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As for the outcome, it is clear that there have been some positive results. It is positive that the savings and deposits business and the mortgage lending will continue within the mutual movement with the Nationwide, and there is a reasonably positive outcome for the labour force. But I would like to pursue a question that has already been raised with the Chancellor: why could the potential offer from the Building Societies Association not be taken up? Presumably, when the BSA offered to put in £30 million of its own members’ money, it made a pretty hard-headed calculation of what the Dunfermline could service and repay. It is difficult to understand why it came to a radically different conclusion from that reached by the Government. As the BSA was willing to step up to the plate itself, why did the Government not feel able to match its contribution? Is one of the reasons why the Government were not able to do so a rigid application by the FSA of its capital adequacy rules?
We have heard a great deal about the future of counter-cyclical regulation, but do we not here have a case of the 8 per cent. rule for capital being so rigidly applied as to make it very difficult to deal with situations of this kind?
I have previously raised my final point not with the Chancellor, but with his Ministers. It is to do with the contributions made to the deposit protection scheme, and the fact that that weighs disproportionately heavily on the building societies, because it is based on the level of deposits, rather than loan exposure. Building societies such as the Nationwide that are very prudent in their operation and maintain a very high level of deposit savings in relation to their lending are therefore paying a much heavier contribution than the banks. Not only is that storing up trouble for the future, but it seems very unfair, and it has, of course, affected the calculations in this particular case. Will the Government take a fresh look at this matter, which all the building societies feel very strongly about?
Mr. Darling: The hon. Gentleman raised three questions. On supervision, we are both in agreement that the primary responsibility for management decisions always has to rest with management. The management in this case took the decision over a number of years to go into areas where the building society had not previously gone. The hon. Gentleman referred to the IT system. Ironically, the In-House organisation he mentioned was proposing to sell its expertise in IT, whereas in fact £10 million—I think that is the sum—had to be written off in respect of the IT system. That was clearly primarily a management decision. However, as I said to the shadow Chancellor, there are lessons to be learned here, and we need to look at them.
On the point about the Building Societies Association, we looked at the idea very seriously. If it had worked, and all that was necessary was a capital injection from either the Government or the BSA—and, possibly, the Scottish Government as well—there would have been attractions in that, such as that it would have been relatively simple to do. Our problem was that the FSA—which is, at the end of the day, the regulator—came to the view that although that might buy time, it was almost certain that, as I said in my statement, the society would have to come back for more. That was the difficulty. It also has to be said that when we spoke to the BSA, there were certainly some who were proposing to contribute to what would have been a pooled amount—it would have come from about half a dozen larger BSA members—but some of them were sceptical as to whether that would fix the problem. As the hon. Gentleman knows, one of the lessons that has to be drawn from other parts of the world—indeed, arguably, from nearer to home—is that if we are going to try to fix the problem and recapitalise banks, we need to do it properly. The Japanese experience was that if we keep coming back and back, it prolongs the problem rather than resolves it.
On the deposit protection scheme, the hon. Gentleman raises a perfectly good point and I know that it is something that the FSA will be examining; it obviously needs to consider both the distribution and the treatment of the building societies’ contributions and the banks’ contributions. I will ensure that on that, and on other matters, I will keep the House informed.
Willie Rennie (Dunfermline and West Fife) (LD): In Dunfermline this morning, the feeling was a mixture of depression, anger and confusion as to why such a fine Scottish institution had come to this. I am bitterly disappointed that more could not have been done to save such an institution, which has been a trusted friend to many people in the community in Scotland over 140 years. Could the Chancellor of the Exchequer please explain why more was not done to save this institution? I have heard many of the explanations here, but many, including the Scottish Government, the rest of the mutual sector and others, were willing to rally around to come to the rescue of the building society. What has happened will do tremendous damage to the mutual sector as a whole, which is trusted by many in the community throughout the country. The Government had a responsibility to do more to save the institution, and in Dunfermline this morning, people were feeling that it was a sad day when such a fine institution had come to this.
Mr. Darling: I am well aware of the affection that many people in Dunfermline have for the building society. The society has, over many years, enjoyed a very good reputation, not only in the town of Dunfermline but in Scotland as a whole, and I think it is a great pity that it has come to this. The hon. Gentleman asked why it had happened. As I said in my statement, the reason is that the management of the society decided to go into quite large-scale commercial lending, and they did so at the top of the market. These loans are now, in many cases, not being repaid. The management also acquired property mortgages from two American companies just before that particular market collapsed, and they also encountered the problems with the big IT project that I mentioned. We tried everything that we possibly could to reach a solution.
The hon. Gentleman rightly refers to the contribution that was considered from us, from the BSA and, possibly, from the Scottish Government. The problem was that it would not have fixed the problem; we might well have been back in a few months’ time, or in a year’s time, facing exactly the same problem. We needed to find a long-term resolution for the members of that society, and to do the best we could in relation to jobs and financial stability. I am glad that we were able to transfer the building society to another building society. He is right to say that there is a lot of affection for the building society. I, like many others, am very sorry that the decisions taken by its management meant that it got into those difficulties. We have had to do what we believe is right to secure the long-term interests of the people who have their money in that building society.
Mr. Russell Brown (Dumfries and Galloway) (Lab): The chairman of the Dunfermline building society, Jim Faulds, has made his views known today; he has made some severely adverse comments about the decision that the Government have taken, going as far as to say that this action was not necessary. Is my right hon. Friend in a position to pass comment on some of those views that have been put into the public domain?
Mr. Darling:
I know that, like many people, all of us here deeply regret that the decisions taken by the management of the Dunfermline building society have meant that we have had to intervene and take measures to make sure that it is put on a long-term stable footing
within the Nationwide building society. I believe that the action that we have taken was necessary, as a result of the judgments that were made, and that it is the right thing to do, both to protect people who have money in that building society and for the long-term financial stability of the industry as a whole.
Mr. Christopher Chope (Christchurch) (Con): My hon. Friend the shadow Chancellor asked the Chancellor of the Exchequer a specific question about the maximum taxpayer exposure as a result of what has happened. I should be grateful if the Chancellor could either explain why he will not answer that question, or answer it now.
Mr. Darling: The answer is that it will depend over time as to what extent we are able to realise the assets that we now hold, including the commercial property. I hope that we will be able to recover all the money that we have had to put in—otherwise the Government will have a call on the capital of the building society and in relation to the FSCS—but the position is very similar to that of the Bradford & Bingley bank, where we had to step in and take similar action last year.
Ms Sally Keeble (Northampton, North) (Lab): I very much welcome the action that has been taken by the Nationwide, part of whose headquarters is in my constituency. It has always been an important and stable financial institution. My right hon. Friend referred to some real weaknesses in the UK mortgage market, such as the self-certified mortgages, although we have always assumed that we did not have a sub-prime issue here. Is he working with the FSA to look closely at the weaknesses in the UK mortgage market and to identify any other problems that might be developing, especially in the mutual sector?
Mr. Darling: We do not have the same problems as the US market, partly because our mortgage market was much more tightly regulated. The US sub-prime problem was caused largely by people who took out loans on properties that were not worth very much, who did not have very much in the way of income, and who were never going to be able to repay when interest rates went up.
The problem that we have in this country tends to centre on self-certification and buy-to-let property. It is those mortgages that the Dunfermline bought off GMAC and a subsidiary of Lehman Brothers, and that is part of the reason for its difficulties. It all points to the need to ensure that the mortgage market, and the wider financial services industry, is properly supervised and regulated. It is worth remembering that even as late as 2007 some people were calling for the complete deregulation of the selling of mortgages, which would be absolute madness.
Mr. Michael Fallon (Sevenoaks) (Con): Is it not extraordinary that the provision of another £1.6 billion of public money to rescue another failed institution no longer seems extraordinary? Can the Chancellor explain why the regulator allowed the Dunfermline building society to over-commit itself so recklessly in 2006 and 2007 in commercial property and sub-prime?
Mr. Darling:
The hon. Gentleman is right, in that the action that Governments are taking all over the world simply would not have been contemplated three or four years ago. He asks a pertinent question about supervision, and I said earlier that I want to get a report on that,
because there probably are lessons to be learned. The issue comes back to a point that has come up time and again with Bradford & Bingley, HBOS and RBS: what were the management doing? What questions were being asked? When the money was coming in, surely someone was asking how and on what basis it was coming in. We have to tackle the management weaknesses, which fundamentally led to the problems, and we have to learn the lessons in relation to supervision and regulation of such institutions.
Mr. Gordon Prentice (Pendle) (Lab): On that very point, surely the directors of the Dunfermline owed a fiduciary duty to the members of the society. If the directors behaved recklessly, as described by the hon. Member for Sevenoaks (Mr. Fallon), surely there must be some come-back against them. My Friend said that the Dunfermline is the 12th largest building society out of 55 in this country: are any of the others similarly exposed or is this a one-off?
Mr. Darling: The FSA is responsible for the conduct of directors and the supervision of all building societies and other financial institutions in this country. Part of its job is to keep a close eye on developments in every institution.
Stewart Hosie (Dundee, East) (SNP): The end result is that the taxpayer will have the bad bits of the society while the Nationwide gets the residential mortgage book, the deposit-taking business and the society’s reserves. It will also get £1.6 billion of net financing. The general public will be perplexed as to why £1.6 billion of net financing represents better value for money than £60 million of recapitalisation, so may I ask the Chancellor whether, if the Dunfermline had been recapitalised to the £60 million suggested by the FSA, it would have met the capital adequacy rules and have been eligible for or entitled to other liquidity funding?
Mr. Darling: The FSA believed that even though an injection of £60 million might have bought time, it would have been necessary to return to the problems faced by the Dunfermline within a short period. In other words, that would not have provided a long-term solution. The hon. Gentleman asks about the £1.6 billion. I had the benefit, if I can put it that way, of seeing him on Sky television earlier this afternoon, so I had some inkling of what he might say. Perhaps I can explain the position. We have transferred the deposits of the Dunfermline to the Nationwide, and the Nationwide therefore has a liability to pay out those deposits. If the hon. Gentleman thinks about it, most of a deposit of £10,000 with the Dunfermline or any other building society would be lent out in order to get a return, but the liability for the full amount remains. Therefore, the Government have to provide financing—that is the £1.6 billion; it is different from providing working capital. With respect, the hon. Gentleman is not comparing like with like.
Let me make it clear that I understand fully that it does not matter where Members represent: all of us will be sorry that a building society that has done well over many years has got itself into such a position, through judgments that clearly went wrong. We have had to step in to try to resolve that, to provide security for depositors and to provide a long-term future. What we have done is absolutely right and I am afraid that it was unavoidable.
Sir George Young (North-West Hampshire) (Con): Why have the loans to housing associations, which are a good credit risk, not been transferred over to the Nationwide along with all the other residential mortgages, some of which will be a lot riskier? How confident is the Chancellor that this is the last time that he will need to make a statement of this nature?
Mr. Darling: When we looked at what the Nationwide was proposing, we felt that on balance the better value for money would be to see whether there was another way of dealing with the housing loans. They are important. The Dunfermline provided a lot of money for social housing in Scotland and it is important that whatever we do we provide the best value for money.
More generally, I think that over the past two years I have made more statements than any other Chancellor of the Exchequer, by a long chalk. At the moment, I cannot tell the right hon. Gentleman that I expect that situation to change.
Sir Nicholas Winterton (Macclesfield) (Con): I think that the Chancellor will agree that the Nationwide building society is increasingly proving to be a life-saver. I say that because I have a constituency interest. My own Cheshire building society, as well as the Derbyshire building society, is now under the safety of the umbrella of the Nationwide, because the Cheshire indulged in issuing highly speculative commercial property loans, which it should not have done. Will the regulatory body take control, at last, and prevent building societies from indulging in such activities and involving themselves in matters about which they know too little?
Mr. Darling:
There is some force in what the hon. Gentleman says. As Adair Turner, the chairman of the FSA, has said, lessons need to be learned not just from this case but from other cases too, and supervision and regulation need to be far more intrusive than they were in the past. We had a similar problem with Northern Rock when that bank became over-exposed and reliant on one source of funding. When that funding dried up, the bank had nowhere else to go. The hon. Gentleman is right that it is very important that we learn those lessons, but I must tell him that it was not so long ago that people were calling for not more regulation
but less regulation, even in respect of the selling of mortgages. I think that that would have been the wrong way to go.
Mr. Bernard Jenkin (North Essex) (Con): May I forecast that this will not be the last time that the Chancellor of the Exchequer comes to the House to make a statement of this nature? Can we be absolutely clear that this crisis is not a failure of capitalism or markets? It is a failure of governmental regulation. It is a failure to control profligate borrowing and profligate lending. Markets are punishing Governments, regulators and countries for failing to supervise the capitalist system properly.
Mr. Darling: I assure the hon. Gentleman that this is not the last occasion that I will come to the House. I proposed to come to the House tomorrow afternoon to take part in the economic debate, which, I am sure, we are absolutely looking forward to.
On the hon. Gentleman’s wider point, this is not the occasion to dwell on the future of capitalism, but the one thing that I would say is that he cannot leave out the conduct of the boards of management of some of those institutions, where there is no doubt that huge mistakes were made. Yes, there are lessons for the regulators, for Government and for everyone else, but we also need to ask ourselves, as should the people who are charged with running those financial institutions, whether they did the right thing. I am afraid that the answer in too many cases is no they did not.
Mr. Peter Bone (Wellingborough) (Con): Further to the Chancellor’s last comments, yesterday on BBC radio the chairman of Dunfermline building society was very scathing of both the Chancellor and the Secretary of State for Scotland, accusing them of misleading the country about the mortgages that were bought and suggesting that the Chancellor had said that they were sub-prime American mortgages, when, in fact, all the mortgages were British. Can the Chancellor confirm that it is true that they were British mortgages? Were those mortgages transferred to the Nationwide?
Mr. Darling: I have just said in my statement that the Dunfermline had bought those mortgages from two American companies—GMAC and a subsidiary of Lehman Brothers—and that is precisely what I have been saying since the problem first became apparent.
Points of Order
4.11 pm
Alan Duncan (Rutland and Melton) (Con): On a point of order, Madam Deputy Speaker. Might you consider asking Mr. Speaker for a report on the proceedings and conduct of the Committee that considered the Apprenticeships, Skills, Children and Learning Bill? From Thursday to Friday afternoon, it sat overnight for a total of 17 hours and serious disrespect was shown to the Chairman by the Government. It sat through the night, even though the programme motion still allowed for another day’s sitting, and the House had to remain staffed for the whole period, at short notice and considerable expense. That has cost the taxpayer a lot of money, just because of vindictive management by Labour Whips, as punishment to their own Ministers and Members, who failed to turn up at all on the Thursday morning. May I ask you to find out whether there can be a proper investigation into that?
Mr. Nick Gibb (Bognor Regis and Littlehampton) (Con): Further to that point of order, Madam Deputy Speaker. As my hon. Friend the Member for Rutland and Melton (Alan Duncan) has just said, on Thursday we spent more than 17 hours in Committee, not finishing until midday on Friday, because the Government refused to adjourn the Committee until every clause of the Bill had been finished, despite the fact that we had available in the programme motion five and a half hours of time in Committee tomorrow, Tuesday 31 March. The reason the Government Whips Office did that was to punish Labour Back Benchers for failing to turn up on Thursday morning, as a consequence of which the Government lost three votes on their own amendments. Can you advise me how much that petulant fit of pique has cost the taxpayer in staff overtime, taxi fares and other House of Commons costs that would not have been incurred if we had used the time available in Committee tomorrow? Can you advise me whether that approach to managing a Bill is the most effective way to organise the scrutiny of legislation?
Madam Deputy Speaker (Sylvia Heal): Hon. Members have raised the question of proceedings in a Committee. I inform them that such proceedings are matters for the Chairman of a Committee and not for the occupant of the Chair to rule on.
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