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Competition

Volume 98: debated on Wednesday 4 June 1986

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'A building society shall not seek to lend money to a member where that member has sought a loan from another lender or finance broker and where that lender has sought the society's permission to register a second charge with the Land Registry.'.— [Mr. Shersby.]

Brought up, and read the First time.

With this it will be convenient to discuss new clause 27—

Prohibition on second charge—
'A building society shall not place a restriction in its mortgage deed which prevents its member from obtaining finance from another source without first obtaining the society's consent.'.

First, I declare an interest. I am vice-president of the Corporation of Finance Brokers.

My purpose in moving new clause 26 is to draw attention to what many finance brokers consider to be an anti-competitive practice arising from an abuse of a dominant position by some building societies which require their borrowers to covenant within the mortgage deed not to enter into any further borrowing which requires the security of a charge upon the property without first obtaining the consent of the society in writing.

To enforce that covenant societies then apply to the Chief Land Registrar for a notice of a restriction to be entered into the register of title relating to the property. The result of that restriction is that the societies are contacted and given early notice of a borrower's intention to seek a loan elsewhere.

Building societies defend that practice by claiming that such a requirement enables them to encourage borrowers to explore their existing financial commitments and to exercise restraint if it seems likely that they may over-commit themselves. All that would be laudable were it not for the fact that building societies are themselves entering into the personal loan and second mortgage market.

In fact, the finance brokers are aware of many instances where an approach to a building society seeking consent to a second charge immediately results in that society calling in its borrowing member and persuading him or her to take a loan by way of a further advance or a second loan from the society itself.

That practice is seen by finance brokers as poaching. It makes use of the stranglehold which societies have, due entirely to the covenant in the mortgage deed. It also arises from the dominant position of a society and allows it to make a further advance at little or no cost whereas the information about the availability of further advances is often communicated to the consumer by means of an advertisement paid for and placed in the newspapers by a finance broker.

It can be argued that would-be house purchasers should read and agree to the restrictive covenant when they sign the mortgage deed. Perhaps solicitors should advise their clients on that point rather more effectively than they now appear to do. That point was touched on in the previous debate.

The fact of the matter is that most house purchasers do not read the fine print in the mortgage deed. I have often wondered whether there should be a requirement to put such a restrictive covenant in bold type in red ink, rather like those warnings that we have all seen on hire purchase contracts. However, hire purchase contracts are rather different from mortgage deeds. Most house purchasers only sign one mortgage deed in their life, or perhaps two or three at comparatively long intervals.

The effect of the restrictive covenant is, in the view of most brokers, to interfere with the borrower's freedom of choice and to influence the borrower in such a way that he feels obliged to take a loan from a building society. That occurs when the borrower is suddenly informed that the society is aware that a loan has been sought from another lender. The borrower can even be called in to discuss the matter with the manager or some other official of his building society. The borrower may then be told that the society can refuse to allow the registration of a second charge, but if he or she would care to take a further advance from the society then, of course, the request can be accommodated over perhaps a 15 or 20-year term, if desired.

What of the claim that societies are protecting their members from over-committing themselves? Let us suppose that the society refuses either to agree to a second charge or to make a further advance. What happens then? The answer is that the borrower can borrow unsecured from another lender, for example, a high street money shop. In that case he could find himself paying high interest rates ranging today from 35 to 44 per cent., or in the case of a conventional hire purchase finance agreement on, say, a three-year-old car a borrower would commonly today be paying around 30 per cent. At the very worst a borrower could go to a loan shark charging horrendous rates of interest.

That compares with about 18 to 19 per cent. APR for loans arranged by members of the Corporation of Finance Brokers who adhere to a code of practice which ensures that they not only bear in mind the interests of their clients, but exercise the utmost integrity in dealing with their affairs, have regulations governing advertising and ensure that money is not spent before a loan is made.

I am sure that my hon. Friend the Economic Secretary will agree that there is much to be said for secured loans at reasonable rates of interest and subject to respectable conditions. Such a position can obtain only if there is free and fair competition between societies, the banks and other established finance houses and the brokers who place business with them.

In the Green Paper which preceded the Bill it was made clear that competition in the provision of financial services is one of the desired objectives. But does the dominant position of certain building societies, which makes it virtually impossible for any other lending source to secure their loan, really add up to competition, or is it really a restrictive or anti-competitive practice?

My hon. Friend the Economic Secretary to the Treasury has indicated in correspondence that he understands that on the whole it is the exception rather than the rule for a borrower to need the society's consent to a second mortgage, and that it is relatively unusual for consent to be refused. That may be so if the borrower really persists, but he will obviously feel inhibited from so doing. One building society which I understand directs requests from borrowers to the provision of a loan by the society is the Nationwide, which is one of the largest societies in the country, and there are others. I ask my hon. Friend the Economic Secretary to consider whether the Nationwide is observing the policy of greater competition that the Government advance.

9 pm

These matters are of great importance to all members of the public who want to be sure that they have a free and fair choice of financial services in a competitive market. My new clauses are designed to put down a marker and to engage the attention of my hon. Friend the Economic Secretary, to whom I pay tribute for his constant interest in and wise advice on these matters. I know that he is not convinced that an absolute statutory bar on restrictions on the taking of a second charge or the making of an advance when approached for permission to make a second charge is the right way forward. I share his dislike of more and, perhaps, unnecessary restrictions in a rapidly changing mortgage market, but I have sought to indicate that there is a problem and where that problem lies.

I was glad to learn from my hon. Friend the Economic Secretary, in a letter that he wrote me yesterday, that he has arranged for information that I sent him to be provided to the Office of Fair Trading. I am glad to know from him also that the OFT is now to undertake some more general inquiries into the incidence of the practices which I have described and their effects on competition. I hope that all these inquiries can be completed quickly and that everything will be done to ensure free and fair competition, coupled with adequate protection for consumers against excessive interest rates that are often charged on unsecured loans.

I hope that the Government will resist these clauses. The hon. Member for Uxbridge (Mr. Shersby) has presented them as measures that are in favour of competition, but they are far from that, because they seek to exclude building societies from that competition. The hon. Gentleman mentioned one society. I understand that only one society has a prohibition rule that means that the society's consent is required. The building societies have nothing to fear from this issue going to the Office of Fair Trading.

The hon. Member for Uxbridge has talked about people being driven into the hands of loan sharks who charge interest rates of 35 per cent to 40 per cent., but I suggest that the new clauses would do just that. A borrower from a building society is as much a member of the society as a lender, and he is proud to be a member. The building societies have a tremendous record of looking after their members. If a borrower needs extra finance, it is fair for the society of which he is a member to discuss the matter with him. The society will probably say, "Let us examine your financial affairs. Is the best way of solving your financial difficulties the granting of an extra loan? Shall we extend your mortgage? Shall we transfer more money to your mortgage? What is the problem? Can we help you?" That is all that societies do.

The Building Societies Association has informed me that over the years it has had complaints from mortgage brokers and finance companies, but apparently it has never had a complaint from a borrower. The hon. Member for Uxbridge said that the new clauses will act in defence of the borrower and in the interests of competition and fair trading, but apart from the many drafting defects—for example, unregistered land is not covered and there is reference to unsecured loans—I object to the principle which lies behind them I said, I hope that the Governent will reject them. They will prevent building societies from assisting their members and assist others to lend money.

I support the argument that has been advanced so eloquently by my hon. Friend the Member for Uxbridge (Mr. Shersby). I do not pretend for one moment to be an expert on building societies, but I support my hon. Friend because I have received representations from my constituency which I have passed on to him and to which he has responded. I believe that he is highlighting a problem, about which I understand he has had considerable correspondence with the Treasury, especially my hon. Friend the Economic Secretary, and that the Treasury recognises that there could be a problem.

the right hon. Member for Halton (Mr. Oakes) will admit immediately that in introducing the new clauses my hon. Friend said that he had tabled them as markers in the hope that the problems might occur and the concern that has been expressed by constituents to individual Members will be taken fully into account by the Treasury.

I make these remarks with deep interest because the headquarters of the Cheshire building society are in my constituency. It is an excellent society. I have never had a single letter or word of complaint about its practices, and I commend it for the excellent service that it gives to people not only in my constituency but over a wider area.

After considerable research over many months, my hon. Friend the Member for Uxbridge has presented an excellent case to the Treasury. I hope that my hon. Friend the Economic Secretary will give an understanding and sympathetic reply. I doubt very much whether my hon. Friend the Member for Uxbridge intends to press the new clauses to a vote, but he hopes that an area that is causing concern can be taken fully into account by the Treasury. I hope that assurances will be given from the Treasury Bench.

I compliment my hon. Friend the Member for Uxbridge (Mr. Shersby) on a well-argued case, and on the manner in which he put it forward. My hon. Friend the Member for Macclesfield (Mr. Winterton) has just supported him. Equally, the right hon. Member for Halton (Mr. Oakes) asked us to resist the new clauses. In fact, it would not be wise to put them on the statute book.

I listened to my hon. Friend the Member for Uxbridge with considerable interest and a good deal of sympathy because the matter that he raised is a cause for concern and, as he mentioned, we have been in correspondence about it. I have also had a letter from the hon. Member for Thurrock (Dr. McDonald)—only in the past 48 hours, so I hope that she will forgive me for not having replied, but perhaps I can do so now.

One of the basic themes of the Bill is competition. By letting societies offer a wider range of services, we hope that they will be able to respond positively to the competition that they now face in their traditional markets, and to introduce new competition elsewhere. The line between legitimate competitive activity and abuse of market position can be very fine. We need to be vigilant in making sure that one does not turn into the other.

I do not believe that the abuse described by my hon. Friend the Member for Uxbridge is very widespread, but it seems to come close to the line of what is acceptable and possibly even to cross it. I do not think that an absolute statutory prohibition of the sort that is suggested in the new clauses would be the best way to proceed, so I hope that my hon. Friend will not press the new clauses. However, I am glad to have the opportunity to comment on them because I believe that the situation that he has outlined needs further investigation.

As my hon. Friend mentioned, I have passed to the Director General of Fair Trading the papers that he sent to me, and his office is now to undertake more general inquiries into those practices to see whether further action under the competition or fair trading legislation would be appropriate. I hope that, pending the outcome of that investigation, any building society that might be tempted to poach business in that way—to put it crudely, to trade off the efforts of others — will recognise the distaste that is felt in the House for such behaviour. I should add that if that were to become a matter for legislation, which at this stage I do not accept it will, it would be for competition legislation, not for legislation relating to regulation or consumer protection. I shall ensure that my right hon. Friend the Secretary of State for Trade and Industry, who is responsible for those areas, is kept fully informed about it.

In view of that, I hope that my hon. Friend will feel able to withdraw his new clause, but in doing so will be satisfied that we are taking action on the point that he has raised.

I am grateful to my hon. Friend the Economic Secretary for his sympathetic and understanding reply. I am glad that he recognises that there is a problem in this area, and I am grateful for the action he has taken in referring the matter to the Director General of Fair Trading and for drawing to the attention of our right hon. Friend the Secretary of State for Trade and Industry the matter of the competition legislation.

In the light of his satisfactory reply, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.