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I know that the subject of cash machines is close to the heart of the Economic Secretary, who has taken a
leading role in this regard. The Nationwide has argued consistently that its members should have free access to cash machines, and that not just building societies and mutual organisations but all organisations in the financial services sector should offer that service.
There are problems and dangers at present. Last year, for every free cash machine that opened 67 charging machines opened. I am very taken with the innovative scheme that my right hon. Friend the Member for West Dunbartonshire (John McFall)—the Chairman of the Treasury Committee, of which I am a member—has developed with the Economic Secretary to pilot 600 new free cash machines throughout the country. I say that as one whose constituency is likely to benefit from seven of them. I am consulting the organisation involved to decide where they would best be placed.
Meg Hillier: I agree with my hon. Friend that cash machines are an important issue. Many of my constituents are among the poorest, and are not easily able even to open bank accounts. That is where credit unions come in useful. Does my hon. Friend not agree, however, that taking away free cash machines is a reprehensible act on the part of some of our larger financial institutions, which seem to care only about people who can afford to open bank accounts?
Mr. Love: I agree very strongly. Those on lower incomes—those who can least afford to pay charges—are affected particularly adversely, because a £1 or £1.50 charge is much higher for someone who is taking out £10 than someone who is taking out £100. Moreover, most charging machines are located in low-income areas, while free machines are not easily accessible to those on low incomes.
Kerry McCarthy (Bristol, East) (Lab): I believe that my hon. Friend signed my early-day motion, which congratulates my right hon. Friend the Member for West Dunbartonshire (John McFall) on his initiative in promoting free cash machines. Is it not important that as many Members as possible point out that some of the most deprived parts of their constituencies lack free machines, and that we do all we can to lobby for them to be located in such areas?
Mr. Love: I congratulate my hon. Friend on her early-day motion, which is an excellent way of drawing attention to an issue to which we will return. The Nationwide has played a central role in this respect as well, not just in providing free cash machines itself but in recognising the wider consumer interest in ensuring that they are easily accessible, especially to the less well off.
Sir John Butterfill: While many banks pay lip service to the problems of financial exclusion, do not those that impose charges on those who draw money from cash machines reinforce the reluctance and fear of those who are shy of opening bank accounts?
Mr. Love:
I agree. That is a very important point, because the thrust of our efforts is to try to eliminate financial exclusion. When we look into why many people do not take up the opportunities that are now available in this modern consumer society, we discover
that the reason is their resistance to what they perceive to be the motivation of the organisations concerned. Charging people for gaining access to their cash reinforces those negative stereotypes. If the financial institutions were to eliminate such negative stereotypes and give a more positive image to those who currently do not make use of the financial services sector, that would benefit them in terms not only of their public reputation, but of their bottom line.
Kerry McCarthy: My hon. Friend has rightly sung the praises of the Nationwide building society for its initiatives on free cash machines. Does he agree that the Nationwide should also be congratulated on its promotion of basic bank accounts? Some of the other high street banks have not been quite as enthusiastic about making such bank accounts available to the most financially excluded people. Does my hon. Friend agree that they should take a leaf out of the Nationwide’s book by doing more to promote such accounts?
Mr. Love: Yes, I do agree. All the evidence shows that a bank account is the gateway to financial services in this country. Clearly, an ordinary cheque account might not be entirely appropriate for low-income consumers for all sorts of reasons, which I shall not go into at present. The basic bank account has been constructed to be an attractive option for people on low incomes. The financial services sector should help to ensure that anyone who wishes to open an account opens the appropriate one, and for those who prefer a basic bank account that option should be available. My hon. Friend is right that, sadly, the evidence is that many organisations in that sector are not doing that with as much enthusiasm as we would expect.
In terms of other financial institutions, I especially wanted to mention the friendly societies. The hon. Member for Bournemouth, West mentioned the Liverpool Victoria which is based in Bournemouth. It is the largest friendly society. There are 57 such societies in total, with a turnover of about £15 billion, and with about 5 million members. We should not lose our sense of history in respect of the friendly societies. In the pre-war period, the Beveridge report was produced, and its aim was to address the five great wants, as he called them. It led to the creation of the welfare state, but Beveridge did not suggest that the state should lie at the centre of the provision of welfare. He suggested that there should be a major role for what he called voluntarism, which at that time was primarily represented by the friendly societies. They had an enormous membership—in the region of 12 million or 13 million people. The creation of the welfare state—and the delivery of welfare through state mechanisms—contributed to the decline of the friendly societies. However, such societies offered a specific and targeted service to low income consumers, and that has persisted through their period of decline. The friendly societies could greatly help us to achieve our goals, especially that of engendering the saving habit among those who do not save very much. The child trust fund is among the measures already taken to address that.
All mutuals in this country share a few fundamental principles. First, they share a community purpose. My hon. Friend the Member for Hackney, South and Shoreditch (Meg Hillier) talked about the housing
association movement, which consists of industrial and provident societies established for community benefit. The principle of community benefit is a central purpose of all mutual organisations. It inspires the Nationwide and other such organisations to offer a service not only to their members but to the wider community.
As has been mentioned, the mutuals are owned by their members. There can be confusion about who is an owner or a shareholder and who is simply a depositer. That distinction can be complex, but the reality is that all such organisations are owned by their members, rather than by a separate group of shareholders.
They also have a democratic voting system. That has not been talked about, but the principle of one member one vote lies at the heart of mutual organisations. It is an important principle that we should try to uphold because what such organisations have tried to achieve for their members and society in general is based on that principle.
There has been much change. Members have mentioned the changes brought about by the Building Societies Act 1986 and the movement towards deregulation. In the early 1980s we got rid of exchange controls, and in the mid-1980s we had the big bang in the City of London, and it was almost inevitable that that would feed through and have an impact on the building societies and the housing association movement. The result was the 1986 Act, which introduced the opportunity to demutualise. We have had many arguments subsequently about whether demutualisation gave the members of that generation a short-term benefit but at the cost in the longer term of the society and future generations of its members. I do not wish to rehearse those arguments with the hon. Member for Bournemouth, West, but I think that we both agree that many people lost out because of the blandishments offered in respect of what was a short-term benefit. The current members of demutualised societies are living with the consequences of that.
The Abbey National demutualised in 1989, and the Cheltenham and Gloucester followed in 1995. The big year for demutualisation was 1997—that was the year of the demutualisation big bang. The Woolwich, the Halifax, the Alliance and Leicester and Northern Rock all demutualised in that year. Bradford and Bingley demutualised in 2000. That was the last demutualisation; seven years have now past without one.
What has happened to all the societies that demutualised? First, a number of them have disappeared from the high street—they have been taken over and consolidated into other organisations. As the hon. Member for Bournemouth, West said, many banks found it convenient to buy a building society or a demutualised mortgage bank in order to gain their expertise and to be able to deliver new services in the marketplace, and that was sensible. Some societies have gone from strength to strength; that is the case in respect of the Halifax, because it was a large organisation. The one major success in the demutualised sector has been Northern Rock, and I shall return to that point shortly.
It is worth repeating that the organisations that demutualised produced a great stream of statements about what they were going to achieve by demutualisation, but, disappointingly, almost none of that has been achieved. Most organisations still provide the basic financial services that mutuals provide. They have not got into the broader areas of financial services—the more sophisticated high risk areas, which some of them have tried and failed to get into. If such organisations continue to provide those basic financial services rather than provide more sophisticated services, by far the most appropriate structure for them to have is a mutual one because in that case they do not pay shareholders and they can deliver the benefit to the people they represent.
Demutualisation has been a disappointing experience: not an entirely negative one, but, generally, the demutualised societies have not achieved what they set out to achieve. One cannot escape coming to the possible conclusion that demutualisation was undertaken for the benefit of senior employees and that it has been of very limited benefit for some of the members. That was done in accordance with the spirit of the age, and we may well now be living with the consequences of that.
Nothing has happened since 2000. Has demutualisation run its course? Only time will tell. Interestingly, in 2005 a part of the old Bristol & West was re-mutualised, so we are beginning to see the reverse process. Someone said to me, “Was that the first remutualisation?” It may have been, but it was not the first conversion from company to mutual. If one goes back through the aeons, one discovers that Standard Life was originally a company that became a mutual, only to demutualise in the past few years. It will be interesting to see whether in 20 years’ time, Standard Life may consider it advantageous to it, and to its policyholders, to become a mutual again.
Although there has been consolidation within the building society movement in the past five or six years, the number of societies has decreased from 65 to 63. However, as several Members have said, the expectation is that the consolidation process will speed up, and we hope that the Bill will give that process impetus. The level of consolidation so far has been small, but interestingly, between 2001 and 2005 the number of full-time employees increased from 28,000 to 35,000. In 2001 there were 9,000 part-time employees; now there are 12,000. Moreover, funds from mortgage advances have risen from £31 billion to £59 billion, so we can say with some certainty that although the number of societies in the movement may be decreasing, the number of employees—and, more importantly, the number of customers and member mortgages—is growing very quickly. Indeed, the Nationwide is a very good example in that regard.
Can the Bill help that process? I certainly think it can, and that it will create a stronger and much better mutual movement. As others have said, the Bill has three important clauses. Clause 1, which everyone has discussed, deals with the relaxation of non-member funding limits for building societies. The Building Societies Act 1997 resolved this issue by creating the 50 per cent. limit. In a sense, it was a mopping-up measure that tried to create a level playing field for a building society movement that had been under severe attack since 1986 from carpetbaggers and others, who I
think we can say were not primarily concerned with the best interests of the movement. The Act was meant to address that issue, and it created a permissive regime and increased the regulator’s powers to ensure that everything was done properly and transparently. It increased accountability to society members. Numerous societies rarely contacted their members or had any conversation with them, and the Act corrected that.
The 1997 Act also introduced the 50 per cent. member funding limit, and since then, there have been occasions when people—and, indeed, the movement itself— thought that an inappropriate constraint. The Miles report comments on that issue in several different ways. That provision can limit the amount of mortgage business that a society can do, which can therefore have an effect on the competitive pricing of their mortgages. It must be stated clearly that on occasion it can be cheaper to go to the wholesale market than to raise the money from one’s own members.
That brings me back to the one demutualisation success story: the Northern Rock. As part of its demutualising strategy, it took in enormous funds from the wholesale market, created a much more efficient organisation and leant those moneys back to mortgage holders. The strategy was successful for the Northern Rock, and my strongly held view is that if building societies are given the flexibility that clause 1 provides, it will be successful for them, too.
The other reason for clause 1 is the growing trend towards fixed-rate mortgages, which at the moment are relatively short-term. People have a three or five-year fixed-rate mortgage, and then go on to something different. As I said earlier in discussing Nationwide, people must consider carefully what are their best interests. However, there is a trend for moving to long-term fixed-rate mortgages, which the Government would like to foster. One can see many benefits to mortgage holders in having a fixed rate and knowing how much they will pay in future, and if we go in that direction, it will have implications for societies based mainly on short-term members’ funds.
The Miles report goes into that subject in great detail, and if the Government want to sponsor a move in that direction, we must create the conditions for building societies to compete in those circumstances. Clause 1 offers that opportunity, and it will deliver a competitive building society movement. It will also allow them to issue more mortgages—to follow the Northern Rock strategy of building the business, and by doing so, creating a more competitive business. I therefore strongly support the clause. It is a very important step in the creation of a level playing field for mutuals and the rest of the financial services sector.
Clause 2 would rebalance the relationship between members—those who own the business and who, in many cases, will be depositors—and non-members. The issue is not just wholesale funds, however. One need only speak to someone at the Nationwide building society to realise the full complexity of the situation, in that some depositors are members and therefore shareholders, and others are not. The reality is that taking in a large group of new depositors—in others words, wholesale funds—changes markedly the relationship between those depositors and the people who are also members and shareholders, and who, in
normal circumstances, therefore come last in the pecking order should the society be dissolved.
Everybody has made this point, but let me make it again. No member of a society has lost out in any transfer of engagements or in any building society dissolution since the second world war. It is one of the safest investments that anybody can undertake, so we are discussing only a theoretical possibility—but of course, theory sometimes becomes reality. If it did, it would be inappropriate for members, who in many cases are depositors, not to stand on a level playing field with those who deliver wholesale funds. Otherwise they would almost certainly lose their capital in a dissolution, because they would come last. That would not be right, and by saying that the consumer will be protected, we are standing up for the consumer.
The hon. Member for Bournemouth, West has already made the point, which others have confirmed to me, that the wholesale markets will not look negatively on allowing such a privilege. They will still deliver wholesale funds at a competitive rate and in a way that allows building societies to continue to compete with the rest of the financial services sector, because building societies are such a blue-chip investment.
I now come to clause 3. I know that many people see clause 1 as the most important, but clause 3 is at the core of what we are trying to achieve. I mentioned earlier that we have an anomalous situation in law in this country, in that any mutual from any part of the mutual sector may demutualise and become a private company, but may not transfer its engagements to another part of the mutual sector. It makes no sense that a building society may not join with a co-operative or a mutual insurer. The legislative playing field should be level so that organisations owned and controlled by their own members may take the decisions that they believe to be most appropriate for them.
If any such organisation said to its members, “You have a choice: you can either demutualise and join with an ordinary bank or other financial institution, or you can remain mutual and join another mutual in a different part of the financial services sector,” I cannot imagine that people who have owned and controlled that society for generations would not prefer to remain mutual. That is what I mean when I say that there should be a level playing field, which would increase the options available to members when they decide such matters and would help to maintain and strengthen the mutual sector. That is what the Bill is about: strengthening mutuality in this country.
The mutual sector has gone through a pretty torrid time since 1986, and not of its own making. I assume that the crafters of the 1986 Act never dreamt that what actually did occur would occur. They thought that there would be a sensible, rational deregulation of the sector that would benefit consumers. They did not think that out of the proposal for demutualisation would come all that happened in the heady 10 years of carpetbagging, but it did. We have gone through that difficult time and are beginning to rebuild the sector. The Nationwide and other building societies are competing the pants off the rest of the sector, and mutual insurers are showing the rest of the insurance sector how to do it. We need to give them this Bill, and let them do it even better in the future.
11.42 am
Kerry McCarthy (Bristol, East) (Lab): I shall be brief, Mr. Deputy Speaker.
Mr. Mark Hoban (Fareham) (Con): Hooray!
Kerry McCarthy: I shall be even briefer now that I have received that response. We have had a full and comprehensive debate, although there are only a few Members in the Chamber. I am sure that the hon. Member for Bournemouth, West (Sir John Butterfill) is keen to hear what the Minister and the Conservative Front-Bench spokesman have to say about his Bill, which I congratulate him on promoting. This is only the second time that I have attended the Chamber on a Friday to debate a private Member’s Bill. Last time, the Bill’s promoter received something of a mauling, so it is a tribute to the hon. Gentleman’s experience in this field that there has been such a degree of consensus on the Bill. Congratulations to him, for putting forward such a coherent measure.
Like my hon. Friend the Member for Hackney, South and Shoreditch (Meg Hillier) and the Economic Secretary, I speak not only as a Labour MP but a member of the Co-operative party. I used to be a director of a co-operative development agency, and am now a proud member of Money-Go-Round, Bristol’s credit union, so I very much support the mutual sector—as much for what it represents as for the important role that it plays.
I support the idea that the financial sector is there to serve the needs of its community. As we have heard from various speakers, that was the origin of the building and friendly societies movement through the self-help initiatives of the 18th century. When I went on a Treasury Committee trip to the United States last year, it was obvious from the community development financial institutions and legislation such as the Community Reinvestment Act that the US still has the ethos that financial institutions should be made to play a role in their communities. We have drifted away from that in this country—a point to which I shall return. It is important to protect mutuals, but we will not do that by preserving in aspic the way in which they operate now. We should do it by introducing incremental changes as necessary, to allow them to survive and flourish in an ever-changing and often challenging marketplace.
As we have already heard, previous legislation, including the deregulation of the 1980s, has allowed diversification, but—unfortunately, some would say—it led to demutualisation. We have already heard from my hon. Friend the Member for Edmonton (Mr. Love) about some of the organisations that chose to demutualise. I worked for one of them—Abbey National—shortly after it floated and became a plc. It was very successful as a result, and was the biggest bond issuer in the country at one point. It has had its ups and downs in more recent years, but as an institution it benefited from demutualisation. None the less, it is sad that so many such institutions went down that path.
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