Clause 1

Part of Financial Mutuals Arrangements Bill – in a Public Bill Committee am 9:30 am ar 25 Ebrill 2007.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury 9:30, 25 Ebrill 2007

It is a pleasure to serve once again under your chairmanship, Mr. Taylor, although for the first time in a Committee of this nature. I also thank Treasury officials, the staff and experts from Mutuo and the Building Societies Association, and particularly the hon. Member for Bournemouth, West, whose leadership and determination to see such important reforms through to the statute book have been demonstrated in recent months.

We had a full and substantial debate on Second Reading when we aired the wider issues surrounding  the important role that the mutuals sector plays in our economy and the reason why such flexibilities are needed in order to allow building societies and wider mutuals to operate on a level playing field. I repeat what I said on Second Reading in paying particular tribute to the hon. Gentleman’s work. The Government support the principles that underpin the Bill, and we will endeavour to do everything that we can to see it through to the statute book.

There is no deviation from the principles that underpin the Bill, but since Second Reading, extensive and detailed discussions have taken place to ensure that it can be made operational and effective, given the corporate company and wider European legislative framework in which it is necessary for the clauses to operate when they become law. The Bill introduces amendments to building societies legislation on the wholesale funding limit and the position of members in the event of an insolvency. It also updates other mutuals’ legislation to transfer the ownership of a different type of mutual society as a subsidiary company. As I have said, taken together the measures will strengthen the competitive position of mutuals and benefit their members.

New clause 1 amends section 7 of the Building Societies Act 1986 to give the Treasury the power to increase the limit to the proportion of funds that may be raised from sources other than individuals’ shares. As I said on Second Reading, that power should reside with the Treasury and would be operated with full consultation with the Financial Services Authority.

Currently, societies must raise at least half their funds from shares held by their individual members. The remainder can be raised from other sources—generally wholesale funding. The power will allow the Treasury to increase the external funding limit up to 75 per cent. However, the Treasury will be able to use that power only if it also makes an order under new clause 2, which I will come to in a moment. The new power will be subject to affirmative resolution.

New clause 1 also amends section 5 of the Building Societies Act 1986, which defines the “principal purpose” of a building society to be making loans secured on residential property which are funded substantially by its members. The new clause gives the Treasury a power to amend that principal purpose requirement to reduce the extent to which loans are required to be funded by the society’s members. That is to bring the requirement in line with changes to the funding limit. Again, that power is subject to affirmative resolution. Government amendments Nos. 7 and 8 make appropriate changes to the long title.

Increasing the funding limit will increase the amount of “wholesale” funding that societies may use, giving access to cheaper funding and creating a more level playing field with banks. That change was recommended by the 2004 Miles review of the UK mortgage market. The figure of 75 per cent. leaves a significant element of member funding.

On Second Reading, the hon. Member for Bournemouth, West made it clear that he was in favour of using the negative resolution procedure for the various orders that will be necessary to implement the Bill. We have considered that point carefully during the drafting of amendments, and I have discussed the matter with him  personally. We believe that all the main implementing orders for the Bill should be made under the affirmative resolution procedure, in line with the usual procedure for Henry VIII powers.

The powers conferred by the Bill allow the Treasury to make significant amendments to the primary legislation governing building societies and other mutual societies. Having considered those matters carefully, we believe that Parliament should have the opportunity to debate the changes in the light of consultation on the detail of the policy.