Draft Building Societies (Core Capital Deferred Shares) Regulations 2013
The Committee consisted of the following Members:
† Birtwistle, Gordon (Burnley) (LD)
† Campbell, Mr Alan (Tynemouth) (Lab)
Dobson, Frank (Holborn and St Pancras) (Lab)
† Drax, Richard (South Dorset) (Con)
† Fuller, Richard (Bedford) (Con)
† Jackson, Mr Stewart (Peterborough) (Con)
† Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op)
† Javid, Sajid (Economic Secretary to the Treasury)
† Lammy, Mr David (Tottenham) (Lab)
McDonald, Andy (Middlesbrough) (Lab)
† Penrose, John (Weston-super-Mare) (Con)
† Reckless, Mark (Rochester and Strood) (Con)
† Roy, Mr Frank (Motherwell and Wishaw) (Lab)
Shannon, Jim (Strangford) (DUP)
Sheerman, Mr Barry (Huddersfield) (Lab/Co-op)
† Swayne, Mr Desmond (Lord Commissioner of Her Majesty's Treasury)
† Williams, Stephen (Bristol West) (LD)
† Zahawi, Nadhim (Stratford-on-Avon) (Con)
John Paul Flaherty, Rebecca Short, Committee Clerk s
† attended the Committee
First Delegated Legislation Committee
Monday 25 February 2013
[Annette Brooke in the Chair]
Draft Building Societies (Core Capital Deferred Shares) Regulations 2013
4.30 pm
The Economic Secretary to the Treasury (Sajid Javid): I beg to move,
That the Committee has considered the draft Building Societies (Core Capital Deferred Shares) Regulations 2013.
May I start by saying what a pleasure it is to serve under your chairmanship, Mrs Brooke? May I also take this opportunity to congratulate you on your recent honour in the new year’s honours list?
Sajid Javid: I was not surprised to hear about it.
In our coalition agreement, we stated that we would support diversity in the financial services sector and promote mutuals. To maintain their contribution to the UK’s diverse financial services industry, it is important and necessary that building societies thrive in the economic climate. We published a White Paper in June last year setting out how the Government plan to implement the recommendations of the Independent Commission on Banking. While the central focus of the reforms has necessarily been on the big systemic banking institutions, they do apply to all large institutions, including large building societies. We are determined to ensure that all building societies are well placed to play a central role in the future of UK banking services.
Following the banking crisis, financial institutions such as banks and building societies must develop new capital instruments to meet the new, stricter regulatory requirements of Basel III. We recognise that that places pressure on institutions to design new instruments that meet stricter regulatory requirements, and for those instruments to receive clear and consistent tax treatment. The Finance Act 2012 therefore created a power to provide special tax rules for these new types of regulatory capital instruments to give certainty to both the sector and investors. The regulations are the first use of that power.
The building society sector has developed a new instrument, which it calls core capital deferred shares—or CCDS—to satisfy the new, stricter common equity tier 1 criteria set out in Basel III. These building society shares are equity in nature and are the closest thing to share capital issued by banks. The Financial Services Authority considers them to be “non-objectionable”. Therefore, subject to ongoing discussions on the new EU capital requirements directive, we anticipate they will count as core tier 1 capital.
Under the current tax rules, building society shares receive a different tax treatment to shares issued by banks. Unlike building societies, banks do not withhold tax on dividend payments on their shares. Building societies have made it clear through discussion and consultation that they want their core tier 1 shares to be
taxed in the same way as similar shares issued by banks. We have worked with building societies to understand the issues they face in meeting new regulatory requirements while continuing to attract investors. The new building society shares will represent equity for the society and pay a discretionary distribution of profits to investors, so the new rules in these regulations provide that the tax treatment of the society and investor will be akin to that of bank shares. Building societies and investors want clarity, and we agree, so we have introduced these new regulations to provide that clarity.In conclusion, the new rules in these regulations provide a level playing field with similar shares issued by banks. They will support diversity in the financial service sector, as well as ensuring that our building societies continue to play an integral role within the sector and that consumer choice and competition is protected and promoted.
4.34 pm
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op): May I add my congratulations, Mrs Brooke, to those of the Minister? It is a pleasure to again serve under your chairmanship this afternoon.
I hope to be in a relatively positive mode on these regulations. We have long taken the view that it would be sensible to have some alternative equivalent capital instruments, such as those that have now been identified, working alongside the building society sector and with the Treasury and the FSA. Through that, we can improve building societies’ safety and loss-absorption capabilities without any risk of their having to demutualise, and without any threat to the very character of mutual building societies. The spotlight today is very much on core capital deferred shares, to which the Minister referred.
On the principles of the regulations, we agree with the Government that the current tax rules are not appropriate for CCDSs and that building societies’ new capital instruments will have many features in common with ordinary share capital, so it would not make sense to tax them in the same way as permanent interest-bearing shares. The regulations ensure they are taxed in a more equal way, as if they were ordinary shares issued by other companies. That removes the disadvantage building societies may have faced in trying to raise capital on the market, and that is why they support the regulations.
As I said, the Opposition support the reforms, which ensure that the regulatory treatment of building societies puts them on a more level playing field with banks. The Building Societies Association has welcomed the opportunity to take advantage of the flexibility brought about by this change. We are also keen to ensure that there is greater competition in financial services in the aftermath of the financial crisis, and we need stable building societies to be part of that process.
I have just a couple of questions for the Minister. First, how many of Britain’s 46 building societies will be affected by this measure? Secondly, I would like to ask about the assessment by Her Majesty’s Revenue and Customs, which stated that the measure is expected to increase tax receipts by £20 million a year from 2013-14. How was that figure calculated, and how will that revenue be used?
The regulations have not been considered by the Treasury Committee. Will the Minister therefore encourage it to look more widely at the question of diversity and at the future of mutuals in financial services? What more can be done to ensure equal treatment for the capital instruments of building societies and banks? In that context, why have the Government—not withstanding the Minister’s opening comments—perhaps not lived up to the coalition agreement pledge to bring forward detailed proposals to foster diversity in financial services and to promote mutuals?
While the Opposition agree with the regulations, we are somewhat disappointed that the Government still have not taken more of an opportunity to encourage the growth of the mutual financial sector and that there has not been more activity on that front.
4.37 pm
Sajid Javid: First, I welcome the hon. Lady’s support for the measures and for the Government’s general objective of trying to increase competition in the financial sector overall.
The hon. Lady asked several questions. On how many building societies we expect to take advantage of the measures, we certainly expect one—Nationwide—to do so fairly quickly. It was one of the building societies that originally approached the Government on this issue, and given that it is one of the larger societies, that is not surprising. There are no restrictions on the number of building societies that can take part; the measures will be open to all. At this time, I am aware of only one building society that has said it will take part, but I expect that number to increase over time.
The hon. Lady asked about the increase in tax receipts, which she rightly said is approximately £20 million a year. Previously, where building societies issued so-called PIBS—permanent interest-bearing shares—those had a different tax treatment, and today’s changes will lead to a tax change. On the detail of how we calculated the number that has been mentioned, I will be happy to provide the hon. Lady with further information. I would point out, however, that this was in no way intended as a tax-raising measure by the Government; it was purely a response to a sensible request from the building societies sector. One consequence of the change is a change in tax receipts.
The hon. Lady asked about the diversity of the financial sector and whether more can be done to encourage mutuals. The Government have looked at a number of measures, and we will continue to do so. In the financial sector in general, there are other entities, as well as mutuals, that play an important role. The hon. Lady will know, for example, about some of the measures we have introduced to allow credit unions to expand and, in some cases, to become more profitable and increase their membership base. We are committed to helping this sector of the financial industry to grow, and we will continue to look at other measures that could be helpful.