performed better than their plc rivals in a variety of performance indicators.
As my hon. Friend the Member for Edmonton (Mr. Love) said, mutuals are consistently placed higher than plcs in the best buy tables on a variety of criteria, ranging from savings and mortgage rates on the one hand to annual premium-with-profits policies for insurers on the other.
In comparing the average standard variable rate mortgage of the top 10 mutual building societies with nine converted societies assessed in September 2005, it was found that the average rate was 6.58 per cent. for former mutuals and 6.37 per cent. for building societies. Again, that is a clear statistical demonstration of the added benefit that mutuality brings.
Mr. Love: Before my hon. Friend leaves that point, did not the investigation show an even deeper malaise in that all the former building societies that demutualised had set themselves various objectives on demutualisation but had in almost all cases failed to achieve them? Indeed, some had been gobbled up by other companies in the marketplace, and few had shown genuine positive signs of growth and success as a result of their demutualisation.
Mr. Bailey: My hon. Friend makes a valuable point. I do not wish to indulge in the grief of the experience of one or two of the companies that demutualised, but it is worth underlining that, in many cases, members of building societies that demutualised have subsequently lost out on the value of the products that they had with those companies.
Since mutuals have an obvious cost advantage, one would think that they commanded a higher proportion of both the savings and the mortgage markets. However, obstacles have stood in the way of their expansion. One is the wholesale funding restraint, which the hon. Member for Bournemouth, West mentioned. The Bill tackles that. To hark back to the Miles report, which the Treasury commissioned in 2004 to make recommendations for improving funding provision for long-term mortgages, recommendation 19 advocated modifying the wholesale funding restraint to enable building societies to take up to 70 or 75 per cent. of their funds from the wholesale funding market. The issue has lain fallow until the hon. Member for Bournemouth, West took it up. That restraint acted as a considerable brake on the potential for building societies to expand.
The history of building societies shows that they grew out of small, often deprived communities, and their savings products reflect that. By their nature, building societies found it proportionately more difficult than the plc banks to obtain the savings that would have enabled them to get greater wholesale funding. The difficulty has been exacerbated by the fact that, for good community reasons, building societies have maintained their branch networks and their roots in local communities in a way that plc banks have not.
In my area, the successful West Bromwich building society has done well historically in providing low-cost financial services for the local housing market, and plays an active part in promoting community causes. We also have two much smaller societies that do the same in very local areas. They are the Tipton and Coseley building society, which operates in one of the most deprived communities historically in the black country, and the Dudley building society. They provide access to financial services that the major plc banks do not. However, the nature of the customers with whom they engage means that there is not the same intake of funds that there might be in other areas. By removing the wholesale funding restraint or modifying it to the point where mutual societies can borrow more on the wholesale funding market, the Bill takes away one of the obstacles that prevents them from undertaking their activities more effectively.
The hon. Member for Bournemouth, West mentioned the Bills provisions on pari passu, which effectively give members equal rights with wholesale funders in the event of a dissolution of a society. As he
said, dissolution is highly unlikely and the provision is not likely to be used, but it is necessary to include it. It makes it clear that, in the unlikely event of a dissolution, existing members will not be disadvantaged if the building society had expanded its wholesale funding, so the provision is welcome, logical and necessary.
The Bill also deals with transfer of engagement. Again, that has an undeniable logic. Let us consider the co-operative movement. A hundred years ago, there were literally thousands of co-op retail societies. Even as recently as 20 years ago, there were well over 100. However, a process of transfer of engagement, which was allowed under the Industrial and Provident Societies Act 2002, means that those societies have merged to become, in many cases, major societies with huge turnovers. That has happened in response to market conditions and the need to adapt to changes in consumer behaviour. It is therefore illogical that the mutual sector does not have the same flexibility. I understand that some technical problems exist, but I hope that the Treasury ensures that they are ironed out to give the mutual sector the same flexibility that has existed for the plc and co-operative retail sectors for many years.
Mr. Love: Is not one of the primary reasons for clause 3 an attempt to sponsor transfers of engagement from positions of strength and not, as has happened in the mutual movement of the past, from positions of weakness? Only through coming together when in a strong position can we grow the mutual movement and compete effectively with the rest of the sector.
Mr. Bailey: My hon. Friend makes a valuable point. Looking at the co-operative retail sector, I would like to think that not all the transfers of engagement came from positions of weakness, but certainly a fair proportion of them did. In the mutual sector, companies are much stronger and this process is likely to be used as part and parcel of a process designed to strengthen their position even more. It is certainly a way of promoting as opposed to just defending the mutual sector. As I say, I believe that it has a compelling logic and I hope that any technical obstacles will be overcome in Committee.
To conclude, over the last 100-plus years, the building societies movement has played a huge and valuable role in the purchase of housing for lower-income people. It has been of enormous and significant social benefit. Even today, in a very highly sophisticated financial market, the mutual sector has proved that it can deliver in a way that the plcs have not.
Sir John Butterfill: Does the hon. Gentleman agree that when the banks, for example, want to improve their expertise in mortgage lending, the route that most have taken is not to get their own department to do it, but to seek to take over a building society to perform that function under their jurisdiction?
The hon. Gentleman makes a valuable point again, no doubt rooted in his deep knowledge of the industry. It is fair to say that the expertise built up in the portfolios that building societies have is much
coveted by the plc banking sector, so we could say that they are prime targets. That underlines the rationale for the Bill, as it clearly demonstrates that if we want building societies to thrive and sustain their value in the market, we must give them the legislative and regulatory framework to enable them to do so.
In removing this obstacle, the Bill may seem to be a fairly arcane piece of financial regulation, but it none the less has potentially profound and significant implications for how the movement can develop and continue its historic role in a highly difficult and sophisticated financial setting.
It is a pleasure to follow the symmetrically named hon. Member for West Bromwich, West (Mr. Bailey) and I would like to congratulate my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) on securing a place in the ballot. As those who have not been successful often point out, it is simply a lottery. The real skill is in introducing legislation. In that respect, my hon. Friend has been characteristically modest in not mentioning that he has brought three private Members Bills before the House and that, if this goes through, it will be his fourtha record for this House of Commons. I am sure that the House would want to congratulate my hon. Friend on that. Members will want to speak to him later about his skill.
Todays debate is about the building society sector and I would like to commend the Minister, whose speech to the Building Societies Association I read this morning. He referred not just to 200 years of British history, but went back even to Roman history. I hesitate before complimenting him, however, given that politicians sometimes rise to make speeches written by othersas I am sure he in particular will know.
The Bills removal of funding limits is certainly a very welcome step. I probed in an earlier intervention on my hon. Friend the Member for Bournemouth, West the level to which he thought it would rise through the Financial Services Authority and the Treasury. It was interesting that a broad consensus seemed to arise around 75 per cent.
A second aspect of the Billdealing with the transfer between mutuals and other structuresis incredibly sensible. It made no sense whatever that the only exit route for a building society was to merge with its exact mirror, or indeed with a plc. Most mergers nowadays are more mature and they take place not for size reasons but for specialism reasons. It makes more sense for a small building society to merge with a friendly mutual that might typically offer insurance products rather than just lend for mortgages. The Building Societies Act 1986 was a major step forward, but it became evident over subsequent years that some areas needed changing. The Bill certainly brings forward most of those changes.
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