The Economic Secretary to the Treasury (Ian Pearson): I beg to move,

It is a pleasure to serve under your chairmanship, Mr. Martlew. I acknowledge the important role that the hon. Member for Bournemouth, West (Sir John Butterfill) has played in this endeavour. As Members will know, the order implements part of the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007, which was introduced as a private Member’s Bill by the hon. Gentleman in 2006 and received Royal Assent in October 2007. The Treasury has since consulted extensively with stakeholders, the general public and other Departments on how to take that forward. The order has been informed by those discussions.

The 2007 Act contained three main sections: section 1 dealt with how building societies are funded; section 2 dealt with members’ rights in the event of a building society insolvency; and section 3 dealt with how to facilitate transfers between mutual societies, which is relevant to our debate today. I would like to clarify briefly the Government’s position on sections 1 and 2. Section 1 amends building society law to allow building societies to borrow a greater proportion of their funding—up to 75 per cent.—from the wholesale markets. The Government accept the principle that building societies should have flexibility in their funding strategies but are not convinced of the need to implement that section in the current economic circumstances. The Government will review the case for implementing section 1 in two years’ time.

Section 2 will amend building society law so that, in the event of a building society insolvency, members’ shares would rank equally with liabilities to other creditors. Respondents to the Government consultation were unanimous in their view that the Government should implement those measures. The Government will therefore take section 2 forward, taking into consideration the provisions made in the Banking Act 2009, which the hon. Member for Fareham and I debated at great length in Committee in recent months.

Section 3 will make it easier for a building society, a friendly society or an industrial and provident society to transfer its business to the subsidiary of another UK or European economic area mutual society. The Government laid an implementing order to facilitate such transfers in January 2009. That order related to building societies, and it is significant that the recently proposed merger of the Co-operative Group and Britannia building society was said to be made feasible by that order. The Government also intend to lay implementing orders applying to similar transfers of industrial and provident societies in the near future after further discussions with the sector.

During the debates leading to Royal Assent, and following representations from the mutual insurance sector, the Government promised to review, where possible, how any implementing order could be drafted so as to include mutual insurance companies. I am glad to say that the draft implementing order, which we have laid, will also enable mutual insurers to participate in such transactions. At this juncture, I must point out that credit unions are not included in the order, as they are outside the scope of the 2007 Act. However, work is ongoing, as several hon. Members will be aware, to review the legislative framework surrounding credit unions.

Why is the order important? The mutual sector offers greater choice and a community-based approach to its members, and it also helps to meet several useful public policy functions. Mutuals are increasingly competing with mainstream banks and insurers and are key partners with the Government in delivering important initiatives such as the growth fund, child trust funds and independent savings accounts. The activities of mutuals in encouraging a savings ethic among members helps to create wealth and reinforces a culture of saving that can give people security and opportunity. In addition, institutions such as friendly societies, by providing life assurance and assistance to their members during sickness, unemployment and retirement, offer a socially responsible alternative to proprietary insurance or reliance on the welfare state.

Co-operative businesses are also at the forefront of responsible business practice and corporate social responsibility. Membership of the mutual sector now exceeds 30 million, with total assets in excess of £400 billion. It is a significant employer in the UK economy, employing nearly 1 million people and is the mainstay of many communities. The mutual form, founded on common and joint ownership and a democratic voting structure, continues to engender trust and community participation. The Government are keen to see the sector grow, in order better to serve its members, and to offer many more people the opportunity to become members. That is why we think it is of the utmost importance that it has a variety of opportunities for corporate restructuring, such as offered by the order.

In the past, mutual societies wishing to grow had very few options: merger with another similar society or demutualisation. It is the Government’s policy intention to facilitate transfers between mutuals as envisaged under the order, offering them an alternative route for transferring their business while remaining in the wider mutual sector. The order will do that by providing the transferring mutuals’ members with membership rights. It contains appropriate safeguards, not only to protect the rights of transferring mutuals’ members, but to prevent contrived demutualisations, or demutualisations by the back door.

The order will enable mutual societies to develop different group structures, as an alternative to demutualisation. In particular, it will make it possible for a building society to transfer to the subsidiary of another mutual society under a simplified procedure. That will result in a revitalised and self-sustaining sector, offering quality services to its members and enhancing competition in the UK economy. I commend it to the Committee.

Mr. Mark Hoban (Fareham) (Con): Mr. Martlew, it is a pleasure to serve under your chairmanship. As the Economic Secretary said, the order flows from legislation that was introduced by my hon. Friend the Member for Bournemouth, West—it is the fourth private Member’s Bill that he has successfully steered on to the statute book. We supported it through its passage in the House because we recognised the importance of strengthening the financial mutual sector by enabling it to modernise and to form integrated financial services mutuals, covering a wide range of different sectors. Obviously, as the Minister pointed out, the merger of Co-op and Britannia is a good example of how the legislation can be used to strengthen the mutual sector in what is a difficult time for mutuals.

The Minister referred to section 1 of the Act. Even by the time that he, his immediate predecessor, now Under-Secretary of State for Work and Pensions, the hon. Member for Burnley (Kitty Ussher) and I debated it on Report and Third Reading, section 1 appeared to be redundant. It did not appear to be quite as redundant in 2006 when her predecessor, now Secretary of State for Children, Schools and Families, the right hon. Member for Normanton (Ed Balls) and I debated the Bill, which was seen as a way in which to allow building societies to compete with banks and to have access to the wholesale markets. How quickly times changed between Second Reading and Report and Third Reading.

With reference to the statutory instrument, the Minister referred to the risk of back-door demutualisation. That is clearly a concern for people, who will have seen what happened to former building societies that demutualised, with two in public ownership and others being swallowed up by larger financial institutions. Is he certain that the provisions in the order cannot be used to enable a back-door mutualisation, or does he still think that there is a risk of that taking place? If there is a risk, are there any other safeguards that could be introduced to reduce it? Building societies should be able to debate whether they should be demutualised, but hon. Members on both sides of the Committee would deplore a process where they could be demutualised through the back door, rather than through public debate and discussion.

One of the ways in which building societies build up their tier one capital is through the permanent, interest-bearing shares. I notice that in the statutory instrument there is a recognition of the fact that, where a building society transfers to become part of another mutual, those shares cease to be tier one capital and could, at best, become innovative tier one capital. Does the Minister think that that reduces the attractiveness of permanent interest-bearing shares to building societies? What other routes are there for building societies to boost their tier one capital if they believe that the permanent interest-bearing shares are no longer appropriate?

Many mutual insurers were concerned about being specifically referred to in the Bill. The compromise that the Government reached to enable mutual insurers to be covered was to extend the definition in the Bill to include other EEA mutuals.

When we had the debate on the Floor of the House, I asked the then Economic Secretary about EEA mutuals, which cover a wide range of mutual organisations, including any form of co-operative established in the EEA. It is not just financial co-operatives—the example that I gave on the Floor of the House was a wine-growing co-operative in France. Are we now in a position where only financial mutuals will be able to merge with other financial mutuals, or could other financial mutuals, including wine-growers, merge with building societies, mutual insurers, industrial and provident societies? Has that prospect been closed down by the way in which mutual insurers have been specified under the order?

Mr. Colin Breed (South-East Cornwall) (LD): I do not want to add much more. I think that we all agree that this is a significant step forward and a natural progression from the Banking Bill that many of us spent hours debating.

I welcome what is going to happen, because I think that it is right. However, I am concerned that whether it be a transfer, a takeover, a merger or whatever, it almost always equals reduction. In other words, there will be fewer of them. What we have seen in the banking sector is the over-concentration of a smaller number of very large banks reducing competition to a certain extent. They have certainly reduced choice and perhaps even affected innovative products.

I hope that the Government’s new-found endeavour to expand or support the sector, and to create what might be called the modernised mutual to encourage savings, which I think we all agree with, is the next stage. We need to have transfer ability. Mutuals need opportunities to merge so that they can grow their business, but we also need to bring in new entities under a modernised mutual to ensure that we have a good number. One of the terrible things about demutualisation was that we significantly reduced the overall number of building and friendly societies that were available to the electorate.

The credit unions do a tremendous job, but they are in many respects held back from doing some of the things that they really want to do. I hope that the next stage will provide an opportunity for the credit unions to be given special treatment in relation to the way they are looked at. Despite lots of problems, they have achieved some recognition, but they need a lot more. As the Minister might know, I am particularly keen to see them converted to community banks because they are a far more appealing vehicle than credit unions. A credit union does not mean much to a lot of people, but a community bank does.

There are opportunities to create a new vibrant sector where people get into saving and understand the bottom end, particularly those who do not have access to even the basic bank accounts. Saving at a very low level and borrowing at a very low level at very reasonable rates is a sector that we need to look at. While we may facilitate the ability of mutuals to take each other over, merge and grow, I am keen that we do not obstruct new entrants to the market.

As for mutual insurers, I have a slight concern. We are having a rethink on offshore mutuals.

Mr. Breed: To continue my comments on mutual insurers and the creation of the designation of an EEA mutual society, I do not want the growth of offshore mutual insurers to be a result of the order. In fact, I would like it to be the other way round—I want us to start to curb that growth and have the mutuals onshore. I would like the Minister to give me some comfort that he does not think the measure will be the means by which we begin to see some growth in offshore mutual insurers.

Mr. Hoban: Is the hon. Gentleman suggesting that he opposes strong European financial mutuals acquiring weaker UK ones?