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but it was unclear from the Bill, when it left this House in April, whether that would fall under the negative resolution procedure. Clause 3(6) of the original Bill seems to limit the affirmative procedure to orders made
as a consequence of subsection (10) and to orders that amend paragraph (a) or (b) of subsection (11). We were led to believe that much of the Bill would be covered by the affirmative procedure to ensure that Members in both Houses had the opportunity to debate the issues, rather than relying on Members praying for the annulment of an order. I should be grateful for some clarification from the Minister on whether the order-making powers in proposed new subsection (c) in Lords amendment No. 3 will be subject to the affirmative or the negative procedure.
I want to turn now to the substance of Lords amendment No. 3. As my hon. Friend the Member for Bournemouth, West said, the original clause limited the different types of mutuals that could merge to building societies, friendly societies and industrial and provident societies. The amendment would allow that definition to be broadened to include mutual insurers by making reference to EEA mutual societies. We have broadened the Bill to apply to UK-based mutuals in order to include mutual insurers, and I am concerned that the drafting of the amendment would broaden the range of European co-operatives that could take advantage of the Bill.
Lords amendment No. 3 first defines an EEA mutual society as
“a body which is a European Cooperative Society for the purposes of Council Regulation (EC) No 1435/2003 (statute for a European Cooperative Society)”.
I took the trouble to print out the regulation to see what sort of mutuals might be covered— [Interruption.] I will resist the Minister’s entreaty to read it out, as I am sure that you would rule me out of order for straying from the point, Madam Deputy Speaker. However, I could not find any definition in the regulation that would restrict the type of mutuals that could merge with a UK financial mutual to comparable European financial mutuals. Paragraph (7), for example, states:
“Cooperatives are primarily groups of persons or legal entities with particular operating principles that are different from those of other economic agents. These include principles of democratic structure and control and the distribution of the net profit for the financial year on an equitable basis”.
It goes on to mention the various principles that a European co-operative society or SCE might have and it lists seven. I shall not read them out. If the Minister tempted me to do so, it would be to the regret of the whole House, as there are 24 pages of regulation.
My concern is that these provisions cover all sorts of co-operatives. I spent my holiday in France this year and the village we stayed in had a wine-making co-operative—as, indeed, did all the villages in the local area. However, there is nothing in the current drafting to suggest why wine-making co-operatives in France could not merge with a UK financial mutual. I am sure that that would not happen and it sounds preposterous until we consider the fact that at least one French insurance company that I am aware of owns a vineyard. There could occasionally be a conflict and other French wine-making co-operatives could acquire the taste for owning insurance companies. It may sound a somewhat frivolous point, but it emphasises my concern that Lords amendment No. 3 starts off by enabling any co-operative falling within the scope of regulation 1435/2003 to enter into a merger with a UK
financial mutual. The Minister might say that the order-making power in the provision will be used to define the type of mutual that can acquire a UK financial mutual and to rule out the prospect of the French wine-making co-operative from doing so, but I shall be grateful for her assurance that that is indeed the case.
Lembit Öpik: I am following and I am intrigued by the hon. Gentleman’s argument, but what evil is he seeking to prevent? If for some reason a British financial institution wanted to merge with a wine-making co-operative in the south of France, I presume that it would do so only because it thought it was in the best economic interests of the business. I am not completely clear about what precisely the hon. Gentleman is trying to prevent UK financial mutuals from doing. As far as I can see, they are motivated not by a love of wine, but by a love of profit.
Mr. Hoban: Defenders of the mutual societies would say that they are not motivated by a love of profit, but by a love of serving their members. However, the hon. Gentleman makes an important point. In response, the Bill was given a Second Reading on the basis that it would facilitate the merger of different types of financial mutuals rather than create some mutual conglomerate that covers a whole range of activities from selling insurance to selling bottles of wine—pleasurable though that conjunction of activities might be. I am merely seeking clarification from the Minister of how she believes Lords amendment No. 3 will work. Does she envisage that an order will be introduced to define more clearly the types of financial mutuals that are covered by this particular regulation in order to prevent a merger with non-financial mutuals of whatever nature?
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There remains one potential anomaly to which I would like to draw the attention of the House. On Second Reading, we had some discussion about the exclusion of credit unions from the legislation. We understood the reasons for that and I shall not depart from that consensus. However, I wonder whether a credit union based in another EEA state could merge with a UK financial mutual whereas a UK credit union could not. I am concerned that there could be an uneven playing field here as between other EEA financial mutuals and credit unions that can merge with UK financial mutuals and UK credit unions that cannot merge. Will the Minister clarify whether, under the order-making power in amendment No. 3(c), other EEA member state credit unions could be excluded from merging with UK financial mutuals? It is important for the House to understand how the amendment will operate in practice.
Mr. Chope: Does my hon. Friend agree that this is extremely complicated territory and that it would be easier for the House to follow what was happening if the Minister were to intervene on him when he raised these specific points? We would then be able establish whether we were satisfied before moving on to his next point.
Mr. Hoban:
My hon. Friend, who has great experience in these matters, makes a valid point. As a gentleman, I would always give way to the Minister if she sought to
intervene as my speech progressed. I would certainly hate there to be any unanswered points at the end of the debate.
Sir John Butterfill: Perhaps I can enlighten my hon. Friend. I refer him to clause 3(9) of the original Bill, which defines financial mutuals and the categories under which they fall. It is clear that they do not include credit unions—either here or abroad.
Mr. Hoban: My hon. Friend makes an important point. I am not a parliamentary draftsman, so I bow to the experience of those whom he has consulted on this matter. However, I remain keen to ensure that the link between amendment No. 3 and its definition of an EEA mutual society cross-references clearly with the definition in clause 3(9) of a mutual society. Perhaps the Minister will clarify whether that linkage actually exists. It is a powerful point, because if established, it completely removes the problem of the French wine-making co-operative— [Interruption.]
Philip Davies: I, too, bow to the greater experience of my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) in these matters, but I wonder whether there is a danger of putting too much faith in the Treasury. Amendment No. 3 (c) clearly refers to
“a cooperative or mutual undertaking of such description as the Treasury specify by order”,
so it could be subject to change at some future point. Whatever the Minister says is the current intention may well be superseded in the future.
Mr. Hoban: My hon. Friend makes an important point, which is why we need more clarity about what is currently intended to be within and without the scope of the amendment. I am sure that the Minister will be able to address the issue in her remarks.
Mr. Chope: Does my hon. Friend accept that a UK building society, financial mutual or mutual society would also be an EEA mutual society, because the United Kingdom is part of the EEA? Were the amendment passed, we would have two separate definitions: one of an EEA mutual society, and one of a mutual society. Surely the EEA mutual society and the mutual society are the same.
Mr. Hoban: We are getting into some tricky territory relating to drafting and how the clauses interact. I would be concerned if amendment No. 3 overrode subsection (9) such that credit unions, which we agreed were outside the scope of the Bill, could be brought in by virtue of the definition of an EEA mutual. I am sure that the Minister will clarify that eloquently when she chooses to speak in the debate.
Extraterritoriality, whereby a Government seek to regulate activities that take place in other states, is a thorny issue in the financial services industry. I am a little concerned that the way in which amendment No. 3 interacts with clause 3(1) and (2) gives rise to the accusation of extraterritoriality. I am sure that the Minister is also wary of other states trying to regulate extraterritorially in the UK, and we would not want to be accused of introducing the same vice in the Bill.
Clause 3(1) gives the Treasury the power to modify transfer provisions as it thinks appropriate, to facilitate the transfer of business between mutual societies. Subsection (2) indicates the extent to which the Treasury can intervene by referring to membership rights and so on. Will the Treasury be able to stipulate conditions about membership of a new pan-European financial mutual, when an EEA financial mutual acquires a UK financial mutual? The excellent explanatory notes, in reference to Lords amendment No. 6 and the justification of the charging by the FSA, state:
“The extension of clause 3 to EEA mutuals will require certain safeguards to be in place, equivalent to those applicable to domestic mutuals, regarding membership rights in the holding mutual and further demutualization.”
Amendment No. 3 would therefore appear to give the Treasury power to stipulate the future activities of a pan-European financial mutual. I suspect that it would enable the Treasury to say that such a mutual could not demutualise. In the event of further mergers, the Treasury, because of its earlier stipulations on mergers, might be able to restrict the commercial freedom of a mutual as it develops and grows.
Lembit Öpik: My interpretation would be that the Treasury could stipulate what happens within the jurisdiction of the UK but not necessarily elsewhere. Therefore, would not it be expedient for any pan-European organisation to operate as a subsidiary in the United Kingdom, to fulfil any of the British Government’s stipulations, and to operate on a connected but not identical basis in other parts of Europe?
Mr. Hoban: The hon. Gentleman might be right, but we need some clarity. From reading the explanatory notes, I am not sure what the limits will be to the operation of the Treasury’s powers. If his interpretation is right, my concern is met, but that is not clear at the moment. An EEA financial mutual might choose not to merge with a UK financial mutual because it fears that the provisions that the Treasury can make under clause 3(1) could impede its future pan-European operations.
Lembit Öpik: Guidance from the Minister on this point is probably helpful, but I suspect that it is a pretty open-and-shut case. Will the Minister confirm that any legislation that we pass today will only be relevant to activities within the jurisdiction of the British Government—those in the United Kingdom?
The Economic Secretary to the Treasury (Kitty Ussher) indicated assent.
Lembit Öpik: The Minister is nodding, so I suspect that she will confirm that the issue raised by the hon. Member for Fareham (Mr. Hoban) is resolved by the fact that the legislation that we pass now will only be applicable to countries directly overseen by the British Government.
Mr. Hoban:
The hon. Gentleman might be right, and the Minister might indicate that in her remarks. I would add, however, that people might become
members of a pan-European financial mutual, so how do we protect their rights? We have one sort of regulations for European co-operative societies, but the European Commission proposed a harmonised set of rules for European financial mutuals, which might give greater protection on a pan-European basis. Those proposals, however, have been withdrawn.
Sir John Butterfill: My hon. Friend is being untypically—or atypically—naive. The situation is no different from that for banks. Santander, which bought Abbey, operates as a pan-European banking conglomerate. Its activities in the UK, however, are regulated by the FSA and the Treasury. There would be no difference between what happened in relation to a commercial bank and what happened in relation to a European-wide financial mutual: what it did in the UK would be regulated by the UK. I would have thought that obvious, and I do not quite understand my hon. Friend’s concerns.
Mr. Hoban: Part of this process is to tease out what will happen when the amendments come into force. When mutuals merge, and a pan-European financial mutual is created, I am not clear how members rights will be protected in that larger organisation. If a mutual becomes a subsidiary of a pan-European mutual, how would that work in practice? I would be content if the Minister gave the House the assurances that the hon. Member for Montgomeryshire (Lembit Öpik) and my hon. Friend the Member for Bournemouth, West have offered. Some clarity would be helpful, however, given that the explanatory notes are not as full as they could be in explaining the matter.
Philip Davies: I feel that I should leap to my hon. Friend’s defence in the face of the onslaught from my hon. Friend the Member for Bournemouth, West (Sir John Butterfill). Does he agree that the analogy given by my hon. Friend the Member for Bournemouth, West is not completely accurate, because while the activities of such a mutual relating to customers and consumers will be regulated by the FSA, in the same way as those of any bank, the issue of membership rights is totally different, and does not apply in the case of Santander and Abbey?
Mr. Hoban: I do not want to go too far down this route. My hon. Friend makes an important point. UK shareholder rights are different from those for a shareholder in a Spanish organisation; shareholder rights are not the same across all EEA member states. I am sure that the Minister will clarify the situation.
Mr. Chope: Will my hon. Friend give way?
Mr. Hoban: I will give way one last time.
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Mr. Chope:
I think that my hon. Friend is on to a good point. There is a distinction between members of a mutual society and shareholders in a company. The Abbey National used to be a building society with members, whose interests were bought out when it became a company; the company was then taken over by Banco Santander. What we are discussing in this
instance is the possibility of a mutual building society being taken over by a European bank which is a company, and members of the building society in the United Kingdom being disadvantaged by what happens in the operation of that organisation elsewhere in Europe.
Mr. Hoban: That is an important point. We may need to distinguish between a member of a mutual as a customer of that mutual and a member of a mutual as “a shareholder” in the organisation. What I am trying to tease out is how that distinction works in the case of a pan-European mutual. Presumably a member of a United Kingdom mutual that has been taken over would expect to remain a member of the pan-European mutual. How will his rights as a member of that pan-European mutual be protected? The Treasury has powers under clause 3(1) and (2) which I understand to apply to a UK merger. I should like to know how they would apply in the context of a merger between, say, a UK and a French financial mutual.
Lords amendment No. 6 gives the Financial Services Authority power to charge fees for any functions conferred on it under the Bill. I wonder whether the Minister has had any discussions with the FSA about the type of charges that might be incurred. Our debate on extraterritoriality demonstrated some of the complexities involved in these matters, and the amendment implies that complex situations could be involved in this instance as well.
My comments have been intended to probe, and to ensure that the House exercises its role of scrutinising legislation. A gap was left at the end of the last Commons stage, and I think it should be filled. We all want financial mutuals to be strengthened, and if the amendments would allow that to happen, I approve of them.
Lembit Öpik: I congratulate the hon. Member for Bournemouth, West (Sir John Butterfill) on his prodigious production of legislation. Given that this is his fourth Bill of the session, I suggest that he is rather more successful at running the country than most Ministers. I also congratulate the hon. Member for Fareham (Mr. Hoban) on identifying so many causes of fear in just six amendments. I do not mean to be rude, but I feel that rather than this being a celebration of detail, there is a hint of paranoia over the possibility that the hon. Member for Bournemouth, West may be trying to slip one under the wire and cause the permanent descent of financial mutuals in the United Kingdom into the hands of the operators of vineyards in France.
The hon. Member for Fareham made an interesting point about hybridity. I should like to know the Minister’s views on that, but it seems to me that Lords amendment No. 1 reduces the risk of application of the instruments relating to hybridity. I can see why that is attractive to the industry: it streamlines the process and, as far as I can see, reduces the opportunity for public debate about such changes. Conversely, if the amendment does indeed work in the private interests of companies, it may not necessarily work in the interests of investors or the public in general. Perhaps the Minister could give us her perspective on whether there will be unreasonable restriction of the opportunity for
public participation if the hybrid—instrument procedure is used less often.
Sir John Butterfill: I am sure the hon. Gentleman is aware that before any merger of this type could take place, the members of both the mutual societies concerned would have to vote in favour of it. They would be the people most directly affected.
Lembit Öpik: The hon. Gentleman has summarised the single most important defence for any such change. It is true that there will already be a legal requirement for the most direct stakeholders to have an opportunity to vote on the matter. The Minister may wish to put something on the record for future reference in case the legislation is ever applied in controversial circumstances.
I do not share the hon. Member for Fareham’s concerns about Lords amendment No. 3. He spoke of the dangers of a potential merger between a financial mutual in the United Kingdom and a vineyard or wine-making co-operative in the south of France. I observe in parenthesis that judging by the current performance of my endowment mortgage I probably should have invested my money in French wine, so it may not necessarily be a bad decision. Nevertheless, there is a practical and strategic question to be posed.
If for some reason a financial mutual in the United Kingdom decided to merge with a co-operative of whatever sort elsewhere in Europe, presumably the usual channels would have to be pursued and the members of the financial mutual would have an opportunity to vote on it. So if the senior management of a financial mutual were able to persuade its British membership that the merger was indeed in the interests of the organisation, who are we to prevent it from taking place? It is obvious—in my view, at least—that the organisation would still be bound by the regulations as they pertain in the United Kingdom, and that the security of the investments of the stakeholders in the United Kingdom would therefore be preserved. I do not entirely understand what the hon. Member for Fareham fears could happen that would not be in the interests of the organisations concerned, and would not be authorised by the stakeholders.
Mr. Hoban: The hon. Gentleman is right to point out that it would be up to the members of both organisations to decide. I seek clarification of what is intended by the amendment; I do not mean to pass comment on its application.
Lembit Öpik: That is probably a worthwhile request to the Minister. I too hope that she can clarify her understanding of the consequences.
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