§ 12.3 p.m.
§ Lord Brabazon of Tara
My Lords, I beg to move that the Bill be now read a second time.
The Bill before your Lordships is a major and fundamental piece of legislation for building societies. It completely replaces the existing Building Societies Acts, which, although largely consolidated into an Act of 1962, are still based in large measure on legislation which goes back to 1874. It is a very substantial Bill, running to 123 clauses and 21 schedules spread over 270 pages. That is because it deals with all aspects of the societies—their constitution, their powers and their supervision.
The present legislation has stood the test of time well. From their small beginnings, the societies have developed into major institutions whose activities affect many people. They have played a vital role in bringing home ownership within the reach of many of our citizens, and providing safe havens for their savings. The building society formula has been a successful one, and this Bill seeks to build on it.
The theme of the Bill is evolution with continuity. The environment within which the societies operate is changing fast. I need hardly remind your Lordships of the changes afoot in the financial markets, which are reflected in the Financial Services Bill shortly to come before this House, and in the proposals for fresh banking legislation in the White Paper published last December. The house buying markets are changing as new instutitions move into the estate agency field, simplified property services are set up, and conveyancing has become more competitive. New lenders and new methods and techniques are entering the mortgage market. And fresh initiatives have been developed in the housing fields in which the societies will wish to play their full part.
The Bill therefore modernises the legislation. It brings up to date the powers of the societies so that they can continue to compete effectively in the housing and financial services markets. It brings up to date the constitution of societies, making the law more appropriate for the major institutions the societies have now become. And it brings up to date the protection afforded to customers of societies, both by improving and modernising the system of prudential supervision, and by introducing the new statutory provisions for an ombudsman and an investor protection scheme.
The Bill is also a forward-looking one. It deliberately sets out not to ossify the legislation in its present form, but recognises that the societies and their markets may evolve further. So the Government have been careful to build flexibility into the definition of building society powers and the limits placed upon them; a flexibility, though, which leaves Parliament to decide the pace of change.
The Bill falls into eleven parts. Part I deals with the constitution of the new Building Societies Commission which is set up by this Bill to supervise 1181 societies. These functions are presently vested in the Chief Registrar of Friendly Societies, who will retain responsibility for registration functions and for the other societies, notably friendly societies and industrial and provident societies, for which he is at present responsible. The commission will build on the existing expertise of the registry, and there will be common staffing of the commission and the registry.
The commission will have responsibility for prudential supervision, including the authorisation of societies to raise funds from the public, for confirmation of mergers or conversions to company status, and for policing the compliance of societies with the provisions of the legislation. Its costs will be recovered through fees levied upon the societies. The commission will be required to lay an annual report before Parliament.
The intention is that the commission will have seven members initially, three full-time and four part-time. The present chief registrar will be chairman and first commissioner. The existing assistant registrar dealing with building societies' supervision will be one of the other full-time members. The appointment of three part-time commissioners has been announced: Mr. Sidney Procter, former chief executive of the Royal Bank of Scotland Group, Mr. Geoffrey Sammons, former senior partner of the law firm Allen and Overy, and Mr. Herbert Walden, past chairman of the Building Societies Association. I am sure your Lordships will welcome the agreement of three such distinguished men to serve. The names of the remaining full-time and part-time commissioners will be announced in due course.
Part II of the Bill provides for the basic establishment and constitution of societies. Under Clause 5, a society's purpose or principal purpose is to be the raising of funds from members for lending on security of mortgage. The existing Act provides only for a sole purpose, so that all other activities must be necessary or incidental to it. By introducing the concept of the "principal purpose", the Bill opens the door to a much wider range of permissible activities. Much of the detailed constitutional provisions are contained in Schedule 2, which makes some important changes to the existing law.
New provisions are introduced for streamlining the management of the affairs of societies, while improving their accountability to their members. For example, members are given new rights to circulate resolutions and supporting statements to annual general meetings, but subject to safeguards to protect societies from unnecessary circulation of frivolous material. And, for the first time, borrowers are given statutory rights to a say in certain circumstances.
This Part also deals with the raising of funds, including authorisation by the commission, about which I shall have more to say in a minute or two. It provides that the majority of funds must continue to be raised in the form of shares, thus safeguarding an important aspect of the mutual status of the societies. It also places a limit, initially 20 per cent., on the proportion of funds that may be raised from wholesale rather than retail sources.
Part III deals with the assets of societies. Principal among these are what the Bill terms commercial assets: their mortgage lending and the assets acquired 1182 under the new powers in the Bill. At least 90 per cent. of these must be class 1 assets, which may broadly be thought of as traditional home loans. These are loans secured on first mortgage of residential property which the borrower is, or will be, occupying as his main residence. This 90 per cent. minimum is one of the key provisions in the whole Bill. It will ensure that building societies continue very largely to concentrate on their traditional business, with residential mortgages providing a basis for a safe investment for savers. The remaining commercial assets may be either class 2 or 3. Class 2 assets will be other types of mortgage loan; for example, second mortgages or loans to bodies corporate, such as housing associations.
Other commercial assets will be in class 3. These are generally higher risk assets, and so will be limited to 5 per cent. of the total. They will include loans not secured on first or second mortgage, which will be subject to a maximum of £5,000, or £10,000 in the case of loans secured on mobile homes. Residential land may also be held in class 3, thus enabling building societies to own and manage rented property and participate in shared ownership schemes. Most of the powers to hold class 3 assets will be available only to the larger societies whose total commercial assets exceed £100 million. It is only the larger societies which can be expected to have the financial resources and management depth to go into this riskier business prudently. There will, nevertheless, be a wide range of new powers open to the smaller societies which the Government believe will give them every opportunity to continue to compete effectively with their larger brethren.
This Part also makes provision for building societies to hold a proportion of their assets in liquid form. It is, of course, essential for a deposit-taking institution to hold adequate liquidity, to meet short-term fluctuations in cash-flow and to reassure investors that they will be able to withdraw their funds when they need them. The clause also, however, places a maximum on the proportion of liquid assets, so as to prevent any society from turning itself into something akin to a money fund rather than a mortgage lending institution. The societies are also enabled to enter into financial contracts for the purpose of reducing the risk of loss from interest rate or other changes.
Part IV of the Bill sets up the statutory Investor Protection Scheme. This is closely modelled on the corresponding provisions in the Banking Act 1979, with two important exceptions. First, the level of protection provided is 90 per cent. on the first £10,000 rather than the 75 per cent. in the Banking Act. As my honourable friend the Economic Secretary to the Treasury said in another place, such higher protection, reflecting that in the existing voluntary scheme run by the Building Societies Association, is reasonable so long as societies continue to be markedly different institutions from banks, but this may need to be reconsidered if and when the limits of 5 per cent. on class 3 assets and 10 per cent. on class 2 assets are increased.
The second main difference from the Banking Act scheme is that no provision is made for a permanent fund to be set up. This reflects the experience over many years that building society insolvencies occur only very rarely indeed, whereas there have been a 1183 number of insolvencies of small licensed deposit-takers which have led to calls upon the Banking Act scheme since it was set up.
Part V deals with the powers of societies to offer services which are not necessarily directly incidental to their primary business of raising money to lend on mortgage. These critical powers are set out in full in Schedule 8. They will allow building societies to offer a much wider range of financial and housing services than they do now. The societies will be able to offer full money transmission services, with the rights and responsibilities of bankers. They will be able to invest in estate agency businesses. They will be able to offer full insurance broking services, rather than the limited service in respect of insurance related to loans that they offer now. They will be able to set up personal pension subsidiaries, and act as outlets for investment business, which will allow them to play their part in fostering wider share ownership just as they have fostered wider home ownership.
But with these wider powers will go increased responsibilities. Clause 35 accordingly incorporates two modest consumer protection measures: that building societies should not abuse their strength in the mortgage market by making offers of loans conditional on the use of other services; and that services should be priced separately when more than one is offered. The Government recognise, however, the undesirability in principle of legislating for one set of institutions alone, and will therefore be prepared not to bring this clause into operation if the building societies introduce and operate an effective code of conduct covering these matters.
Part VI deals with the powers of control of the commission. These cover a number of areas. First, there is the task of ensuring that building societies stay within the confines of the Act. This involves policing the various percentage limits on building society business set out earlier in the Bill, and preventing societies from stepping outside their statutory powers. To this latter end, the commission is given the role of determining whether particular proposals or activities are within building society powers, after hearing the society's views. The Government hope this will provide a quick and sensible alternative to arguing such matters out in court, although, of course, the courts will be available if the simplified procedure does not resolve a question satisfactorily.
Clauses 41 to 45 set out the commission's powers of prudential supervision. This is the function it will carry out to promote the protection of the interests of investors and depositors, and the prudent custody of their funds. The commission may direct a society to apply for fresh authorisation during the first five years of the Act. This is essentially a transitional provision, since all societies currently authorised to raise money from the public will be given automatic authorisation under the new Act. The commission may also, after taking account of representations by the society, impose conditions on its continued authorisation and, in the last resort, may revoke authorisation. Clause 45 sets out the important list of criteria of prudent management, which societies should seek to meet and which the commission may take into account in considering whether prudential action is necessary in 1184 particular cases. A right of appeal to an independent tribunal exists against the use by the commission of these powers.
The commission is also given powers to control advertising in the interests of potential investors with the society and to obtain from societies the information it needs to do its job. Such information must of course be treated as confidential, except in closely defined circumstances. These are set out in Clause 53, but the policy on this has been worked up further in consultation with those concerned with banking supervision and the Financial Services Bill, and the Government will be tabling detailed amendments to this clause for Committee stage.
Part VII contains provisions relating to directors. Many of these are based on the corresponding provisions in the Companies Act. But there are important new provisions in Clauses 60 and 61 governing the election of directors; and Clause 69 requires disclosure of the benefit derived from business with the society by firms in which their directors have an interest.
Part VIII deals with accounting aspects. These have been the subject of detailed consultation with the building societies and the accountancy profession. They include strengthened requirements for accounting records and systems of control of the business, as well as provision for the preparation, audit and publication of annual accounts. One important amendment which the Government will be tabling will be to Clause 82 on the dealings between auditors and the commission.
In accordance with the announcement made by my right honourable friend the Secretary of State for Trade and Industry on 9th June, we shall introduce a reserve power to require auditors to pass information on the commission in certain circumstances in line with the amendments proposed to the Financial Services Bill. This power would be activated only if a satisfactory relationship between auditors and the supervisors does not evolve on the basis of the guidelines now being worked up by the accountancy profession.
Part IX provides for building societies to belong to an ombudsman scheme in respect of the accounts of savers and of its lending. This major reform was introduced during the passage of the Bill through another place, and is the first ombudsman scheme to be provided for statutorily outside the public sector. While the provisions may appear unduly long and complex, I can assure your Lordships that they are necessary to secure a satisfactory scheme.
Part X deals with dissolution, winding up, mergers and conversions to company status. The provisions on dissolution and winding up are based on those in the existing legislation and in company law. Those on mergers develop the provisions in the 1962 Act, and introduce some important new features. First, borrowers must now approve mergers. Secondly, a merger between one society and another more than eight times its size must be approved by at least 20 per cent. of members of the small society eligible to vote on the proposal. This is intended to provide an encouragement to small societies to merge with those of comparable size to form stronger local groupings, 1185 rather than to transfer their engagements to large national societies. Thirdly, provisions are introduced which will enable the informal constraints currently placed by the registry on compensation to directors and bonuses to members on mergers to be put on a proper statutory footing. Finally, societies are to be required to report to their members any merger proposals received from other societies which the board would otherwise seek to block.
The provisions governing conversion to company status have of course excited considerable interest. They are based on proposals contained in a consultative document published by the Treasury last December at the same time as the Bill. There will be an opportunity in due course to consider these provisions in more detail, and I would only make some general remarks at this stage. The Government believe that the conversion option should be there for societies to provide maximum flexibility to meet future changes in the financial services markets. This principle is supported by many societies and by the Building Societies Association. But conversion should be undertaken only with the support of a substantial proportion of the membership. So we are proposing that it should not only be supported by investors on a special resolution and by borrowers on the borrowing members' resolution, but that the special resolution should attract a poll of at least 20 per cent. of those eligible to vote. Where the proposed transfer of business is into an existing company rather than a specially created one, the threshold will be even higher—at leat 50 per cent. of those eligible to vote on the special resolution must assent. Many noble Lords with experience of the building society movement will confirm that these are considerable thresholds of membership support. Other safeguards are included to ensure that conversions do not take place for reasons other than the best interests of the society.
Part XI contains the mixture of miscellaneous and supplementary provisions that it is usual to find at the end of a substantial Bill such as this one. It includes a power to modify certain constitutional provisions of the Bill by secondary legislation if the corresponding areas of company law are changed in future. And the transitional provisions make it clear that societies may carry out preparatory work for the new powers now even though they will not be able to offer the services to the public until the powers are actually available to them.
Clause 121 and Schedule 21 deal with conveyancing by institutions such as building societies, banks and estate agents. They go wider than the rest of the Bill, but this Bill is obviously an appropriate vehicle for them in view of the close links between building society matters and the house buying market. They implement the Government's undertaking to open up the provision of conveyancing services to institutions other than firms of solicitors and licensed conveyancers, subject to rules to be made by my noble and learned friend the Lord Chancellor. I know that these proposals have been criticised in some quarters as being too restrictive in preventing lending institutions from offering conveyancing services to their borrowers. But the Government believe that those critics have failed to appreciate the magnitude of the 1186 potential conflicts of interest involved, which have not so far proved susceptible to being eased by codes of practice or other ideas.
As will have been appreciated from this fairly quick summary of the Bill's provisions, it is a major and complicated piece of legislation. But, for all that, I hope it may prove not to be an unduly controversial one. The Government have been careful at all stages to consult as widely as possible with interested parties over a long period, and I am happy to report that the Building Societies Association has expressed itself generally content with its provisions. It has, moreover, left another place with the broad support of the opposition parties, and I very much look forward to an interesting and informed debate here today in your Lordships' House. I believe that it is a good Bill and I commend it to your Lordships. I beg to move.
§ Moved, That the Bill be now read a second time.—(Lord Brabazon of Tara.)
§ 12.25 p.m.
§ Lord Barnett
My Lords, I suppose I should start as many do on this sort of Bill by declaring an interest not as a director but as a lender or investor and borrower—not necessarily both at the same time. Your Lordships will have appreciated that the noble Lord the Minister was obviously obliged to go through the 11 Parts of this rather lengthy 273-page Bill. Your Lordships will be pleased to know that I do not feel I have that same obligation. I have noted the reference to the new clause in relation to auditors that the Government have in mind to introduce. I would declare an interest in the sense that it is the same profession to which I have given some service over the years, although I do so no longer in that way. Your Lordships will, I am sure, be very interested in the problem that will arise out of the wording, whatever that may be, of the new clause when we see it in due course.
The Bill provides an opportunity for me to offer sincere congratulations to the building society movement, which has filled a great social and housing need. It has grown enormously since the building society movement began at the start of the nineteenth century. As the need has grown the building societies have grown to meet it. They have met demand in many different ways as and when that was required. They are now helping with many major social problems—for example, in the field of urban renewal, index linked finance, private finance for housing, private rented housing, shared ownership, the rescue of derelict housing stock and the building of cost housing, and also with home improvements, Indeed, with support for first-time buyers generally, sponsored housing, young persons schemes, housing for the elderly and in many other areas the building society movement has been doing a first-class social job. It really can claim, in my view, a first class achievement and a genuine success story which in many ways is peculiarly British. It is the envy of the world, and rightly so.
It is done in a way that sophisticated financial quarters may well question, and indeed have questioned, as being wrong, if not impossible; namely, to borrow short and lend long. Admittedly it has been 1187 helped by a tax system which has not necessarily helped everyone, for the building societies are able to provide lower mortgages than would otherwise be the case because they have a lower composite tax rate than the average basic tax rate. They do so because they are being financed by people who should not be investing in building societies in order to help those to obtain mortgages from building societies. It has gone on a very long time and many like myself have been somewhat concerned about it.
But I suppose it would be a little much to expect the building societies to advertise that pensioners who are not liable to tax should not invest with them. It was left to professional advisers to do that from time to time and I am sure the building societies will understand that that was necessary. But I was happy to note that from 6th April this year there has been a change at least for ex-patriate savers whereby interest can be paid gross to non-residents. It is a pity, as I have indicated, that it is not available more widely. Perhaps the Chancellor of the Exchequer might consider that.
Nevetheless, it is right to pay a tribute to the way the building societies have met the enormously increased demand for mortgages for United Kingdom house purchase. We have seen a huge growth in that area in the past 10 years from 1975, when it was £2,768 million, to 1985, when it was £14,318 million.
However, one recognises that the building societies do more than just provide mortgage funds. They have, as I have indicated, provided an important social function. My attitude to the Bill will be to ensure that nothing is done to put at risk the vital role that they perform in that direction. With the few reservations that I have, I nevertheless welcome the Bill because the building societies are working in a very different environment today from that which existed 200 years ago. Indeed, the environment, as the Minister made clear, has been changing rapidly, particularly in recent years. How the societies will cope with the Big Bang in October I doubt if they know, any more than anyone else in the City. Clearly, the whole of that changing environment requires the alterations that are to be found in the Bill, in order to bring building societies more up to date than they are under the present legislation.
The Bill removes restrictions that no longer make sense, and I accept that. The building societies need to be allowed greater scope to meet the demands and challenges of the fast-moving financial world. I am pleased to note the remarks of the Minister in another place, when introducing the Bill, when he stated that his primary theme is continually based on a successful formula. It is my concern precisely that that successful formula should not be endangered in any way.
That point brings me to my first reservation, indeed anxiety. It is a concern that has been expressed in another place by members on all sides and of all political parties. I refer to the danger to small building societies, and indeed to larger ones, through possible mergers, takeovers, and the opportunity to change from mutuality to plc status.
Let me say at once that I appreciate that the Government have sought to build safeguards that need to be examined in some detail at a later stage of the 1188 Bill. However, the question arises as to whether the existing safeguards are adequate and also whether we really need the conversion from mutuality, which has served the building society movement and the community well for a very long time. I know that is something that your Lordships will want to examine at greater length when we reach the Committee stage.
As to mergers and takeovers, it is not that I am personally worried about the large, efficient building societies not providing an excellent service. On the whole, they do—although one has to recognise that all very large organisations, whether public or private, have a built-in bureaucratic propensity to the worst kind of inefficiencies. My concern and, I know, that of many others is that small is also beautiful—a slogan that, it will be obvious to your Lordships, I have naturally supported all my life. There are many small building societies doing a first-class job. They are specially geared to local needs, and in the dash for modern methods, I hope your Lordships agree that we should not want to throw out the baby with the bathwater. We must see to it that the safeguards are adequate in that particular area.
Probably the biggest worry in that respect, as I have indicated, is the conversion from mutuality to plc status and the greater opportunity that will provide for the takeover by major financial institutions, either at home or from abroad, of what would be to them a very attractive financial proposition. I recognise that can happen with or without conversion to plc status, and I have no wish to attack—at least, not today—large multinational companies. In their own fields, frequently, they do an excellent job. But the building society movement, as I have indicated, works in its own very special field and serves the wider community in a way that is foreign to major multinational companies, whether British or foreign.
I quoted the Minister when he was introducing this Bill in another place as saying that his primary theme in this Bill is continuity based on a successful formula. The danger that that could be lost in the rush towards the 21st century should at least be noticed and should be watched very carefully by your Lordships when we reach later stages of the Bill.
I recognise that the Government have tried very fairly to look at the problem and introduce special safeguards, so that the conversion to plc status needs 20 per cent. of subscribers to vote and 75 per cent. of them to agree—plus, unusually, 50 per cent. of borrowers. So it will not be easy to achieve those percentages, but by order those percentages can be changed to much lower levels. Anyone who has experience of orders and of the inability to amend them in any way, and of the speed with which they pass through both Houses, will know that the adequacy of that safeguard needs to be examined very carefully.
On the takeover percentages, as the Government have built them in, it will be even more difficult, 50 per cent. of members will have to vote in favour. It sounds as though the Government are seeking to make takeovers and conversions almost impossible—although we must recognise that it will be possible for the takeover experts to make very tempting proposals to building society members.
1189 In Committee in another place, I noted that one Conservative Member asked, if the Government feel that such fundamental changes are nevertheless desirable, then should not the Minister make it easier rather than harder to make the conversion? If, on the other hand, the Minister was arguing that he was making the change very difficult, then why bother at all? It is a kind of, "Have you stopped beating your wife?" question. Nevertheless, it is a serious question, because if the Government, and your Lordships, do not want that kind of conversion, then one is bound to ask why it is to be allowed in the Bill at all, especially as it would have, it seems to me, a profound effect on the very successful formula to which the Minister referred at the start of his speech in another place, and which I have mentioned.
Some other areas have worried a number of my honourable friends in another place, and others elsewhere. For example, there are the dangers of allowing a small percentage of funds for non-housing. I am bound to say that I personally am not worried about that area because if the housing demand is there, I am confident that the building societies will meet it as they have done so far. And if the building societies do lend, for example, on unsecured loans, then again I am far from concerned. Indeed, I would welcome the competition, because there are some pretty exorbitant rates now being charged on unsecured loans, and if the building societies become involved in that area and provide better competition, I personally would welcome it.
The Minister referred to one major omission from the Bill that has created some controversy in another place, especially in respect of my honourable friend Mr. Austin Mitchell. From the noble Lord's current expression, I see that he must be delighted that my honourable friend is not a Member of this place. I refer to his, campaign that building societies should be permitted to undertake conveyancing, not just as the Minister said but in respect also of their own customers.
My honourable friend made a serious charge of bad faith against the Government in general and in particular against the Solicitor-General and the Prime Minister. It was a charge that they had betrayed a clear promise that they had made. I shall not trouble your Lordships with reading it out, but there was a very clear and specific promise made to my honourable friend in another place that if he dropped his Bill, the Government would introduce specific measures to permit that which he was seeking to be implemented in the Building Societies Bill. But as the Minister has said, the Bill, while it allows conveyancing, does so only in respect of customers other than those of the building society itself; in other words, not the building society's own customers. That is not what Ministers had promised my honourable friend.
The Minster said, as was stated elsewhere, that the Government's case is essentially the case of conflict of interest, and in particular, it has been said elsewhere, a conflict of interest over the terms of the mortgage. When I looked at this I began to have at least some sympathy at first with that argument. But the problem arises, with the greatest possible respect to the noble Lord the Minister, more in theory than in practice. The issue will need great consideration in Committee, 1190 so I will not bore the House with it at too great a length today. But it is important to put on record that most conveyancing—apart from the fact that it is not done by a qualified solicitor but rather by a junior clerk—would not involve the kind of conflict of interests that the Government have implied in that argument.
The real problem in practice is not whether the solicitor for the purchaser is independent or employed by a building society. The real questions for a purchaser are financial ones, and neither solicitor, in my view, is best qualified to advise. Indeed, nor do they. They quite rightly do not bother to advise. Many independent solicitors quite openly and ethically have connections with a building society. In practice, therefore, there is little or nothing between the advice, or lack of advice, of an independent solicitor and a solicitor engaged by a building society. Therefore, I feel that the conflict of interests argument is a bogus one.
I believe that competition could be good news for prospective purchasers, and it might well open up a true open market in which real financial advice would be available to a prospective purchaser, not just about the terms of the mortgage but whether, for example, the purchaser should use a particular building society, whether they should use a building society at all, whether they should use a bank, or whether they should have an insurance-linked borrowing. All that kind of information is not best given by a solicitor, whether he is an independent solicitor, so-called, attached through some connection to a building society, or one directly employed by a building society. In both cases they are unlikely to say to a prospective purchaser, "I do not think you should be going to this building society at all; I think you should go elsewhere. Do not bother with me. I can afford to lose the business, and so can the building society". That is a somewhat unlikely scenario, and in practice it does not happen, as most of your Lordships will know.
Therefore, this whole question of whether the Bill includes what the Government promised my honourable friend Austin Mitchell is something that I hope your Lordships will recognise is worthy of serious consideration.
There are a number of other worries concerned with the need to ensure adequate protection for consumers, investors, house purchasers and employees of the building societies. But many noble Lords will wish to speak today so, for now, I repeat my general welcome for the Bill, and for my part I shall certainly not seek to delay its passage. I seek only to ensure that the excellent service carried out by the building societies should be allowed to expand in the best interests of the community they have served so well for nearly 200 years.
§ 12.43 p.m.
§ Viscount Chandos
My Lords, on behalf of the Alliance Benches I should like to thank the noble Lord the Minister for his clear introduction to the Building Societies Bill. I seem at the moment to be unable to speak in your Lordships' House without having to preface my remarks with a declaration of interest, but on this occasion I should declare that I am a director 1191 of a bank which is both involved in the home loan market itself as well as having a wide range of business relationships with building societies. In the same vein, I hope your Lordships will forgive me if, on this occasion, I am unable to attend as much of the day's debate as I should have liked—one example perhaps of the problems inherent in practitioner-based regulations or legislation.
As the noble Lord, Lord Barnett, has already said, the building societies have been the principal source of finance for home buyers throughout the post-war period and, indeed, for most of this century. They have provided in that time a good and valuable service. The steady increase in home ownership over a long period and the sharp rise in recent years resulting largely from the Government's programme of council house sales have been financed predominantly by the building societies and they have coped with these increasing demands remarkably well.
However, no area of business—least of all any part of the financial services business—can be immune to change. The combination of external competitive pressure on the building societies with internally generated impetus for change and development of their own business meant that the review conducted two years ago in the Green Paper, Building Societies: A New Framework, was necessary and desirable and that the consequent Bill being introduced today was an inevitable response to those changes.
As your Lordships' House will be considering in broader perspective when the Financial Services Bill is discussed next month, legislation in the area of the financial services industry must aim to strike a fair balance between the prudential protection of investors and depositors with the interests of users of credit or financial services provided by the institutions concerned. I believe that the Building Societies Bill should be judged by these criteria and, in general, I believe that the Bill comes out well.
It has been customary to think of the clearing banks as being the principal suppliers of credit and many other financial services to the retail market, notwithstanding the dominant position of the building societies in one specialised area; namely, the provision of home loans. In the various examinations of the clearing banks and their proposed mergers over the past 20 years the Monopolies and Mergers Commission has had to consider the right level of competition prevailing in that market. In potential conflict with that objective of maximising competition have been other factors, including the Bank of England's concern from a supervisory aspect as well as considerations that are unusually hard to define, such as regional or nationalist implications based on a bank, say, in Scotland or the North-West of England being acquired by, or merging with, a London-based institution.
It is difficult to feel very happy with the results of some of the decisions made over the past few decades, with the regional strengths of some traditional clearing banks being lost without any compensating improvement in the level of efficiency or competition provided by the major clearing banks resulting from that series of mergers. Britain has still been slow in its 1192 extension of banking services throughout the population compared to other developed countries, and much of the running in developing new customers for banking services has been made by institutions other than the main clearing banks—the foreign banks and consumer credit companies being at the forefront and, subject to the limitation of previous legislation, the building societies being other important innovators.
It is therefore against this background that we should welcome in principle the increased competition which the building societies could potentially offer the clearing banks and other financial institutions in providing a wider range of retail financial services, just as we should welcome the banks and insurance companies beginning to provide significant competition to the building societies themselves in the area of home loans. It would not only be unfair for the building societies to be kept under the same restrictions as existed 40 years ago while other financial institutions benefit from a period of deregulation in challenging the building societies in their own market, but it would also be detrimental a wide range of consumers and users of financial services if the societies were to be excluded from the potential provision of these new services.
Your Lordships may be aware of the deregulation that has taken place in the past six years in the United States in the equivalent market—that of the savings and loans associations. In a very different overall market, subject still to some unusual and possibly anachronistic banking regulations, the deregulation of the savings and loan industry has been an important part of the overall changes taking place in the United States banking system.
However, it cannot be said that the experiences of the Americans can be regarded as at all satisfactory, for in the last two years, despite an extraordinarily favourable trend in US interest rates, there have been unprecedented levels of failure among the savings and loans associations. FISLIC (Federal Insurance Company for the Savings and Loan Industry) now has serious difficulties in providing adequate cover for the number of failures that are occurring, with this problem exacerbated by a number of the healthiest savings and loans associations, through being acquired by banks, leaving FISLIC and becoming members of FDIC, the equivalent federal insurance corporation for the banking industry. The largest savings and loans association, FCA, was brought to its knees in 1984 by aggressive and ambitious management, which not only conducted its traditional business in a rash way but also participated speculatively in areas such as consortium take-overs and notorious "green mail" operations.
Despite the great degree of financial sophistication prevalent in the United States, the managements of the savings and loans associations have been ill-equipped in many cases for some of the diversification and expansion that they have undertaken since the deregulation process started. However, I believe that the Bill before us today has been drafted with reasonable regard to events in the United States and mindful of the pitfalls as well as the beneficial effects of deregulation and greater competition.
1193 In terms of lending opportunity the Bill proposes only modestly increased powers for the larger societies to make unsecured loans to individual borrowers and does not allow wholesale excursion into corporate lending or investment in corporate securities of the sort that has clearly caused so many of the problems in the United States. There is concern even with these proposals that increased competition in the provision of consumer finance may in fact lead to an unacceptable level of competition in this market for all participants, with a consequent reduction of profitability and indeed serious risk of loss, similar to that which has occurred in corporate and sovereign lending by international banks, thereby giving rise to consequent instability in the world banking system.
In trying to strip out the arguments of self-interest from those of genuine prudential concern, again I believe that the current proposals in the Bill offer a reasonable extension of competition and consumer choice without significant risk to the stability of either the building societies or the banking industry as a whole. However, it is obviously most important that the Building Societies Commission performs its supervisory function to the highest standards and with the greatest rigour to ensure that management of the societies is both prudent in its traditional business and competent in the new areas entered into.
I have mentioned the problems suffered by FISLIC in the United States in generating sufficient revenue to cover the increasing costs of reimbursing depositors with failed savings and loans associations, and the proposal for establishing a building societies investor protection board should be viewed in that light. To begin with I believe that it is right not to protect investors for 100 per cent. of the amount invested or deposited, since there has long been a problem in encouraging any degree of discrimination among the general public in the quality of institutions with which they deposit or invest.
The secondary banking crisis of the mid-1970s saw no part of the losses borne by depositors who had benefited in many cases from the often abnormally high rates of interest offered by the secondary banks which subsequently failed. Some degree of risk-sharing is correct, as was acknowledged by the subsequent Banking Act, and while it may be possible to argue whether the 90 per cent. level of insurance and £10,000 ceiling is correct, I believe that the principle is right.
I am sure that much attention will be given at Committee stage to these clauses, but in the belief that the new powers of unsecured lending are prudently modest, I am happy that the broad outline of investor protection offered by the proposed investor protection board is adequate. Like the noble Lord, Lord Barnett, I believe that the measures proposed to allow societies to change their status from that of friendly societies to that of public limited companies and to be taken over will be subject to more detailed and intensive discussion at Committee stage. The major building societies have certainly been concerned that the conditions proposed are unduly onerous, given the nature of their existing business and investor and depositor base, but we should be wary of accepting any measure of laxity when the friendly society or mutual 1194 status has served the industry well, not just in the past but very effectively at present when building societies' perceived credit standing has allowed them to tap the wholesale markets so successfully for additional funds.
As the noble Lord, Lord Barnett, also emphasised, we should be careful to ensure that the measures are not such that the building societies are merely seen as ripe for the picking by other financial institutions which are seeking to expand their retail financial network, with a consequent reduction in the level of competition and consumer choice which the Bill is intended to foster. A strong and independent building societies industry should be a long-term objective, and the measures which are proposed to foster local mergers are to be welcomed in that light. The Government's apparent firmness toward the lobbying of the major building societies on the threshold of conversion and take-over is to be welcomed.
Therefore, in general I should like to commend the Bill to your Lordships' House and hope that the contribution made by my noble friends and allies and by myself from these Benches toward the detailed discussion of the Bill will be seen by the Government and your Lordships' House as helpful and constructive.
§ 12.57 p.m.
§ Lord Hill of Luton
My Lords, I am not sure whether a former chairman of a building society and a modest current investor needs to declare an interest but if so, then I do. I propose to concentrate my few remarks on one point and it is a point which may prove to be of crucial importance.
While varying in strength from time to time, the competition of the banks has been substantial, though building socieites have maintained their position in servicing 80 per cent. of mortgages. But will this situation continue? The banks and other financial institutions, by virtue of their position as public companies, are able to escape the restrictions that fall upon building societies. This point is absolutely crucial, even though there is no substantial effect on the major companies at present.
It is very important to contemplate the procedure that has to be followed if any building society can successfully claim to be in the same competitive position by having become a public company. One does not ask for more, but it seems to me that if banks and other organisations are really effective that must be an option to be pursued. It is on that point and that point only that I wish to say a few words.
There is a voting procedure laid down in the Bill for a building society which, for good reason at some time in the future, desires to acquire the role of a public company to compete on equal terms with the banks. The building society members, which means investors of £100 or more and borrowers, are entitled to vote on the issue of translation from one role to another. The constituency is extremely large. I think that I am right in saying that there are 1.5 million members of the Abbey National Building Society. Nevertheless, it is right that the Government should proceed to secure that permission is given by the members of an individual society desiring to make a change.
We should look at the voting procedure: and I must get the words exactly right. The terms proposed in the 1195 Bill under which a mutual building society can convert to company status are that 20 per cent. of members must vote and of that 20 per cent., 75 per cent. of investors and 50 per cent. of borrowers who vote must vote in favour of the conversion.
We should bear in mind the constituency which consists of investors of over £100 and borrowers on mortgage. We must ask, "What interest are they likely to show in this tremendous poll that is provided for before change can be made? I am not sure that the small investor, the very foundation of the building society, can be persuaded whether it is right or not that the legal basis of the building society should change to that of a public company. I do not think that there will be much enthusiasm; and, secondly, I do not suppose that the borrower paying off a mortgage will think that it is a matter that concerns him.
That leads me to the main point of criticism. It is not that the decision should be reached by a majority of the members; after all, that is the traditional way of making a decision—by a poll which requires a certain minimum vote. However, here 20 per cent. must vote and of that 75 per cent. of investors and 50 per cent. of borrowers must vote in favour. Why should they? There is a natural inertia about signing paper. They will need to be persuaded that it is a matter that affects them. I do not know how that will be done. I do not know how they are to be persuaded to have sufficient interest to reach the required minimum.
Bless my soul! 20 per cent. of the votes of a vast number of members must be obtained before the decision can be proceeded with. Then there is the requirement about the make-up of the majority. That seems to be a device which will ensure that a motion to change the basis will never be passed. With a minimum of 20 per cent. of a disinterested constituency required, there is then a requirement for a majority under different headings. Of course the decision should be reached by a majority. Of course the decision should be that of the members, despite the inconvenience of so vast a constituency.
To require a 20 per cent. vote of members as the basis of the formula is, I suggest, not an option but a non-option which will not facilitate the translation of a building society into a public company.
The banks may well indulge in an enormous campaign with which the building societies cannot compete. They will be left with only 5 per cent. of their money for purposes other then lending on houses. I urge that this proposal is examined most carefully. There will never be adequate competition with the banks. It will never be possible to put a building society on the same legal basis as the banks so that the two competitors can offer an equal range of services. I hope that that point can be dealt with at the appropriate later stage.
§ 1.6 p.m.
§ Lord Shuttleworth
My Lords, it is not without a little trepidation that I rise to address your Lordships' House for the first time. In doing so, I have at once to declare an interest in the Building Societies Bill as a director of one of the country's large societies.
1196 It seems to me that the objective attached to the principles of the Bill is in essence a simple one—to reinforce success. Your Lordships have already been reminded of that success story. Building societies have almost half this country's total population as investors, and some 80 per cent. of mortgage business is held by them. Home ownership now encompasses 64 per cent. of households and is still rising. Legislation is needed now to ensure that as the financial environment changes so societies can continue to provide a valued and needed service in the new environment. The Bill must give societies the flexibility to compete and to conduct their primary, established business in the current financial climate.
Societies do not seek protection; they seek equality of competition. Without the same access to wholesale funding and without the power to offer the additional services required by members, which other competing financial institutions already enjoy, it will be extremely difficult if not impossible for building societies to continue to do what they have done so well for so many years. However, in providing those new powers for a successful future—here I entirely agree with the noble Lord, Lord Barnett—we must guard against destroying those still relevant factors which have contributed to such a successful past.
I refer to two in particular. The first is that societies have concentrated single-mindedly on their traditional purpose, which is lending for house purchase on first mortgage. The second factor is that societies, with their mutuality, are organisations with which people like doing business. It is important for the future of building societies to ensure that those two principles are not pushed to one side.
In order to provide what their members want, societies will, to a greater or lesser degree, embrace the new powers available, and whether they be unsecured lending, estate agency, pension provision, stockbroking or the development of residential land, societies will do that with professionalism and care. We must however keep the extent of those new powers in their true perspective. Only 10 per cent. of commercial assets may be committed to them, although there is of course provision in the Bill for the amount to be increased if future circumstances warrant. Initially, at least 90 per cent. of activity will continue to be in building societies' traditional mainstream business and so their principal purpose will not change under the Bill.
On mutuality, members' rights are in some areas increased with, for example, the circulation of election addresses and borrowers' new entitlement to vote on mergers. The adoption of any of the new powers requires members' express approval. Some may point—indeed, some have—to the provision in the Bill for conversion to plc status as the death knell for mutuality. A number of societies may well find that course of action suitable for them. I believe that the number will be few. The statutory procedure will make conversion very difficult to achieve in practice, requiring as it does this high figure of 20 per cent. of all members to vote. The case for conversion will have to be extremely convincing. It is not only for the board or the management but it is for the members, because it is they who will have to decide. In my view, both these factors, so contributory to past success—singlemindedness 1197 of purpose and mutuality—will continue to play a significant part under the new legislation. It is that which leads me to support the principles contained in it.
However, I should like to refer briefly to two points of detail in the Bill on which I should welcome further clarification—in my case, probably, correction of my interpretation. The first catches my eye as a chartered surveyor. The Bill authorises a society to hold premises of which only part is used for its business. However, if I understand it correctly, it provides that in prescribed circumstances, all such premises may have to be treated as forming part of a society's Class 3 assets, not just the part of the property not occupied for the society's business, but all of it. It seems to me to be somewhat counter-productive to encourage societies to undertake new services within Class 3 limits set out in the Bill while arbitrarily limiting the extent of Class 3 by requiring societies to include in it the total value of all their offices currently owned where any part is not used for their business. This will affect different societies in different ways. But some figures that I have seen indicate that it could reduce the availability of Class 3 assets for new services by as much as 25 per cent.
Another point that may cause some concern to those working in building societies relates to the ombudsman, or adjudicator as he is curiously called in the Bill. I speak as a layman in legal matters. I wonder whether it really is appropriate to provide that he may, in some circumstances, direct a society to take a certain course of action. He may even direct a society and a complainant to vary contractual rights subsisting between them at what amounts to the discretion of the complainant. The Bill provides that such directions may not be questioned in the courts. Such contractual rights to be altered might exist between a society and a large number of other members in addition to the complainant. Would it follow that all these other members' rights should be varied automatically once such a direction has been made?
The Bill goes on to provide some sort of let-out for societies by stating that an ombudsman's decision need not be implemented after all providing the society publishes the decision and its intention not to comply. The ombudsman scheme in the Bill contains more severe measures for building societies than non-statutory schemes applicable to other financial institutions. I do not think that it is reasonable to justify them by saying, in effect, to building societies, "Well, if you don't like the decision, even if it has been fairly arrived at, you can ignore it so long as you publish the fact". Nothing, surely, could be more calculated to cause offence to the members. And the building societies that I know would be most reluctant to behave in that sort of way.
Both the points I have referred to are really matters of detail. The fundamental point is that, with other competing financial institutions already operating under regimes not available to building societies, this legislation is essential to societies' futures. It will be important to maintain a constant review of the limits both for wholesale funding and for new powers. As circumstances change, it will be almost inevitable that 1198 these are raised. But this will be the proper way of ensuring that those factors that have made such a contribution in the past can be retained within a developing framework for building societies. This Bill can provide the flexibility to compete that societies seek. It will reinforce success. For these reasons, I strongly support it, and I look forward to the day that it reaches the statute book.
§ 1.15 p.m.
§ Lord Strabolgi
My Lords, it is a great pleasure and indeed a privilege to be the first to congratulate the noble Lord, Lord Shuttleworth, on his maiden speech—a speech to which we have listened with the greatest interest, knowing the noble Lord's great experience in this field. The noble Lord is, I believe, by profession, a chartered surveyor. As he has told your Lordships, he is also a director of one of the largest building societies. The noble Lord was, I believe, too modest to say that in fact (I hope I am right in saying this) he is deputy chairman of that society. It is a great pleasure to welcome him to the House. I hope that he will be able to take part in further stages of the Bill and to give the House the advantage of his great wealth of experience on this subject. I hope, too, that we shall hear from the noble Lord on many other occasions.
Like other noble Lords who have spoken and like my noble friend Lord Barnett, I, too, welcome the Bill in general but with certain reservations. The reasons for the Bill are clear. They are the entry in recent years of the banks and finance houses into the building societies' traditional market, as the noble Lord, Lord Brabazon, implied in his speech. We are grateful to the noble Lord for explaining the Bill in such a lucid and, considering the length of the Bill, concise way. The Bill attempts to do two things—to preserve the present character of the building societies and to allow them, or at least the larger societies, to play a wider role in what is becoming an intensely competitive field. I hope that one result of the legislation will not be a drastic reduction in the number of smaller societies, and that these will continue to have a role to play, especially at the local level. Here, I, too, must declare an interest, as I am the chairman of a medium-sized building society.
The Bill ranges far and wide over a large field. I do not intend to speak for long. Many points have already been raised by noble Lords. I should like to deal briefly with two that are causing me concern. First, by Clause 116 the right to make unsecured loans is restricted to societies with commercial assets of over £100 million. The original proposal, I understand, was that a society must have free reserves of £3 million. The Government have now changed this qualification, replacing it with a requirement that a society's assets, discounting liquid and fixed assets, must be £100 million.
This is going to make it difficult for those societies (and I include my own) that are just below the £100 million mark although their reserves are fully adequate to make unsecured loans of up to £5,000 to any one person as allowed in the Bill. Such a restriction will make it difficult for these middle ranking societies to remain fully competitive in this field. The restriction will mean, for example, that such societies will not be able to offer modest loans for house repairs or improvements related to the main mortgage. Nor 1199 will they be able to offer small top-up loans in cases where a purchaser is, for example, buying a house at, say, £1,000 over the valuation, which might have been a rather cautious and conservative valuation. If a society cannot provide the shortfall, the purchaser is driven to take a second mortgage from a finance house at a much higher rate.
I should also like to say a word about the Investor Protection Scheme—perhaps I should call it "the so-called" Investor Protection scheme—in Part IV of the Bill. This statutory scheme limits the level of protection for shareholders to 90 per cent. of their investment, with a ceiling of £10,000. Here I should like to say that I do not agree with the noble Viscount, Lord Chandos. The present building societies' protection scheme, which is a voluntary scheme, has no limit at all. The Government are here trying to do two mutually exclusive things, if I may say so. They are, on the one hand, encouraging people to put their savings into building societies. To this end they have abolished the amount that an individual can hold. Latterly, this was I think £30,000 some months ago, but now there is no limit at all.
That, I think, was a very right decision on the part of the Government. But if things go wrong, it will not be much comfort for larger savers to discover that all the compensation they can expect if they have a holding of, say, £30,000 or £40,000 is £9,000. The percentage was originally 75 per cent. of £10,000, but this was raised in Committee in another place to 90 per cent., a difference (although it is largely academic) of about £1,500. In my own society more than 60 per cent. of investors have over £10,000 invested. I believe that this is the case in many other building societies, particularly the ones of medium range. These, I think, are two matters to which we should return in Committee.
I refer particularly to the question of the Investor Protection Scheme. This morning I had a letter from the consumers associations, who are most concerned about it as well. They have pointed out to me that it is not unusual for sums much greater than £10,000 to be lodged with a building society. For example, when a householder has sold one house before buying another, and lodges the money for some period—which could be quite a long one if they are taking time to buy a new residence—this could be a large sum. The sum of compensation of £9,000 seems quite inadequate.
I understand that the compensation scheme proposed in the Financial Services Bill is likely to offer at least 90 per cent. protection up to a maximum of £30,000. The compensation levels offered by the bankers' investment protection scheme are expected to be, I understand, reviewed in the forthcoming banking legislation. Perhaps the noble Lord, Lord Brabazon, would like to say a word about this when he replies. I therefore think that the present protection scheme is quite inadequate. It seems to me to have little purpose other than a cosmetic one. It is a matter which should be examined in more detail at a later stage of the Bill.
Apart from these two points, I should like to say that I welcome the Bill and hope that your Lordships will give it a Second Reading.
§ 1.24 p.m.
Lord Campbell of Croy
My Lords, as the first speaker from this side of the House to follow my noble friend Lord Shuttleworth, I take great pleasure in congratulating him on both the fluency and content of an outstanding maiden speech. He speaks from knowledge and experience of the subject and I am sure that it is a general view that we look forward to hearing him again frequently in this House.
I should like to thank my noble friend Lord Brabazon for the excellent way in which he outlined and summarised a long Bill. I have to declare an interest as a director of one of the larger building societies. I welcome the Bill. Legislation which has catered for the building society movement for about 100 years now needs changes in order to apply to today's conditions and the prospects ahead. The Bill on the whole meets the challenge. The principal role of building societies has been raising funds by attracting retail savings and lending for residential housing. These, I am sure, will continue to be the building societies' predominant functions. But in future they will be able to play a wider role in housing generally and in the expanding competitive market for financial services.
I have in the past on occasions, and on other subjects, criticised the Government for lack of consultation before proposals or legislation were put forward. That charge is not applicable today. I believe that there has been full consultation with the bodies concerned. For example, the Green Paper in 1984 took fully into account the Building Societies Association's discussion document published early in 1983, the Spalding Report. When the Bill was introduced it was clear that there had been careful consideration of the comments which had been made on the Green Paper from the building societies and from others.
There has been a phenomenal expansion in the last 30 years by building societies. They have become a significant part of our country's financial establishment. In more recent times there has also been increasing competition. Other institutions have entered the market or are in keen competition with the societies. For example, National Savings compete on the investment side, and, on lending, the banks entered into that market in quite a large force some three years ago. The large building societies five years ago entered the wholesale market as they were then allowed by legislation, to a limited degree which was monitored by the registrar. For example, they were able to issue bonds and to carry out transactions in certificates of deposit.
A highly competitive market is also developing for retail financial services. Without the new powers building societies would be unable to take part. All this is good news for consumers, for the general public. They have already benefited from the increased competition and they stand to gain more in both convenience and price. With regard to convenience several services will be available at one counter or in one office, some directly associated with house buying.
I should like to draw attention to two or three provisions in the Bill and comment on them. On housing, I should like to see the building societies 1201 making a greater contribution to solving national and local housing problems. Hitherto they have been restricted because they have not been empowered to hold land or to make unsecured loans. The Bill changes this, although only for societies over a certain size. No doubt the threshold in the Bill will be the subject of comment. It has already been commented upon by the noble Lord, Lord Strabolgi. In future the societies will be able to own land provided that it is for residual housing or associated with such housing.
The building societies can tackle one particular national housing problem by helping to replace the diminishing private rented sector, either working in conjunction with housing associations or on their own. I understand that several building societies are ready to enter this field as soon as the new legislation is in effect.
The noble Lord, Lord Barnett, referred generously to what the building society movement had been able to do in the housing field, and in difficult areas of it, in the past. I believe that without conflicting with the requirements of those wishing to buy homes, the role which they can play in the private rented sector is an increasing one. They could meet the pressing needs of those who, because of the mobility required for certain kinds of job, or for other reasons, seek rented accommodation which is now difficult to find. I emphasise that the building societies can in future help in what has been a difficult housing problem, thereby also assisting industry and commerce where mobility is required for those working in various kinds of job.
The ability in future to make unsecured loans within certain limits will also help with housing improvements and repairs and the purchase of household equipment and chattels. Building societies are mutual institutions owned by their members. Membership of the large societies runs into several millions. The noble Lord, Lord Hill of Luton, made a guess at the number of members in the Abbey National. He said that there were 1.5 million members. My information is that there the figure is about 7 million, and the Halifax must have even more. Therefore, we are dealing with a very large section of the British public. It could be said that what is good for building societies is likely to be good for nearly half of the population who are either members or in the families of members.
I should like to comment also on the provisions which would enable a society to convert to a limited company. One view, strongly held and advanced in another place, is that mutuality should, if possible, be retained, and conversion to a public limited company should be made difficult. There is also another view; namely, that conversion is being made much too difficult in the Bill by the requirement that at least 20 per cent. of qualifying investors must vote in favour. That has already been put very cogently by the noble Lord, Lord Hill. As I understand it, that school of thought visualises that circumstances may arise in the future where a society would be at a disadvantage in competition with banks and other institutions which enjoy more flexibility by being public limited companies. Indeed, 20 per cent. is a very high hurdle.
My own recent experience may interest noble Lords because the society in which I serve was involved in the largest merger that has taken place in the building 1202 society movement. Last October, the new society, the Alliance and Leicester, emerged. I was a director of the former Alliance. As part of that procedure about 2 million people had the right to vote by post. I do not think that there had been as big an operation as that previously. We reckoned that we would be lucky if we got 10 per cent. to vote. In fact, that is what happened: about 10 per cent. voted. About 90 per cent. were in favour and so there was no difficulty about the result. It was a friendly merger; it was not one of those mergers which required a page of a national newspaper every two or three days. Nonetheless, there were hoops to be gone through. Therefore, I am very much aware of the difficulty which the noble Lord, Lord Hill, mentioned of getting a 20 per cent. threshold.
I should like to draw attention to the provisions in the Bill which allow that threshold and the other thresholds to be altered. The noble Lord, Lord Barnett, made reference to this matter and I should like to spell it out. Under Schedule 2(30)(6)—page 190—the Government, can amend these thresholds by order, through a statutory instrument under subparagraph (7), and that statutory instrument would be subject to annulment by either House of Parliament. So there are provisions for altering the thresholds and the Bill caters for changing circumstances in the future. If a situation were to arise a few years ahead where it was generally agreed that it should be made easier for a building society to convert to a company, then it is possible without having to introduce a new Act of Parliament.
Both of these views have been expressed today and no doubt we shall hear them again. However, the noble Lord, Lord Barnett, asked why all this is in the Bill at all, because if there was a general feeling in another place that conversion was not a good thing, why put it in with this very difficult hurdle and yet also have provision to get round it? The Government must answer such questions, but I shall offer one reason, and that is that it is sometimes wise and prudent to have powers in a Bill for use in unpredictable situations in the future.
The noble Lord, Lord Barnett, I am sure will recall from his time on the Front Bench in another place—as I do—occasions when something clearly needed to be done and Ministers were being urged to do it, but they then said that there was no provision in any Act of Parliament which allowed them to do it, certainly not in the relevant Act. I hope that we shall have further legislation on building societies well before another 100 years' time, but I see that there is some point in having provisions in the Bill so that if a situation were to arise such as the one to which the noble Lord, Lord Hill, referred, the building societies and the Ministers would not say, "There is absolutely nothing in the existing legislation to cover this point. We've got to try and get another Act of Parliament". Therefore, for my part, I am glad to see that there is also the provision for altering the thresholds in the Bill.
I am sure that we shall examine the Bill thoroughly and scrutinise those parts that may need to be revised in accordance with our traditional functions in this Chamber. I should like to congratulate the Ministers who have borne the heat and burden so far in another place. I ask the Government to do what they can to 1203 provide time at the appropriate intervals for the later stages of the Bill here. I know that this is difficult because there are several important Bills in the pipeline which are pressing on your Lordships' time. However, I am sure that everyone in every part of this House, while ensuring that the main, relevant matters are raised, will take no more than the time necessary to do so.
From the building societies' point of view, it would make a considerable difference if the Bill could be law before the Summer Recess, because the effective date for commencement could then be in January, which is the date for which they have been preparing; otherwise they would have to wait an extra three or four months. I recognise that that may not be possible, but I suggest that it is worth bearing in mind as we study the Bill which is a generally acceptable measure which will not meet with serious objections from any part of your Lordships' House.
§ 1.38 p.m.
§ Lord Luke
My Lords, first I should like to thank the Minister for his introduction of the Bill and, secondly, I should like to add my congratulations to those of other noble Lords to the noble Lord, Lord Shuttleworth. I noted that in his speech the noble Lord, Lord Barnett, complimented the movement, and I agreed wholeheartedly with him when he said that the societies fulfil an important social function. I also noted his reservations.
This Bill has been subject to long and careful study in another place and its contents have been examined minutely for at least two or three years by the Building Societies Association on behalf of the whole building society movement. As we realise, the Bill is very detailed, which is as it should be—especially for those societies wishing to take up any of the new powers—and the guidelines are clearly set out. There has been a very large measure of agreement among all parties concerned. The Bill seeks to establish a completely new legal framework for building societies.
Building societies are to be given extended powers in a number of directions in addition to their main existing business, and a range of new services which are connected with their mainstream housing business. At the same time control has been assured through the setting up of the commission as a regulating body. The new commission, as the governing body, is to promote the protection by each society of its investors and the financial stability of the societies themselves, and many other functions of regulation and control. After all, it is not a bad thing to keep us all in order. This should be a source of confidence for the public.
On the housing side, the proposals would enable societies to make a greater contribution, in partnership with other institutions, to solving some of the major housing problems, and I note what the noble Lord, Lord Campbell said on that. No doubt the larger societies will avail themselves of functions outside the hitherto normal roles of investment and advances for housing purposes, for which societies have become specialists in their own field, but I would question the advisability of small societies entering into spheres—where other professions have been expert by tradition 1204 for a long time—without the necessary expertise themselves.
As chairman of a society—and I suppose I ought to have mentioned that a bit earlier—I welcome the Bill, and I am sure that it is right that in the present competitive financial field building societies should be given extra facilities to compete on equal terms. The provisions for the conducting of building society business with the public are important and necessary, but equally important are the parts of the Bill dealing with how societies should order their own affairs on behalf of their members whose money they are safeguarding.
There will of course be questions—already raised in your Lordships' House—on conversion and the powers of the ombudsman, or adjudicator (I do not know what we are supposed to call him) which may be worked out at the Committee stage. But I hope, with the noble Lord, Lord Campbell, that the passage of the Bill will not take too long, in order that the necessary provisions can be put into effect by 1st January. With those few remarks, I give the Bill a warm welcome.
§ 1.43 p.m.
§ Lord Houghton of Sowerby
My Lords, I too should like to congratulate the noble Lord, Lord Shuttleworth, on his most competent and informative maiden speech. I sincerely hope that he will find it possible to be with us in the later stages of the Bill. I am sure that we would like to draw on his temperate and well-informed approach to this problem. I have a special regard for the noble Lord because he was a director of a society, which has now lost its identity in a merger, with which I had long association; and he was helpful and wise when I was chairman of the Civil Service Housing Association.
I have been connected with building societies ever since I was born in a house that my father bought through a building society. It was not one of the big, permanent affairs, but a tiny grouping of people who came together to form a small society in a small town in Derbyshire.
What this Bill is to do is to launch building societies into the new growth industry, which is the high street money market. In The Times newspaper of Tuesday last there were two articles, the third leader and a contributed article by Mr. Tim Congdon, on the worries which are bound to lie behind this new move to put building societies far forward in the financing of housing and generally taking their part in the wider financial affairs of the country. I share some of these worries, because I think that without in any sense blaming building societies we are bound to look at the position they occupy in our housing and financial policy at the present time.
I must draw your Lordships' attention to the imbalance at the present time of the housing policy of the Government which provides ample scope for the extension of home ownership on very favourable terms—with a large tax discount to reduce the effective rate of interest on their mortgages—with, on the other side, the position of houses to rent, which have virtually been reduced to being a social benefit subject to a needs test. That disparity is becoming almost a scandal. Where does one go for houses to rent?
1205 The total provisionally anticipated cost to central government of all housing benefits for 1985–86 is £11½ billion. Mortgage interest tax relief accounts for £4¾ billion of that, which is 41 per cent. of the total cost of housing benefits to the Government, including all supplementary benefits for rate and rent rebates and all that kind of thing. Since 1983–84 the total cost of rent and rates allowances to recipients of supplementary benefit, and rent and rates rebates outside supplementary benefit, has risen by 23 per cent.
The cost of mortgage interest tax relief has risen by 76 per cent. in that time. This is partly accounted for by the sale of council houses on bargain terms and the increased demand for mortgages for house purchase. All those figures were given in reply to a Written Question in the House of Commons Official Report, at column 432 on 3rd June. This tax forgone to assist home ownership is open-ended. The higher the borrowing, and the higher the income of those who borrow, the higher this raid on the revenue will become. I have not got the actual figures with me for the rise between 1983–84 and 1985–86, but the figure has risen to 41 per cent., and the increase was 76 per cent. during that period.
We know a great deal about the mutuality of the present system. I fail to see how mutual it is. Presumably mutuality is something between the investor and the borrower. But the investor has never made any money out of building societies. It is the borrower who makes it all. The investor has had the shabbiest treatment, along with small investors in other institutions, during the period of inflation. They had no hedge against inflation. The borrower did; the house purchaser did; but not the investor. The borrower was buying an appreciating asset which he paid for by payments in a depreciating currency. The investor was having his savings eroded all the time.
I do not want to be cynical about this, but I cannot help but say that home ownership has excelled as the best that borrowing can buy. Now I ask: where are the houses to rent? I sincerely echo the plea that was made just now by the noble Lord, Lord Campbell of Croy, that building societies should be encouraged. In fact, I think we should insist that they avail themselves of the opportunity of taking a share in the provision of houses to rent, which they have long said they have wanted to do and which I think now should be made almost a condition of the extension of their powers into the wider financial market. We do want their help in that direction. The part of the Bill that lifts the restriction but which still retains a limitation must be carefully considered in Committee.
As things are at the present time—when we realise that we have killed off the private landlord by rent control; we have reduced the local authorities' stock of housing by offering the sale of council houses at bargain prices, and have insisted that they should sell them; and have deprived local authorities of the right to use their capital accumulations from the sale of council houses to build more houses for municipal letting—we have made house purchase on mortgage almost the only option for thousands and thousands of people who are in search of accommodation at the present time. That is an intolerable situation. Furthermore, 1206 I do not think that it is entirely sensible to inflate more and more the already huge private mortgage borrowing requirement—a phrase used in Mr. Congdon's article in The Times last Tuesday. The private mortgage borrowing requirement might even exceed the public sector borrowing requirement before very long.
We must recognise that the draftsmen of the Bill have made a skilful and competent attempt to provide for the reasonable ambitions of all societies—large, medium and small—within the existing framework of the traditional building society. It was a hard job to do, and I think they have made a very good attempt at it. While I believe that the tax subsidy on borrowing for house purchase should be reduced as a matter of fiscal justice and social justice, there is no reason at all for refusing an extension of the ancillary services of building societies which are in this Bill. In fact, I believe that some of the larger building societies probably ought not to remain within the restrictions and framework of the building society law at all.
The two top building societies, the Halifax and the Abbey National, are twice the size in assets and membership of the next in the league table, which is Nationwide. The membership of the Halifax is not far short of 20 times the population of the town. I reckon that the first 28 societies in order of size, taken as a whole, are larger than the remaining 130 societies put together. That is the disparity between the top of the league table and the rest. Yet we are trying to provide within one Bill for societies of different size and potential, and to put the same framework upon them.
It is obvious that shareholder control cannot be effective in the largest and even medium size societies. We come to the question as to whether conditions should be imposed on the taking of polls for various important matters among such large constituencies. I think, for example, that the power and certain of the interests of shareholders should be encouraged by giving added weight to the franchise in proportion to individual shareholdings. One man one vote in societies of this kind is not enough to stimulate interest. If you have half a dozen votes to cast instead of one, you are tempted to use them. That is in accordance with all the conventions of trade unions, public companies and the rest. You vote according to your stake in the institution. I think probably £100 as a qualifying condition for voting could stay if there was an added vote for shareholdings above that. But if there is no added weight for shareholdings above that then I think £100 is probably too low. Also, the conditions for the ballots on mergers and particularly on conversions will have to be thoroughly examined in Committee.
What I think is wrong with a 20 per cent. minimum is that it is contrary to all the principles of democracy. If you are making an appeal to the ultimate authority, which is the members—the referendum, the ballot, is the appeal to the ultimate authority, that of the membership—you cannot put restrictions upon their right to reach a conclusion. You cannot say, "We shall appeal to the rank and file on condition that 20 per cent. of them vote". Mrs. Thatcher came to power on not much more than 20 per cent. of the vote! It is possible to lose your deposit in a Parliamentary 1207 election and still be elected. We do not impose these conditions anywhere else, in the body politic. There are no similar conditions to this in public companies; and certainly trade unions know what to do—they have a card vote. There is no point in having these conditions in the Bill if we judge that they are unrealistic and we then have to consider whether there should be any at all.
The noble Lord, Lord Campbell of Croy, gave us an interesting illustration of the problem of the ballot in a very large society. But his society, although they had 10 per cent. of the vote, did not have to be worried about getting 20 per cent. If the parties to the merger had been worried about getting 20 per cent., it would not even have gone to the poll. What would be shattering would be for big societies of repute and standing, with enormous interests at stake, to go to the poll and fail to win. That would be awful. To have a 20 per cent. minimum vote and then that 75 per cent. of those voting should be necessary to carry the day is a double hurdle that is quite unrealistic.
The person who does not vote should never decide elections. People who did not vote would decide the election if there was a minimum requirement that a certain percentage should vote. That I think we must bear in mind. I shall differ from my noble friend Lord Barnett if he is taking an opposite view. I shall be on the same side as the noble Lord, Lord Hill, and I think that we may examine this dispassionately when our time comes.
Now, my Lords, I must finish. I doubt very much the wisdom and the social justice of the intensification of the scramble for personal savings to be converted into personal consumption and not investment. This, I think, is the main financial and economic problem that this exercise and all others related to it are presenting to us. In "The Projected British Workforce for 1985–90" published in the Financial Times yesterday, only two groups are likely to employ more people than at present. It is expected that by 1990 employment in distribution and finance will be up 6.2 per cent. to 6 millions; in leisure, up 11 per cent. to what is nearly 3 millions. In every other industrial group, the prospect of the numbers employed is down. In manufacturing industry, the prospect is 12 per cent. down. If that is the prospect, we shall be in an economy of diminishing prosperity and our people will be largely debtors who will be borrowing their passage into the 21st century. That, I hope, is not a prospect that will be realised; but before being so happy about wider financial facilities and while we are making life almost carefree for a lot of people by the use of the credit card, I really think that we want to know a little more and to be more satisfied in our minds on where we are really going.
On the Bill itself, I pay the same tribute to it as have many others. In its detail, I shall be glad to co-operate in seeing it through, subject to the reservations that have been mentioned on particular matters. Much that I have said has nothing to do with trying to cramp the building societies. What it has to do with is the overall financial and economic policy and the housing policy of the Government, which I do not think fits what we are now doing.
§ 2.3 p.m.
The Earl of Selkirk
My Lords, I should like first of all warmly to congratulate the noble Lord, Lord Shuttleworth, on a most notable maiden speech. I am delighted to think that I agree with almost every word that he said. I sincerely hope that he will come here more often than he has in the past. I have to declare an interest. I am a borrower, I am a depositor, and I am a vice-president of the Building Societies' Association; and I have been associated with it for a number of years.
It is worth remembering that this is only the second Bill of importance on building societies over the past 200 years. For the first 50 years, there was no Bill at all, there was no statutory background to building societies, such as they were, in the elementary stage. I think that it makes a very sharp contrast to what has happened in the case of the Companies Bill, of which we have one every other year, and have had, I think, for the last half century, in some aspect of it.
We have an opportunity here, and a very interesting one, of seeing a Bill put together with practically no references to any previous legislation. I would not say that it reads exactly like a novel, but it is at least comprehensible. You can read through it in a manner which, frankly, I have not been able to do to any Bill for a very long time. Therefore, I should like to congratulate the draftsman on being able to put together a Bill which is very largely understandable. As my noble friend Lord Campbell has said, I think that we should also congratulate the Government on the trouble they have taken in preparing this Bill. It has been a good two years under examination and it has been done with very careful consultation with those working with the building society movement. I think that they have benefited greatly both from the help of Mr. Boleat and Mr. Armstrong who has devoted an immense amount of time and trouble to seeing that it is workable and that it is in line with what can be effectively done. Therefore, I think that the result has been (and it is quite interesting) what I believe was a very agreeable Committee stage in the other place which some people have been described as jovial—a most unusual adjective to use in connection with Committee stages in the House of Commons.
The noble Lord, Lord Houghton, says that the depositors have had such very shabby treatment. It is a bit funny that £100 million should have been subscribed by these same depositors who have had such very shabby treatment. I find it just a trifle difficult to follow the exact practical forces of the arguments which he has used.
The Earl of Selkirk
My Lords, there are a number of banks in this country and there are investment companies, which I have heard of and about which I know very little. Nonetheless, I believe that they exist.
I think that the building societies are delighted that they are going to be allowed to go abroad. This is a step forward of great consequence which they have been wanting to do for a long time. I think that we must remember that the movement we started here, in 1209 succeeding in getting a method of borrowing short and lending long, has very seldom been reproduced in any other country. In America it really has never been copied. To a limited extent it is in South Africa, New Zealand and Australia, but in no other country. I believe that our European neighbours will benefit by getting the experience and knowledge of how we have been able to work it.
I should like to ask one question about the commission. I had thought at one time that the organisation would be put upon the Bank of England. I am told, it may be wrong, by those who know the Bank of England, that you are much better out of it. This may be an insult. If it is, I apologise. But the commission which has been put forward seems to be a very sensible one. My only point is this. Is it going to be too much under the Treasury? This should be an independent commission, reporting of course to the Treasury, and no doubt the Treasury will deal with the parliamentary work. But we probably ought not to have a chairman who is a former Treasury official. Certainly he should be a man of broad experience in the affairs of this world but really should not have been officially connected with the Treasury in any way. I say that because this is a very important body and it should take an extremely wide view of its duties. Of course, that does not mean that the members would not be in close touch with the Treasury.
As the noble Lord, Lord Houghton, has said, as indeed did my noble friend Lord Campbell, we shall be most interested in what Clause 3 investments will be able to do. The Minister himself said he hoped the money would be used for building, reconstructing inner cities and building for rent. Building for rent, as the noble Lord has said, has been a catastrophe. It has been destroyed by parliamentary action. It must be reinstated; I hope it will be. I have been a little sorry on occasions because the Government have not seemed to grasp the importance of rented property, renting being a perfectly proper way of holding property and land. It has fallen right away, and Parliament is responsible for that. I should like to think that we can regain something of the position that obtained in former times.
I have to say something about companies. I do not entirely share the full extent of the feelings expressed by the noble Lord, Lord Houghton. This is a complete change. If a building society becomes a company it is then just like any other joint stock company. It will come under the Bank of England. It is true it will have limited liability, which the building societies do not have, and it will be in the position where anyone with 51 per cent. of the shares controls the company. As my noble friend has said, anyone who has that number of shares in a building society has one vote; but this is a quite different proposition. In this case you do not have your vote by money but simply as an individual. That is a very big change and it is not one which should be made lightly.
I am not against those who feel they want to change to joint stock companies, but I do not think it will be easy. People have shown immense confidence in building societies and they have subscribed to them in a manner in which they have not subscribed to banks. I think that the continuity, which was mentioned in 1210 particular by the noble Lord, Lord Barnett, is enormously important.
Perhaps I might in passing mention a point on which I disagreed with the noble Lord, Lord Barnett. He spoke in the same sentence of mergers and of conversions to joint stock companies. If I may say so with respect, they are two totally distinct things. Mergers have gone on in the past, and of course will go on again in the future.
I should like to say to the noble Lord, Lord Strabolgi, that I quite agree with him that small building societies should be preserved; but they must be efficient. If they are not efficient they will be taken over. But there is room for them and they enjoy the confidence of local people in their area. For so long as they can maintain that confidence they are serving an extremely useful purpose indeed.
I do not think I need add anything more. I believe this is a very valuable Bill and it will release enormous resources to a wider field. I believe that building societies must be remembered for what they have done and I hope they will continue to be a movement. This is something which is quite different from a bank, an investment company or any of these other bodies. This is a movement in which the societies work together competitively among themselves. I believe that is a very healthy relationship. We should not speak too disparagingly of the word "mutual". Many people may intensely dislike the profit motive—they may be right; they may be wrong. But that does not exist with mutual associations, and the building society movement has been extremely successful. The limitation of its work has been statutory, not because the people concerned could not conduct that work. I believe they will make full use of the powers available, and that they will maintain the strength and ability of the mutual movement.
§ 2.13 p.m.
§ Lord Kirkhill
My Lords, I, too, join with other noble Lords in congratulating the noble Lord, Lord Shuttleworth, on his maiden speech. I hope he would be in no way offended if I left it at that simple statement because, as the tail of speakers wags endlessly onwards, I think it becomes rather more difficult to say something fresh or interesting about what the noble Lord said, although I confess that I believe his speech was entirely interesting.
I, too, should confirm an interest, in that for many years I was a building society manager and, if I live long enough, I shall be the recipient of a building society pension. I think it is also fair for me to say that, in the meantime, I am one of the vice-presidents of the Building Societies Association.
Building societies are important institutions in the social, housing and financial fabric of the country. Over 6 million families are currently buying their homes with the help of building society loans, and the societies have helped owner-occupation to increase from 29 per cent. of all dwellings in 1950 to over 62 per cent. today. Societies have also provided a popular and efficient savings service, and now some two-thirds of all adults and well over one-third of all children have building society savings accounts. The 1211 societies hold over 50 per cent. of the liquid assets of the personal sector, amounting to well over £120 billion. The societies have become familiar institutions through their branch networks and their extensive advertising. They have a reputation for efficiency and friendliness, which I believe stems partly from their mutual nature.
The problem has been, of course, that the law under which building societies operate is effectively over 100 years old, as many Lords have mentioned, and it is time for a comprehensive reform. I think that is agreed by all of us. However, in my view, both Parliament and the building society industry itself need to ensure that the legislation preserves the basic characteristics of building societies while allowing them to adapt to a rapidly evolving market situation.
The arguments for new building society legislation are compelling. The current Act under which they operate, consolidated in the Act of 1962 but largely reflecting 1874 legislation, rather treats the societies as being local clubs where everyone knows everyone else and where the members effectively can have a major say in running the organisation. As societies have become much bigger, certain elements of the constitution have become inappropriate. It surely cannot be right for people with just £1 invested to have the same voting rights on matters such as mergers as those who have many thousands of pounds invested, and that over a long period of time.
Generally, however, the constitution of building societies has stood the test of time well and the mutuality concept is one that many find appealing, although my noble friend Lord Houghton has cast his own personal doubt upon the basic concept of mutuality in toto. I would not entirely accept his argument, although there is a change in the modern age. But most find it appealing, particularly, I believe, in the socially important area of housing. For my part, I am pleased to note that the Bill does little more than bring up to date the constitutional provisions, while preserving the basic mutuality concept.
The possible conversion to company status in certain circumstances would find scant support from these Benches, I believe, offending as it does against the concept of mutuality to which I have just referred, and I do not consider that we would give support to that aspect of the Bill at the later stages. Nevertheless, it is in respect of their powers that building societies need new legislation.
Societies have grown rapidly in the postwar period, partly because they have efficiently seized market opportunities, but also because they have not until recently been subject to great competition. Indeed, for much of the period they were unable to meet mortgage demand, and therefore did not have to be too responsive to the needs of their customers; nor did they need to be innovative to the mortgage market. Similarly, in the savings market societies have faced very little competition, partly because of government constraints on their natural competitors—the commercial banks and the savings banks.
All that has changed over the past few years. The commercial banks are no longer subject to direct 1212 controls on their lending or deposit-taking, and the savings banks have become much more commercial and, I believe, will become even more so, assuming that their flotation is finally completed, as it might well be by the end of this year. There is a range of new institutions in both the savings and mortgage markets able to take advantage of new technology, and we must keep that point very much in mind. It is now possible to offer a good rate of interest on a savings account, together with ready access to money through cash dispensers without the need of the expensive branch network.
Now that mortgage demand is being fully met, estate agents are seeing the opportunity to take over much of the business of originating mortgage loans and there has been a scramble among City institutions to purchase estate agencies. The customer increasingly expects a package of services. To the housebuyer the banks can offer this because unlike societies they can offer bridging finance without constraint, estate agency and insurance broking services. Similarly, in the savings market the customer is looking for a package of services, but building societies are prevented from offering even something as simple as a cheque guarantee card or an overdraft facility.
Not only do market conditions require building societies to offer a wider range of services, but the public also expect this. A market research survey conducted by the National Consumer Council in 1983 showed that 56 per cent. of building society customers said they would like their building society to offer a chequebook; 39 per cent. wanted standing orders; 32 per cent. wanted cash dispensers; 28 per cent. wanted personal loans; 26 per cent. wanted travellers cheques; and 20 per cent. wanted overdraft facilities. The National Consumer Council concluded:Bank customers who also have building society accounts tend to find building societies easier to deal with. Significant numbers of them would like their building societies to offer payment services, like chequebooks, which have traditionally been the exclusive preserve of the banks".I am advised that recent market research conducted by the Building Societies Association shows a strong demand for building societies to offer estate agency and structural surveys, and similarly a strong demand for the new financial services which the Bill seeks to allow them to offer.
As my noble friend Lord Barnett pointed out in his opening speech, one of the most pleasing features of the housing market over the past few years has been the willingness of the various institutions to attempt to work together. Building societies, housing associations, local authorities and private developers are co-operating in a wide range of ventures. Societies have funded imaginative housing schemes and several have set up satellite housing associations. However, the same societies are inhibited from playing their full part in such developments because of the legal constraints under which they now operate.
The societies cannot, for example, own land. This point has been emphasised time and again during our Second Reading debate this afternoon. This prevents them from owning rented property, something for which, as many noble Lords have pointed out, there is huge demand. They are unable to make unsecured 1213 loans for housing purposes such as financing small repairs and improvements. For all of these reasons it is right that building societies should have wider powers related to their mainstream functions in the savings and housing markets. In my view, the Bill has the balance in this respect just about right.
The Bill before the House is very long, running to 270 or so pages. I am sure that this is much longer than either the Government or any of the rest of us would really have wanted. However, it is also an unusual Bill. The noble Earl, Lord Selkirk, touched upon this point just a few moments ago. It is a Bill that received an unopposed Second Reading and an unopposed Third Reading in the other place. My spies there tell me that the Committee stage of the Bill in the Commons was one of the most constructive and one of the most good humoured of recent times. There was only a handful of Divisions, and numerous amendments were made to the Bill as a result of the debate. As the noble Lord the Minister indicated in his opening remarks, most of the discussion took place in non-partisan terms.
There was a substantial delay of some 10 weeks between the end of the Committee stage and the Report stage. During that period the Government—and their initiative is to be commended—took the opportunity to bring forward amendments to meet commitments made at the Committee stage, and also to tidy up the Bill in a general way. As a result, the Bill before your Lordships' House is, in my view, in a much more satisfactory form than many of the Bills that arrive here from the other place.
It therefore now falls to your Lordships' House to scrutnise and—by way of constructive debate and persuasive argument, certainly from this side of the Chamber—to seek to improve the Bill and make amendments in certain key areas outlined by my noble friend Lord Barnett in his opening speech. With that proviso, I give the Bill a most general welcome.
§ 2.26 p.m.
§ Lord Suffield
My Lords, I congratulate my noble friend Lord Shuttleworth, although he is not here, on his maiden speech, and I apologise for not being in the Chamber to hear it.
I also must declare an interest, as the president of the Corporation of Finance Brokers. I refer to one aspect of the Bill that has been brought to the attention of the Government in another place and to which my noble friend Lord Brabazon has referred in his speech. It concerns the situation where a building society has granted a loan to a client on his house or land and the society then seeks to impose a restrictive clause in respect of the original loan with the land registrar, to prevent its client from securing a further loan with anyone other than the society.
I ask the Government whether it is within the powers of the commission, and whether it is the commission's duty, to investigate and to take action if such a complaint as I have illustrated is addressed to the commission by an outside body. If not, who will deal with such a complaint? Will it be the Office of Fair Trading? Otherwise, I welcome the Bill.
§ 2.27 p.m.
§ Lord Graham of Edmonton
My Lords, I must begin by saying how much I appreciated the comprehensive introduction given to the Bill by the Minister. I was also very heartened by the stimulating speech made from my Front Bench by my noble friend Lord Barnett. We shall certainly be in business when this Bill reaches the Committee stage, because my noble friend and others have raised a number of matters that will definitely need to be explored. Today, I wait to hear what the Minister has to say about the very pungent remark made by my noble friend in regard to Mr. Austin Mitchell and his interest in the conveyancing issue.
Like many other noble Lords who have taken part in this debate, I must declare a non-financial interest, in that I am a vice-president of the Building Societies Association, and I am of course proud to declare that interest. I also speak as a beneficiary of the building society movement—in my case, of the Nationwide. I am among a whole host of good friends in welcoming the Bill, and most, though not all, that it proposes.
I am well aware of the pressures for the Bill. I have to remind the Minister that although there has been a great period of consultation, the Financial Secretary in another place told that House on 4th June that he did not apologise for introducing 1,000 amendments to the Bill. So much for consultation and adequate preparation. If, despite all that, it is necessary to table 1,000 amendments, then I wonder how many we will have to table at this stage of the Bill in your Lordships' House. Certainly we shall need to do our job properly but the Bill will not be impeded by myself or, I suggest, any other Member of your Lordships' House.
We have been reminded that the Bill rests on a legislative framework which goes back to 1874, and that, of course, is part of the strength and, in this context of change, part of the weakness of the present situation. I certainly follow much of the general debate but I have to confess that my great anxiety stems more from the trends over the years than the specific proposals within the Bill. I have here, as have most noble Lords, a note from the Building Societies Association. It states that the Bill will retain the present characteristics of societies as being mutual institutions.
At this stage I declare two further tangential interests: my deep connections with the co-operative movement and also with the friendly societies movement; in particular the Ancient Order of Foresters. My concern is simply that there is grave danger that the mutuality concept, the principle of mutuality, has been eroded and is being eroded; and that that decline ought to be arrested.
What do I mean when I talk of mutuality? I mean self-help. I mean each member has a like interest with his or her fellow members in combining to achieve the objectives for which that society was formed. In that period 100 to 150 years ago there was a great burgeoning of organisations based on self-help and mutuality: co-operative societies, mainly in the aftermath of the industrial revolution and in the industrial north, friendly societies such as the Ancient Order of Foresters, and many others, in towns and 1215 villages; building societies fiercely local and parochial. Yes, all for the common good of those willing to subscribe and combine. But now, in 1986, it would be a brave soul who would assert that societies—co-operative, friendly or building, and some with millions of members—could still honestly claim to be mutual in their former and real sense.
This Bill is primarily about the head and too little about the heart. Those like myself who want to wish this Bill well by getting the head in good order can still be worried about the state of the heart. Some of us wonder whether the heart has gone out of our beloved institutions or whether we can breathe new life into them. There is a need to equip building societies with a framework of legislation which fits them better to survive and prosper into the 1990s and beyond, for they have not only their own shortcomings to overcome and their own house to put in order, but the financial climate now, and for the future, is savage and cut-throat. We wish the building societies, large and small, a useful life for there is litle doubt but that "we ain't seen nothing yet" when it comes to competition for the traditional use and users of building societies.
My noble friend Lord Barnett told us about the Big Bang which is due to come in the City. We know about that. It will unleash a torrent of sophisticated initiatives designed to attack hitherto sacred preserves. Not only does this Bill enable a broadening of related services for and from building societies, but the Financial Services Bill lets loose a set of circumstances which will test the professional capacity of those who manage and guide our building societies.
In this harsh world of the commercial and financial jungle those who live by the sword will perish by the sword. In that context, I wonder whether the Government and the Minister have taken on board the fears of those professions who see in the extension of building society services a real threat to their own professions and their living. The president of the National Association of Estate Agents has put it thus:Building societies will be able to indulge in many new ventures such as estate agency. It is not the competition that worries us. What is worrying is that these non-profit making institutions will be able to do all these things, and more, free of charge. Or at any rate free of charge in any particular circumstances. That could destroy estate agency as we know it. There are no effective safeguards. The Minister [in another place] has given assurances against cross-subsidisation. What protection have we when they can cross-subsidise to the extent that a service is free of charge?I wonder whether in his reply the Minister can tell the House that there is a problem or that there could be problems for estate agents and what he will do about this situation. I am sure that the estate agents themselves will be very interested to know.
I have referred to co-operative societies, friendly societies and building societies. They flourished particularly in the period of greater prosperity that followed the 1840s. At that time, and for some time after, by far the most important class of those associations consisted of the friendly societies. They had many more members in overall total than had any other type of institution. The legal and administrative framework that had been created to suit their needs not unnaturally was the one that was reflected in 1216 legislation. It was that framework which basically was also made to serve co-operative and building societies.
Whether or not that framework was appropriate to them—and it has changed little over the years—building societies learned to live with it and to make it work. In a way, of course, it still works, but it does not work now in the way that was originally intended; nor indeed, I believe, in the spirit of the statutory provisions.
The question must be asked whether it is really necessary or sensible that everyone who comes along wishing to deal with a building society should have to be made a member in the first place. Building societies themselves have long said that most of those whom they enrol as members are virtually only customers and that is all that they want to be. If that is true—and I am inclined to think that it is—do we want to perpetuate this unreality? After all, an organisation such as the Co-operative Insurance Society, which is one of the largest, most efficient and successful of insurance companies, issuing 14 million policies covering life, home and motor insurance, is, as its name proclaims, a co-operative society, but it does not make all its policyholders members of the society, and so far as I know none of them has complained about it.
The basis of the existing constitution of voluntary societies was that the members formed, belonged to and controlled an organisation which by its very nature was autonomous. Inroads have been made into that concept of autonomy and these inroads can be expected to increase with consequent inhibitions upon the powers and decisions of members as well as those of the board. A constitution which disregards these important and very real considerations loses much of its conviction both for members and for the outside world.
We all subscribe to the idea that democracy is a good thing, but unless we define its place in any organisation and provide the machinery to allow it to function efficiently, we are simply mouthing platitudes. Furthermore, there is no necessary connection between democracy and efficiency. Commercial efficiency in particular can be obstructed in an organisation in which the democratic structure is unsuitable or unwieldy, so that when, as now, the idea of competition is promoted as a means to commercial efficiency, the society that tries to operate in the most democratic way is likely to find itself with a handicap.
In conclusion, it is not just a question of considering the problems of democracy and exchanging views. So far as concerns building societies, it is even more important that we should take stock of their ability to continue in the future making the immense and generally successful contribution to the life of the people in this country that they have made over the past 150 years. I strongly believe that the philosophy and the system embodied in building societies, cooperative societies and friendly societies have an important role to play. These societies are therefore very much to be encouraged, developed and, if necessary, allowed to adopt a form more appropriate to modern conditions. That is why I welcome the Second Reading of this Bill.
§ 2.40 p.m.
§ The Earl of Shrewsbury
My Lords, I shall begin by offering my congratulations to my noble friend Lord Shuttleworth on an excellent and interesting maiden speech. I must declare an interest as I am a director of a major building society. I have listened intently to all that has been said by noble Lords today, and I agree with a great deal of it. It is a considerable achievement to have all the parties involved in the drafting of this potential piece of legislation agreeing on so many points. It makes the task of your Lordships' House so much easier and the Bill's passage that much quicker. I am sure that those two things are preferable for all concerned.
We are of course dealing with a Bill which is a major updating of the business parameters of the building society movement. It will make the movement more able to compete within the financial services market; it will create a whole new spectrum of business; and, I am sure, it will make the movement much more competitive and more service-to-customer oriented. The industry has always taken a great deal of pride in its customer relations. In my view that can only he enhanced by the Bill. This is a highly competitive industry, and this type of legislation is long overdue.
A building society's primary aim must always be to provide finance for house purchase and in raising funds for that purpose provide the carrot of a good return to would-be investors. The mutuality of the nature of the business has always been paramount. I am confident that, with the various restrictions-on-lending criteria to be imposed by the Bill, that mutuality will be and must be retained. I say that because I feel that, as it stands, conversion to a plc will not be a feasible option for the vast majority of societies.
However, the door can be opened to alternative ways of raising finance by the services and new activities to be allowed by the Bill. Those can be only of benefit to both borrower and investor; both will have a much fairer deal. Customer service, stability and mutuality are the three most important factors governing the building society movement. I feel secure in the knowledge that the Bill safeguards those qualities adequately.
The appointment of an ombudsman is the only matter about which I have reservations. While I acknowledge that such an appointment is highly desirable and necessary, I feel most strongly that the ombudsman should not have powers which can set aside contracts which have been freely entered into by a society and its members. That is a constitutional point which I feel goes too far. I hope that Her Majesty's Government will see fit to introduce an amendment in Committee to alter that. In general, I feel that the Bill is just what is needed, and I shall give it my utmost support.
§ 2.42 p.m.
My Lords, at this late hour your Lordships will be delighted to know that I shall be extremely brief. At the start of the debate, I was exhilarated to hear those great champions of free enterprise, the noble Lords, Lord Barnett and Lord Kirkhill, support the Bill with such vigour. I think that they were right so to do. I welcome the Bill but I think 1218 that it is worth considering the rhetorical question, "Why are the insurance companies and the banks far and away the richest institutions in the United Kingdom?"
The cynic would undoubtedly reply, "Because they have been ripping off the public more successfully for far longer by providing less of a service to their customers than anyone else". Like all cynical observation, there is an element of truth in it. In so far as the Bill releases a cool and energising breeze of competition upon those services, I welcome it with great enthusiasm.
I have listened to a great many fascinating speeches during the debate, not least the excellent maiden speech of my noble friend Lord Shuttleworth and the speech of my noble friend Lord Shrewsbury. I agree entirely with what they said.
I am worried about whether those who should be consulted have been properly consulted during the Bill's preparation. By that I do not mean those institutions, organisations or associations which purport to look after the interests of the people who are most affected by the Bill—the public. I ask myself whether the public were consulted. If they were consulted, the question that I should have liked to see put to them is "In your experience, during the course of your life, have the banks done a good job?" The other question would be to ask whether the building societies have done a good job. After all, it is not the building societies, the banks, the insurance companies or the estate agents but the public whom potentially the Bill may greatly affect. I believe that the public would respond very simply by saying that the banks have not done a good job but that the building societies have done an extremely good job.
My concern about the Bill is the enabling power that it grants building societies, in effect, to change their nature. This has been mentioned and developed by other speakers far better than I am able to do. I would simply put forward one point. If you change fundamentally an institution's constitution, you undoubtedly change its nature. It is the nature, the character, of building societies that have inspired their modus operandi and their success. I support those, not least the noble Lord, Lord Barnett, who have expressed concern about this point. It should be examined with great care.
The other part of the Bill that causes me concern is Part V, which deals with the provision of services. In effect, this gives power to building societies to provide a whole range of services, some financial and, oddly enough, some not, although they are associated with housing matters. I believe that these powers have the potential and contain the risk of giving power to the strong. By the strong, I mean those strong financially and, above all, strongly placed in the market place—strongly placed not only in the sense of location but also in terms of time to do great harm to the weak.
Despite this Conservative Administration's much vaunted support of small business, they are giving, by virtue of this power, tremendous strength to the strong. There are thousands of highly professional and experienced small firms and, indeed, sole practitioners in insurance brokerage, surveyors and valuers, land agents and pension scheme administrators who do not 1219 want to be employees of building societies. They wish to remain in the same form and in the same state as they have enjoyed all their lives. This is a point well worth considering. It is, of its nature, a Committee point and will be worth developing at a later stage.
I should like to ask my noble friend a simple question. Do the Government really want a lively, diversified, competitive and locally operated mortgage and financial services industry? Or do they want to set the scene in 1986 for, say, the Big Five building societies together with the Big Four banks by the year 2000? This is my major concern. I beseech the Government to look to the example of the United States of America, where a lively market exists in these fields because the building societies, or, as they are called there, the savings and loans institutions, are, oddly enough, far stronger in total than the banks themselves. This is because the vast majority are small, locally orientated and very close to the community they serve. Part V, comprising only two clauses but a couple of pretty hefty schedules, needs close consideration.
§ 2.50 p.m.
§ Lord Williams of Elvel
My Lords, we have had a very interesting debate today which has been characterised by a considerable degree of harmony from all sides of the House. We are grateful to the noble Lord, Lord Brabazon of Tara, for presenting this Bill to your Lordships in such a clear fashion. It has also been noteworthy that there have been a considerable number of speakers from all sides, even on a Friday, and there might have been more had the Government not chosen to take this business on a Friday. We are, of course, very grateful for the distinguished contribution that the noble Lord, Lord Shuttleworth, made. It is a subject on which he is a very great and acknowledged expert and his views will be of very great value to your Lordships' House in the future, not only on this matter, but I am sure on other matters as well. We are very grateful to him for his contribution.
I am perhaps unique among noble Lords who have spoken today in not having a conflict of interest. I am not a director of a building society. I am not a depositor in a building society, nor an investor in a building society, and I have no building society mortgage. Furthermore—perhaps this is the conflict of interest that I have managed to avoid—I have not received extensive briefing from the Building Societies Association. There may be other noble Lords in this happy position but I have yet to meet them; and I mean no disrespect to the noble Earl, Lord Selkirk, my noble friend Lord Kirkhill and my noble friend Lord Graham, if I say I hope very much that I can maintain this comparative virginity in this case.
There is, however, one point that the BSA has made, I understand, that I feel that I should comment on. The BSA advised many of your Lordships that at the end of the proceedings on the Bill in another place the Opposition Front Bench wished it well. Not quite so fast, my Lords, I regret to say. My honourable friend the Member of Parliament for Thurrock said quite clearly—and I quote from the Official Report, col. 1052—that, 1220we still have certain reservations about the Bill, but we wish the building societies well. We have emphasised during our debates the importance of their commitment to housing and their meeting of that social need in the past. We hope that in future the societies will remain as mutual organisations and will continue primarily to meet the housing need."— [Official Report, Commons, 4/6/86; col. 1052.]She finished her speech by saying again:We wish the building societies well"—the building societies, my Lords; not the Bill necessarily, nor indeed the Building Societies Association necessarily.
The fact remains also that the position was taken up consistently by the Front Bench of the Labour Party in another place, and, with the equal consistency which has been such a shining characteristic of my party over the years, I am glad to say that this is also the position of the Labour Front Bench in your Lordships' House.
But, again, the fact remains that the Economic Secretary to the Treasury in another place introduced something over 1,000 amendments, as my noble friend Lord Graham has pointed out. He was good enough to say that they were in response to representations that had been made, and to discussions which had taken place in Committee. Nevertheless, a lot of them were introduced on Report in another place and I think it is only right and proper that your Lordships should have full opportunity to hear the case for the Opposition, and other noble Lords who disagree with all or part of the Bill, and also to scrutinise the legislation very carefully to make sure that when it leaves your Lordships' House it is as good as we can possibly get it.
There is one general point that I should like to make before addressing the Bill itself. There are many measures coming before your Lordships' House at the moment—far too many, in my view. Not only is the timetable congested, which is bad enough, but Bills get re-written more or less on the hoof as they go along. Hasty drafting means bad final legislation. I must say that I noted, with a certain amount of regret, that the noble Lord, Lord Brabazon, indicated that the Government were going to table yet more amendments to this Bill in your Lordships' House. After all the consultations have taken place, to which noble Lords have quite rightly referred, after the full debates that took place in Committee in another place, and in the full House, it is rather sad that the Government have not yet got their legislation in a position where they do not have to table detailed amendments in your Lordships' House.
Every Bill that I have had anything to do with in the past two months has had one or more inconsistencies in relation to other Bills—particularly inconsistencies in relation to the Financial Services Bill, which of course your Lordships have yet to see officially. I am extremely concerned that in the Bill about which we are talking today there may well be similar anomalies.
I notice, for instance, that in this Bill the noble and learned Lord the Lord Chancellor has been given a starring role (if I can put it like that) in deciding whether or not to recognise institutions and individuals who may provide conveyancing services. Yet the Government have only recently refused in another place a proposal to keep a register of those allowed to sell insurance and pensions on the doorstep. I ask 1221 myself: are those positions consistent? Is there anything in the Bill which has a philosophical and political thrust different from those thrusts that we shall see when we come to debate the Financial Services Bill?
My noble friend Lord Strabolgi asked: would this Bill be consistent with the measures for banking supervision that are to be proposed next year? I think that he was particularly talking to the narrow point of investor protection. I am talking to the wider point: will the building societies, as they develop into markets in competition with the banks, be controlled in a similar fashion to the banks? There are many noble Lords—not just on this side of the House—who are very uneasy at the indecent haste with which a great deal of legislation is being put into the sausage-machine, and we find that it is not necessarily good legislation when it comes out.
Having made those general points, perhaps I may turn to the Bill itself in a little more detail. As I understand the noble Lord, the Bill has three distinct objectives to which a number of noble Lords have referred. The first objective seems to be to tidy-up and update the legislation governing building societies, in the light of developments over the past few years. The noble Earl, Lord Selkirk, described that in some detail. The clearing banks are obvious competitors. They have obviously been competing in an area which has been traditionally the preserve of building societies and they have competed, I think I can say, with varying degrees of enthusiasm and varying degrees of success. It has not been an unlimited success story for clearing banks in the mortgage lending market. Indeed, recently some of them have started to try and cut back on their mortgage lending. Nevertheless, they are there and, as I think one noble Lord remarked, they have approximately 20 per cent. of the mortgage market at present.
It is worth hearing in mind that the clearing banks intruded into this market because they felt that they were retaliating to what they regarded as rather unfair fiscal discrimination in their collection of deposits. Now that that has to some extent been rectified, they probably take a less aggressive view of the mortgage market. Nevertheless, other noble Lords have referred to even more recent developments and there is just one that I should like to pick out which I think will be very important over time.
There is a small but undoubtedly growing market in securitised mortgage investments by means of which obligations become tradable between one investor and another investor, and the price at which that mortgage obligation is traded is a matter of dispute and agreement between the buyer and the seller. This is a development which I think one can genuinely say is an import from the United States of America. It is quite large over there and it has started here. Indeed, one particular investment bank has announced in rather public terms that it is going to set up a market in this regard. It is those kinds of developments to which noble Lords have been referring when they say that building societies under the present legislation are not really in a position to compete, and that there are some aggressive, and indeed in some case unruly, intruders 1222 who seek to take advantage where they can. I have no doubt that we shall return to that matter at later stages of the Bill.
The question of principle that relates to this objective of tidying-up legislation is this. Does the Bill, as presented, provide the right framework for the societies to compete on a fair basis without sacrificing the traditional, and in our view very valuable, relationship that the societies have built-up with their investing and borrowing members? Nothing could be more destructive than the loss of local or regional identity; the loss of investor or borrower identification with the society of which he, or she, is a member. We shall scrutinise with great care in the ensuing stages of the Bill the measures that it contains to further this objective.
It is a fine balance. Some noble Lords think that it has been got right in the Bill; others think that it has slipped in one way or another. We shall be looking at that particular balance carefully. But if we wish the building societies well we must—and we from these Benches will do so—will the means to allow them to maintain their health in what is an increasingly competitive market.
The second objective, as I understand it, is to enable building societies to compete in markets from which they are at present excluded. Here I seem to find a certain lack of clarity in the societies' own motivation. At times, the argument seems to be that they wish to supplement their traditional activity, that of mortgage lending, by complementary services, such as loans to finance repairs and improvements to houses, without resort to these tricky schemes like agency service schemes, and providing homes for rent—and the noble Lord, Lord Campbell of Croy, and my noble friend Lord Houghton of Sowerby both spoke eloquently about this.
All that seems clear. But at times the motivation seems to go well beyond that and seems to reflect the ambition of some building society managements to participate in the financial services revolution. There is something called "A financial services revolution", and because they are big organisations they wish to participate.
I cannot see for the life of me how the services listed in Schedule 8 to the Bill relate to housing finance. Foreign exchange transactions? Unit trusts for the provision of pensions? Administration of pension schemes? Insurance broking? Advice on insurance? We have a plethora of institutions offering these services. Do we really need another set? If we do, then the question that follows from that principal objective is apparent. How are these services, and the providers of these services, going to be regulated? How are they going to be managed? By whom? Foreign exchange dealing is a risky and dangerous business, particularly when you allow people into currency futures and currency options, as one clause in the Bill (to which the noble Lord drew our attention) specifically sets out to do. Even if it is only conducted on behalf of individuals, it is still a dangerous business.
Who is going to monitor the currency exposure of building societies that are going to be engaged in this business? Who is going to pick up the pieces when an insurance contract goes wrong, or a unit trust loses its 1223 unit holders' money because it has made unwise investments? These are complicated areas, and the prudent management concept is certainly not enough, as we shall see when your Lordships come to debate the Financial Services Bill. A heavy burden will fall on the Building Societies Commission, and I join with the noble Earl, Lord Selkirk, in looking to see that the commission will be properly equipped, and that its expertise and remit will be at least equivalent to those of the banking supervisors and the proposed Securities and Investments Board.
The third objective is to allow the societies to compete adequately, to ensure a consistent flow of funds with which to finance their lending. This applies particularly to the retail sector. After all, societies (as I think the noble Lord, Lord Campbell of Croy, pointed out) have been granted access to wholesale money markets for some time now by being allowed to pay interest to non-residents gross of tax. Indeed, they have taken full advantage of this by borrowing I think as much as £30 billion largely in five-year to ten-year floating rate notes, which is a sensible instrument given the maturity portfolio of their lending.
All that seems to be eminently desirable. But in the retail market, where societies hold deposits in one form or another of over £100 billion—and that is more than half the total retail deposits in the United Kingdom—they are under attack from the clearing banks and other forms of saving. Here they put forward the view that to defend themselves they need to be able to engage in what I would regard as being banking money transmission services. The point has been made that they should have a cheque card system; they should have a cheque system; they should be able to give overdrafts, and should be able at least to perform the money transmission services that the high street clearing banks can.
I have a slight doubt about this. I share somewhat the doubts of my noble friend Lord Houghton of Sowerby about whether these are really the things that building societies should be doing. But there is a greater ambition on behalf of the largest societies to convert themselves into real banks by going the public company route and attempting to become—or, indeed, having to become if they are to be authorised by the commission to convert—recognised banks in the full sense of the Banking Act 1979. It is at this further point that we part company totally with the Government.
As my noble friend Lord Barnett said, we have enough retail banks in this country; why do we need any more? Will not any building society that takes—
My Lords, does the noble Lord seriously think that four banks are enough banks for this country? There are thousands of branches, but we have only four banks. It is a monopoly.
§ Lord Williams of Elvel
My Lords, I am grateful to the noble Lord, Lord Morris. It is not actually true that we have four banks. We have four banks and several subsidiaries. Scotland has a different system. But the fact is that high street banks (if I can use that expression) are closing branches at the moment because they are unprofitable. If we allow building 1224 societies to convert their high street branches into branch banks we shall have a great plethora of people sitting on the high street offering the same service.
Lord Campbell of Croy
My Lords, the noble Lord, Lord Williams, referred to something I said. At a convenient moment after that I thought I should say that he has referred to the fact that the building societies have been in the wholesale market, as I said. My society was the first to go in about five years ago, but societies have been limited to a small percentage of the funds that can be raised from that source, and that will be in the Bill as well. I believe it is 20 per cent. Their main function must be still the retail side and on the high streets. If building societies are to be doing that, surely they ought to be able to have the powers of money transmission and other facets which the banks have.
§ Lord Williams of Elvel
My Lords, I am grateful to the noble Lord, Lord Campbell of Croy, for his intervention. My argument was tending towards the view that building societies should be given more ability for medium term wholesale borrowing. In fact, it is financially prudent. I think the noble Earl, Lord Selkirk, talked about the magic of borrowing short and lending long, and this is something that has been achieved only by the building society movement in this country. I believe it is financially prudent to match the maturities of your borrowing and your lending side, but that is a point to which we shall come in Committee. That was the burden of my argument.
We wish the building societies well. But we have to be satisfied that this new framework which is being proposed will not just be to the advantage of the societies but will preserve what my noble friend Lord Graham of Edmonton talked about: what is good and wholesome in this movement, and the links that it has built up over the years with its investors and borrowers. We on our side welcome this Bill. We welcome it with reservations. It is in that spirit that we shall be questioning the Government very closely when we come to Committee.
§ 3.9 p.m.
§ Lord Brabazon of Tara
My Lords, it is fair to say that the Bill has in general terms received a welcome from all sides of your Lordships' House. I referred in introducing the debate to the great care that the Government have taken to consult as widely as possible about it and I am grateful to many noble Lords who have paid tribute to that. Throughout, the Government have sought to produce a Bill which sets the best possible framework for the future development of the societies and I believe it is a generally non-partisan measure. I am heartened that so many noble Lords share that view.
Our debate today has benefited from the participation of many noble Lords with considerable experience of building societies. I think that I am probably almost alone, with the noble Lord, Lord Williams of Elvel, in not having an interest to declare in this field. But that experience of many noble Lords will be of great value when we come to consider the Bill in detail, as their contributions today have shown. I should like to pay particular tribute to the close co- 1225 operation that the Government have received from the Building Societies Association in preparing the legislation. Their contribution has been very valuable. On such a substantial Bill as this one, it is inevitable that tidying up will be needed in your Lordships' House. Accordingly, the Government will be tabling a not insignificant number of amendments for Committee stage. I am glad to say that most of these will be of a technical nature, responding to points raised by the building societies and others and bringing the detailed provisions of the Bill into line with corresponding proposals for banks and investment business—which was a point raised by the noble Lord, Lord Williams of Elvel.
Some amendments will address slightly more important policy points, and I shall seek to ensure that those in particular are tabled as soon as possible and certainly well before the Committee stage. At the same time if any noble Lord would like to discuss the Government amendments or any other detailed points in the Bill, I shall be happy to help in whatever way I can. I should also say that Notes on Clauses will be made available as soon as possible.
Turning to the points raised in the debate, I am grateful to the noble Lord, Lord Barnett, for the general welcome that he gave to the Bill. Fairly early in his speech he raised one point about the payment of interest gross to certain depositors as a possibility. As he will be well aware, that is a matter for my right honourable friend the Chancellor and not something which we could attempt to introduce into this Bill. It is a Finance Bill measure. He reminded us of the changing environment which has taken place over the last few years in the building society movement. I would say to him, yes, even over the last six months while the Bill has been in another place there has been a tremendous increase in competition for the mortgage market from the banks.
The noble Lord's two main points, I think, were those on conveyancing and conversion. If I may, I shall return to the matter of conversion at the end of my remarks. On the subject of conveyancing, he accused the Government of not having fulfilled the undertaking allegedly given to his honourable friend the Member for Great Grimsby. If I may, I would refer him to the reply made by my right honourable and learned friend the Solicitor-General in Standing Committee in another place on 20th February this year (col. 480). I shall not weary your Lordships by reading the reply in its entirety this afternoon.
I am grateful to the noble Viscount, Lord Chandos, and his party for their general welcome to the Bill. He made some interesting comparisons with the experience of savings and loans associations in the United States. I can assure him that in the preparation of this Bill, we have taken fully into account what has happened over there.
The noble Lord, Lord Hill of Luton, was mainly concerned with the issue of conversion. As I have said, I shall return to that a little later. I should like to join other noble Lords in saying how much I enjoyed the maiden speech of my noble friend Lord Shuttleworth. He brings a great deal of experience of this subject to your Lordships' House. I am grateful to him for his support for the Bill and I hope that we hear from him 1226 not only during the later stages of this Bill but on other matters which come before us.
He asked me two specific questions. One was about the classification of premises used partly for business purposes. My noble friend asked for clarification as to the provisions of the Bill concerning the classification of premises used partly for business purposes. He was quite correct in saying there was a power for these to be treated in prescribed circumstances as held wholly in class 3. However, I can assure my noble friend that the present intention is that those prescribed circumstances should be limited to cases where only a relatively small proportion of a building is to be used for its business purposes, not where the building is mainly used for its affairs. A possible figure would be when less than 40 per cent. of the premises is used for business. It is only when the majority of the premises is rented to others—a relatively small number of cases—that they will be put into class 3.
My noble friend, and also my noble friend Lord Shrewsbury, asked whether the ombudsman should be able to override a contract between society and complainant. This is the nature of an ombudsman scheme. He is there to adjudicate on what is fair, over and above the strictly legal entitlement. If the power were removed, the ombudsman would be no more than an arbitrator or a court. It is because of this role that the Government have included the let-out by means of which a society may decide not to comply with the ombudsman's decision if it explains its reasons publicly.
Nevertheless, I recognise the concern expressed by my noble friends. It is not the Government's intention that the ombudsman should have unfettered discretion to rewrite the terms of contracts freely entered into. The Treasury have had discussions with the Building Societies Association and are now considering with the parliamentary draftsmen whether an amendment to make this clear would be appropriate.
The noble Lord, Lord Strabolgi—and, again, I thank him for his welcome of the Bill in general terms—brought up two particular points. One concerned the unsecured lending rights of small societies. I should make it clear that the qualifying asset holding will apply only to a minority of the new powers available to societies. Your Lordships need look no further than the service powers in Schedule 8 for evidence of that. Of the powers there, only the part of estate management service is required as a qualifying asset holding. Elsewhere the new forms of secured lending under Clauses 11 and 12, including the power to lend on second mortgage, will be available to all societies. Small societies will be able to offer unsecured loans as agents for others.
Therefore, a large number of new opportunities will be available to all societies, and societies will need to develop their businesses and requisite business capacities carefully. What the asset threshold will mean generally is that only those with sufficient management depth and capacity will be able to have powers in the least accustomed and more risky fields.
While I accept the criticism that the figure of £ 100 million is to some extent arbitrary, I think that arbitrariness is a small price to pay for ensuring that 1227 the higher-risk powers are available only to the 60 or so societies most likely to have the capacity to take them on.
The noble Lord also mentioned the investor protection scheme. Protection on the first £10,000 gives small depositors a reasonable level of protection but does not absolve them of their responsibility to judge the prudence of any deposit. That was a point made by the noble Viscount, Lord Chandos. It is the small investor who is in most need of the statutory protection. A higher ceiling of protection would catch many larger investors, including corporate investors who are generally better placed to judge the prudence of their investments. The £10,000 limit is the same as that applied in the Banking Act. Some people have called for 100 per cent. protection but we believe that would be quite wrong. As experience in the United States and elsewhere has shown, full statutory protection can be very damaging: investors do not have to judge the prudence of their decisions, and we believe it is important that they should have to do that.
I should again like to thank my noble friend Lord Campbell of Croy and also my noble friend Lord Luke for their reception of the Bill, and particularly for their remarks about the great contribution made by building societies in the housing field and what we can expect from building societies now under the new provisions. I know that one leading building society has already announced that it should be able to build 3,000 houses a year as a result of the measures which we propose. Again, my noble friend Lord Campbell of Croy talked about conversion and I shall return to that later.
The noble Lord, Lord Houghton of Sowerby, referred to the Government's housing policy in general, and particularly the question of mortgage interest relief. I have to say that the 6 million people buying their own homes with the aid of a building society mortgage will, I hope, welcome the firm commitment given by this Government to maintain the relief. The Government remain committed to encouraging home ownership and mortgage interest relief as a central plank of that policy. The noble Lord also mentioned houses for rent. One thing that this Bill encourages building societies to do for the first time is to provide accommodation for rent.
The noble Lord, Lord Houghton of Sowerby, said that over the years the concept of mutuality between investor and borrower in the building society movement had been—as I think he put it—a rip-off; investors had not made money out of building societies, and borrowers had done very well out of their house purchase. Certainly the latter is very true. All I can say is that under this Government, for the first time for many years, with inflation down to 2¾ per cent., investors in building societies are enjoying a real rate of return on their money.
The noble Lord mentioned the £100 qualifying shareholding for voting and suggested that it was too low. This is a matter of judgment, as the noble Lord recognised. The figure is a significant increase on those in existing legislation. Setting the threshold higher at £250, rather than at £100, would not reduce the electorate by very much, but in the Government's 1228 view it would cut out people who might legitimately expect to be able to play a role in their society.
My noble friend Lord Selkirk was particularly kind in complimenting the draftsman of this Bill, and about the consultation that had taken place. He asked about the composition of the Building Societies Commission. My noble friend will be aware that the present chief registrar will be the chairman of the commission. I do not know whether my noble friend knows him, but he is not a man to be in any way subservient to the Treasury. The commission will also have a majority drawn from outside central government members and will be established as an independent body which accounts to Parliament for its activities. Unlike the chief registrar under present legislation, who exercises supervisory powers in respect of individual societies, he will not require prior Treasury consent. So I hope my noble friend will to some extent have his fears allayed, because there will not have to be approval by the Treasury.
My noble friend also referred to the Rent Acts. I can only repeat the assurance which has been given from this Dispatch Box recently, that the Rent Acts are at the moment the subject of review and we very much hope to be able to bring in legislation in the next Session.
The noble Lord, Lord Kirkhill, broadly welcomed the Bill and reminded us of how building societies' customers themselves wanted many of the changes which we are proposing. My noble friend Lord Suffield and the noble Lord, Lord Graham of Edmonton, talked of complaints about unfair competitive practices. This is not a matter for the commission, whose primary concern is the financial position of societies and the protection of investors. However, the Office of Fair Trading have extensive powers under the competition and fair trading legislation to investigate anti-competitive practices.
In another place, a particular case was mentioned and my honourable friend the Economic Secretary to the Treasury said at Report stage there that this was a matter for concern. He has accordingly drawn the attention of the Director General of Fair Trading to it and I understand that his office are now looking into this matter. It is the Director General of Fair Trading who has the expertise and the powers to look into matters of this sort, and I am sure it is right to use that expertise rather than to graft a further function on to the commission.
The noble Lord, Lord Graham, talked about the concept of mutuality. I accept that the basis of mutuality has changed as societies have grown into larger institutions, but accountability to membership is an important factor in promoting efficiency. The Bill thoroughly overhauls the constitutional structure of societies while sticking to the fundamental mutual principles. The Government's aim has been to provide a framework for improved member participation and accountability and this will become evident on closer scrutiny during later stages.
My noble friend Lord Shrewsbury talked about the Ombudsman scheme which I think I have already covered. My noble friend Lord Morris talked in particular about the position of small, independent professionals and whether they would be lost as a 1229 result of the building societies moving into their traditional markets. We do not believe that the Bill will tend to diminish the role of small, independent professionals or that they will all have to become employees of building societies which, as my noble friend said, they might not want to do. In the Government's view, the small business will continue to be able to offer a distinctive specialist service. It will be able to respond to competition from building societies; and although evolution of their markets is inevitable, I believe that they will continue to thrive.
The noble Lord, Lord Williams of Elvel, put forward a number of points and asked whether the Bill provides the right framework for the societies to compete without damaging local or regional identity. I hope that is the case, and I hope that our proposals in regard to mergers of small societies will help in that direction. The noble Lord asked whether I thought it was right that building societies should be allowed to offer services such as foreign exchange, unit trusts, cheque cards, and money transmission services. It is inevitable if they wish to compete with the banks and to keep their customers happy; and their customers are demanding these services. It is surely a good thing for the building society movement that their customers should be able to get these kinds of services from the building society with which they place their savings on a regular basis.
I turn lastly to obviously the most important subject about which every noble Lord has spoken. I refer to the business of conversion into pies. I am sure that we shall come back to this in Committee stage so I shall not be too long on it at this moment, especially as time is getting on. We strongly believe that it is important to allow members of mutual institutions the choice; but specifically while mutuality has served building societies well, and I expect it will continue to do so in the future, it undeniably has its problems. There are problems of accountability and it is difficult to raise new capital. It is right to offer societies the option of continuing outside the framework of mutuality in the future. Some societies may find the use of their new powers taking them towards the limits under the Bill faster than the rest. In such circumstances it is surely better to allow such a society the chance to step outside the legislation rather than to relax the limits prematurely. If a building society were to get it into trouble, under the present constitution only another society could rescue it. Surely it is sensible to allow the possibility of a rescue by another outside institution.
Several noble Lords have taken the opposing view in that they believe that we have set the hurdles impossibly high. If in the event they turn out to be unreasonably difficult there exist provisions in the Bill to adjust them; but for the reasons I have given, I believe that the levels proposed are the appropriate ones initially. The noble Lord, Lord Houghton of Sowerby, said that it was undemocratic to require a 20 per cent. minimum number of members voting on this resolution. I would only give the noble Lord two examples. One was the Bill for the proposed devolution of Scotland and Wales, at the time the party opposite was in power, which required a yes vote of at least 40 per cent. of the electorate.
My Lords, if my noble friend will forgive me, that was the result of pressure from this side.
§ Lord Brabazon of Tara
My Lords, I stand corrected by my noble friend; I am sure he was part of that pressure. I come closer to home, to say that when we consider the Bill in Committee, we will demand, as the noble Lord, Lord Houghton, will know, a minimum of 30 Peers present if matters come to a vote. If the number present falls below that, then the proceedings are suspended. That is quite a good example to give the noble Lord.
I have covered as many points as I can in the time available. I shall study with interest again everything that noble Lords have said, and if there is any particular matter that I have missed out, then I will certainly write to the noble Lord in question.
In conclusion, this Bill presents building societies with perhaps the most exciting opportunity in their recent history. They will be able to build on their past success and offer new services to their members in ways that their founders can scarcely have foreseen. The Government believe that the societies, guided by the new commission, will use their opportunities with wisdom and prudence, without losing sight of their traditions and roots. The societies have built their reputations on a tradition of service to their customers for more than a century. With this Bill on the statute book, they will be able to evolve and develop that tradition for many years to come. For all those reasons I commend the Bill to your Lordships.
§ On Question, Bill read a second time, and committed to a Committee of the Whole House.