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10 Mar 2009 : Column 33WH—continued
11.29 am
Mr. Gordon Prentice (Pendle) (Lab): I am here to support my friend and constituency next-door neighbour the Member for Keighley (Mrs. Cryer), who tabled the early-day motion that has attracted huge support from colleagues across the House. There is a problem, as everyone who has spoken has identified, and we are all looking to the Minister to give us a solution this morning.
The Marsden building society is located in the heart of my constituency, just as the Dunfermline building society is in the heart of the Dunfermline constituency, but the Marsden’s reach extends across Lancashire. It has been a highly regarded and profitable building society for about 150 years; it was established in 1860 and has about 40,000 members. It does not pay dividends to shareholders, any profits are ploughed back into the organisation and it offers good rates to borrowers and depositors alike. It is a good, highly regarded organisation that supports the community and has a strong regional identity. Earlier this morning I visited its website, which tells its 40,000 members:
“As a member of Marsden Building Society you can rest assured that your savings are in safe hands. The Society’s business model is well placed to protect the interests of members.”
That is true—and what a contrast to the banks, which have let everyone down.
I do not know the last time that someone was knighted for their services to building societies, but we have the grotesque example of Sir Fred Goodwin, who still has his knighthood for services to banking. I am not going to be diverted down that road, Mr. Pope—I see you looking at me in that admonishing way of yours. As long as we have knighthoods and damehoods, I should like to see one go to someone who promotes the mutuals and building societies that play fair.
Mr. Jeremy Browne (Taunton) (LD): Does the hon. Gentleman have it in mind to put forward the hon. Member for Keighley (Mrs. Cryer) for a damehood for services to building societies?
Mr. Prentice: I would be delighted to do that, but I am against any name-changing titles, whether they are knighthoods, damehoods or anything else, but let me move off that point, interesting though it is.
I had a word with Neil Shoesmith, the chief executive of the Marsden building society, to tell him that my friend from Keighley had secured the debate, and the first thing that he said was that the Marsden accepts, without question, its responsibilities under the Financial Services Compensation Scheme. I would expect him to say that, because all the building societies realise that the burden should be shared fairly; however, it is not being shared fairly. As other Members have said, the liability for the levy favours organisations that are funded by the wholesale markets rather than by retail deposits. The Marsden, like most building societies, is almost 100 per cent. funded by retail deposits and the levy is equivalent to about 15 per cent. of its pre-tax profits, whereas a bank with high wholesale funding pays about 5 per cent., as we have heard. That is wholly disproportionate.
Despite those additional burdens, the Marsden has come through the crisis profitably, with strong capital and low-risk residential mortgage books, but that is not to say that building societies do not fail sometimes. The Skipton and Scarborough building societies recently merged; that is how building societies respond when they get into difficulties. They have not gone cap in hand to the public purse, expecting a bail-out as the banks have. We are now in a grotesque situation in which risk-averse building societies are funding, through the perverse levy, the losses of banks and other organisations that have failed because of their imprudent lending. That is the reality. The levy erodes building societies’ ability to offer the best rates to savers and borrowers.
In a nutshell, prudent, profitable organisations such as the Marsden, with low-risk assets, are having to pay disproportionately for the excesses of those with high-risk assets and low capital. I do not know what we need to do get out of that situation. We have heard that the Treasury Committee is to conduct a review, and that Lord Turner is to look into the issue. Whatever happens, we need an early review of the scheme because of the corrosive impact that it is having on the Marsden and other building societies across the country.
11.36 am
Anne Snelgrove (South Swindon) (Lab):
I, too, congratulate my hon. Friend the Member for Keighley (Mrs. Cryer) on securing the debate, which is of equal interest to me because the headquarters of the Nationwide
building society is in my constituency. I know that she has also been assiduous in taking this matter up in private meetings at the very highest levels of Government, and I congratulate her on that. Although I do not sign early-day motions, because I am a parliamentary private secretary, I support hers completely. [Interruption.] The hon. Member for Taunton (Mr. Browne) needs to speak to the Chief Whip, who reaffirmed last week, in a private meeting, that that is absolutely so.
The Nationwide employs many people from my constituency and the surrounding constituencies, many of whom have written to me about the levy because they are concerned about the effect it will have on the Nationwide in Swindon and the great part that it plays in the community and the knock-on effect on that community. It is one of those businesses that makes a major contribution to our local and national economy, being the largest building society, and the initiatives that it takes on locally and nationally are ones that the Government would support, because it helps Swindon residents and the wider society. We are asking the Government to support it and all the other building societies that hon. Members have discussed today.
I was seven years old when I opened my first building society account. My parents took me to the Halifax because they banked there and they felt that it was a safe place to put their money. It was once the biggest mutual and was the watchword for safety, but then it demutualised. I kept my account into my adulthood, as I am sure many other hon. Members did. I voted against demutualisation, and I think that those who thought demutualisation the wrong thing to do have been proved right. Both my right hon. Friend the Member for Birkenhead (Mr. Field) and I knew that something was wrong with the Halifax in 2006, when the Christmas hamper firm Farepak collapsed and HBOS grabbed £30 million of savers’ money to add to its £4.8 billion profit. We said then that something fundamental had changed in that institution that would lead to its downfall. Even so, we called on the bankers, in early-day motion 117 of the 2006-07 Session, to repay that £30 million, and we warned that the collapse of Farepak would be a greater portent of what was happening to that demutualised society.
Although many financial institutions, such as HBOS, have not been prudent in recent years, the Nationwide has been. It has remained mutual and it has protected savers. I have a lot of time for the Co-operative party’s campaign to remutualise Northern Rock and Bradford & Bingley, as mutual ownership has long been shown to be a good solution for ensuring a stable, long-term future for Nationwide and other building societies. However, instead of being rewarded for that, they are being punished, as my hon. Friends have said.
As the Building Societies Association argues, it is particularly galling that, in the few cases where building societies have got into difficulties, mergers have been arranged by stronger building societies without recourse to public funds—a phrase my hon. Friend the Member for Keighley used and one that we should repeat. I therefore congratulate the Nationwide on taking on board two smaller societies—the Derbyshire and the Cheshire—to safeguard those building societies and the whole sector.
Conversations with the chief executive of Nationwide, Graham Beale, who would be an admirable candidate for a knighthood, have shown that both he and the board felt strongly that it was their duty to take on the societies that had been exposed to some toxic debts and that they should do so at no expense to the taxpayer. However, as a mutual, all the Nationwide’s profits are ploughed back into the organisation and any losses have to be absorbed by the organisation. The Nationwide has no shareholders to cream off the dividends so it keeps a much smaller amount in reserve, most of which is in its retail balances. Even in good times, building societies’ stated profits will always be lower, so they will still suffer from the system that the Financial Services Compensation Scheme has created.
The Nationwide is being forced to pick up the bill for the failure of banks, and rather than being supported at a time of stress, it is being leant on. That gives the building society sector less room for manoeuvre and leaves it with less money to lend to its customers at a time when the Government are asking them to lend more. Nationwide favours a pre-funded scheme based on risk. I would like the Minister to consider such a scheme and give us his opinion on it. Last year, the Treasury Committee said that it favoured such a scheme, which would provide greater consumer confidence and encourage institutions to act prudently. Last June, the Governor of the Bank of England also said:
“A degree of pre-funding is one of those ideas that is bound to be unpopular before the fund is called upon, but seems decidedly wise after the event as it lessens the burden on the banking system in a time of stress”.
A risk-based levy could be introduced whereby banks meet the first slice of any FSCS levy resulting from a bank collapse, with building societies contributing only after the banks have paid their dues.
Mr. Mark Hoban (Fareham) (Con): Will the hon. Lady give way?
Mr. Hoban: The hon. Lady has plenty of time in which to take interventions. Does she think that the same principle should apply to credit unions and that they should bear their losses first? At the moment, when a credit union collapses, the cost of compensation or of meeting customer balances is spread between banks, building societies and credit unions. Does she think that credit unions should stand alone too?
Anne Snelgrove: Credit unions in this country do a fantastic job, particularly for the small savers in my constituency who suffered from the collapse of Farepak. We should consider all those points, but I will not go as far as saying yes to the hon. Gentleman’s question because I know that some credit unions are small organisations and that they are not nearly as large as the building societies that we are discussing. We need to look at credit unions as a separate case.
Finally, I ask the Government to consider increasing the compensation limit to £100,000. That is something that the building societies have also asked for. Doing so would help them to compete with European and American banks and would protect 99 per cent. of building society deposit balances. As hon. Members have said, no building
society has ever made a call on the FSCS levy, and Nationwide and all the building societies that we have heard about today are paying for institutions that have behaved far less prudently than they have. I hope that the Minister will listen to our pleas and will stop this iniquitous levy on our local building societies, which are local and national heroes.
11.44 am
Mr. Jeremy Browne (Taunton) (LD): Thank you, Mr. Pope, for giving me the opportunity to speak in the first of the winding-up speeches on this extremely important subject. I congratulate the hon. Member for Keighley (Mrs. Cryer) on securing the debate. She has not yet been recognised for her services to the building society sector by Her Majesty the Queen, but no doubt that time will arrive in due course. The hon. Lady has given us a welcome opportunity to discuss a vital topic, and it has been taken up by a number of hon. Members who have direct constituency experience of the benefits that building societies bring to their communities and, indeed, in most cases specifically to them as individual depositors and savers.
My party supports an insurance scheme because it is an extremely sensible safety net. The initial scare led to depositors queuing in an orderly British fashion outside Northern Rock to withdraw their deposits. One feels that in many countries people would have been breaking down the doors, but in this country people stood for hours and hours in queues. However, so far no one has actually lost their money in the banking crisis or storm that has hit our financial sector. That is very important because if the view took hold among the population that if banks or building societies were going down, people would lose their deposits and, in some cases, their life savings, panic would set in. People would want to withdraw their money and keep it under their mattress or put it into what they regarded as a safe harbour. That would obviously have profound implications for the banking and financial sectors, and indeed for the economy as a whole.
It is not just in the interest of the individual depositor or even the individual institution to have some sort of safety net to protect people, although obviously the primary beneficiaries, at least in the immediate term, are depositors who have confidence in the British financial sector. Of course, if we did not have a scheme of this type, people would still expect to be bailed out if their bank or building society failed, so in a way the insurer of last resort would be the state. That is increasingly what is happening, but the banks and building societies themselves have a responsibility to insure as far as possible against risk in their sector, and they should not assume that the state will always be there to pick up the pieces. If the state needs to do that on behalf of all of us, using the money we all give to the state as taxpayers, it should be the last resort rather than the norm. My party shares the wide consensus that an insurance scheme broadly of that type is a desirable and sensible way to proceed.
Engaging in the key point of the debate, I also agree that the share the mutualised building societies are being asked to contribute is unreasonable. The relevant calculation—a point made by my hon. Friend the Member for Dunfermline and West Fife (Willie Rennie) and
others—is surely not the overall share of the market for mutualised building societies compared with that for banks. Surely, the relevant consideration is the risk to funds of depositors in the building society sector compared with the risk to those in the banking sector. One does not need to calculate that risk in a particularly sophisticated way—although no doubt there is benefit in doing so—because the evidence is there for us all to see.
Many of the Members who have contributed to the debate have already made the point that so far no mutualised building society has had to draw on that insurance-based scheme. To use the example mentioned by my hon. Friend, the situation is like that of the extremely cautious driver who makes sure that their car is insured. Of course, they are legally obliged to do so, but their low premium reflects the low likelihood that they will ever have to draw on the insurance. That is surely the relevant and sensible model for us to follow. Its logical conclusion is that because building societies are much lower risk, they should pay a much smaller proportion to cover against risk than higher-risk institutions. It would be an extraordinary irony if building societies were threatened because of the size of the levy on them to cover the risks taken by the banks that got us into these difficulties in the first place.
While we have the opportunity, and because it is relevant to our deliberations, I want to widen the debate slightly and consider how we got into a situation where building societies feel that they are being put under unreasonable pressure and banks are much more likely to draw on the insurance-based scheme. I agreed with many of the comments that the hon. Member for Staffordshire, Moorlands (Charlotte Atkins) made, but I do not necessarily take the view she seemed to imply that shareholder institutions inevitably deliver a lower level of customer service than organisations that do not have shareholders. I believe that shareholding capitalism has an important, dynamic part to play in our economy, and it would be wrong for us to conclude that shareholder capitalism per se has failed.
Clearly, many capitalist organisations with shareholders—in this case, banks and financial institutions—have failed. In part, that was caused by a failure of regulation and of leadership at the highest levels of the banks, and by pure greed. People put short-term profitability before the long-term interests of their institution.
I remember the unseemly clamour when many of the building societies demutualised. When the people who had previously been running the mutualised building societies went into work after demutualisation to do what, on the face of it, appeared to be exactly the same job as they had done before, they thought it only right that they should be paid an amount that was three or four times more because they were now running a swashbuckling financial institution—yet they were sitting in the same office doing what appeared to be much the same job.
That was also the case when many of the utilities were nationalised. Civil servants who appeared to be perfectly competently running utilities suddenly thought that they were right at the cutting edge of modern capitalism and paid themselves far greater salaries to do what appeared to be much the same job as they had done before.
Mrs. Cryer: Is the hon. Gentleman aware that at the time of the demutualisation of Bradford & Bingley and the Halifax, which are both adjacent to my constituency, I and many of my colleagues wrote to the two organisations and begged them not to demutualise? Now we feel like saying, “We told you so.”
Mr. Browne: I am sure that the hon. Lady did that. One of the things that I thought was interesting about the phenomenon was that when members got the letters through their door, many seemed to take the view that it was an opportunity to get a free cheque for £200, £300 or £400, with no downside at all. I do not think that the members who voted for demutualisation can completely absolve themselves of blame; there was a vote, and they chose to exercise it. The situation was presented to people—at least they chose to see it that way—as though the question was, “Do you want to be given several hundred pounds with no downside?” It is not surprising that many members of the building society, when the choice was presented to them in those terms, thought, “Why not take the money?” They would still have a mortgage with the same organisation, which would have the same name, and they would go into the same office to talk to the same people in the same uniforms, but they would have enough money to pay for a holiday in southern Europe, or whatever.
[Mr. David Amess in the Chair]
It seems that only now the chickens are coming home to roost, and people have realised what they let themselves in for, but at the time it appeared to many people who were less forward-thinking than the hon. Lady that demutualisation was all upside. At the time, there was no obvious downside.
However, it is fair to say—I shall inject a note of politics into this discussion—[Interruption.] No, it is important, because it is almost exactly a quarter of a century since the big bang, and the financial deregulation mood took hold in this country and there was a sea change in the way that we viewed and approached financial services. During that quarter of a century, the Conservatives and Labour have governed for almost precisely the same proportion of time. They were both in power for about 12 or 13 of the past 25 years and, in that sense, have presided equally over the process.
Anyone viewing the financial catastrophe that has engulfed the whole financial services sector could reasonably ask what the motivation was that led to both the Conservative party initially and then the Labour party being so remiss when it came to trying to prevent it. Why were they asleep at the wheel? Was it simply incompetence, or were other motivations and forces at work?
It was the Conservative party, of course, that sowed the seeds of many of the problems that we face today. There was a belief in high-risk, high-return capitalism. I am trying to look at the situation as dispassionately as possible and I think that was the main motivation for many Conservatives in the “loadsamoney” 1980s—you will remember, Mr. Amess, that the 1980s were satirised as being about loads of money and, as there often is, there was truth in the characterisation. It was a me-first decade, and a time to make money as quickly as possible.
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