Session 2009-10
Publications on the internet
General Committee Debates
Delegated Legislation Committee Debates

Draft Building Societies (Insolvency and Special Administration) (Amendment) Order 2010
Draft Building Societies (Financial Assistance) Order 2010



The Committee consisted of the following Members:

Chairman: Mr. Joe Benton 

Ancram, Mr. Michael (Devizes) (Con) 

Bailey, Mr. Adrian (West Bromwich, West) (Lab/Co-op) 

Blears, Hazel (Salford) (Lab) 

Browne, Mr. Jeremy (Taunton) (LD) 

Cable, Dr. Vincent (Twickenham) (LD) 

Duddridge, James (Rochford and Southend, East) (Con) 

Hands, Mr. Greg (Hammersmith and Fulham) (Con) 

Hewitt, Ms Patricia (Leicester, West) (Lab) 

Lilley, Mr. Peter (Hitchin and Harpenden) (Con) 

Linton, Martin (Battersea) (Lab) 

McCarthy-Fry, Sarah (Exchequer Secretary to the Treasury)  

McGovern, Mr. Jim (Dundee, West) (Lab) 

Mudie, Mr. George (Leeds, East) (Lab) 

Salter, Martin (Reading, West) (Lab) 

Seabeck, Alison (Plymouth, Devonport) (Lab) 

Yeo, Mr. Tim (South Suffolk) (Con) 

Ben Williams, Committee Clerk

† attended the Committee

Column number: 3 

Sixth Delegated Legislation Committee 

Tuesday 23 March 2010  

[Mr. Joe Benton in the Chair] 

Draft Building Societies (Insolvency and Special Administration) (Amendment) Order 2010 

4.30 pm 

The Exchequer Secretary to the Treasury (Sarah McCarthy-Fry):  I beg to move, 

That the Committee has considered the Draft Building Societies (Insolvency and Special Administration) (Amendment) Order 2010. 

The Chair:  With this it will be convenient to consider the draft Building Societies (Financial Assistance) Order 2010. 

Sarah McCarthy-Fry:  Thank you, Mr. Benton. 

The building society sector weathered the financial crisis relatively well in the light of the especially harsh business environment of the past few years. During that time, however, there has been consolidation in the sector and one failure—that of the Dunfermline building society. The sector continues to provide valued services to members and customers throughout the United Kingdom and the Government are committed to supporting the financial mutuals sector as a viable alternative to banks and an important way of ensuring a more competitive financial services sector. 

The draft Building Societies (Financial Assistance) Order 2010 will modify the legislation that applies to building societies to make it easier for them to receive financial assistance from a qualifying institution: the Treasury, the Bank of England, the European Central Bank or another central bank in the European economic area. Although the building society sector has held up well, the financial crisis brought about the need for liquidity assistance for financial institutions of all kinds. Liquidity support, such as that provided by the Bank of England’s special liquidity scheme, is one example of the sort of scheme in place across Europe and elsewhere. Improving the ability of building societies to access emergency funding from central banks strengthens the resilience of institutions against potential failure and thereby protects the interests of building society customers, who are also their owners. 

In most respects, the order replicates the provisions of the Building Societies (Financial Assistance) Order 2008, which was made under the Banking (Special Provisions) Act 2008. It modifies the application of section 7 of the Building Societies Act 1986 to ensure that relevant financial assistance from a qualifying institution is not taken into account for the purposes of the 50 per cent. limit on non-member funding of building societies. It also disapplies section 9B of the 1986 Act, which restricted the creation of floating charges, and applies insolvency law provisions on administrative receivers to make it possible for a qualifying institution to appoint an administrative receiver under a floating charge. 

Column number: 4 

However, the draft order makes wider provision than the 2008 order. Whereas the 2008 order applied only to financial assistance offered or provided by the Bank of England, the 2010 order will apply in respect of financial assistance offered or provided by the Treasury, the Bank of England, another central bank of a member state of the European economic area or the European Central Bank. It therefore widens the sources from which financial assistance can be granted. In addition, whereas the 2008 order applied only when financial assistance is provided to maintain the stability of the financial system in the UK, the 2010 order will apply when financial assistance is provided for any purpose, even when there is no wider threat to financial stability. 

Prior to laying the order, the Treasury consulted in July 2009 on a wider order that would modify building society law to make it easier for building societies to receive financial assistance from a central bank and allow building societies to grant floating charges in favour of payment and settlement systems to help them to take advantage of such financial assistance. The consultation closed on 31 October 2009 and respondents expressed the view that both provisions would be useful for the purpose of accessing financial assistance. 

After further consideration, however, I decided that it is appropriate to make an order that is more limited in scope than that proposed in the consultation. The wider order would have enabled building societies to grant floating charges for reasons unconnected to financial assistance. It would have given a general and indefinite permission to building societies to grant floating charges, so that they could access payment and settlement systems directly. Doing that could have increased risk in the sector and would have gone beyond the intention of the policy. The draft order therefore puts in place the first of those two provisions only, which nevertheless makes it easier for financial assistance to be granted to building societies from a wider range of sources. 

Let me make it clear that the proposals in the draft order are purely precautionary. They are intended to place building societies on a similar footing to banks, not to single them out for special treatment. We regard the draft order as sensible and prudent contingency planning on the part of the authorities. Extending the financial assistance order to cover assistance from the Treasury, the Bank of England, the European Central Bank or another central bank in the European economic area has been widely supported by stakeholders, including the building societies themselves. We believe that the draft order represents sensible contingency planning, improving the position of building societies and bringing them on a similar footing to banks with regard to financial assistance. 

The Building Societies (Insolvency and Special Administration) (Amendment) Order 2010 makes technical changes to the building society insolvency procedure and the building society special administration procedure. Those were created urgently in March 2009 to enable the resolution of the Dunfermline building society to take place. It was not possible at that point to undertake public consultation before making the necessary secondary legislation. The Government therefore committed to full public consultation after the event and to producing an amending instrument if necessary. That consultation was conducted from July to October 2009; the Treasury has also received advice from the Banking Liaison

Column number: 5 
Panel, which has been published on the Treasury’s website. Stakeholders supported the policy proposals and the BLP has made three technical recommendations, which are set out in its published advice. 

On building society insolvency, the BLP made two recommendations: first, that the financial services compensation scheme should have certain additional rights in the insolvency; and secondly, that society members should retain the right to participate in the insolvency and to be informed about its progress. Those are matters for the statutory insolvency rules. The Government agree with the BLP proposals and they will be included in the rules when they are made in due course. 

On building society special administration, the BLP proposed that provisions should be made to ensure that the building society special administrator can change the name of the residual society after a partial transfer. Under the building society special administration procedure as it stands, there are various routes by which the special administrator could pursue that goal, and he or she would ultimately have recourse to the courts. To put the administrator’s ability to change the name of the residual society beyond legal doubt would require significant revisions to building society law, and we do not believe that such wide-ranging changes would be appropriate, so the order is limited to making essentially minor and technical amendments, some of which respond to points made by the Joint Committee on Statutory Instruments when the original order was made. 

I commend both draft orders to the Committee. 

4.38 pm 

Mr. Greg Hands (Hammersmith and Fulham) (Con):  Let me start by welcoming you to the Chair, Mr. Benton. I believe that this is the first time that I have served under your chairmanship. 

I thank the Minister for her long and thorough speech. She described the measures as purely precautionary, but obviously we in the Opposition believe that they still deserve scrutiny. The orders are the successors to orders made in 2008 and 2009, in the wake of turbulent developments in the financial markets, and each in its previous form was examined in Committee by my hon. Friend the Member for Fareham (Mr. Hoban), whose expertise is being deployed elsewhere this afternoon. It is right that the Government have sought to re-examine legislation that was conceived in some haste. The consultation that they have engaged in with the industry has been welcome. 

As was made clear when the measures were debated in another place last Thursday, the Opposition support the changes before us this afternoon. I can also report, following that debate, that the Minister’s colleague, the Financial Services Secretary, has been as good as his work and has fixed the teething troubles that were affecting the website—he described it as “fiddling with the technology”—so the responses to the consultation on the draft Building Societies (Financial Assistance) Order 2010 can now be accessed without difficulty. 

However, further to the issues raised in another place, and notwithstanding our support for the measures, I have eight questions for the Minister regarding the financial assistance order. The consultation document that was published in July 2009 is rather coy about what

Column number: 6 
inspired the move to broaden the range of financial institutions entitled to provide support to building societies outside the framework of the 1986 Act. At present, only the Bank of England can bail out a building society in that way. Under the new regulations, the Treasury and any European economic area central bank can also do so. My first question is: can the Minister explain whether any central bank or EU body has made representations on that point? In other words, does that particular part of the regulation arise from representations made? 

My second question is: has the Treasury discussed such assistance with central banks in the EEA area or the ECB? Thirdly, is there any reciprocity in this area? In other words, is there some kind of an agreement whereby the UK central bank—the Bank of England—or, indeed, any other body, might in future have to provide financial assistance to bodies in other EEA areas? Fourthly, it would be helpful to learn in what circumstances the Minister envisages such assistance being offered. Although we might be happy for the ECB, for example, to spare us from having to bail out one or all of our building societies, if that unfortunate situation should arise again, it is hard to see why the ECB or any other EEA central bank would feel that it was their responsibility. Could we have an example—either actual or hypothetical—of where the Minister believes that another EEA central bank could bail out a UK building society? 

The fifth question is this. Assuming that another EEA central bank did want to bail out a UK building society, can the Minister be confident that such an intervention would always be in the UK national interest? I note that the Financial Services Secretary said in the other place: 

“One of the lessons of the past few years is that we were not able to allow banking businesses to fail.”—[Official Report, House of Lords, 18 March 2010; Vol. 718, c. GC286.] 

Given that, what would happen if the Government and the Bank of England took the view that some hypothetical building society should be allowed to fail, only then to have an EEA central bank or the ECB step in and bail it out? I am not suggesting that that is likely to happen, but the possibility seems to have been opened up. It would be helpful to know the Minister’s view on the potential for intervention—or even rumours of intervention—to conflict with UK policy towards a mutual. I appreciate that the order is designed to place building societies on the same footing as banks, which was also true of the 2008 order, whose provisions were limited to the Bank of England. 

Another aspect of the order that is worth consideration is the looser criteria that apply to floating charges. Gone is the condition that charges are applied only to assistance 

“for the purpose of maintaining the financial stability of the United Kingdom,” 

although to be fair, the Minister raised that point. Now any purpose will do. That makes sense in the context of assistance from an EEA central bank, but it is nevertheless a significant relaxation, which also applies to the Bank of England and the Treasury. It seems that we are becoming rather dependent on the good sense and good intentions of the qualifying institutions. I would be grateful for a bit more detail on that. 

The seventh question is this. Can we have some further detail on the withdrawal of the option to allow floating charges in relation to settlement banks? The

Column number: 7 
eighth and final question is this. The reasons provided seem justified, but given that the consultation document felt that the present system had unfortunate repercussions for delivery-by-value transactions, it would useful to know whether the Government regard this matter as having been settled, which is something that the Building Societies Association “strongly advocated” in its response. 

As I said, we do not oppose the two orders, but some significant questions need to be answered before we can give the Government a carte blanche to introduce these far-reaching measures. I look forward to the Minister providing responses to those eight questions. 

4.44 pm 

The Exchequer Secretary to the Treasury (Sarah McCarthy-Fry):  I am not sure I managed to get all eight questions down, but I am sure that Hansard did. If I do not manage to respond to all of them now, I undertake to write to the hon. Gentleman on the additional points. 

James Duddridge (Rochford and Southend, East) (Con):  While the Minister is marshalling her papers, perhaps she could comment on the scrutiny role of the Opposition in Committees such as this one. The hon. Member for Twickenham seems to be quite familiar with television studios and acting as a commentator on economic affairs, but when he is put on a Committee that is responsible for scrutinising in detail matters to do with building societies, he fails to turn up, as does his hon. Friend the Member for Taunton. Is what the hon. Member for Twickenham does really an appropriate use of politicians’ time, or should that be done in addition to the duty in the House to scrutinise legislation? 

The Chair:  Order. We have heard what has been said, but it is not a matter for the Minister to respond to; neither is it germane to what we are discussing today. 

Sarah McCarthy-Fry:  Nevertheless, it is telling that there are no Liberal Democrat Members here to scrutinise the draft orders. I welcome the scrutiny that the hon. Member for Hammersmith and Fulham has given to them. 

I forgot to welcome you to the Chair, Mr. Benton, and I apologise for that discourtesy. 

On whether there has been any consultation with any of the European central banks or European institutions, I will have to write to the hon. Gentleman, because I do not know the answer. There is no agreement on reciprocity; these matters would be dealt with on a case-by-case basis. I undertake to write with a more detailed answer, because I agree that that is not entirely helpful. 

The hon. Gentleman asked in what circumstances assistance would be offered. It is necessary when an institution is in distress and such action is needed to protect depositors. We are widening basis for financial assistance so that it is not narrowly confined to maintaining the financial stability of the UK. The order is intended to assist in protecting depositors in building societies in the same way as we protect depositors in banks. 

Column number: 8 

One of the main questions that was asked was about the wider order— 

Mr. Hands:  Before the Minister moves on too far, can I take her back to the first three questions on the role of the EU? Does she believe that what lies behind the provision in respect of the EEA central banks is the growing amount of cross-border ownership? She must be able to tell us something about what is driving the right of other EEA central banks to intervene in a bail-out of a UK building society. That has not suddenly arrived out of thin air. There must be some basis to it. 

Sarah McCarthy-Fry:  I do not think that I can help the hon. Gentleman now, except to say that the order was widely consulted on with the building societies, and they felt that it was important and appropriate that the provision was widened to include bodies in addition to the Treasury and the Bank of England. I will write to the hon. Gentleman with the specific reasons why that was included. I regret that I do not have that information in my notes. 

Looking to the wider order, under the special liquidity scheme, the Bank of England provided recipients with Treasury bills; societies could then enter into a sale and repurchase agreement in respect of the bills in order to generate funding. One way that they could do that was through the CREST settlement system. If we had allowed building societies to grant floating charges in favour of payment and settlement systems, it would allow them to access CREST directly. On further consideration, we were worried that, because of the nature of Treasury bills and other securities, it would then be impossible to decide whether the charge related to securities received from a central bank or other securities. 

The wider order would have allowed building societies to grant floating charges in connection with payment and settlement systems, not just in respect of building societies that were in receipt of financial assistance. We did not feel that such a fundamental change to building society legislation was appropriate. However, we have asked the building societies expert working group to consider whether there is a way that we could do that that would not have the effect that I described. We did not want to include that in the order, but further work is ongoing. There are no immediate plans for additional legislation, but the expert group has been asked to consider that matter because, when it replied to the consultation, it was in favour of the wider order. It was only when we came to look at the matter later in the process that we realised that it might open things up much wider than we intended. 

I regret that I was not able to answer in detail the questions relating to the EEA banks, but, as I said, I undertake to write to the hon. Gentleman. I thank him for his questions. 

James Duddridge:  On a point of order, Mr. Benton. I apologise for trying to distract the Minister into discussing the hon. Member for Twickenham. In all seriousness, however, may I ask you to take up the matter of how hon. Members notified about Committees? I have been the Treasury Whip for the official Opposition for a year and a half, and on a number of occasions the hon. Member for Twickenham has been listed as a Committee

Column number: 9 
member, but not once has he turned up. Perhaps there is something wrong in the notification system. 

The Chair:  That is hardly a matter for the Chair, but let me put it this way to the hon. Gentleman: what he said has been noted and will be recorded. Let us leave it at that for now. 

Question put and agreed to.  

Column number: 10 

DRAFT BUILDING SOCIETIES (FINANCIAL ASSISTANCE) ORDER 2010 

Resolved, 

That the Committee has considered the draft Building Societies (Financial Assistance) Order 2010.—( Sarah McCarthy-Fry. )  

4.52 pm 

Committee rose. 


©Parliamentary copyright
Prepared 12:51 on 24th March 2010