House of Commons
|Session 2007 - 08|
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Public Bill Committee Debates
Draft Building Societies (Financial Assistance) Order 2008
The Committee consisted of the following Members:
Annette Toft, Committee Clerk
attended the Committee
First Delegated Legislation Committee
Monday 2 June 2008
[Miss Anne Begg in the Chair]
Draft Building Societies (Financial Assistance) Order 2008
That the Committee has considered the draft Building Societies (Financial Assistance) Order 2008.
It is a pleasure to serve under your chairmanship, Miss Begg, for the first time, I think.
If the Committee permits, I shall take a few minutes to explain the intention behind the order, which follows from the Banking (Special Provisions) Act 2008, which contained a power enabling the Government, by way of order, to remove existing statutory barriers that might prevent building societies from accessing emergency financial assistance from the Bank of England. I am pleased to say that the building societies sector continues to provide highly regarded services to members and customers throughout the United Kingdom. During the passage of the 2008 Act, the Government promised, as a precaution, to put such an order before Parliament as soon as practicable, and I am pleased that we can do that today.
I emphasise the fact that the Government are fully committed to legislative reforms that will improve financial stability and depositor protections generally. Global financial markets remain turbulent, and it is important that we have a strengthened framework in place for now and the future. The tripartite authorities recently closed the first round of consultation on reforms to improve financial stability and depositor protection, throughout which they held numerous workshops and bilaterals on detailed policy issues. More than 100 written responses were received, which we are taking time fully to digest, and we intend to consult further before the summer break. As set out by the Prime Minister in the Governments draft legislative programme for 2008-09, legislation will be brought forward later in the current parliamentary Session. The order forms part of that reform programme.
The proposals outlined by the Government in January included measures to improve building societies access to emergency financial assistance from the Bank of England, both in the range of measures that the Bank can use and the amount of assistance that building societies can draw upon. In that regard, the proposals are purely precautionary and are intended to place building societies on a similar footing to banks, not to single them out for special treatment. We regard the order as sensible and prudent contingency planning on the part of the authorities, and it will be relied on only where there is a serious threat to the financial stability of the United Kingdom.
The Committee will be interested to know that of the responses to the consultation on the policy to be enacted
Mr. Mark Hoban (Fareham) (Con): Will the Minister be clearer about who was actually consulted? I think that I am right in saying that there was no public consultation on the statutory instrument, so will she indicate which institutions were consulted about its contents?
Kitty Ussher: We held a number of informal discussions, including with the Building Societies Association, as I said. The hon. Gentleman is right in that there has not been formal, normal consultation specifically on the order. However, the paper that we issued in January on improving financial stability and depositor protection included our intention to make the change proposed in the order before us, which was also debated in the House on 20 February, when we undertook the wider legislation. It seems uncontroversial, so we considered it best to proceed.
Mr. Hoban: Will the Minister clarify why no formal consultation took place, given that she has had some months to introduce the legislation? Other than the Building Societies Association, to which institutions did the Treasury speak about the matter?
Kitty Ussher: We announced in February, in the debate on the 2008 Act, that we would introduce the measure by secondary legislation, and this has proved the first opportunity to do so. Given that it was in the Act, we did not consult formally on the specific measure, although we are debating it fully today, and I hope to have the hon. Gentlemans support at the end of the Committee. We have held a number of informal discussions with interested parties that broadly support the measure and, although I do not have a list of precisely which companies are involved, I am not aware that there is major opposition to it.
I shall now explain the detail. First, on the lending limit, under the Buildings Societies Act 1986, at least 75 per cent. of a building societys business assets must be residential mortgage loans. The order would suspend that lending limit where financial assistance from the Bank of England would cause the building society to be in breach of that requirement. The lending limit would be restored after one year or, if required later, once the financial assistance from the Bank of England had ended.
Secondly, every building society is currently required by the 1986 Act to ensure that at least 50 per cent. of its funding is from its own members deposits. That is referred to as the funding limit. Certain items may be disregarded from the funding limit, and the order will add financial assistance provided by the Bank of England to that list. Of course, building societies can and do take part in the Bank of Englands lending facilities during the course of normal business and the normal funding limit in such circumstances will continue to apply. The
The Bank of England, like a commercial bank, has a responsibility to ensure that its lending is prudent, especially where there is a risk to financial stability. Accordingly, the Bank of England needs to ensure that its position as a creditor is not jeopardised before providing emergency financial assistance to either a bank or a building society. It does so by taking effective security measures. The order will remove statutory barriers that could jeopardise the banks position as a building societys creditor and which could, therefore, constrain speedy action in a crisis. Those barriers include section 9B of the 1986 Act, under which a building society may not create a floating charge, and schedule 15A to that Act, which effectively prevents the appointment of an administrative receiver under a floating charge.
When providing financial assistance, the Bank of England needs to be able to secure its lending against the assets and undertaking of the relevant bank or building society. That is wholly consistent with the banks policy for lending in circumstances where there may be a threat to financial stability. The order will modify the restriction in section 9B of the 1986 Act to allow a building society to grant a floating charge over its assets to the Bank of England. Again, I stress that a building society would be able to do that only where the Bank of England had provided financial assistance in extreme circumstances. There is no change to the restrictions on the normal business of a building society. It will remain impossible for a building society to create a floating charge in favour of other creditors.
The order applies the law on administrative receivers to building societies so that should a building society to which the Bank of England has provided emergency financial assistance secured by a floating charge default, the bank could appoint an administrative receiver. I stress the fact that in the circumstances that we are debating today it is unlikely that the Bank of England would need to appoint an administrative receiver. However, the Government believe that it is sensible that the bank, which would become a major creditor of a troubled building society for reasons of maintaining financial stability, should have the additional safeguards provided by that right.
Finally, a number of technical and consequential provisions will ensure that various other parts of the 1986 Act are consistent with the order.
I hope that Committee members agree that the order represents sensible contingency planning on the part of the authorities. Stakeholders, including the building societies, have widely supported this improvement in the position of building societies, which would put them on to a similar footing to banks with regard to financial assistance from the Bank of England.
Mr. Hoban: In many respects, timing is everything in politics. It is slightly coincidental that we are discussing this statutory instrument, which has been introduced as a consequence of the failure of one former building society, on the same day that another former building society, the Bradford and Bingley, has issued a profits warning and sought an injection of capital from elsewhere. I am reminded of what a Building Societies Association press comment states its director general, Adrian Coles, said when he appeared before the Treasury Committee:
Northern Rock bank may not have met with such a sticky end, he said, if it had retained the building society status it gave up in 1997.
Timing appears to be everything in such matters.
First, to put it beyond any doubt in the Ministers mind, we will be supporting the statutory instrument. It is certainly clear from the discussions that I have had with the Building Societies Association that the measure has broad support from the industry. The protections that apply to banks should also apply to building societies. However, we should be careful what we wish for, because if a building society seeks financial assistance from the Bank of England through this route, it could become liable for nationalisation. That is part of one of the provisions set out in the Banking (Special Provisions) Act 2008, and if that step were taken, I am not sure that the role of the Minister as receiver would be relevant. I do not know whether the Government intend to nationalise a building society before the powers of the Act expire next February, but we should be wary about what we look for in terms of such support.
I have some detailed questions about the measure and the background to it. In the Ministers opening remarks, she said that during the debate on the Banking (Special Provisions) Act 2008 it was agreed that the statutory instrument would be introduced as soon as was practicable. Given that we have not had a formal public consultation on the SI, why has it taken until the beginning of June to introduce a measure that was promised in February this year? What was the logjam at the Treasury that prevented the measure coming before us sooner? There have been other statutory instruments relating to the matter, the first of which nationalised Northern Rock and was introduced on 31 March. A couple of months ago, we considered the compensation SI. It seems that the order is the tail-end Charlie of the secondary legislation process, so I should be grateful if the Minister could explain why we have had to wait until 2 June for it to be introduced.
The Minister referred to the lending funding limit and the fact that building societies have to raise at least 50 per cent. of their capital or their funds from their retail consumer base. Last year she and I debated the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007, which, following secondary legislation, enabled that limit to be relaxed. Will the Minister tell us where we are on that and how the measure will interact with subsequent legislation? If my memory serves me right, when the Act was discussed it was envisaged that the amount that building societies could raise with wholesale markets could be as much as 75 per cent. I am not sure how the order will interact with that limit and whether it will be feasibleI am
Should any consequences from the special liquidity scheme be considered in the context of the measure? The scheme enables banks and building societies to swap mortgage-backed assets with Treasury bills. Is there any interaction between that and the relaxation limits that we are discussing?
I have a question about a matter that I think the Minister has clarified, and which was debated during discussions on the SI in the Lords. There has been some confusion about when the banking reform Bill will be introduced to Parliament. The original intention was to ensure that the Bill went through all stages before Prorogation. The Bill was mentioned when the Prime Minister unveiled the draft legislative programme for the next Session, and I think that the Minister indicated today on the record that it will be introduced after the summer recess but before Prorogation. I guess the intention is that the Bill will be carried forward into the following Session but will be passed and receive Royal Assent before 21 February 2009, when the Banking (Special Provisions) Act expires. There is a sunset clause in that Act. Will the Minister be more precise about the timings that she envisages, since her colleague in the Lords was unable to give that assurance?
Mr. Jeremy Browne (Taunton) (LD): Thank you, Miss Begg, for giving me an opportunity to contribute briefly to our deliberations. As has just been said, we are considering matters arising from the misfortune that overtook the Northern Rock building society, and we have further unsettling news today about the Bradford and Bingley. We can reflect on how fortunate we are that the Government have brought an end to boom and bust, because we would be truly in dire straits had that not been the case. I hope the Minister will clarify a few issues that are directly relevant and related to the matter before us.
The first point that I do not fully understand is why the lending and funding limits are not applicable or relevant when we are discussing an institution that has, in effect, been taken into public ownershipwhy in those circumstances the governing regulations should be different from when Northern Rock was trading as an entirely independent-from-Government entity.
I should also be interested if the Minister could update us, or shed light, on the overall financial implications up to the present day of the Governments taking Northern Rock into public ownership, and on whether any further financial consequences will arise from the order we are deliberating this afternoon.
Finally, on a point mentioned by the Conservative spokesman, will the Minister indicate the Governments progress on legislative changes in this regard? As I understand it, further legislation is promisedOctober was the month to which the Conservative spokesman alludedso unless I misunderstand the situation, the legislation before us will be overtaken by legislative events in only a few months from now. I should be grateful if, for clarity, the Minister could explain why we
Kitty Ussher: As always, I am grateful for Members questions. I shall give some more detail about the nature of the consultations so far, in response to the question asked by the hon. Member for Fareham. As well as the general intention laid out in January in the broader paper on depositor protection, and the debate on the Floor of the House in February during the passage of the wider emergency legislation, we held a workshop with the BSA, a number of building societies and consumer representative bodies in February, where we discussed the subject of the order. As part of the wider consultation, we received written responses, including one, as I said, from the BSA, which support the measure.
When I mentioned informal consultations with a large number of bodies earlier I said that I did not have a list, but now I do. It includes the Financial Services Authority, the Bank of England and the BSA, and of course we constantly have conversations with individual building societies. I could not think of anyone else to consult, but if the hon. Gentleman is able to come up with anyone else, I should be delighted to talk to them.
The hon. Gentleman asked why the procedure has taken so long. We produced the statutory instrument internally as soon as was possiblegiven the need to get it right and to talk to people to do soafter the passage of the Bill. Certain technical issues needed to be resolved with the FSA and the Bank of England. They have been resolved. The statutory instrument was actually laid at the beginning of April, before the Easter recess. Why it is being debated only today is a matter for higher authorities than me, through the usual channels, but I share the hon. Gentlemans bemusement in that regard.
I shall deal with the issue of interrelationship and what is commonly known as the Butterfill Billthe Building Societies (Funding) and Mutual Societies (Transfers) Act 2007which the hon. Member for Fareham rightly mentioned. In a sense, it is part of the same process, but there are some other elements to it: funding limits more broadly, consequential rights of building society members and transfers of engagements. We have a provisional timetable for the transfer of engagements, to which I hope we will keep. It is our intention to consult by summer 2008. In the next few weeks, we hope to work out something with a view to implementation in the autumn.
As regards funding limits, or access more broadly to wholesale market funding, we intend to wait for the other banking reform proposals to be implemented before addressing that point. We will then consult on the practicalities, technicalities and safeguards that should be in place. One such safeguard could be whether societies should be required to make additional disclosure should they wish to borrow more from wholesale markets. We want to ask stakeholders what they think about that and whether other safeguards should be included. Experience from the past year suggests that societies have full cognisance of the risks involved in borrowing from the wholesale market, but I should like to consult properly before making a decision.
The other part of the Butterfill Bill focuses on removing some of the restrictions that prevent building societies from working together. That has been done, so it is now a matter for the private sector.
A point was raised about the special liquidity scheme. However, I see no relationship between what we are discussing today and the special liquidity scheme that the Bank of England announced more than a month ago. As the hon. Member for Fareham is aware, that scheme refers to the type of collateral that is eligible, which is a different point from whether emergency lender of last resort funding would be available to a building society.
Members mentioned the Bradford and Bingley. However, as the Bradford and Bingley is a bank and not a building society, it does not come under the order that we are discussing today. As regards the timing of the banking reform Bill, the only decisions that have been made are those that I have already shared with the Committee. In the next few weeks, we intend to publish the draft proposals and hold the next round of consultation. It was quite clear from the response to the last round that firms in the financial services sector, and more broadly, would welcome an extra period of time to discuss such important issues, so we decided that we would introduce legislation after the recess. We lost a few weeks of parliamentary time, but gained a few months of consultation time. That is as far as our decisions have got at the moment.
I turn to the interrelationship between the order and the wider reforms when they are legislated. It is not
Mr. Hoban: Is the Minister saying that the powers will be replicated in the banking reform Bill, because the order depends on an Act that has a sunset clause of February next year?
Kitty Ussher: I am advised that the answer is no. I presume the statutory instrument continues in legal force even if the provisions of the specific legislation lapse under the sunset clause, as the hon. Gentleman has said.
The hon. Member for Taunton asked why different arrangements would be in place if Northern Rock is owned by the public sectorI hope that I got that correct. I am not aware that who owns the society makes any difference in that regard.
According to my notes, I have answered all the questions that I was asked. I therefore commend the statutory instrument to the House.
Question put and agreed to.
That the Committee has considered the draft Building Societies (Financial Assistance) Order 2008.
Committee rose at six minutes to Five oclock.
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