Building Societies (Funding) and Mutual Societies (Transfers) Bill

My Lords, I am conscious of the fact that I am breaking every conceivable convention in making a speech on Bill do now pass apart from congratulating the noble Lord, Lord Naseby, on taking the Bill through the House. Any contribution to a Bill do now pass debate should be brief and to the point. Mine will be to the point but not short. I apologise for that but the Treasury has a close interest in the sector to which the Bill relates. Although the Treasury and the Government have fully supported the Bill’s passage through the other place and this House, and the noble Lord, Lord Naseby, deserves the thanks of the whole House for the way in which he has conducted it, it would be remiss of us not to comment on it, given that it relates to issues which were the subject of yesterday’s significant Statement by the Chancellor of the Exchequer. The Bill proceeds through this House after a period of significant market instability. As the Chancellor said yesterday in the other place, the Government are undertaking a review of the framework of depositor protection, and will introduce legislation in the next parliamentary Session. However, these reforms will take time and the Government are clear that they must balance the need for urgent action in the light of recent events with the need to consult as widely as possible. In the interim, this Bill comes at an opportune moment. It introduces helpful amendments to building societies legislation. First—in the Government's view, this is the Bill’s most important improvement—it allows society members to be put in the same position in the event of insolvency as other creditors instead of taking a subordinated position as they do now. This will provide an important additional consumer protection until such time as changes can be made to the broader depositor protection framework. This measure will be implemented by an order made under the power in Clause 2, which is not dependent on anything else in the Bill. Secondly, the Bill allows flexibility for the future in relation to wholesale funding, as the Treasury would be able to use the power in Clause 1 to increase by order the maximum level which building societies can borrow from the wholesale markets to 75 per cent. Clearly, in the light of recent events in wider financial markets, we will want to consider carefully whether such a power should be used—and this Bill provides ample scope for scrutiny. Such an order will require affirmative resolution, ensuring that there is a full debate in both Houses before the measure is implemented. The order can be made only once the position of members on insolvency has been equalised. The Bill will also make it easier for one type of mutual society to transfer to the ownership of another type of mutual society as a subsidiary company while retaining important elements of mutuality; for example, voting rights for the individual members transferred to the new company. The mutual insurance companies and the equivalent European mutuals will be included as a result of the amendments discussed and agreed in Committee. The Government welcome this opportunity to update the legislation on building societies and other mutual societies. We are sympathetic to the reforms that are being introduced, particularly as they have the potential to benefit members of mutuals significantly. The Treasury will consult in due course on the secondary legislation that will implement the policy behind this Bill. In view of recent events in the banking sector I will make a few comments about the Government’s policy on wholesale funding and building societies. The increase in access to wholesale funding for building societies will provide them with more flexibility in financing their mortgages. However, the concentration of funding will also pose risks that need to be effectively managed by firms. The recent case of Northern Rock is a clear example of the importance of risk management in this regard, where the firm’s reliance on wholesale funding and securitisation meant that it was particularly affected by the recent market turbulence and faced liquidity problems as a result. The purpose of the change is to place building societies on a level playing field with banks in access to wholesale funding. This is consistent with the recommendations of the Miles review and the proposal that long-term mortgages be facilitated by building societies having greater access to wholesale funding. The effect of the Bill is to provide the means to greater freedom for societies to reach new and wider markets as they develop. There is no requirement that societies should operate at the proposed maximum level. It will remain for the society to manage its liquidity risk appropriately, and one important factor it will wish to consider is the appropriate balance of member and wholesale funding. This Bill simply gives them greater scope to manage that risk as they see fit, still subject to the full prudential regulatory requirements of the FSA that I will outline in a moment. Societies may choose to alter their funding level as their members’ needs dictate, within the existing or revised limits. The Bill also gives the Treasury the option of requiring societies to obtain a members’ resolution before exceeding the 50 per cent wholesale funding. Within the scope of its principles-based regulatory regime, the FSA has a range of powers available, should it consider that a society is taking an inappropriate risk in its funding approach. It should be noted that, unlike banks, building societies also have statutory constraints placed on them under the Building Societies Act. As a result, the Government consider that there will be sufficient safeguards in place at the time the wholesale funding limit is extended. I appreciate that this is an extraordinary intrusion on a Bill that the Treasury has backed all the way through. It is a very late contribution, and I apologise to the House for that. The Treasury and the Government are fully behind the Bill and are grateful to the noble Lord for the way in which he has conducted it through the House, but it would have been inappropriate for the Bill to have gone through without the Government making some statement in the light of what was said yesterday. I apologise to the House for breaking all known requirements with regard to the procedure on the passing of a Bill, but I hope that it will be understood on this occasion that it is meant to be helpful both to us and to the wider community.