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As I have explained, I believe that the issue is resolved by the fact that the British legislation will apply in all circumstances in which the United Kingdom Government have jurisdiction, and will not apply in areas where they do not have that jurisdiction. The hon. Member for Bournemouth, West has already made an analogy with another financial institution that explicitly organises its operations following a takeover of a British-based financial institution in order to ensure that its British operations must adhere to British
legislation, and that at the same time it operates according to the regulations as they apply in other European states.
I was interested by what the hon. Member for Fareham and others said about the difficulty of not having a harmonised system of regulations across the European Union as a whole. Far be it from me to suggest that that sounds like a curious plea from those on the Conservative Front Bench for fiscal and legislative harmonisation across the EU, which I personally feel—perhaps this makes me a Eurosceptic—would be taking things too far.
Mr. Hoban: I should hate the hon. Gentleman to leave with an incorrect interpretation of my remarks. I merely drew attention to the absence of such harmonised regulations. We are left with the question of how it can be ensured that the interests of members are protected. I recognise that there are different rights in different member states when it comes to, say, shareholders of public companies. We should encourage the rich variety in the European Union rather than seeking to homogenise it.
Lembit Öpik: I fully understand the hon. Gentleman’s desire to clarify on the record the position of those on the Conservative Front-Bench. For the avoidance of doubt, and because I know from painful experience that irony translates poorly in Hansard, let me reaffirm to the good people of the United Kingdom that I believe that, on balance, I am still more pro-European than the hon. Gentleman.
There is, however, an inescapable reality to do with harmonisation. In respect of any such proposed legislation it will be necessary for judgments to be made in the application of regulations in cases of potential mergers. So long as there is not a harmonised system of regulations explicitly defining the terms of mutuality and associated matters across the EU, we will have to depend on the common sense of those interpreting the regulations when a merger is proposed.
An interesting point was made about credit unions, but that highlights just one of a number of situations in which there could be a grey area and the legislation would have to be interpreted according to specific circumstances. I do not believe that it is possible to frame such proposed legislation so explicitly as to cover in black-and-white terms every possible eventuality. I seek the Minister’s guidance on this: will she furnish us with her judgment on whether, when the legislation is applied, there will still need to be a degree of interpretation?
In the real world, I expect there will be few circumstances in which such uncertainties arise. In the majority of cases, the arguments will be so clear and the mergers so well defined in established precedent that we will not have such a problem. It is also my experience that when we in this House analyse proposed legislation we often over-emphasise potential problems and undervalue the benefits of having professionals making judgments.
Although I hope the Minister can give some clarification on the issues I have raised, overall the amendments are sensible, as they have been framed
with the industry in mind. There is also the ultimate insurance policy: when such mergers are proposed, the members will vote on them.
Mr. Chope: I congratulate my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) on the progress he has made with his Bill. I have the privilege of being one of the co-sponsors, and I look forward to it getting on to the statute book—I am probably almost as excited as he is about that prospect. However, that does not mean that we should not use the opportunity presented to us today to get a little more clarity, particularly from the Government on what their intentions are as they will hold all the cards under the powers we will give them under the Bill.
The fact that we have a decent chunk of time to discuss the Bill at this stage of the parliamentary Session is a great vindication of the decision taken a few years ago by a previous Leader of the House that we should have a sitting Friday after the long recess so that we can consider amendments from the other place to private Members’ Bills that we in this House have carried through to Third Reading. Under the previous arrangements, when the last Friday sitting was at the end of July, it would not have been possible for the Bill to make progress with the amendments made in the other place. There used to be a vicious circle: because of the reluctance of the other place to make amendments that they knew would kill a Bill, Bills were less perfect than they would otherwise be.
First, I should declare my interests, not only as a sponsor of the Bill but as someone who holds a mortgage with the Nationwide, which is a supreme example of a good mutual. I have my house insurance with the Liverpool Victoria, which I understand is a mutual insurer, and I have a great constituency interest in what we used to call the Portland building society—it has now been taken over by the Nationwide. Its headquarters are in my hon. Friend’s constituency, which is, perhaps, one of the reasons he has developed a strong interest in this subject.
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I shall first discuss amendment No. 1. It was moved by Lord Evans of Temple Guiting on 10 July. At that stage, he was a member of the Government so he was speaking on behalf of the Government, but I understand he resigned on Wednesday. I am sure that the Minister will join me in paying tribute to his service, and in particular his contribution in helping to steer the Bill through the other place. He said that the overall purpose of the Bill was to ensure that there were
“helpful amendments to building societies legislation in relation to the wholesale funding limit and the position of their members in the event of an insolvency.”—[ Official Report, House of Lords, 10 July 2007; Vol. 693, c. 1355.]
That is important. We discussed earlier in connection with safeguards what happens if a mutual organisation in our country is taken over by a mutual organisation outside the country and therefore outside the bounds of the regulatory control of our regulatory authorities, and that mutual then goes into insolvency. How will members based in the UK who are caught up in such a transfer be protected? It is important that the Minister gives us some assurances on that, particularly in the case of mutual insurance companies, which are much
more vulnerable to the marketplace than building societies. The Minister whom I quoted was, of course, speaking before the Northern Rock crisis occurred.
Sir John Butterfill: My hon. Friend does not realise that the scenario he describes could happen today, without this Bill being enacted. The only difference is that it would happen only if one of the parties lost its mutuality. The members would have to vote for that. Any British mutual can be bought by an overseas entity of any type whatsoever, but its members would need to vote for that, and it would lose its mutuality en route. That makes no difference to the scenario my hon. Friend describes. It simply enables them both to remain mutuals.
Mr. Chope: Is that correct? I ask with great respect, as my hon. Friend is a much greater expert in this matter than I am. To go back to the example of the Abbey National, it was originally a mutual society, then its members chose to demutualise and benefited from that, and then in due course that company was taken over by Banco Santander. That had become a shareholder issue, and the shareholders in the company then became shareholders in the Spanish company. In the case of a mutual that is taken over by another mutual, that organisation does not lose its mutual status and its members want to be assured that they will still be members of an organisation that has value and that at some stage in the future they will be able to benefit from that. Therefore, I am unsure whether the issue of a mutual being taken over by a foreign mutual is the same as that of a mutual that becomes a company in this country as a result of a resolution passed by the members. Perhaps the Minister will be able to give some clarification on that when she responds to these points.
The Northern Rock example involves a building society that gave up its mutuality before losing much of its reputation—or perhaps I should say, its head. Many of the erstwhile mutual members of Northern Rock received shares in lieu of their mutual interest and are now, arguably, far worse off than if it had never given up its mutuality.
However, at least the Northern Rock scenario is under the control of a British regulator and the rules made by this sovereign Parliament. That would not be the case if Northern Rock had been taken over when it was mutual by another mutual somewhere else in the European economic area. That is the distinction to which we need to draw attention.
Lembit Öpik: Leaving aside the fact that Northern Rock’s recent difficulties obviously have nothing to do with its status as a financial institution—
Lembit Öpik: Well, okay—we will have that discussion in the pub later. Leaving that aside, surely the hon. Member for Christchurch (Mr. Chope) can see that any financial institution based in the United Kingdom must necessarily be subject to British regulations. Is he suggesting that a financial institution taken over by a foreign organisation would be subject to regulations from somewhere else, even though it was operating within the United Kingdom?
Mr. Chope: Obviously, the operations of such an institution within the United Kingdom, in so far as they dealt with retail issues—insurance or building society services, for example—would be regulated in this country. I am concerned about the regulations on the operation of such a mutual society. For example, what proportion of loans would it be allowed to take in comparison with the value of its members’ interests? One thing that prompted my hon. Friend the Member for Bournemouth, West to introduce this legislation was his liberalising desire for mutual building societies to be able to have access to the wholesale market for funds. It was that power that went to the head of Northern Rock and resulted in its current problems. I do not say that that was the sole cause, but it contributed. If Northern Rock had remained a mutual building society, it would not have been able to get access to those wholesale funds or to get into its current difficulties, which have resulted from recent events in the financial markets.
Lembit Öpik: What mechanism can the hon. Gentleman foresee that would enable the people determining whether to make such changes in the status of financial institutions to decide what the strategic decisions of the management were likely to be? The hon. Gentleman cannot blame the structure of the organisation for the decisions that were made; if it were a structural issue, why was only Northern Rock affected and not other similar organisations?
Mr. Chope: I do not say that the problems were all due to the structure of the organisation—
Madam Deputy Speaker: I should remind hon. Members that we are not debating the issue of Northern Rock. Enough reference has been made to it for an understanding to have been achieved.
Mr. Chope: I am grateful, Madam Deputy Speaker. You enable me to answer the hon. Gentleman’s other point on how we would introduce safeguards, in respect of which I have a bit of a problem with Lords amendment No. 1. At the moment, one of the safeguards is that before any approval, if the issue is a hybrid one, anybody who felt aggrieved could petition the other place under the hybrid instrument procedure. However, under Lords amendment No. 1, such a move would be excluded. Paragraph 6 of the explanatory notes on the Lords amendments refers to the justification for that, but it does not wash. Paragraph 6 states:
“Lords Amendment 1 ensures that any order made under clause 3 which may have effects peculiar to a particular mutual will not be dealt with under the hybrid instrument procedure...As a result of the addition of ‘EEA mutual’ to clause 3 it is possible that an order... could, for example, require an EEA mutual society acquiring a UK mutual to give transferring members full membership rights in the EEA mutual.”
Most of us would think that a good idea. However, the paragraph goes on:
“If the EEA mutual has a unique legal form that might raise a question of hybridity.”
Okay—so it raises a question of hybridity. If the hybrid instrument procedure were applied, members of the UK mutual subject to it would be able to decide
whether, either as individuals or collectively, they wished to petition the other place under that procedure.
Lords amendment No. 1 would ensure, as paragraph 6 goes on,
“that the hybrid instrument procedure would not apply, should such a situation arise.”
Why should it not apply? What mischief could possibly result from the hybrid instrument procedure? The essence of that procedure in the other place is that an opportunity is given to petition, just as people can petition against a private Bill or a hybrid Bill. If the relevant people consider that they need to petition against it, they can; the petition is then considered by the relevant Committee in the other place. That can either reject the petition as being irrelevant or without substance, or say that the petition has substance and merit, and proceed accordingly.
Sir John Butterfill: I bring my hon. Friend back to the point that we would be dealing with two groups of members: the members of a mutual may be borrowers or depositors. In such cases, both the interest groups would be served. I cannot think of another group of people who would have locus standi by petitioning as my hon. Friend suggests. Will he say who they could possibly be?
Mr. Chope: We are talking about hypotheses. If my hon. Friend does not think that any group would have a locus standi to petition in the event that a hybrid instrument had been deemed, there would be no harm in allowing the hybrid instrument procedure, because it would not make any difference. Perhaps neither my hon. Friend nor I are wise enough to know exactly what is behind all this, but paragraph 6 is phrased as it is because somebody thinks that private interests might well be prejudiced as a result of the procedure. Under the hybrid instrument procedure, those interests would have a right to petition in the other place and “they” might wish—I do not know who “they” would be—to preclude that right or opportunity from those aggrieved petitioners.
Sir John Butterfill: My hon. Friend knows very well that in such circumstances mischief-makers could claim to have locus standi, that the procedure for establishing that is complex and long, and that the issue would go to the Court of Referees. People interested in delaying things—for whatever reason; another commercial company might want to take the building society over, for example—could make mischief knowing that, although they would not succeed, they could delay the whole procedure.
Mr. Chope:
If one looks at the history of the hybrid instrument procedure, one sees that it has always been the last desperate throw of the people who have been challenged on the issue—to say, “We cannot afford to delay.” It so happens that there would be no delay if the petition were rejected and that in the other House there is what is called, I think, an expedited hybrid instrument procedure to cover the scenario to which my hon. Friend refers. We should not have too much
haste if that is going to result in people feeling or being prejudiced against as a result of a takeover of an organisation, in which they have a mutual interest, by an EEA mutual.
Philip Davies: Does my hon. Friend agree that my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) might well be right in saying that this provision would prevent unnecessary delay in any such mutual takeover or joining together? Does he further agree, however, that it might also prevent a necessary delay?
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Mr. Chope: Exactly—my hon. Friend is absolutely right. That is why, when looking at this issue, their Lordships’ House and a Joint Committee of both Houses regarded the hybrid instrument procedure as sacrosanct—as a cherished means of preserving the rights of individuals, which should not be prejudiced by a hybrid instrument. The whole purpose of the procedure is clear. My hon. Friend the Member for Bournemouth, West says that he does not think that a set of circumstances will ever occur when it will be triggered. That is fine, but why not leave the power in the Bill?
Our noble Friend Lord Naseby raised this issue in the debate in the other place on 10 July. The Minister present said in response that, given the “sheaf of notes” that he had on hybridity, he would write a full letter about it to our noble Friend. That letter, dated 12 July, was placed in the Library of the other place on 17 July, as deposited paper 2007/563. I intend to quote briefly from it—if I can find it from among my papers. [ Interruption. ] The Minister, helpfully, has a copy. Perhaps she—
Madam Deputy Speaker: Order. Perhaps the hon. Gentleman can continue, even without the benefit of the letter.
Mr. Chope: Exactly, Madam Deputy Speaker. Effectively, what the Minister who wrote that letter said was not very different from the explanatory memorandum. It is not satisfactory that we are being asked to allow the rules on hybridity to be disapplied, without any guaranteed safeguards for members who might otherwise be able to resort to those rules. The provisions in the Standing Orders of the other place have stood the test of time as a necessary safeguard. Those set out in Standing Orders Nos. 216 and 216A are clearly stated and do not involve an enormous amount of time; however, they do ensure that those who feel aggrieved can put forward a petition, which can then be considered.
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