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Needless to say, the cleverest argument against this amendment was put forward by the Minister. What else would one expect? I refer to the argument about whether the sanction will be too effective or ineffective. In her academic capacity, the Minister will be familiar with the procedure of ducking witches. They used to throw the witch into the water. The innocent witch was received by the holy element, and thus sank. The guilty witch was not received by the water, and thus floated. That is what we believe will happen here. The procedure will be draconian in its effectiveness against the honest and will be totally ineffective against the dishonest. We think that that is the wrong way round. The honest, who will not be prepared to drive uninsured, will suffer severely, while the dishonest, who will drive uninsured, will cause a good deal of damage.
After the exchanges that have already taken place, I was a little surprised to note that the Minister saw fit once again to repeat the argument: "All he has to do is to comply". I do not wish to visit painful territory, but perhaps the Minister will agree that that threat--for that is what it is--can be repeated in support of any requirement, however justified or unjustified. The Minister said that: "This is what will happen if he does not support his child as he should". We agree that he should, but that he should do so as required by this Bill. That is quite another proposition.
The noble Lord, Lord Mackenzie of Framwellgate, said that the court uses every means at its disposal. Yes, but it begs the question which is before us now: whether these means should be at the disposal of the courts? I think it is important to keep in the minds of all those who have anything whatever to do with motor vehicles that the qualification for driving a motor vehicle is that of being safe while one handles it. As soon as we produce the sanction of disqualification for any other reason whatever, we will be diluting that principle. To me, the principle is important.
I recall that, when we discussed this matter in Committee, the noble Lord, Lord Stoddart of Swindon, said that he would call a Division even if he had to do so entirely on his own. However, it appears that the noble Lord is not in a position to do that. Perhaps, as an act of generosity, I should do it for him. I shall not ask for a show of hands; I shall ask for a show of feet. I wish to test the opinion of the House.
Resolved in the negative, and amendment disagreed to accordingly.
The noble Lord said: My Lords, I start by thanking those of your Lordships who have put their names down to speak in this short debate, which has the virtue of being remarkably timely because the deadline for postal votes for the Standard Life demutualisation proposals is little more than four hours away. I should declare an interest at the outset as a Standard Life policy holder.
The purpose of my Unstarred Question is to make the case for consumer choice and competition in the provision of financial services. In preparing for tonight, I had meetings with the chief executives of Standard Life and the Nationwide Building Society. While there are obvious differences between building societies and insurance companies, they share a common philosophy. At the top of the list is their personal commitment to their members. Both chief executives made the point that they can devote their working day to thinking exclusively about their customers and the long-term prospects for their companies.
The chief executive of a financial PLC, on the other hand, has primarily to consider his shareholders and will be expected to spend a lot of time in the City talking to analysts, financial institutions and others who can influence the share price. There is nothing wrong with that, but surely it is sensible for both kinds of company to co-exist and for customers to have a choice, as indeed my noble friend Lord McIntosh of Haringey indicated in answer to a question from the noble Lord, Lord Higgins, on 19th April, when he said that,
Let us remind ourselves about some of the advantages that mutual companies enjoy. For one thing, profit is not the first item on their agenda. They do not have to maximise short-term profits for the benefit of outside shareholders because they simply do not have any. On the other hand, most of the building societies which have converted to plcs pay out more than one-third of their profits in dividends to shareholders, who are made up largely of city corporations, not individuals or former members of a society.
Instead of paying dividends, the profits made by a mutual are put back into the organisation to benefit its members through interest rates which are higher for savers and lower for borrowers and through better services, such as lower charges, free ATM machines, the sustaining of branch networks and so on. A good way to judge the value that a customer gets from a financial organisation is to look at the difference between the interest rate that he receives for his savings and the interest rate that he pays on his mortgage. The narrower the margin between the two the better the deal the customer gets. Traditional banks have margins of about 3 per cent or higher and converted institutions operate on margins above 2 per cent, but for many building societies the margins are less than 1.5 per cent.
Plcs must charge customers for the use of shareholders' capital. Demutualisation gives ownership of the capital to the present generation of customers. They take for themselves the right to charge future customers for the use of capital which has been passed to them as a benefit in trust. By contrast, the board of a mutual company has a responsibility, as the Minister said in answer to a supplementary question from me on the same day in April,
Given management of equal quality, mutuals should have an advantage over plcs in terms of superior investment returns and other financial service products. Certainly, in the case of Nationwide and Standard Life that is undoubtedly the case. Nationwide claims--I have no reason to disbelieve it--that over the past three years a customer with a £50,000 mortgage and £5,000 in an instant access branch-based savings account would be better off with it than any of the five leading former building societies which converted to plcs by amounts ranging from £739, compared with the Halifax, to £1,081, compared with Northern Rock.
There are similarly interesting comparisons in the returns on life and pension policies. The magazine Money Management has calculated that payouts by mutuals have been around 4 per cent higher on average for policies maturing over the past 15 years. Compared with the average plc, Standard Life's payout record is 9 per cent better. The record is also better when it comes to endowments and pension payouts.
In every debate about demutualisation much is made in the media about the size of possible windfalls for policy holders. That is particularly so in the current battle for Standard Life. Mr Fred Woollard, who has emerged from his home in Monaco as the leader of the pro-plc campaign, claims that flotation of Standard Life would value it at between £12 and £15 billion. He says that that would produce average payouts of
That is very nice for Mr Woollard, but it is important to recognise the difference between an average and a typical windfall. It is like a lottery prize fund of, say, £5 million in which one winner gets £4 million and 100,000 get just £10. Therefore, the average prize is just under £50 but £10 is the typical prize.
An interesting comment on Mr Woollard is made by a Standard Life employee, Mr Garry Morrison, in the company's document on demutualisation. Mr Morrison points out that he has worked for Standard Life for more than 20 years,
The talk of "windfalls" is rather confusing. In this context a windfall is simply the conversion of a long-term benefit into a short-term one. What do windfalls do? They drop to the ground, bruised and often unripe. One may get the fruit earlier but it would be much better, and more tasty, if it was left on the tree to mature properly.
The Treasury Select Committee in another place carried out an examination of demutualisation in the previous Session. Its report largely supported mutuals and employed a number of the arguments that I have adduced tonight. The committee wanted to make it harder for carpet-baggers and to increase safeguards, particularly so far as concerns the 1986 Act. One of its recommendations--that, for future members, windfalls would be assigned to charity--has been followed by a number of societies. That has largely discouraged the carpet-baggers, who are interested only in short-term gains.
While I understand that the Government are unwilling to find time for primary legislation to implement those of the Select Committee's recommendations with which they agree, I hope that they will bear in mind the need to reduce the uncertainty and disruption caused by potential carpet-baggers.
Finally, can the Minister inform the House whether the Treasury is yet in a position to respond to the letter which Mr Davis of the Nationwide sent to the Economic Secretary on 26th May about the relative unfairness of the new all- employee share scheme? This centres on the point that mutuals are not able to take advantage of the share-based tax incentive schemes for their staff which featured so much in the Chancellor's Budget. It puts them at a disadvantage compared with their competitors. Clearly, it is unfair and anti-competitive because plcs enjoy tax breaks which are not available to mutuals. A positive response to these points would be seen as an indication of a real commitment by the Government to ensure fair competition between mutuals and plcs. That is what I hope to hear reiterated by my noble friend when he replies to the debate.
Lord Shutt of Greetland: My Lords, I am grateful to the noble Lord, Lord Faulkner of Worcester, for introducing this debate. I wonder whether it is 15 years too late. Several horses have bolted and few are left in the stable. The Trustee Savings Bank Act 1985 was perhaps the start when that cousin of the building societies was allowed to float. The Building Societies Act 1986 has seen the shedding of the mutuality of Abbey National, the Cheltenham & Gloucester, Halifax/Leeds Permanent, Woolwich, Alliance & Leicester, National & Provincial, Bristol & West, Northern Rock and Birmingham Midshires building societies. Fifteen of the top building societies in 1984, amounting to 70 per cent by asset value, have now demutualised. If Bradford & Bingley, which is in the wings, also does so, that figure will increase to 73 per cent.
We have seen the same process in insurance with Norwich Union, Scottish Amicable, Clerical Medical & General, and Scottish Widows, with Friends Provident in the wings. We have seen it happen to the AA and the RAC. We have witnessed the decimation of the mutual family.
This matter has been of some concern to me. Four years ago I arranged for Demos to publish a little booklet entitled Building Society Bounty: The Case for Member Philanthropy which hit on the notion of inter-generational equity.
The situation as regards mutuals has been rather like the parlour game of pass-the-parcel. When the music stops and the windfall drops, it is those of this generation who benefit. There is a moral case for charitable foundations to be created to honour those mutual years and to look carefully at those communities where the mutuals have been based. There is a further opportunity later: there are often substantial unclaimed or orphan shares.
What do many mutuals have in common? One of the major features of mutuals is their non-London base. Standard Life is based in Edinburgh. Unusually in this case, the directors want to retain mutuality; and I wish them well. Most directors' leadership has been to move
It was announced on Tuesday of this week that 250 to 300 high quality jobs will be lost with the Halifax. I regret that I have to declare an interest: my daughter is affected. That announcement came after I had put down my name to speak in this debate. It is interesting to note that although it was the main story in the Halifax Evening Courier, there was not a mention of it in the London Financial Times.
Why has there been this rush to demutualise? One of the problems has been that the relationship towards members has not been understood properly. Perhaps they have been considered as just customers. What does membership mean? The remaining mutuals may have a chance, but they need to cherish their members and to give meaning and purpose to membership. Within the past few days we hear that water companies are thinking of becoming mutuals. Does that indicate that mutuals are all right if there is no money in them? We have also seen the new mutuals, the credit unions.
I look forward to the Minister's response. I recognise the general case for the mutual: that there are no dividends to be paid out; the mutuals are not worrying every day about the share price. However, where mutuality is to cease--there may be good reason in some circumstances--will the Government encourage the creation of a charitable foundation at the time of demutualisation? Will they seriously consider "gifting" orphan shares? Will the noble Lord indicate the Government's view on regional identity in financial services provision and the role of mutuals in sustaining a regional financial presence? In particular, do the Government wish to encourage the cherishing of the members?
Lord Haskel: My Lords, I congratulate my noble friend Lord Faulkner on his timing. It really is split second stuff! I support what he says. Mutual companies used to dominate the building society and insurance businesses. The purpose of mutuality was to enable low earners to own their homes and to enjoy the security of insurance. Mutual companies were more concerned with the less affluent and, indeed, the rich were charged more.
The purpose was not profit, as my noble friend pointed out. Mutuals had a social purpose. Indeed, a well-run mutual offered a better deal than a well-run shareholder company because the mutual did not pay dividends. However, along came an era of short-term market economics and there was significant change. Conversions took place and reserves built up over many years which really belonged to the past members who were no longer around to claim them. They were shared out among the current members. Plcs gave a better deal to the bigger customers and their justification of the "trickle down" effect has not taken place.
Why is demutualisation a matter for the Government? Is it not simply a matter of market forces in the private sector? I do not think so. There are occasions when the task of government is to promote the general good over the private interests of individuals or groups. In recent years, leaving decisions to the market has been a manifestation of that. However, there are occasions when market failures need to be put right. The markets in water and electricity are recent examples where the Government have had to become involved.
The gradual disappearance of mutuals is, I believe, another case of market failure. The market has failed, not because the mutuals are poorly managed or their time has run out, but because their rules are outdated and a small group with short-term interests--the carpet-baggers to whom my noble friend referred--can take advantage of that. If our mutuals disappear, our choice will be eliminated.
The argument for maintaining mutuals is one of choice and competition. After all, if members of mutuals have free use of the company's capital, this must give them some competitive advantage, and that should be available to their customers.
There are also social reasons for correcting this market failure. If the market economy becomes a market society, I believe that our society will change for the worse. We shall all be the losers. Almost every day now the Government have to decide where the market economy ends and where society begins. Mutuality is another such decision. And the decision should not wait long because as the assets of the mutuals increase, so the incentive for demutualisation becomes greater.
I welcome the battle waged by Standard Life and the Nationwide Building Society. I congratulate the managers on their principles. If nothing else, this is proven by the fact that in previous flotations of mutual companies the biggest beneficiaries have sometimes been the managers by virtue of the large salary increases and share option schemes which accompany the changing status.
More seriously, I welcome the sense of responsibility mutuals show in trying to look after the interests of future members. If future members do not have to pay the cost of capital, they must be better off. Some say that shareholder ownership is a spur to better management. This means the threat of hostile takeover. But these takeovers also have disadvantages. Few have created the so-called shareholder value which was promised. Many have done more harm than good. They destroy valuable relationships and the implicit contracts built up over many years. Just because this kind of damage is unrecorded by conventional accounting and so does not show up in the financial cost of takeovers does not mean that it has not happened. The competitive cost is there. I believe that that is an argument that mutuals must consider.
Like the noble Lord, I must declare an interest as a Standard Life policy holder. I must also say that I am totally confused and have made a conscious decision not to vote either way in the current vote, not only because of this debate but also because I do not know which way to vote. I am in favour of mutuals. However, I do not understand the case for insurance companies as well as I do for building societies.
I was a board member of the Woolwich for some years. In those days, we took conscious decisions again and again to remain mutual. Times have moved on, and I now find myself a Woolwich shareholder. I am sorry to say that the value of the shares has gone down since they were handed out to me, which is rather disappointing. Based on my experience, I do know a little about building societies.
A point that I have made many times to Dr Davis of the Nationwide and to others who have come to speak to the Building Societies All-Party Group was raised in this debate by the noble Lords, Lord Haskel and Lord Shutt. It relates to reserves built up over many years, to quote the noble Lord, Lord Haskel. That is what is wrong with mutuality. The reserves that are held by building societies are too great. The pot of gold at the centre is what is attracting people. If the societies were giving a greater degree of benefit to their members all the time, no one would be carpet-bagging, because the pot of gold would not be there. That is the point on which the societies should take action.
I was pleased when the Nationwide Building Society recently introduced a good savings account yielding interest of 7 per cent. I have money in the Nationwide; however, I was just on the point of taking it all out. Interest rates had gone up and up, and the Nationwide's rates had hardly moved at all. It seemed to me that that was wrong.
I appreciate that no mutual can afford to offer savings at a loss, as has happened with Egg. A mutual must have adequate reserves. But there is no reason for the mutuals to build such enormous reserves that they cannot make use of them and they form nothing but an attraction, a honey-pot, a pot of gold. I give way to the noble Lord, Lord Haskel.
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