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 Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury) 9:30, 25 Ebrill 2007

I welcome you to the Chair, Mr. Taylor. I apologise to the hon. Member for Bournemouth, West for not being present when he introduced his Bill, which I strongly support. It seems to be a very important piece of work. It has been endorsed by the relevant bodies, particularly the Building Societies Association. I wish it well, and again apologise for not having been here to make the more general points about it.

Although the Government amendments are fully in sympathy with the Bill, they are very substantial, and I should like to raise one broad question: how important and pressing are the funding limitations? That is an important question, because it determines whether we need to make explicit the raising of the limit from 50 to 75 per cent., or to make it open-ended, and whether the legislative provisions need to be rapid, easy or more leisurely.

I got two different interpretations or answers from my background reading on the Bill. On the one hand, Northern Rock gave evidence to the all-party group and argued that its ability to transcend the funding limitations by demutualisation had been a critical factor in its success as a commercial organisation. It had been able to grow rapidly and therefore to cut the spread between its borrowing and lending rates, which were originally the key attractions for mutuals because they do not have to pay dividends. Northern Rock made the point that the funding limitations had been a crucial part of its thinking about the business model that it adopted.

On the other hand, as I understand the evidence, few if any mutuals—we are talking primarily about building societies—have taken advantage of the 50 per cent. that  they are currently allowed. Why have they not done so if it is a binding constraint? I raise that question for the reasons that I mentioned; the answer determines precisely how urgent the process needs to be.

I also wish to refer to the procedure set out in the Treasury’s new clauses, which make it clear that the Treasury rather than the FSA will be the point of determination. Perhaps the Minister will spell out the reasoning behind that decision. As someone who has dealt with both bodies, I can understand that it is probably a sensible decision in this context. I have never found the FSA to be sympathetic to the problems of mutuals. I dealt with the FSA extensively on insurance matters, and it clearly regarded mutuals as an irritating detour from their preoccupations with the City—it was not interested in the idiosyncrasies of the mutual movement. Perhaps that is the reason why the approach has been taken, and the Treasury is too polite it out. There might be some value, however, in the Minister explaining briefly why Treasury rather than the FSA should be the locus of decision making.

In conclusion, I shall reiterate what I said at the beginning of my remarks: as someone who was involved in the campaign to stop the collapse of the building society movement through demutualisation in the late 1990s, I think that the arrest of the slide is valuable. Positive initiatives are now being taken to strengthen the legislative basis of mutuality, and I welcome the Bill as an important component of that process.