Financial Mutuals Arrangements Bill

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Clause 2

Power to amend etc, to alter priorities on dissolution and winding up of building societies
Question proposed, That the clause stand part of the Bill.
The Chairman: With this it will be convenient to discuss the following: Government amendment No. 6.
Government new clause 2—Power to alter priorities on dissolution and winding up.
Ed Balls: New clause 2 will give the Treasury the power to amend the Building Societies Act 1986 to ensure that, in the event of a building society insolvency, any assets available are distributed equally between creditors and members. That will change the current position, in which creditors have priority over members. The power may also be used to make transitional provisions to cover, for example, debts entered into before the changes take effect. The power will be exercised under the affirmative procedure—again, for the reasons that I outlined when I introduced clause 1 to the Committee.
The current position puts members at a disadvantage. In the event of insolvency, they are entitled to their deposits in savings accounts only when all creditors have been paid in full. That contrasts with bank customers, who, because they are creditors of the bank, rank equally with other creditors. The power to exclude categories of special liabilities will enable the Treasury to deal with them individually, which it was not practical to do in the Bill.
It is important that transitional provisions ensure that the rights of creditors in respect of debts entered into before the commencement of the order are unaffected by the change. The power is also exercisable under the affirmative procedure. As the use of the power would be a significant change to insolvency law, as applied to building societies, the views of the Insolvency Service and others will be sought before exercising the power.
Sir John Butterfill: I very much support the proposal, but it is important to put it in context. No building society has failed for at least 40 years—it is therefore an extremely unlikely event—but the new clause addresses a moral issue: is it right on an insolvency that small retail depositors who are unsophisticated in financial matters should be subordinated to the wholesale capital markets who are extremely sophisticated players? Redressing that is quite long overdue.
Question put and negatived.
Clause 2 disagreed to.

Clause 3

Transfers between mutuals
Question proposed, That the clause stand part of the Bill.
The Chairman: With this it will be convenient to discuss the following: Government amendment No. 9.
Government new clause 3—Transfers to subsidiaries of other mutuals.
Government new clause 4—Transfers to subsidiaries: distribution of funds.
Ed Balls: I pay particular tribute to the hon. Member for Bournemouth, West, not simply because of his leadership on matters of mutual policy, but because of his wide experience in the House, including as an excellent Chairman of the Standing Committee that considered the Finance Bill last year. His knowledge of procedure is second to none, and the fact that he ensured that we voted correctly was appreciated by hon. Members on both sides of the House, myself included.
New clause 3 will give the Treasury the power to modify legislation relating to the transfer of the business of building societies, friendly societies and industrial and provident societies, to make those transfers easier. The modifications will apply where the transfer is from one mutual society to a company that is a subsidiary of another mutual society. The Treasury may also use the power to ensure that members of the transferring mutual society, and new customers after the transfer, are given certain membership rights in the owning mutual society.
The Treasury may also make other changes that relate to the transfer—for example, to prevent a change in ownership of the new subsidiary company for a specified period. Where the power is used to modify primary legislation, or to modify the rules on subsidiaries, it will be subject to the affirmative procedure. But it may also be used to modify secondary legislation—for example, transfer regulations made under section 102 of the Building Societies Act 1986—in which case the negative procedure will apply.
These amendments are intended to lighten the burden on financial mutual societies where they transfer ownership from one type of mutual to another. The wider opportunities for a more diverse range of ownership in the sector will help it to compete both internally and in the wider financial sector. The Treasury will also consult on the appropriate means of restricting further transfers of ownership outside the mutual sector, so that the procedure does not become a back-door means of demutualisation. That is likely to be achieved by placing a time bar on future transfers of ownership.
Sir John Butterfill: Again, I very much support the clause. It goes to the heart of the Bill. It has been anomalous that mutual financial organisations can merge with one another only by one of them first losing its mutuality, which rather defeats the whole object of mutuality. It is a key part of the Bill that these arrangements will enable those transfers to take place, without the loss of the important principle of mutuality.
As I indicated earlier, there is one area where I am disappointed and that is the position of mutual insurers. I understand that their omission is due to possible concerns about European Union law relating to companies. I think that only seven companies are affected by that, and it may yet be possible, with the wit and ingenuity that is available to us, to table a further amendment on Report, so that they could be included. If that were possible, I would welcome it, but I do not want to hold up the progress of the Bill in its entirety on that issue.
10 am
Ed Balls: Just to reply to the point made by the hon. Gentleman, we have considered carefully whether mutual insurers could be included in this part of the Bill. As I explained on Second Reading, this is an area that has raised more substantial difficulties for us than other aspects of the original proposed legislation. Mutual insurers are difficult to define as a category. Many of them are friendly societies, which are already covered by the Bill; others are governed by private Acts of Parliament, and so could not be covered in a public Bill. Changes in that regard would have to be made in those private Acts under the private Bills procedure. The remaining mutual insurers are companies limited by guarantee. We have considered whether the Bill could be extended to companies limited by guarantee that are also insurers. However, as insurance is regulated on a Europe-wide basis, we would have to allow the same procedures to apply whether transfer is through a subsidiary of a body corporate in another member state, which is similar to a company limited by guarantee.
The work that we have done in consultation with the hon. Member for Bournemouth, West and his advisers has continued to throw up a range of problems. For example, it would be difficult to specify in UK legislation what rights members of the transferring mutual society should enjoy in the holding company established in another member state. That is one example of a range of difficult definition issues that we have not been able to solve. So far, that has meant that we have been unable to come forward with proposals in new clause 3 covering mutual insurers.
However, I take on board the hon. Gentleman’s plea that we should keep trying. I am happy to go back today and take a further look at these matters, and to see what more can be done. I will write to members of the Committee in a day or two to inform them whether we can continue those discussions. If it were possible to come back with an amendment in Report, we would do so, although I fear that simply to investigate the matter further and see whether that was possible would take some days. I do not know whether the timetable will give us the space to do so, but we have no principled reason for excluding mutual insurers. If we could table an amendment on Report, we would. We would need some time to do the work to see whether that was possible.
I shall keep in touch with Committee members, but if we are unable to make progress, we will continue to need to discuss the issue beyond the life of this Committee and this Bill. It is not off the table; if we can make progress, we will. It will take some days to look at the matter, but I do not rule out an amendment on Report.
Question put and negatived.
Clause 3 disagreed to.

Clause 4

Short title, commencement and extent
Ed Balls: I beg to move amendment No. 4, in clause 4, page 5, line 4, leave out ‘Financial Mutuals Arrangements’ and insert
‘Building Societies (Funding) and Mutual Societies (Transfers)’.
The Chairman: With this it will be convenient to discuss Government amendment No. 5.
The aim of the amendments is to ensure that similar procedures for approving distribution of funds apply where the new procedure is used as currently apply in the case of mergers between building societies. The mutuals sector will be consulted on whether to adopt that approach in the implementing order, and amendment No. 9 would make an appropriate change in the long title to reflect new clauses 3 and 4.
Amendment agreed to.
Amendments made: No. 5, in clause 4, page 5, line 7, leave out ‘different provisions or’.
No. 6, in clause 4, page 5, line 9, leave out subsection (3).—[Ed Balls.]
Question proposed, That the clause, as amended, stand part of the Bill.
Ed Balls: I should have said in my earlier remarks that Government amendment No. 5 makes a technical change to clause 4 on commencement powers. Amendment No. 4 gives a new short title to the Bill—the Building Societies (Funding) and Mutual Societies (Transfers) Bill.
Question put and agreed to.
Clause 4, as amended, ordered to stand part of the Bill.

New Clause 1

Funding limit for building societies
‘(1) In section 7 of the Building Societies Act 1986 (c. 53) (funding limit)—
(a) after subsection (6) insert—
“(6A) The Treasury may, by order—
(a) provide for subsection (1) to have effect as if the reference to 50 per cent were a reference to such greater percentage (not exceeding 75) as they think appropriate;
(b) prohibit a society from applying the increased percentage unless a resolution of the society of such description as the Treasury think appropriate is passed in favour of applying the increased percentage.
(6B) An order under subsection (6A) is of no effect at any time unless, at the same time, there is also in force an order under section 90B (power to alter priorities on dissolution and winding up).
(6C) An order under subsection (6A)(a)—
(a) may not be amended so as to reduce the percentage specified in the order;
(b) may not be revoked, unless it is replaced by another such order specifying the same or a greater percentage.”;
(b) in subsection (8), after “subsection” insert “(6A) or”;
(c) after subsection (8) insert—
“(8A) The power to make an order under subsection (6A) is exercisable by statutory instrument but no such order may be made unless a draft of it has been laid before and approved by a resolution of each House of Parliament.”.
(2) In section 5 of that Act (establishment, constitution and powers), after subsection (10) insert—
“(11) The Treasury may by order amend subsection (1)(a) so as to alter the extent to which the making of loans is required to be funded by a society’s members.
(12) An order under this section may make such consequential, saving, supplementary or transitional provision as the Treasury think necessary or expedient.
(13) The consequential provision that may be made by virtue of subsection (12) includes, in particular, provision amending any the following so far as relating to funding by the members of a society—
(a) section 1(1)(a) (functions of the Financial Services Authority in relation to building societies);
(b) section 93(2)(a) (amalgamations);
(c) paragraph 2 of Schedule 2 to this Act (memorandum).
(14) The power to make an order under this section is exercisable by statutory instrument, but no such order may be made unless a draft of it has been laid before and approved by a resolution of each House of Parliament.”.’.—[Ed Balls.]
Brought up, read the First and Second time, and added to the Bill.
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Prepared 26 April 2007