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There are two issues connected with that, which probably need to be spelled out a little. The first is the greater freedom for building societies to grow and to draw on wholesale markets. In following some of the discussion, I was a little troubled by the potential implications, although I do support the move. The argument seemed to be that it was important that building societies should expand as rapidly as possible into mortgage lending. The model cited was Northern
Rock, which is the one demutualised society that has been able to expand, because it no longer has a funding limit, which is the essence of clause 1.
What worries me slightly is the assumption that rapid expansion into mortgage lending is intrinsically desirable. I suspect that we are reaching the point at which former societies such as Northern Rock are in danger of experiencing serious difficulties as a result of being over-extended in the housing market. It may be that very rapid expansion is not desirable. For example, Northern Rock may well find itself with a great deal of bad debt and having to pressure many of its borrowers into repossession. I therefore have slight doubts about the desirability of unlimited growth.
David Howarth (Cambridge) (LD): Does my hon. Friend agree that there is a slight problem, with which the Minister may be able to deal in his reply, as clause 1 now includes a one-way ratchetthe percentage may only be moved in one direction by the Treasurybut in the light of experience, a different policy may be needed at a later date?
Dr. Cable: That is right. To be fair, the Bill is not prescriptive. In fact, it gives the Treasury power to intervene if circumstances change. The position at the moment is that building societies do not use anything like their funding requirements. I had a look at the ratios: the highest is currently about 35 per cent., but some of them are down virtually to zero. The issue that my hon. Friend raises is logically valid, but I do not think that it is a pressing one in practice. I fully support the purpose of clause 1, but I would enter a slight caveat about the dangers of simply encouraging building societies to borrow from wholesale markets to expand their mortgage business.
Sir John Butterfill: I am not quite sure that I agree with the hon. Gentlemen. First, I do not think that there is a one-way ratchet. The Bill gives the Treasury the power to make orders, and presumably those orders could go in either direction. Secondly, the Bill enables the Treasury to move quickly if circumstances demand. Again, that does not imply that there is going to be a sudden rush to increase access to the wholesale markets. It will simply enable the Treasury, using its considerable discretion, to make the rules and, through the Financial Services Authority, ensure that there is compliance.
Dr. Cable: I was not in any sense trying to criticise the Bill, which I support as a sponsor, because it is not prescriptive. Indeed, it builds in the flexibilities that the hon. Gentleman described. I was simply trying to address the building societies over his head, as it were, and suggest that a rush into wholesale markets to expand mortgage lending may not be wise.
David Howarth: I do not want to labour the point, because I accept what my hon. Friend said about the Bills practical effect not being as pressing as one might think at this point. However, there is a one-way ratchet in new subsection (6C), in which the Treasurys power to make an order
may not be amended so as to reduce the percentage in the order
may not be revoked, unless it is replaced by another such order specifying the same or a greater percentage.
Dr. Cable: Yes, I take my hon. Friends point, except that in practice that does not require building societies to increase their funding requirement. It gives the power to do so should they wishthat is the whole purpose of the legislation.
Finally, under this broad heading, the other piece of reasoning behind the key provisionclause 1is that following the Miles report, the Bill will enable building societies to become more active in the fixed interest lending market. The assumption behind the Miles report is that there will be a transition over time to more long-term fixed interest lending, which would be facilitated by the greater use of wholesale markets. That is entirely sensible and it is a good reason for the hon. Member for Bournemouth, West to introduce the Bill.
Again, I would sound a slight cautionary note not just about whether that will happen but about whether, indeed, it is desirable. I have vivid memories of the mid-1970s, when I first bought a house in London, and of coming down from Glasgow and being offered a fixed interest long-term loan by Richmond council at what, at the time, was the almost ridiculously cheap rate of 14 per cent. That was a negative rate of interest, as we were in the middle of a financial crisis, and I was tempted, as it was much lower than what the building societies were offering, but I would have crippled my family if I had taken it. Past experience of long-term fixed interest lending suggests that we need to be careful before encouraging people to go down that road. However, despite those two caveats, the basic provisions of clause 1 are important. The way in which they have been modified by the Treasury is helpful, and I fully support them.
Just a sentence each on the two other basic provisions in the Bill. Clause 2 creates a level playing field for different kinds of claims on a building society should it unfortunately be forced into insolvency. That is an important corrective, but it was emphasised several times on Report that on no occasion since the second world war has a building society failed, so we are dealing with a hypothetical circumstance that is unlikely to arise. It is a necessary provision none the less.
My final point about the Bill was not discussed very much in any of our earlier proceedings, but it is important and in the long term it will probably be the most significant aspect, as it concerns the scope that it provides for the consolidation of different types of mutuals to merge with one another in a way that is not possible at present. Under current legislation, mutuals either have to demutualise to expand and diversify, or find an identical type of mutual institution. The Bill will permit much more diversity of operation. If a friendly society wishes to go in with a building society, or if a football supporters club wishes to link up with a friendly society, that is now possible. That is an important provision in the legislation which, in the
long term, will probably have far more far-reaching repercussions than clause 1.
Mr. Mark Hoban (Fareham) (Con): I shall keep my remarks brief, Madam Deputy Speaker, conscious not only of your guidance to the hon. Member for Twickenham (Dr. Cable) but of the fact that the Second Reading of the Bill introduced by my parliamentary neighbour, the hon. Member for Portsmouth, North (Sarah McCarthy-Fry), is coming up next.
First, may I commend my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) on steering his Bill successfully through the rocky waters of financial mutuals to Third Reading? This is his fourth Bill to reach that stage, and I suspect that it will reach the statute book in due course. It is the product of a collaborativeco-operative, evenrelationship with the Treasury, and I spoke to Mutuo last week about the support that it received from the Treasury in discussing some of those issues. I welcome the Treasurys support in ensuring that the Bill reached this stage. I read the report of Committee proceedings in Hansard, as I was unable to participate on Wednesday. Sensible changes have been made to the Bill, and I welcome the way in which clause 1 in particular has been amended to clarify both the procedure whereby applications can be made for increases in the amount of funding from wholesale markets and the process for granting approval. That is an important freedom for building societies that will enable them to respond more appropriately to the growing demands from consumers for good-value mortgage products.
I wish to comment favourably on another change to the Bill. Opposition Members, particularly Front-Bench spokesmen, are often quick to criticise Government Ministers for evading further parliamentary scrutiny of legislation, so it would be churlish not to congratulate the Treasury on introducing the affirmative procedure in the Bill and ensuring that there will be debate on the regulations when they are drawn up. It is important, given the complexity of the issues that thisalbeit shortBill has raised, that there be further debate. I take on board my hon. Friends comments about the fact that the amendments made in Committee exclude for the time being the mutual insurance company sector. While there are relatively few companies in that sector, they are important players, and I hope that time will be found, if a satisfactory conclusion can be reached, so that universal provision is put in place to ensure that mutuals in different categories can merge without losing their mutual status. It is in the interests of every financial mutual that that relationship exist across all such mutuals.
I hope that the amendments to the Bill enable mutual societies to continue to flourish. The hon. Member for West Bromwich, West (Mr. Bailey) referred to the West Bromwich building society. Having met its chairman and chief executive, I know the important role that that society plays in the community, and I hope that the Bill enables it and other financial mutuals to continue to go from strength to strength. Finally, may I once again
congratulate my hon. Friend the Member for Bournemouth, West on his success and the way in which he has steered the Bill to this stage.
The Economic Secretary to the Treasury (Ed Balls): I echo the comments by Members on both sides of the House in congratulating the hon. Member for Bournemouth, West (Sir John Butterfill) on his achievement and saying how pleased and relieved we are to have reached this stage this morning. I echo especially the comments of my hon. Friend the Member for West Bromwich, West (Mr. Bailey), the chair of the all-party group, as the Bill has benefited from all-party support and co-operation in reaching this stage.
The Bills amendments to building societies legislation regarding the wholesale funding limit and changes to the position of members in the event of insolvency, as well as amendments updating other mutuals legislation to make it easier for one type of mutual society to transfer to the ownership of a different type of mutual society as a subsidiary company, will strengthen the ability of building societies to compete in modern financial markets. They will make the playing field more level and continue to allow mutuals and building societies both to serve their communitiesoften their local communitiesand in some cases to compete on the international, global stage, and to continue to innovate in doing so. Those are the characteristics that make mutuals work so effectively in our financial services arena.
Following the comments of the hon. Member for Fareham (Mr. Hoban), my hon. Friend the Member for West Bromwich, West will know that the West Bromwich building society has built on the leadership that mutuals and friendly societies have shown on the child trust fund. The hon. Member for Twickenham (Dr. Cable) may be interested to know that the vast majority of child trust funds are being provided by mutuals, and I could provide him with the exact statistic if he so wished. The West Bromwich building society is now also delivering a sharia-compliant child trust fund to meet the needs of British Muslims, in my hon. Friends constituency and in the other constituencies that it serves. That is an example of a mutual innovating in the best interests of the whole community, but in a way that is particularly attuned to the needs of its local community. To allow that kind of innovation and local leadership to continue, the Government were very happy to support the Bill.
As the hon. Member for Fareham and others said, the Bill would not have got to this stage without the leadership of the hon. Member for Bournemouth, West, who has a fine legislative pedigree in the House. We are confident that the Bill will be a fourth strike for him. Nor would the Bill have progressed without the support of his advisers, especially Mutuo, which has also been helpful in discussions with the Treasury. I also pay tribute to the Treasury officials who, with the hon. Member for Bournemouth, West, have gone into great detail to make the Bill work.
After a thorough, wide-ranging Second Reading, the Bill went through a detailed and intensive Committee stage to ensure that its principles and intentions could be made to work within the complex and detailed
technical arena of mutuals and co-operative legislation. I hope that the hon. Member for Bournemouth, West agrees that the amendments agreed in Committee deliver his intentions for the Bill. As the hon. Member for Fareham also pointed out, the changes also preserve the Houses ability to debate through the affirmative procedure details of the orders that the Bill enables the Treasury to introduce in due course. Those will follow further consultation on the details of raising the funding limit in particular, and on other changes.
I will not go through all the details of the amendments introduced in Committee; suffice it to say that they were debated thoroughly in Committee, and consensus was reached on the right way forward. I will, however, deal with some points arising from this debate, and with a specific one that arises from discussions with the hon. Member for Bournemouth, West in Committee and subsequently.
In an intervention, the hon. Member for Twickenham asked whether the legislation would apply to credit unions. As he surmised, the answer is no: credit unions are not within the scope of the Bill. Under the Credit Unions Act 1979, credit unions are forbidden to transfer into companies or have subsidiaries. We are separately reviewing the credit unions legislation, and formal consultation will follow an announcement of our intention to consult in the autumn. I have some concerns about the amendments on reporting that he might have introduced on Report, but did not do so, because regulation in the sector is for the Financial Services Authority, and an important part of the flow of information to the regulator is that which is commercially sensitive and cannot be revealed. However, on his broader point that it would be advantageous both to the sector and the House for a detailed statement to be laid before us on the position and role of mutuals, credit unions and building societies in our economy and society, I can see the advantages of bringing that data together in one place. As we prepare our consultation, I will consider whether we could try to co-ordinate the provision of that information. I will report back on that matter.
The hon. Member for Cambridge (David Howarth) also made an intervention, which might better have been made in Committee, but that is by the by. The Liberal Democrats have attended for most of these debates, but have had a slight tendency to want to have the Second Reading in the Committee stage, and the Committee stage debate on Report and then on Third Reading. I hope that they are catching up [Interruption.] I do not want to labour that point
For the benefit of the House, however, I shall answer the point about the ratchet. As the hon. Member for Twickenham pointed out, there is not a requirement for building societies to fund up to the limit to be set in the orderit is an upper limit, which we will set after consultation. But we do not want to be in a position where a building society has funded up to that limit, and then the Government suddenly reduce that limit, as that could be deeply destabilising to the liquidity
and balance sheet of a building society, which, up to that point, had been operating within the law and the regulations. While the Financial Services Authority, within its powers under the Financial Services and Markets Act 2000, can reduce the limit for a particular institution for supervisory or regulatory reasons, the House sets the overall framework for legislation and regulation. It would be a mistake to introduce a power to do something across the sector that would be so destabilising. In drafting the Bill, a deliberate decision was made to avoid the Government putting building societies in that situation.
Sir John Butterfill: Will the Minister confirm my understanding that although the limit may be raised from time to time, by order, and an individual society may at some time reach that new higher limit, there is no reason why the building society should not of its own volition reduce that amount of borrowing if it feels, particularly after consultation with the FSA, that it is too much? It is not an inevitable ratchet whereby borrowing at that higher level must continue.
Ed Balls: The hon. Gentleman once again reveals his detailed knowledge of the subject and why the Bill has been framed properly. He is right. We expect only a few building societies to move towards the limits that have been discussed, but we are creating a freedom that will allow that to happen. It is for individual societies, within those limits and on a day-to-day basis, to choose how to fund themselves. The important point is that legislation at the moment is restrictive and many building societies fear that it hampers their ability to compete and to raise appropriate funds in the wholesale market. That is what we are addressing.
As I know from the depth of my postbag and from the many letters that I have signed in the past monthonce again, a tribute to the hon. Gentlemans experience in organising legislation of this typethere is widespread support from building societies and their supporters for the Bill and for allowing that freedom. I have been able to confirm our support for it in writing many times in recent weeks.
The hon. Gentleman raised one point that we have not been able to address satisfactorily. I explained in Committee that it is difficult precisely to define mutual insurers for the purposes of the Bill. Those that are friendly societies are covered by it, but those that have their own statutory basis cannot be covered in a public Bill. The remaining mutual insurers are companies limited by guarantee. We have considered whether the Bill could be extended to cover companies limited by guarantee that are also insurers, but because insurance is regulated on a Europe-wide basis, we would have to allow the same procedures to apply where the transfer is to a subsidiary of the body corporate in another member state which is similar to a company limited by a guarantee. As we discussed in Committee, that causes us a great deal of difficulty in properly specifying UK legislation which would work in that European context. For that reason, and despite our efforts, we were not able to include mutual insurers in new clause 3 in Committee. I told the hon. Gentleman that we would endeavour to see whether we could make further progress.
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