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The third objective of the Bill is to widen the opportunities for societies of different types to merge. At a time when the commercial sector is combining different types of activitiesthe bank assurance
modelit is important to reflect that different types of financial mutuals themselves should be able to join together without losing the benefits of mutuality.
It is important to remember why mutuals are so important today. They often service markets that many listed companies or larger businesses would not service. Because they collect relatively low premiums and use a different distribution method, they can reach out to members in a way that larger commercial organisations cannot. We need to bear in mind the diversity in the financial mutual sector, too. When I attended the conference of the Association of Friendly Societies last October, I was impressed by the variety and diversity of the organisations there, and by the different ways in which they had developed, whether they represented specific geographic communities, people in particular types of employment, or trade unions.
If we are to encourage the sector to develop, so that it remains viable and continues to meet the needs of its members, we need it to be much more flexible in the way in which it can organise itself. Of course, we must not forget the tremendous work that it does in supporting the needs of members and in going beyond contractual requirements. When I met Mark Rothery from the Ancient Order of Foresters friendly society, he emphasised the importance of the benevolent activities of friendly societies, and of going beyond a strict, contractual relationship with members. If the Bill is able to renew, revitalise and refresh the financial mutual sector, we should welcome it.
I am conscious that a lot has been said, and the Minister is keen to speak, too, so I conclude by welcoming the Bill on behalf of the official Opposition. My hon. Friend the Member for Bournemouth, West, has identified an important way in which we can help the financial mutual sector to develop, and to strengthen and renew itself. We look forward to debating the Bill in Committee, and we wish it success in its remaining stages.
The Economic Secretary to the Treasury (Ed Balls): May I start by joining the hon. Member for Fareham (Mr. Hoban) in praising the series of powerful speeches made in support of the principle of mutuality and the principles behind the Bill? I join him and everyone else who has spoken in praising the hon. Member for Bournemouth, West (Sir John Butterfill) for his leadership on the issue. His speech set out clearly and in depth the case for action and for his Bill. It demonstrated a thorough understanding of the issues, and a commitment to the values that underpin the legislation. I am happy to confirm today that, in principle, the Government support the objectives of the Bill. We shall seek the support of hon. Members on both sides of the House in ensuring its smooth passage. I look forward to continuing our fruitful discussions, for which we are grateful, with all interested parties, so that we can ensure that the Bill reaches the statute book.
It is clear from todays speeches that although commentators in the financial press and more widely are sometimes tempted to talk about the mutual sectors declining role in financial services, the sector is in fact in robust health, and has broad-based support
in the House and more widely. Indeed, it is set to expand further in the months and years to come. We have heard excellent speeches from Labour Members, including my hon. Friends the Members for Edmonton (Mr. Love), for Bristol, East (Kerry McCarthy), for West Bromwich, West (Mr. Bailey) and for Hackney, South and Shoreditch (Meg Hillier), who set out the case for mutualism and for the Bill.
There was support, and detailed questions, from the hon. Member for Rochford and Southend, East (James Duddridge), whose points I shall respond to later, and the hon. Member for Fareham, who pointed out that he has a Co-op in his constituency. That pleased me, and even in his constituency the odd Labour voter might pop in from time to time for a packet of tea or whatever. One of the most important roles that the Co-op plays in my constituency is in providing a welcome shelter from the elements on rainy days in the run-up to elections. It also offers wider support, but we will not go too far into that issue today, because this is a Bill with cross-party support. By cross-party, I do not simply mean the Labour party and the Co-operative party; I also mean the Conservative party, and we are told that there is Liberal party support, too.
I want to discuss the details of the Bill, but let me start by making a few general references to the strength of the sector. My hon. Friend the Member for Edmonton pointed out the success of the mutual sector in recent years, and he is right; at last years Moneyfacts awards, mutuals took almost 75 per cent. of the top three places in the nine mortgage categories. The best available rate for five-year fixed mortgages, for instant mini cash individual savings accounts, and for instant access accounts were all offered by building societies, according to a 2005 study. On a subject that is particularly closely related to my responsibilities, child trust fund accounts have been predominantly provided by childrens mutual and friendly societies.
The sector is vibrant, and vital to the British economy and to the daily well-being of literally millions of people in our society. As we have heard today, the sector has a proud history. It is sometimes thought that its origins lie in the self-help tradition of the Victorian era, and people look back to the early years and the work of the Rochdale pioneers28 men and women who came together from a sense of community and a commitment to solidarity to begin the co-operative movement in Britain in 1844. In fact, history shows that the Romans got there first. It was, in fact, the Romans who first set up mutual insurance societies to provide for death and retirement as early as AD203, so there is a 2000-year history of mutualism. That history continued in mediaeval times with the establishment of craft guilds. The hon. Member for Rochford and Southend, East asked whether my speech to the Building Societies Association was my work. The answer is that it was in part, but it was also a co-operative effort, and I am grateful to the people who provided me with some of the details.
One of the earliest records of the Treasurys involvement with the mutual sector came in 1829 when, in response to cases of fraud, the Treasury appointed John Tidd Pratt as the first registrar of friendly societies, and tasked him with ensuring both that
societies complied with legal requirements and that members interests were best served. He remained in post from 1829 until 1870, and while the Treasury has not managed quite such dedicated individual service since then, our relationship with the mutual sector has remained strong to this day. As hon. Members have pointed out, I am the first Treasury Minister with responsibility for the financial sector to be a Co-operative party Member of Parliament. I see it very much as my task, working with my fellow Co-operative and Labour colleagues, and with co-operative supporters across the House, to continue the long tradition of mutualism in society.
Mutualism flourished, particularly in the late 18th and 19th centuries, in the run-up to the establishment of the co-operative movement in the early 20th century. A number of hon. Members have referred to what seemed to be a period of decline in the 1980s and 1990s, and the demutualisation of Abbey National appeared to confirm the view that mutual building societies would be unable to compete with the commercial banking sector. Between 1989 and 2000, nine societies converted into banks, and as we have heard from a number of Members on both sides of the House, carpetbagging became a growing concern. We have tried to respond to some of the concerns in the building society movement about the pressures of carpetbagging by introducing measures, starting with the passage of the Building Societies Act 1997, which amended the Building Societies Act 1986, to increase societies commercial freedom, to improve accountability and to try to put mutuals on a more equal footing with proprietary companies.
Over a decade, the Government have introduced nearly a dozen legislative changes covering issues from accounting requirements to electronic communications, including amendments to the law affecting conversion. Before the Bill was introduced, we were pleased to support the three private Members Bills that updated co-operative legislation. Our aim is not to give mutuality a privileged position but to allow building societies and mutuals to compete on a level playing field. For example, the 1997 Act withdrew the tortuous list of permitted building society investments, which undoubtedly hampered building societies ability to compete fairly in the marketplace. There were some unwelcome changes in the 1980s and 1990s, but one can argue, too, that the building society sector emerged stronger from that period, rather than weaker. In an improved legislative framework, societies have had to strengthen long-term relationships with their members. Annual general meeting attendance is up and members are being more closely engaged. Building societies have recognised that they have to be businesses and compete in an increasingly sophisticated global market.
The building society model of the annotated combined code was praised by Paul Myners in his review, and other mutuals have been following the building societies lead in corporate governance reform. The remutualisation of Bristol & West branches following take-over by Britannia Building Society is just one sign of greater confidence in the sector, demonstrating that it is succeeding and can grow. These trends suggest that the role played by mutuals is not just an accident of history, and that in the face of intense and growing competition mutual financial
services providers have proved that they can compete and indeed have some advantages, compared with the profit-making sector.
First, as my hon. Friends the Members for West Bromwich, West and for Hackney, South and Shoreditch noted, as mutual institutions owned collectively by their members, without external shareholders in the conventional sense, building societies can achieve advantages in efficiency and innovation and operate with lower cost ratios than plcs. Secondly, some mutuals, particularly small mutuals, including small building societies, serve markets that are often ignored by plcs, and can therefore develop local knowledge and engagement that is hard for larger organisations to achieve.
That can lead to a third advantage, building local loyalty and making a special contribution to local and community life. In the consultation that we are undertaking on the use of unclaimed assets in bank and building society accounts, we have responded sensitively to a particular issue in the building society world by making sure that local and small building societies can use unclaimed assets to continue those links and make a local contribution to community life.
At a time of rapid change and growing complexity in financial services, and given some of the difficulties that have occurred in the past 10 or 20 years in some aspects of retail financial services, there is a unique trust in mutuals, and they have maintained the reputation that they have historically had. That places them in a strong position to respond to consumers need for transparency, fairness and the knowledge that they can trust their providers. Members know that across the vast range of mutual societies that exist, they can expect public service and local commitment. Trust is an increasingly valuable commodity in a complex financial environment.
As more financial responsibility is expected of individuals for personal finance and pensions, the mutual sector can continue to grow in size and capability. For it to do so, we need to ensure that the legal framework within which it operates is fit for purpose. Over decades the legislative framework has not properly kept pace. Co-operatives and credit unions are operating in a framework that dates back many years. The Industrial and Provident Societies Act 1965, which consisted of nine Acts covering the sector, was a consolidation of 19th century legislation. The Credit Unions Act 1979 is almost 30 years old.
Starting with the Building Societies Act 1997, we have tried to put mutuals on a better footing. Significant changes were made for the benefit of the industrial and provident societies by the Industrial and Provident Societies Act 2002. The Co-operatives and Community Benefit Societies Act 2003 introduced further change. In the last year, the Government have introduced measures to increase the maximum interest rate that a credit union may charge its members. Most recently, last week to the day, we laid before Parliament two statutory instruments proposing amendments to building societies legislation. The first of these deals with the treatment of building societies offshore deposits and changes to their treatment for the purposes of the funding limit, allowing such deposits to be treated the same as members shares, up to a limit not exceeding 10 per cent. of the value of total shares in the society. The second enables societies to present
their summary financial statements in a form consistent with international accounting standards. Our aim, as I said, has not been to give mutuality a privileged position, but to allow a level playing field.
To build on the progress that we have made, in November last year I announced that the Treasury would review all co-operatives and credit union legislation. Since then, I have been grateful to all the individuals, societies and trade associations, as well as hon. Members, who have provided valuable advice and constructive ideas to the review, which will lead to a consultation document to be published this spring. Following publication, there will be a 12-week period for formal responses, and we hope to be clear on the final recommendations by autumn this year. I know from the discussions that I have had that the mutual sector attaches high importance to the outcome of that review.
We do not know whether we will be able to come forward with an omnibus Bill. We will need to ensure that we take advantage of every opportunity that arises to implement the findings of the review, whether through regulatory reform orders or when private Members Bills present opportunities such as today. That is why the Treasury was pleased to see the hon. Member for Bournemouth, West so high up in the ballot, and in particular that he chose to devote his slot to helping in this comprehensive effort to improve building society and wider mutual legislation. We agree with him and with Members on both sides of the House who have spoken today that this provides an opportunity to improve the competitive position of building societies and to allow them to respond effectively to the needs of their members.
With regard to clause 1, as hon. Members have already pointed, in particular my hon. Friend the Member for Edmonton, the Miles review on the UK mortgage market identified a need for building societies to be able to access higher levels of wholesale funding. I refer particularly to recommendation 19 of that report, which advised
that Government consider lowering the minimum funding limit by members from the current 50 per cent. 25 or 30 per cent. of building societies funds coming from members would still represent a substantial source of funding.
It is clear, as hon. Members have said, that raising the level of wholesale funding would impact on members rights on the winding up or liquidation of a society, because members shares are subordinate on a winding up. It is for that reason that the Bill includes clause 2. It is clear, certainly to those on the Treasury Bench, that clause 1 should not be commenced in the absence of clause 2. They stand together.
Clause 3 is different from the other two clauses, being of a far broader scope. Its aim in attempting to facilitate transfers within the financial mutuals sector is admirable. However, as I have already said, mutuals legislation is complex. The different Acts are not necessarily compatible with each other. Therefore we have been working and continue to work closely with the hon. Member for Bournemouth, West to clarify the issues, which we will seek to address in Committee.
I shall respond to each clause in detail. Clause 1 proposes to remove the funding limit for building societies. Building societies are constrained in their business operations by the statutory requirement that
they raise at least 50 per cent. of their funds in the form of shares held by individual members of the society. The measure proposes abolishing that requirement, which currently restricts the amount of wholesale funding that a building society is permitted to have. Although we fully agree with the need for greater flexibility, we do not consider that removing the limit entirely is consistent with the nature of building societies. That is why we have agreed to discuss with the hon. Member for Bournemouth, West and his advisers an appropriate amendment that substantially increases the level of wholesale funding that building societies are permitted to have, while retaining a requirement for member funding, too. We have discussed the measure at length, and in our view the objective will be best achieved by giving the Treasury, and not the Financial Services Authority as stated in the current long title, the power to increase the permitted amount of wholesale funding to a maximum of 75 per cent.
Meg Hillier: Will my hon. Friend explain why the Treasury has made that decision, because it seems to make sense to leave the matter in the hands of the FSA? Will he expand on that point a little more for our benefit?
Ed Balls: We have looked carefully at the legislation and where the responsibility lies. We have consulted the hon. Member for Bournemouth, West and the FSA. The FSA is the regulator of individual institutions, but responsibility to this House for setting the overall framework, and therefore the accountability for that framework in legislation, lies properly with the Treasury. I assure my hon. Friend that we will make decisions in full consultation with the FSA. This House will always have the opportunity to scrutinise the decisions that we take. As has been said, the limit will give the building societies substantial room for manoeuvre, but the appropriate decision maker to be accountable to this House should be the responsible Minister. In discussion, we therefore concluded that it should be for Treasury Ministers to make those decisions and to be directly accountable to this House for them.
Clause 2 relates to the consequential rights of building society members on a winding-up or a liquidation. The intention of the clause is to place members on a par with other creditors in the case of a winding up. Currently, members funds would rank below those of other creditors. The clause would put members funds on an equal footing with wholesale debt in the event of a building society being wound up. The position of members funds has been a cause for concern for regulators for some time, because following the winding up of a building society, members could stand to lose more than the equivalent bank customers, although up to certain statutory limits they would most likely have recourse to the financial services compensation scheme. As my hon. Friend the Member for Edmonton has said, that is an academic concern, rather than a real concern, in todays environment.
For many decades, no building society has been in difficulty, because of the soundness of the sector and the cautious way in which it operates. We agree with the
hon. Member for Bournemouth, West that we should take this opportunity to make the position clear. I assure the hon. Member for Rochford and Southend, East that the Bill provides an equal ranking with creditors, including wholesale depositors. The financial compensation scheme applies exactly the same as it would to bank deposits. We will introduce minor amendments to clause 2 in Committee, but only to ensure that we can give proper effect to the intention of the clause. As I have said, we believe that clauses 1 and 2 stand together.
Clause 3 would give the Treasury the power to make regulations to facilitate transfers of business from one type of mutual to another. There are currently legal limits on the permissible types of transfer between different mutual bodies, whereas companies have no such restrictions on the transfer of ownership. The clause would make it easier for a financial mutual to transfer its business to another mutual or to its subsidiary. It would give the Treasury the power to treat transfers between mutuals as if they were transfers between the same category of mutual. For example, a building society could be transferred to a subsidiary of an industrial and provident society or a friendly society under simplified rules and thresholds.
In principle, we support the intention behind the clause, but it is undoubtedly the most challenging part of the Bill. There are still important legal and technical issues to be resolved. A key risk is that it could, if we get it wrong, inadvertently remove certain safeguards that are in place to protect mutuals from carpetbaggers converting them into non-mutual companies. For that reason, we will propose, and I believe that the hon. Gentleman will accept, amendments in Committee whereby the provisions should be subject not to the negative but the affirmative resolution procedure. That means that not only will the Treasury consult on the detail of the proposed measures but that Parliament will have the opportunity for further debate to ensure that the principles of mutuality are not compromised. I hope that all hon. Members will recognise that that extra safeguard is right and proper in order to ensure that the strengths of the mutual sector, which I and many other hon. Members have set out today, are preserved and not inadvertently undermined.
We are concerned about three particular issues. First, there is the question of how a mutual transferring its business to a subsidiary of another mutual would work. Most subsidiaries are companies, and we need to ensure that a mutual transferring business to a company subsidiary would not inadvertently make demutualisation easier. Secondly, the Bill seeks to make transfers to mutual insurers easier, but, again, some mutual insurers are companies, and we want to ensure that the procedure does not inadvertently lead to more demutualisation. Thirdly, some mergers or transfers are not possible because of European legislationfor example, it is not possible to be an insurer and a bank at the same time. We need to ensure that we get that technical issue right in the final drafting of the clause.
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