Financial Mutuals Arrangements Bill

I fear that may not always be the case in the debates we are holding on either side of today’s private Members’ business. The hon. Member for Edmonton (Mr. Love) gave a knowledgeable and thoughtful speech. Thinking about some of his comments about the role of friendly societies before the Beveridge report, I realised that that sense of providing benevolence and support runs through the remaining friendly societies. They play an important role in meeting the needs of some of our communities. The Bill deals with an important sector. Financial mutuals have roots in communities up and down the country. As the hon. Member for Edmonton said, historically they tackled financial exclusion by providing benefits to their members—that mission was as important then as it is today. Typically, those organisations were run by and for the benefit of their members, but mutuals nowadays cover a wide range—from the Nationwide building society to the Catholic building society and from Liverpool Victoria to the Ancient Order of Foresters. The assets of mutuals range from a few millions to many hundreds of millions of pounds. The Bill helps us to recognise the diversity of financial mutuals and provides the means to facilitate change in the sector. If mutuals are to continue to succeed they need not only to take best practice from the commercial sector but constantly to focus on the benefits to their members that come from their mutuality. A mutual that loses sight of its key role in providing benefits to its members is a mutual that has lost its way. Labour Members have spoken graphically about their connections with the co-operative movement. I was born and brought up in the north-east, and the physical embodiment of mutuality—the local Co-op—was a common sight in streets all over the region. The Co-op was, and to a lesser extent still is, part of the fabric of life in the north-east. The divi was a reward to members of the Co-op for shopping there—a forerunner of the customer loyalty cards of today; but it was also a sign of ownership of the business and of the rewards that come from that. People often link the co-operative movement to the Labour party, but even in my own constituency, which is a Conservative heartland, the flagship store in the local shopping centre is a Co-op. The Co-op provides many of the convenience stores across my constituency. I have never really delved into the history so I am not entirely sure what the link is between Co-op stores, the co-operative movement and Labour and Co-operative Members. Next time I shop in my local Co-op, I shall think about Labour and Co-op Members and about the benefits of my shopping to the co-operative movement as a whole. Because of the strong links to the co-operative movement that I have indicated and also to credit unions, I am delighted to take part in the debate. The Bill will strengthen the financial mutual sector in the future. Members have talked about the three key parts of the Bill: to amend the building societies legislation to enable the relaxation of prescribed non-member funding limits; to establish the interests of members so that they rank equally with non-member funders; and to widen the opportunities for societies to merge across different financial mutual sectors. I want to talk about each of those three aspects, but first I want to remind the House of the background. The starting point of legislation governing building societies is the Building Societies Act 1986. At the time it was seen as giving societies greater market freedoms. It set limits on the classes of asset that building societies could invest in and also, as Members have said, provided the paving legislation that allowed building societies to convert to companies. Of the six largest building societies at the time the Act was passed only one, the Nationwide, has preserved its mutual status. The next significant change in legislation was the Building Societies Act 1997, the culmination of a lengthy process of review and consultation on reform of the 1986 Act. It replaced the prescriptive regulatory regime of the 1986 Act with a more flexible regime and made changes to the powers of the sector’s regulator, the Building Societies Commission. Measures were introduced to improve the accountability of societies to their members, but also to protect the remaining mutual building societies from the pressure to change status. Then we had the Financial Services and Markets Act 2000, which again changed the governance of the sector and brought building societies within the remit of the Financial Services Authority. As the hon. Member for Edmonton said earlier, there have been no building society demutualisations since 2000. He identified that the savings business of Bristol and West was re-mutualised in 2006, with the acquisition of that business by the Britannia building society. There are about 60 building societies in the UK, with over £300 billion of assets. They employ about 50,000 members of staff and have over 2,000 branches, about 22 million individual investors—although some people will have accounts with more than one company—and almost 3 million borrowers. Added to that, building societies have sought to increase the range of products that they sell. They hold the majority of the cash-based child trust fund accounts—about 440,000 in total. It is not just building societies that are involved in the child trust fund business. A number of friendly societies and other financial mutuals are also key players in that market. In broad terms—this is reflected in the Bill—building societies are defined as institutions that must have as their main business raising money from investors in order to lend on the security of residential property. Following the 1997 Act, there are few restraints on the other activities that they are allowed to undertake. The principal restrictions are to prohibit them from speculating in derivatives, commodities and foreign exchange markets, although they can hedge their risks, when looking at the risks that arise from lending in fixed-rate markets. There are two principal issues that building societies need to think about in the context of their activities. The first is the topic of the first part of the Bill. Building societies must raise at least 50 per cent. of their funds from members—essentially, the retail markets—and the balance can be raised from the wholesale financial markets. The second is that 75 per cent. of their lending must be lent on the security of residential property. The Bill addresses the first restriction in particular. It is worth noting that not only does the Bill have support from all the relevant stakeholders in the sector but it has cross-party support in the House.