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Mr. Breed: I might be, yes. The hon. Gentleman and most of us have experience of some of the problems in the offshore banking sector—particularly involving foreign banks—and the difficulties in dealing with them. I think that there is new-found realism about the fact that offshore banking for its own sake is coming to an end, and Governments generally back that. Even if were a possibility—I think it unlikely—the current, overriding nature of onshore and offshore business means that we should curb the growth of any offshore operations, because we can control, regulate and supervise them far better onshore. Regulation and supervision will be under the spotlight, and I would not like a major growth in offshore mutual insurers to be a result of the designation.
Jim Cousins (Newcastle upon Tyne, Central) (Lab): Does the hon. Gentleman accept that it is rather curious in a definition of “offshore” to name Europe? Europe is not offshore. I had assumed that the hon. Gentleman was talking more about the sort of relationships that were beginning to develop, say, between the Derbyshire building society and some of the entities in the Isle of Man.
Mr. Breed: I was mainly referring to the order’s reference to:
“with the laws of an EEA state or any of the Channel Islands or the Isle of Man”.
Had it stopped at “EEA state”, I might be quite happy, but I am concerned about the specific inclusion of the Channel Islands and the Isle of Man.
5.3 pm
Mr. Brian Jenkins (Tamworth) (Lab): I shall not delay the Committee’s deliberations in any way, shape or form. I would like the Minister to talk us through the transfer arrangements and rights of members in those arrangements. Who makes a decision to transfer? If it is the board, will the members have the opportunity to be consulted, and perhaps even to stop the transfer of their society?
5.3 pm
We are in some danger of mythologising mutuality, although my hon. Friend the Member for Tamworth correctly pointed out that the nature of membership of one of the small, traditional building societies involves a completely different set of relationships and obligations than being a member of one of the large mutuals that are now coming on the scene. The large mutuals are geographically spread across the UK, cover a wide range of financial services and activities and, in the case of Britannia, involved a merger with a very different kind of mutual.
In such circumstances we can see the degradation of the concept of membership, which we have seen in the corporate governance of some of the banks. In 2006, Royal Bank of Scotland’s annual general meeting had a bagpipe band playing the tune from “Braveheart” as the then board of directors marched to the rostrum. With all due respect to Sir William Wallace, who was unfairly tried in—
The Chairman: Order. We may be straying.
Jim Cousins: Mr. Martlew, I accept your guidance. Let us forget Sir William Wallace, who was unfairly tried in Westminster Hall and should not have been hung, drawn and quartered.
The Chairman: He should not have been mentioned in this debate.
Jim Cousins: The point of that reference is that we might not feel as generous toward the 2006 board of directors of the Royal Bank of Scotland. What that emphasises is the degree to which the governance of a complex organisation falls into the hands of a self-perpetuating group of people. That problem is now a real one in the mutual sector. The rights of members are fundamental to safeguarding the elements of challenge and scrutiny that we are all now realising are such important aspects of our financial services sector.
5.6 pm
Ian Pearson: I shall try to respond to all the points raised by hon. Members in the debate. First, I agree with the hon. Member for Fareham that times have changed. The fact that we do not intend to introduce section 1, but will review the situation in two years’ time, should be widely accepted as an appropriate thing to do. The hon. Gentleman raised a number of questions about back-door demutualisation, treatment of permanent interest-bearing shares as tier one capital, mutual insurers, and wine-growing co-operatives and whether they would be able to acquire building societies. Let me respond to all of those.
On permanent interest-bearing shares, how building societies raise their capital is clearly a matter for them. The order makes no provisions on PIBS and the Act gives no powers to do that. As the hon. Member for Fareham will be aware, the Government have announced various schemes to help banks as well as building societies with capital problems. The Financial Services Authority takes an active role as regulator in ensuring that tier one capital ratios are adequate, but it is for building societies to determine how they raise their capital.
On the issue of mutual insurers, it is important to recognise that the order relates to UK building societies. A building society under this order could be transferred to a UK building society, a UK industrial provident society or an EEA mutual insurer. There is nothing in the legislation to say that the UK industrial and provident society must be of a financial nature, but it must be from the UK. That would rule out a wine-growing co-operative in France, but would not necessarily rule out the Brierley Hill workers’ co-operative, for instance, if it decided that it wanted to get into the insurance company business—though I think that is unlikely.
Mr. Hoban: This may sound like a trivial point about wine-making co-operatives, but when the Minister’s predecessor discussed that point on Report, she made it very clear that the Act enabled any EEA mutual to merge with a UK financial mutual. I pressed her on the point about the breadth of that provision, because I was quite staggered that the Government were prepared to allow an EEA non-financial mutual to merge with a UK financial mutual, but she assured me that the Bill did permit non-financial mutuals based in the EEA to acquire a UK financial mutual. Was what his predecessor said at the time incorrect?
Ian Pearson: The hon. Gentleman might have misunderstood what the former Economic Secretary said. My understanding is that she was referring to an EEA mutual insurer.
Mr. Hoban: No.
Ian Pearson: I will happily go back to Hansard to see whether that is the case. Certainly, the legislation that we are discussing today relates to the possibility of a building society being transferred to an EEA mutual insurer, not a wider EEA mutual.
The hon. Member for South-East Cornwall raised a related point on offshore institutions. I stress that the order applies only to transfers of business by building societies. It is unlikely that it could be used to expand the offshore insurance industry and that is certainly not the policy intention behind the legislation. Any EEA mutual insurer could take over a building society via that process, and I am informed that the Act more widely gives powers to allow any EEA mutual to do so. The order refers only to EEA mutual insurers and, as I suspected and have had confirmed, there is the potential for future orders where that would be the case. We can discuss those with the hon. Member for Fareham.
The hon. Member for South-East Cornwall and my hon. Friend the Member for Newcastle upon Tyne, Central both made an important point about the concentration of the mutual insurance industry. There is a debate that we can have about whether having slightly fewer but bigger mutual companies is a strength or a weakness. The Government, having consulted with the industry, believe that the ability to allow building societies to come together within a mutual framework enables them to be stronger and to offer competitive services. We believe that that mutual status is important as a differentiating factor in the marketplace, and we want to see that diversity.
On the community links between mutual companies, we have a range of building societies in the UK from small community-based ones to large, significant ones that compete directly with the banks. We want to see that diversity of provision maintained. The ability of the mutual sector to strengthen itself but remain mutual is an important advantage, which is why we supported the original Bill and why we are implementing its measures here today.
Mr. Breed: What the Minister just said about creating a smaller number of larger institutions to give them greater stability and improve their operation was exactly the thinking of the FSA when it allowed the demutualisation and mergers of various organisations and the takeovers of the banks. The FSA thought the result would be a smaller number of better capitalised and organised entities, but look what happened. Essentially, that thinking has proved totally erroneous. Those entities became so big, so complicated and so difficult to regulate, supervise and control that we ended up in our current mess. Everyone talks about learning the lessons of the past. Surely one of the lessons we have learned is that a diversified, more spread out and less concentrated industry is easier to regulate and supervise, and provides the choice and innovation that many consumers want.
Ian Pearson: I totally agree with the hon. Gentleman about wanting diversity in the marketplace. He will be aware of the Prime Minister’s recent comments about getting back to old-fashioned savings and lending institutions. In many ways, that is what building societies are, and it has been a great strength of mutual societies in the UK. However, we have to recognise that times change and building societies and industrial and provident societies will want to change with them, Clearly, there are lessons that we are all learning from the global credit crunch and what we have seen with the banks in the UK and more widely. We will reflect on those lessons.
What we are debating, in terms of flexibility for building societies, means that, if their members want to, they can come together and stay mutual. There are advantages in that and there is a strong case for saying there will always be community-oriented and focused industrial and provident societies and building societies that will want to maintain the community link, will not want to grow and will not want to merge. Ensuring that flexibility and diversity is something I think we would all support. All we are doing in the order is giving mutual societies that wish to do so the ability to transfer and that flexibility. That is something that they continue to want—we have checked this out with them. We believe the order will enhance competition in the UK economy as well as help ensure a vital and self-sustaining sector continues, offering real choice for consumers.
Question put and agreed to.
That the Committee has considered the draft Mutual Societies (Transfers) Order 2009.
5.19 pm
Committee rose.
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