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Lord Stewartby: My Lords, before the noble Lord sits down, will he explain why the sale value issue is being dealt with separately?
Lord Davies of Oldham: My Lords, as I indicated earlier, of the two procedures operated here, this one is the approval procedure and does not include the fair value one because that is included in the other instrument that we are bringing forward under the negative procedures that we have also tabled.
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Moved, That the draft order laid before the House on 11 October be approved [33rd Report from the Joint Committee, Session 2003–04].—(Lord Davies of Oldham.)
Baroness Noakes: My Lords, I thank the Minister for introducing this complex order. The House will remember, from our debate on the equivalent Companies Act regulations in November, that I said that we on these Benches are enthusiastically in favour of International Accounting Standards because we believe that global capital markets will benefit from common accounting standards.
We had some concerns, which we outlined, on 5 November. In particular, I asked the noble Lord, Lord Triesman, whom I appear to have frightened off, what the Government intend to do about IAS 39. He replied:
"On IAS 39, the UK would have unquestionably preferred full endorsement, but it has not proved possible. The key short-term priority was to provide companies with clear guidance on the implications of the partial endorsement decision. We are working with the ASB on this guidance".—[Official Report, 5/11/04; col. 575.]
I ask the Minister what progress the Government have made on producing guidance with the Accounting Standards Board on IAS 39, which is a matter of some concern to everyone who intends to apply international accounting standards.
Of course, this particular order has a very narrow scope, applying only to the building society sector, which now has only 63 building societies in it, ranging from the very large, with over £100 billion worth of assets, down to the extremely small, with £18 million in assets.
At first sight, the optional nature of International Accounting Standards seems appropriate for this sector, given the diversity within the sector. On the other hand, it may seem strange to have such a small sector being accounted for on different bases, given that they are all subject to prudential supervision. My question to the Minister is whether the FSA is content for the adoption of international accounting standards to be left to the building societies themselves or whether it would have preferred to see common use of accounting standards.
The main point I want to raise with the Minister today concerns not the international accounting standards but the implementation of the modernisation directive. To that extent, what is happening in this order goes beyond what has already been done for companies. Paragraph 4 of the order adds a new Section 75A to the Building Societies Act 1986 to create the requirement for a business review; and the noble Lord outlined what should be in that business review. I am sure that the Minister will be aware that for companies this particular review was included in the draft order implementing and operating a financial review.
That draft order, which was issued by the DTI earlier this year, was roundly and rightly criticised by both business and the accounting profession. The Government climbed down on the matter in a Written Statement on 25 November. We have yet to see a
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revised order. Indeed, the Government have not yet had the courage to publish the results of the consultation they promised. The DTI's website makes no reference yet to the U-turn.
So, for companies there was a draft order implementing the business review but there is not one at the moment. I have a few questions for the Minister arising out of that. First, I should be grateful if the Minister could explain why the Government are pressing ahead with this requirement for building societies when it is not doing so at the moment for companies.
Secondly, will the Minister explain why the business requirements for building societies do not have any exemptions for small or medium-sized building societies? The equivalent companies order which we had in draft provided for the usual small company exemption.
Thirdly, the original draft companies order provided for auditors to report on the consistency of the business review with the accounts, but I could not find any equivalent reference to that in the building society order.
Lastly, the DTI's announcement effectively said that implementation certainly of the operating finance review, and I assume also the business review, is to be deferred for companies until 1 January 2005, which in practical terms means an extra 12-month leeway for those with a December year end. I hesitate to say that the right hand of government does not know what the left hand of government is doing because we know that the Treasury likes to believe that it is omniscient as well as omnipotent. But if the Treasury do know what is going on in the DTI, perhaps the Minister could explain why the Treasury has a different policy agenda for building societies to that for companies, because the main justification for these orders was to stay in step with companies.
Lord Newby: My Lords, this order seems to be a sensible, useful and technical piece of work to which we could not conceivably want to object. Indeed, it helps consolidate the workings of the single market, which I think we all endorse, despite our other differences about matters European. We therefore support it.
Lord Davies of Oldham: My Lords, I am grateful to noble Lords who have contributed to this short debate, although I am more grateful to those who have been exceedingly brief than those who have been brief but pertinent with their questions. I shall do my best to answer the issues which the noble Baroness addressed, particularly in comparing the provisions for building societies with the state of play with regard to companies.
The noble Baroness asked about progress with regard to the issuing of guidance. The Financial Accounting Standards Board has issued guidance on International Accounting Standard 39. It did so on 15 December and the guidance is on the FASB website. She asked whether progress had been made on that and I can be reasonably definitive in my reply.
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I understand what the noble Baroness says about the business review. She will recognise that further consultations were developed with regard to those other companies. It is not a question of the Government's right hand not knowing what the left hand is doing; it is a reflection of the fact that the position for companies is a little different from that of building societies.
The noble Baroness asked in particular about aspects of the fair value directive. We implemented it last week in the separate statutory instrument to which I referred in my response to the intervention by the noble Lord. We have just adopted with building societies the broad, flexible approach that we have adopted with companies. Building societies will be able to use fair value accounting, if they wish to do so. In the consultation on the issues, we received strong support for our approach to the fair value directive. In that area, I can give assurances that progress is being made and that it is broadly acceptable to the interests outside.
With regard to exemptions for small companies, I must point out that there is no formal method of distinguishing between small and large building societies in the same way as one can distinguish between companies. They prepare accounts on the same basis, while companies vary. The review must be only as extensive as is appropriate to the size of the society. It is not a case of one-size-fits-all. We cannot specify different requirements because we cannot separate building societies in the same way as we can with companies. That is why the issue of exemptions does not really apply.
We intend to publish our revised OFR regulations in the near future. We are making rapid progress on effective communication as a result of this order, which is itself the product of considerable consultation. As the noble Lord, Lord Newby, was generous enough to indicate, it is a step towards the implementation of a single market that is broadly accepted throughout British society and British business as being of great benefit.
I realise that this issue will be of limited interest to the wider public, but it is important for the wider financial services sector to be able to operate on the same level playing field as companies. That is the point that I have sought to stress as the basis of the order. The order provides for societies to employ high-quality modern accounting practices. That will result in greater transparency in accounts and will enable greater access to global markets and global investments. Building societies have an important role to play in the financial services market, and the order recognises that role by increasing opportunities for them and ensuring that, against the background of the developing European perspective, they are four-square with the developments that we have already set in train for companies.
If there are points of detail that I have not covered sufficiently for the noble Baroness, Lady Noakes, who asked some pertinent and precise questions, I will, of course, write to her.
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