Building Societies (Financial Assistance) Order 2008

rose to move, That the Grand Committee do report to the House that it has considered the Building Societies (Financial Assistance) Order 2008. The noble Lord said: The order derives from the Banking (Special Provisions) Act 2008 which contains powers that enable the Government, by way of an order, to remove existing statutory barriers that may prevent building societies from accessing emergency financial assistance from the Bank of England. The building society sector continues to provide highly regarded services to members and customers throughout the United Kingdom. During the passage of the Bill, the Government promised, as a precaution, to put such an order before Parliament as soon as possible. I am pleased that we are fulfilling that promise and that Members of the Committee have an opportunity to debate the order. I remind the Committee that the Government are fully committed to legislative reforms that will improve financial stability and depositor protection generally. Global financial markets remain turbulent, and it is important that we have a strengthened framework in place both for now and for the future. The order forms a part of that programme of reform. In January, the Government’s proposals were published. They included measures to improve building societies’ access to emergency financial assistance from the Bank of England, both in the range of methods that the Bank can use and the amount of assistance that building societies can potentially draw on. I should make it clear that in this regard the proposals are purely precautionary. They are intended to place building societies on a similar footing to banks, not single them out for special treatment. We regard the order before the Committee as sensible and prudent contingency planning on the part of the authorities, and it would be relied on only where there was a serious threat to the financial stability of the United Kingdom. The Committee will also be interested to know that in response to consultation on the policy that this order will enact, the overwhelming majority was supportive. The Building Societies Association has made it clear that it welcomes steps to put building societies in the same position as banks. Improving building societies’ access to emergency funding from the Bank of England strengthens the resilience of an institution against failure, and thus protects against the consequent distress and hardship that this might bring to depositors and members. The key elements of the order are as follows: under the Building Societies Act 1986, at least 75 per cent of the business assets of a building society must be residential mortgage loans. The order, if passed, will suspend this lending limit where the consequences of financial assistance from the Bank of England would cause the building society to be in breach of this requirement. The lending limit is restored after one year or, if later, once the financial assistance from the Bank of England has ended. Every building society is currently required by the Building Societies Act 1986 to ensure that at least 50 per cent of its funding is from its own members’ deposits. This is referred to as the ““funding limit””. Certain items may be disregarded from the funding limit and the order will add financial assistance provided by the Bank of England to that list. Of course, building societies can and do take part in the Bank of England’s lending facilities during the course of normal business, and the normal funding limit in these circumstances will continue to apply. Suspending the lending limit and excluding financial assistance from the Bank of England from the funding limit apply only in the case where there is a threat to financial stability. In these circumstances, the nature and extent of the financial assistance will differ from that of the usual money market operations that the Bank of England conducts. As I have said, suspending the lending limit and adding to the items that are excluded from the funding limit will allow building societies to be placed on a similar footing to that of banks. The Bank of England, like a commercial bank, has a responsibility to ensure that its lending is prudent, especially where there is a risk to financial stability. Accordingly, in order for the Bank of England to provide emergency financial assistance to either a bank or a building society, it needs to ensure that its position as a creditor is not jeopardised. It does this by taking effective security. The order will remove statutory barriers that could jeopardise the Bank’s position as a creditor of a building society and therefore constrain speedy action in a crisis. I will explain a little more about these barriers. They include Section 9B of the Building Societies Act 1986, under which a building society may not create a floating charge, and Schedule 15A to that Act, which effectively prevents the appointment of an administrative receiver under a floating charge. When providing financial assistance, the Bank of England needs to be able to secure its lending against the assets and undertakings of the bank or building society. This is wholly consistent with the Bank’s policy for lending in circumstances where there may be a threat to financial stability. This order will modify the restriction in Section 9B to allow a building society to grant a floating charge to the Bank of England over its assets. Again, I stress that a building society would be able to do this only where the Bank had provided financial assistance in extreme circumstances. There is no change to the restrictions on the normal business of a building society. It will remain impossible for a building society to create a floating charge in favour of other creditors. The order applies the law on administrative receivers to building societies so that, should a building society to which the Bank of England has provided emergency financial assistance secured by a floating charge default, the Bank could appoint an administrative receiver. I should stress that in the circumstances we are debating, it is highly unlikely that the Bank would need to appoint an administrative receiver, but the Government believe it is sensible that the Bank, which would become a major creditor of a troubled building society for reasons of maintaining financial stability, should have the additional safeguards provided by this right. Finally, a number of technical and consequential provisions will ensure that various other provisions of the Building Societies Act 1986 are consistent with this order. The Government believe that the order represents sensible contingency planning by the authorities, improves the position of building societies and puts them on a similar footing to that of banks with regard to financial assistance from the Bank of England. This has been widely supported by stakeholders, including the building societies. I beg to move. Moved, That the Grand Committee do report to the House that it has considered the Building Societies (Financial Assistance) Order 2008. 17th report from the Joint Committee on Statutory Instruments.—(Lord Davies of Oldham.)