Clause 1 - The funding limit: funds to be disregarded

Building Societies Act 1986 (Amendment) Bill – in a Public Bill Committee am 9:25 am ar 7 Chwefror 2024.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Stewart Hosie Stewart Hosie Scottish National Party, Dundee East

With this it will be convenient to consider clauses 2 to 4 stand part.

Photo of Julie Elliott Julie Elliott Llafur, Sunderland Central

It is a pleasure to serve under your chairmanship, Mr Hosie. I thank all hon. and right hon. Members for considering my Bill and taking the time to come to Committee, especially at this time on a Wednesday morning; it is unusual for a private Member’s Bill to attract this many people. I thank the Building Societies Association, which represents the building society sector and its 42 member building societies and seven credit unions. It has provided excellent support on the detail of the Bill and is why the sector thinks it is so important. I also thank the Co-operative party for its support, and Anne-Marie Griffiths in the Public Bill Office for her wealth of knowledge and for being there for not just me, but all those who were successful in the ballot; she is a font of knowledge and a credit to the Clerks of this House.

I welcome the support of the Government and the Minister for this legislation. It was announced as part of the Edinburgh reforms but fell off the legislative process, so I am proud to take up the Bill as a strong new chapter in the mutual and co-operative banking tradition. I am also grateful for the support of the Minister and his officials at His Majesty’s Treasury, especially Logan Cuthbert and Nicola Brown, for all their work preparing for the drafting of the Bill, and for ensuring that the voices of the building society sector are heard and its needs met in the Bill’s detail.

The purpose of the Bill is to bring the building society sector in line with the Companies Act 2006 in some important, specific respects, which will put the sector on a more level playing field with banks and ensure that it can remain comfortably solvent during times of economic pressure while accessing further sources of funding. I will not go through all the arguments that I made on Second Reading as to why the Bill is so important, but I will run through each clause, consider its effects and comment on issues raised on Second Reading.

I have already said that the Bill is an important development of the Labour and Co-operative tradition of working people supporting each other; in that vein, I am proud to have the support of the Co-operative party on the Bill. On Second Reading, the hon. Member for Mid Norfolk talked about how it is also an expression of civic conservatism. Although our readings of the Bill might be different, I am grateful to Members across the usual political divides for coming together to support a Bill that is so important for a sector that supports so many people in all our constituencies and can impact so many lives for the better.

We should take a brief look at the numbers. The building society sector has more than 26 million members and holds more than £352 billion of mortgage assets and more than £313 billion of savings from individuals. What is so great about the sector is the support that it gives to first-time buyers. In the first nine months of last year, building societies in the north-east and Cumbria supported 4,000 first-time buyers, and since 2020 they have lent £3.5 billion to first-time buyers alone—that is one of the things that particularly interested me in taking the Bill forward. It is estimated that for every £10 billion of new lending capacity the sector could support 20,000 new first-time buyers, so if we unlock billions with this Bill, as I think there is the potential to do, we can truly help lots of people.

Clause 1 affects those potential numbers more than any other in the Bill. It describes the funds that can be disregarded if the Bill passes, and amends section 7 of the Building Societies Act 1986. Currently, to operate as a building society—there are 42 in the UK—each society must ensure that a minimum of 50% of its funds is sourced from individual members. That minimum 50% wholesale funding limit ensures that the building societies continue to serve the members they were created for. The Bill does not seek to change the 50% limit, but clause 1(2) provides His Majesty’s Treasury the power to specify certain sources of funding to be disregarded from that measurement. The disregarded funding comprises

“amounts drawn by the society from a specified liquidity insurance facility provided by the Bank of England…amounts represented by specified debt instruments issued by the society with a view to maintaining the minimum requirement for own funds and eligible liabilities” and

“sums received by the society under a sale and repurchase agreement entered into by the society with a view to complying with a specified PRA rule.”

It sounds like gobbledegook, but it really will make a big difference!

The specified liquidity insurance facilities are not named because it is incumbent on the Government of the day to name the particular source of funding building societies can access by reference to the detailed descriptions applying from time to time. By not naming one now, we allow future Governments to specify the relevant funds at that time via secondary legislation, meaning that the Government can be much more responsive to the sector’s needs, and adapt and change when necessary.

Photo of George Freeman George Freeman Ceidwadwyr, Mid Norfolk

I congratulate the hon. Lady on everything she has done to bring the Bill to this point. All of us here, and many listening, will be aware of the appalling situation when the Northern Rock building society, a once great pillar of northern building, became something very different. Can she give any assurances that the Bill is designed to support the best of building societies, which are properly rooted in good, connected capital, rather than what we saw then?

Photo of Julie Elliott Julie Elliott Llafur, Sunderland Central

I thank the hon. Gentleman for reminding me of that situation, which affected an awful lot of my constituents, as Northern Rock and the vast majority of its members were based in the north-east. People still tell me on the doorstep today that they lost literally tens of thousands of pounds. The issue of malpractice and bad practice within building societies is separate from what the Bill does. If things are not being run correctly, there are other checks and balances that came in after the Northern Rock crisis to stop that—particularly the protection for deposits up to £85,000. It is a relevant point, but the Bill will not make that possible again; I am quite sure about that.

The specified debt instruments are not named either. Notably, this function is not to introduce risk into the process—it is to help to support building societies to remain comfortably solvent at a time when they need it most. Proposed new subsection 7(3)(e) of the 1986 Act is quite clear about sale and repurchase agreements. Clause 1(3) inserts appropriate new definitions into section 7 of the 1986 Act and gives the Treasury power to make regulations specifying the detail of funds and Prudential Regulation Authority rules. The regulations will be subject to the negative resolution procedure.

The approach has been consulted on by His Majesty’s Treasury and was backed by industry. It is what the sector needs, and this clause has the power to unlock billions. The removal of these considerations from the 50% wholesale funding limit means that building societies that want to can run much closer to the 50:50 ratio than the 70:30 or 80:20 ratios they do now. That is where my point about unlocking billions comes from. When we look at how many people are supported already and what a difference giving that freedom to the building societies can make, we see there is huge potential to help many more people access a mortgage for the first time.

Clause 2 amends schedule 2 of the 1986 Act to modernise the building society sector’s relationship with its members in line with company law. It sets out the possibility of holding and conducting building society meetings in a hybrid way so that persons who are not present together in the same place may attend, speak or vote. First, that is important to allow access to meetings for those who are unable to attend in person due to health or geographical issues. For example, the Nationwide Building Society is, as the label says, nationwide, so having hybrid meetings opens up the ability for more people to attend, because a physical meeting can be held in only one part of the country. The situation may well be different for smaller, local building societies, but the change is still important.

The second main argument behind the clause is simply that the change brings the building society sector into line with businesses and retail banks as defined in the Companies Act 2006. Building societies should not be held to different standards. The important mitigation is that it is down to individual building societies to consider what is best for them; if a particular building society wants to make the change, its members will need to vote on it and agree to it. That means that the clause does not enforce anything, but gives building societies the ability to change if their members want it; it gives more flexibility. I hope that helps any Members who might have worries about the clause. It is about putting building societies on a more level playing field with retail banks, and it is what the sector has asked for.

Clause 3 is another modernising clause. In simple terms, it will enable the Treasury to introduce increased flexibility for societies in relation to common seals and the execution of documents, in line with company law. It reserves to the Treasury the right to make provision by regulations in future, upon which further consultation in the sector would be usual.

Finally, clause 4 states the territorial extent of the Bill, which covers all of the UK, and when the Bill will come into force. It also makes it clear that modifications of company law to which assimilation can happen as described in clause 3 cover those made both before and after the Bill comes into force.

The Bill does a lot for a sector that needs it and has asked for it. Building societies support millions of people up and down the country, and are much more adept at supporting first-time buyers than other parts of the sector. The Bill gives them much more flexibility to do exactly that.

Photo of Bim Afolami Bim Afolami The Economic Secretary to the Treasury

It is a pleasure to speak to the Bill and, as always, to serve under your chairmanship, Mr Hosie. I congratulate the hon. Member for Sunderland Central on introducing it and on reaching Committee stage, which is no mean feat in this place for a private Member’s Bill.

It is clear from the hon. Member’s remarks that the Bill has the noble aim of supporting the future growth and success of the building society sector. As she said, it will do a lot for building societies, which have asked for this legislation—and the Government and the Treasury strongly support them. As my hon. Friend the Member for Mid Norfolk described, building societies are some of the best in the financial services sector for benefiting local connected communities, and that is the sort of activity we want to encourage.

The Bill will help by modernising legislation so that building societies can have more flexibility around their funding and certain corporate governance requirements. That delivers on the key asks from the sector. As the hon. Member for Sunderland Central said, it is rare that something gobbledegook can have a positive impact on people’s lives, but the technical amendments in the Bill—particularly around capital requirements, which I will explain briefly—will have a positive impact on the ability of building societies to contribute to their local communities in all our constituencies.

As member-owned financial institutions, the 42 building societies in this country work to support the financial resilience of communities throughout the length and breadth of the UK, because they encourage savings and responsible lending, and promote financial literacy and inclusion, which often gets lost. They also play a vital role in supporting their members to buy their own homes, and the hon. Member for Sunderland Central has spoken about the potential for the sector to further support first-time buyers. The Bill achieves all that by making provisions in three areas, which she has already set out, so I will give a shortened version.

First, the Bill amends section 7(3) of the 1986 Act. The year 1986 was a very—

Photo of Bim Afolami Bim Afolami The Economic Secretary to the Treasury

I was. I just realised that it is almost 38 years later.

Photo of Bim Afolami Bim Afolami The Economic Secretary to the Treasury

Exactly—an auspicious year for me.

The Bill amends section 7(3) of the 1986 Act to exclude three specified sources of funding from the 50% wholesale funding limit for building societies. By excluding these sources of funding from the wholesale funding limit, building societies will be able to raise additional wholesale capital, which strengthens their arms to compete with retail banks while promoting competition within the financial services sector.

Photo of Natalie Elphicke Natalie Elphicke Ceidwadwyr, Dover

My hon. Friend the Member for Mid Norfolk mentioned Northern Rock, which was a bank, not a building society, when it failed. Does the Minister agree that the provisions being brought in will allow greater access to capital so that building societies can flourish, while keeping in place the checks and balances that have made building societies so much better at being able to respond to the financial crisis than we saw with some of the banks?

Photo of Bim Afolami Bim Afolami The Economic Secretary to the Treasury

It is worth explaining the dynamic, because it is not straightforward. In essence, the point of the Bill is to level the playing field between building societies and retail banks in this key area. Resilience, in terms of capital, will not be lower for building societies than for any of the retail banks with which we are all very familiar. That is the first point. The controls that are applied to retail banks by sophisticated people with sophisticated mechanisms will have the same capital requirements as building societies—so I agree with my hon. Friend.

Building societies will still be required to hold specified sources of funding for regulatory purposes. That is the key point. The reason we have the capital limits is that, if a shock happens—however rare or unusual that might be—we need to make sure that there is enough of a buffer of capital so that the building society or, indeed, the retail bank does not go bust. Over the last 15 years, we have been through a huge programme of reform to broadly increase the levels of capital by many multiples of what was required in the 2000s, so that that does not happen. Building societies will adhere to that in the same way as our retail banks. Moreover, building societies will still be required to ensure that at least 50% of their funding comes from their members—again, that is a critical way in which buildings societies are different from a typical retail bank—which ensures that the Bill has no impact on building societies’ important and unique ownership model.

Secondly, the Bill amends the 1986 Act to allow the option of real-time virtual member participation at building societies’ meetings, which, as everybody can appreciate, now happens across the corporate sector—it does not happen in Parliament, but that is for another day. This amendment can help to modernise the day-to-day practices of building societies, promoting wider membership engagement by making such meetings more accessible to a greater number of members. That matters particularly for building societies, because they have a membership model; the point is that members find them accessible and know what is going on.

Given that members can do things digitally and more flexibly in other areas of their lives, this small measure can have quite a big and positive impact on participation, but it is worth stressing that the decision on whether to hold hybrid meetings will be up to the members of each individual building society; the Government are not imposing the requirement for endless Zoom calls. If that is what people want, they can have them—they just have to vote in favour of making the relevant changes to the society’s rules by special resolution, which, if I recall my company law properly, requires passing a 75% threshold.

Thirdly and finally, the Bill will provide the Treasury with the powers to further align the constitutional provisions in part 2 of the 1986 Act that concern common seals and the execution of documents with modifications to company law. I do not need to explain to the Committee that common seals have sort of fallen out of general usage—although I have often fancied having one, because I think it would be rather fun to stamp various documents, rather than sign them. But that is now the past and we are bringing building societies into the modern day, which is positive.

Overall, the Bill will help to deliver important amendments to the Building Societies Act 1986 by modernising the legislation so that building societies can compete with retail banks, better serve their members and, to be perfectly frank, better serve the communities they are set up to support. The Government are fully committed to ensuring that all subsequent secondary legislation, which will be subject to parliamentary timetabling, is enacted as soon as possible. I commend the Bill to the Committee.

Photo of Julie Elliott Julie Elliott Llafur, Sunderland Central 9:45, 7 Chwefror 2024

It is a pleasure to follow the Minister on an occasion when we all agree; it is an unusual situation. I thank everyone who has taken part in the debate and Members of all parties, officials and people in the building society sector for their support.

It has been a pleasure to take this Bill forward. If it becomes law, I hope it will make a real difference for all our constituents’ lives and enable more people to get a first foot on the housing ladder, which is so important to us all.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clauses 2 to 4 ordered to stand part of the Bill.

Bill to be reported, without amendment.

Committee rose.