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When customers of mutuals have been surveyed, it is clear what they perceive as the advantages. They believe that mutuals are much more democratic, in that
members have a direct say in decision making and are able to exercise their voting rights. Above all, they are thought to work in the interests of the members, not of the shareholders. In 2001 a survey was carried out by the Consumers Association, which said:
“Building societies deliver better value for one simple, crucial reason. The priority of the shareholder-owned banks is to keep their shareholders happy by paying large dividends, and increasing profits...we calculate that for every £100 in after tax profit the banks make, about £30-40 of that goes to shareholders as dividends.”
The Centre for Business Research at the University of Cambridge has undertaken an ongoing programme of research into the benefits of mutuals. When it spoke to customers and asked them their reasons for choosing a building society, it was clear that the feeling of ownership was very important to them. The No. 1 reason they gave was the lack of shareholders, which creates a feeling of trust. Customers feel part of the institution to which they entrust their money or from which they borrow money. The CBR survey of the mutuals says:
“The essential point is that a PLC owes its duties to its shareholders; we owe our duties to our members. It is easy for a PLC to make attempts to blur that distinction...But at the end of the day they are presented with an inescapable fact: the interests (that is, the interests of shareholders and customers) conflict...We only have to consider the interests of members present and future.”
Another point about the mutual sector, the survey said, is that
“The whole tone, the whole motivation, the whole aspiration is different.”
One point that has not been made so far today is the extent to which credit unions are now filling in the gap left by the mutuals merging or demutualising. My constituency has several credit unions, but most have now merged to form one big credit union, which gives it added strength. In some ways, the credit unions have picked up the mantle of the early mutuals, harking back to their origins, when communities came together to make their own provision and fill in some of the gaps for the financially excluded communities, about which my hon. Friend spoke.
We learned earlier this month that high street banks’ profits have now hit $40 billion. I have no objection to them making such profits, but more should be done to encourage them to reinvest some of those profits in communities through, for instance, promoting basic bank accounts and the free cash machines that other hon. Members have mentioned.
Earlier this month, Save the Children and the Family Welfare Association published an important piece of research illustrating what they call the poverty premium or the price of being poor in the UK. For example, if people do not have a bank account, they cannot pay by direct debit, so their utility bills are likely to be higher. It was estimated that poor families pay 150 per cent. more for basic household goods bought on credit, more than 50 per cent. more on credit and loans, and 10 per cent. more on gas bills paid through pre-payment meters. The poverty premium for a family of four, with one adult earning £250 a week, was estimated at 9 per cent. of their income. In effect, being poor makes people poorer, because they do not have access to financial products at the same rates as other
people. Support for the credit union movement is an important step in tackling some of those issues.
In my constituency, the credit union benefits from capital and revenue from the Department of Work and Pensions growth fund, which means that it can make loans to people who cannot access them from mainstream financial institutions. Eighty per cent. of those loans have gone to women, 60 per cent. of whom were lone parents. The credit union made a comparison of the costs of a loan from the credit union and a doorstep lender. It was estimated that someone borrowing £500 from Provident Personal Credit—the country’s largest doorstep lender—would have had to pay £825 over a year, at an annual percentage rate of 177 per cent., but borrowing from the credit union would cost about £65 in interest over a year. That shows the difference that a small organisation can make in a poor area in my constituency.
Sir John Butterfill: I thoroughly agree with everything the hon. Lady says about credit unions. I was one of the earlier members of the Bournemouth credit union, and am still a member. We are merging with two other local credit unions, and the hon. Lady said that the same was happening in her constituency. I have no doubt that credit unions give a wonderful service in the community I represent. However, I hope that she understands that it was not technically possible to include credit unions in the scope of the arrangements set out in part 3.
Kerry McCarthy: I thank the hon. Gentleman for that intervention.
The Government last looked at credit union legislation in the very last measure passed by the Labour Government before we lost the 1979 election. Some steps have been taken since then—for example, doubling the interest rates that credit unions are allowed to charge—and I think that my hon. Friend the Economic Secretary is looking into the possibility of introducing more legislation, and I hope that will be done.
We need to look at the role that financial institutions—whether community development financial institutions or others—can play in lending to the voluntary sector and new businesses in deprived areas. There is a gap in the market that the high street banks are not really meeting. On that note I shall conclude my remarks, as I think it is time for Front Bench to have their say.
11.52 am
Mr. Mark Hoban (Fareham) (Con): It is a pleasure to follow the hon. Member for Bristol, East (Kerry McCarthy). She spoke eloquently about the benefits that credit unions bring. As a member of the Portsmouth Savers credit union, which serves not just Portsmouth but neighbouring boroughs, I agree with many of her comments about the success of new forms of financial mutual—although I realise that they are outside the scope of the Bill—in meeting the needs of people in many different communities. The credit union movement is excellent and demonstrates that financial mutuals can innovate, and refresh and renew themselves in a way that underpins the purpose of the Bill.
I congratulate my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) not only on securing a place in the private Members’ ballot but on choosing to steer this Bill through the House. I hope he will be successful. Given his tremendous track record, I have no doubt whatever in his ability to see his fourth private Member’s Bill on to the statute book—a record to which we should all aspire over the course of our parliamentary career.
The hon. Member for West Bromwich, West (Mr. Bailey), one of the Labour and Co-operative Members taking part in the debate, spoke knowledgeably of the importance of the building society and financial mutual sector. I was delighted that my hon. Friend the Member for Rochford and Southend, East (James Duddridge) volunteered to serve on the Bill’s Committee. I am sure that he will add expertise and insight to its proceedings.
When the hon. Member for Hackney, South and Shoreditch (Meg Hillier) described the Economic Secretary as a Co-operative Treasury Minister, it was not clear whether she was using the word “co-operative” as a noun or an adjective.
Mr. Hoban: I fear that may not always be the case in the debates we are holding on either side of today’s private Members’ business.
The hon. Member for Edmonton (Mr. Love) gave a knowledgeable and thoughtful speech. Thinking about some of his comments about the role of friendly societies before the Beveridge report, I realised that that sense of providing benevolence and support runs through the remaining friendly societies. They play an important role in meeting the needs of some of our communities.
The Bill deals with an important sector. Financial mutuals have roots in communities up and down the country. As the hon. Member for Edmonton said, historically they tackled financial exclusion by providing benefits to their members—that mission was as important then as it is today. Typically, those organisations were run by and for the benefit of their members, but mutuals nowadays cover a wide range—from the Nationwide building society to the Catholic building society and from Liverpool Victoria to the Ancient Order of Foresters. The assets of mutuals range from a few millions to many hundreds of millions of pounds.
The Bill helps us to recognise the diversity of financial mutuals and provides the means to facilitate change in the sector. If mutuals are to continue to succeed they need not only to take best practice from the commercial sector but constantly to focus on the benefits to their members that come from their mutuality. A mutual that loses sight of its key role in providing benefits to its members is a mutual that has lost its way.
Labour Members have spoken graphically about their connections with the co-operative movement. I was born and brought up in the north-east, and the physical embodiment of mutuality—the local Co-op—was a common sight in streets all over the region. The Co-op was, and to a lesser extent still is, part of the fabric of life in the north-east. The divi was a reward to
members of the Co-op for shopping there—a forerunner of the customer loyalty cards of today; but it was also a sign of ownership of the business and of the rewards that come from that.
People often link the co-operative movement to the Labour party, but even in my own constituency, which is a Conservative heartland, the flagship store in the local shopping centre is a Co-op. The Co-op provides many of the convenience stores across my constituency. I have never really delved into the history so I am not entirely sure what the link is between Co-op stores, the co-operative movement and Labour and Co-operative Members. Next time I shop in my local Co-op, I shall think about Labour and Co-op Members and about the benefits of my shopping to the co-operative movement as a whole.
Because of the strong links to the co-operative movement that I have indicated and also to credit unions, I am delighted to take part in the debate. The Bill will strengthen the financial mutual sector in the future. Members have talked about the three key parts of the Bill: to amend the building societies legislation to enable the relaxation of prescribed non-member funding limits; to establish the interests of members so that they rank equally with non-member funders; and to widen the opportunities for societies to merge across different financial mutual sectors.
I want to talk about each of those three aspects, but first I want to remind the House of the background. The starting point of legislation governing building societies is the Building Societies Act 1986. At the time it was seen as giving societies greater market freedoms. It set limits on the classes of asset that building societies could invest in and also, as Members have said, provided the paving legislation that allowed building societies to convert to companies. Of the six largest building societies at the time the Act was passed only one, the Nationwide, has preserved its mutual status.
The next significant change in legislation was the Building Societies Act 1997, the culmination of a lengthy process of review and consultation on reform of the 1986 Act. It replaced the prescriptive regulatory regime of the 1986 Act with a more flexible regime and made changes to the powers of the sector’s regulator, the Building Societies Commission. Measures were introduced to improve the accountability of societies to their members, but also to protect the remaining mutual building societies from the pressure to change status. Then we had the Financial Services and Markets Act 2000, which again changed the governance of the sector and brought building societies within the remit of the Financial Services Authority.
As the hon. Member for Edmonton said earlier, there have been no building society demutualisations since 2000. He identified that the savings business of Bristol and West was re-mutualised in 2006, with the acquisition of that business by the Britannia building society. There are about 60 building societies in the UK, with over £300 billion of assets. They employ about 50,000 members of staff and have over 2,000
branches, about 22 million individual investors—although some people will have accounts with more than one company—and almost 3 million borrowers. Added to that, building societies have sought to increase the range of products that they sell. They hold the majority of the cash-based child trust fund accounts—about 440,000 in total. It is not just building societies that are involved in the child trust fund business. A number of friendly societies and other financial mutuals are also key players in that market.
In broad terms—this is reflected in the Bill—building societies are defined as institutions that must have as their main business raising money from investors in order to lend on the security of residential property. Following the 1997 Act, there are few restraints on the other activities that they are allowed to undertake. The principal restrictions are to prohibit them from speculating in derivatives, commodities and foreign exchange markets, although they can hedge their risks, when looking at the risks that arise from lending in fixed-rate markets.
There are two principal issues that building societies need to think about in the context of their activities. The first is the topic of the first part of the Bill. Building societies must raise at least 50 per cent. of their funds from members—essentially, the retail markets—and the balance can be raised from the wholesale financial markets. The second is that 75 per cent. of their lending must be lent on the security of residential property. The Bill addresses the first restriction in particular. It is worth noting that not only does the Bill have support from all the relevant stakeholders in the sector but it has cross-party support in the House.
James Duddridge: My hon. Friend mentions cross-party support. Given the importance of the Bill, is he not surprised, as I am, that no member of the Liberal Democrat Front Bench or Back Bench has even come to the Chamber, let alone spoken in the debate?
Mr. Hoban: I am grateful to my hon. Friend for pointing that out. I am sure that that has not been lost on the House. However, the Bill does have cross-party support and support from stakeholders across the sector.
Sir John Butterfill: May I point out that the chief spokesman for the Liberal Democrat party on this matter, the hon. Member for Twickenham (Dr. Cable), is one of the sponsors of the Bill and has personally apologised to me for not being able to be here today?
Mr. Hoban: I am grateful to my hon. Friend for pointing that out. [ Interruption. ] The Economic Secretary suggests that my hon. Friend may have been overly generous in his remarks. I would not be quite as churlish as to say that myself, but I recognise the comments that have been made on both sides.
It is important to look at the impact that the existing limit on borrowing from wholesale markets has. It is recognised that it is, on the whole, cheaper to borrow from those wholesale markets, rather than to rely on retail funds. The hon. Member for Edmonton talked about Northern Rock. It is interesting to look at the evidence that it gave to the all-party group on building
societies and financial mutuals. Its report on demutualisation said that Northern Rock
“insisted that its success over the past eight years would not have been possible under the old mutual model. By being able to access external capital (75 per cent. of which is now raised abroad) it could grow quickly and therefore keep unit costs down.”
That is an important factor to recognise. Clearly, the benefits that will accrue to building societies from the relaxation of the limits will, I hope, flow through to borrowers. The hon. Gentleman talked about some of the issues around demutualisation. It is important to recognise that, when Northern Rock demutualised, it set up the Northern Rock Foundation, which continues to support community activities across the north-east and plays an important role in providing support to community organisations across the region.
Commenting on the Bill, the Building Societies Association said:
“The removal of the constraint means that 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, in the future, appear out of date and unnecessarily restrictive.”
That is an important point to make. The measure facilitates the development of the building societies sector in the future. That point was also made by Professor David Miles in his report in 2004. In the context of funds being raised from members of a building society, the report pointed out:
“If there were a significant increase in long-term, fixed-rate lending, this requirement could place building societies at a disadvantage to other mortgage lenders if tapping wholesale markets turned out to be the most effective way of funding fixed-rate lending.”
Again, that shows the commercial need and the need to continue to provide good value for money to borrowers by accessing the funds that are available in the wholesale markets.
My hon. Friend the Member for Rochford and Southend, East has commented on the Financial Services Authority. The FSA states that while
“we do not think there is any immediate need for an increase in the building society funding limit, we do think it is sensible to build in flexibility for the future: ie to permit”
“to raise the limit if circumstances in future make that desirable.”
That is an important signal from the FSA about the way in which the powers can be used in the future.
The second matter that the Bill deals with is establishing that the interests of members are to rank pari passu with non-member funders. That point has been discussed at some length already in the debate and I do not wish to comment much more on it. I took heed of the comments made by my hon. Friend the Member for Bournemouth, West about the acceptance of that by wholesale markets. That is an important factor as well. It would weaken the purpose of the Bill if wholesale markets took an adverse view of that change in priorities. I am glad to hear that they do not and that they support the change in priorities.
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