Financial Mutuals Arrangements Bill

The hon. Gentleman, with his usual perspicacity, has anticipated my next point. The Miles review, which was commissioned by the Treasury in 2004, raised that very issue. The prospect of an increased demand for long-term fixed rate mortgages, which we are now seeing—because of the increase in house prices, the much more difficult affordability with traditional short-term interest rates and the longer terms of mortgages now coming through into the market—makes it important that the current constraints should not adversely affect the market. The building societies that may wish to embrace the new fixed-rate policies have emerged, and if we do not have primary legislation now, it could inhibit the entire operation of the mortgage market. The removal of the constraint means, as I say, that the building societies would be in a position to meet whatever changes emerge in the marketplace over the next few years, rather than having their response to market changes constrained by legislation that might by then appear out of date and unnecessarily restrictive. This in no way forces building societies to move in the direction of non-retail funding, and many may choose not to do so, but it gives them the opportunity to do it in the most cost-effective way, funding possible mortgages for their borrowing members. There is no doubt that if building societies were not able to meet the demand, other institutions would take that opportunity. If the Bill receives its Second Reading today, it may be necessary to move an amendment in Committee to provide the Treasury with an order-making power, to move the non-member funding limit into secondary legislation, and for the non-member funding ratio to be increased to a fixed level of 75 per cent. That is a matter for the Committee, but I thought that I should mention it now. It is not likely to be a significant constraint for the future. Another consideration is the position of the members of a building society and their relationship with the capital markets from which money may be raised. In response to the increased limits, we want through the Bill to help and give reassurance to the members of the societies, so that in the event of a winding up they will rank pari passu with the other creditors. The reason for that is that people who put money into building societies tend to be relatively small investors, not particularly sophisticated in these markets, and who regard a building society as probably the safest and most convenient place for their money. It is therefore appropriate that, because they are not as sophisticated as people who buy shares in banks, for example, they should have an extra degree of protection. As I understand it, the Treasury is perfectly happy that that should occur, the societies are very pleased about it, and, interestingly, the capital markets have said that they do not think that this will affect the rate of interest that they charge building societies. I had thought that they might want one or two extra basis points in order to agree to this, but all the indications are that they regard the building societies as so safe and so well run at the moment that they are not likely to increase the charge. One of the main purposes of the legislation is to allow very cheap mortgages to be offered, and that will not be affected by this alteration of priorities, which is entirely desirable. Again, it will be dealt with by means of a Treasury order from time to time, but that is the right way forward and an entirely appropriate safeguard for rather less sophisticated savers. That is all dealt with in the second part of the Bill. No investor in any building society, since at least 1945 and probably well before that, has ever failed to get their money back before a distribution is made to others. Over the last 60 or so years, building societies have been among the safest of institutions in which to invest. All the building societies are covered, along with other institutions, by regulations issued by the Financial Services Authority and by the financial services compensation scheme. Under the scheme, savers are entitled to 100 per cent. compensation for the first £2,000 invested, and above that, they can claim 90 per cent. for the next £33,000, making a maximum claim of £31,700. No building society has ever been in a position requiring the FSCS arrangements to be invoked, and the predecessor arrangements that existed before the Financial Services and Markets Act 2000 were never invoked for building societies, either. Part 2 of the Bill therefore covers a highly unlikely circumstance. None the less, it is necessary to describe the two different types of investor in building societies. There is the depositor and there is the investing member or shareholder. Depositors, which are usually financial institutions, are not members of the society and are mostly institutions that operate in the wholesale markets that we talked about earlier. They have no say in the running of the building society. However, the ordinary man-in-the-street investor in a building society does become a shareholder, and as members, such people have the right to receive information about the activity of the society, including the summary financial statement, notification of the annual general meeting and any special general meeting. They can also vote in elections for the board of directors, and frequently have done so, partly because of the activities—undesirable activities in my view—of carpetbaggers in the recent past. Provided that correct procedures are followed, they can propose motions or even stand for election themselves. Again, some of them have succeeded in that objective. The depositors are not members of the society and have few of the rights of shareholders. They need not be notified of the annual general meeting, as they are not entitled to attend or vote at that meeting, and they are not automatically sent a copy of the summary financial statement, although generally copies of the document are available from the societies if they ask for them. In theory, depositors have more security than shareholders, but in practical terms the distinction is largely irrelevant. Under current arrangements, the depositors would get all their money back, but under the Bill, if there were a shortfall the shareholders would not suffer in comparison with the others. The Building Societies Act 1997 imposes restrictions on the categories of deposit accounts that an individual may hold with a building society and, apart from a number of exceptions, individual investors may have only share accounts with societies. Those exceptions, where customers may still open deposit accounts, include current accounts; client or trustee accounts; qualifying time deposits; deposits at overseas branches; and where the society has announced publicly that it intends to transfer its business to a company. Currently, as I said, most depositors are the big wholesale investors. The proposals in clauses 1 and 2 will strengthen building societies and enhance the operation of the mutual movement. Clause 3 addresses the transfer of engagement rules. This is a huge opportunity to strengthen the mutual sector. For many years, mutuals in the UK saw themselves as part of their own mini-sector, such as co-operatives, building societies or friendly societies. More recently, they have been seen as part of a larger reality called the mutual sector. Indeed, that was reflected in this House when the original all-party group on building societies expanded its scope, and its title, to become the all-party group on building societies and financial mutuals. That was because we identified the fact that the mutual sector was a movement in itself, with levels of ethics that were greatly appreciated by the general public and levels of performance that were generally better than the performance of the incorporated sector. Sadly, membership of the mini-sectors within the mutual movement has continued to shrink, through a combination of demutualisation and business consolidation. Consequently, mutuality is seen as a declining business form, despite its great appeal and its value to consumers and customers. The Bill seeks to increase the strength of the mutual sector.