Lords amendments considered.
Transfers to subsidiaries of other mutuals
Lords amendment: No. 1.
The amendments arise out of difficulties that we experienced in tabling appropriate clauses when the House first considered the Bill. They do not affect the first part of the Bill, which extends the right of building societies to greater access to capital markets. We are not considering that today.
However, the second part of the Bill was intended to allow all mutual financials to merge with one another without either party losing their mutuality. Until now, if, for example, a building society wished to merge with a friendly society, one of them would have to lose its mutuality en route. That spoils the basis of mutuality.
The Bill allows financial mutuals to merge without either side losing its mutuality. That applies to all mutuals with the exception of credit unions—and, sadly, at the time when the measure left this House, of mutual insurers. The reason for that was that mutual insurers frequently traded as companies and were therefore caught by European Union and European economic area company legislation. It was not possible in the time available for the Bill’s first stages to find a draft wording that would cover that eventuality and be orderly. Happily, after the measure left this place, the Royal London mutual instructed Herbert Smith and Company, which instructed counsel. Between them they managed to produce the wording that we are being asked to consider this morning. Thanks to what happened in another place—I pay tribute to my noble Friend Lord Naseby—if the amendments are accepted, all the original objectives of the Bill will have been achieved.
Paragraph 5 of the explanatory notes, contained in the helpful commentary on the Lords amendments that my hon. Friend has produced, says that Lords amendments Nos. 1 to 3 ensure that
“transfers of mutual societies can apply where the transfer is to a subsidiary of an EEA mutual (which could include a mutual insurer) as well as where the transfer is to a subsidiary of another UK mutual.”
I would be interested to hear whether that works the other way as well. Can that apply to transfers from a subsidiary of an EEA mutual? We have all had experience of what seems to be a one-way process, whereby European organisations can acquire British interests, but we do not seem to be able to acquire their interests in return if we wish to.
I am grateful to my hon. Friend for giving way again. Having answered my question rather succinctly, will he now address an even more significant issue—the ruling out of the use of hybrid instrument procedures? That was touched on in the other place, but can he give any good reason why the hybrid instrument procedure should not apply in the case of provisions under the Bill?
Yes, because that will not actually occur. If my hon. Friend is concerned about that, he should know that the Bill is simply an enabling Bill. It will enable the Treasury to bring forward proposals from time to time and it will be subject to the affirmative procedure. If he were concerned about an issue, no doubt he could raise it at the appropriate time, but we do not think that the hybridity issue will arise. Because of that, we want to make the position clear in the legislation, rather than having to deal with it at a later date.
But surely if the hybridity issue will not arise, there is no need for Lords amendment No. 1. If the hybridity issue arises, that will only be because private interests may be being prejudiced as a result of a transfer. If private interests are going to be prejudiced as a result of a transfer, surely it is right that the hybrid instrument procedure in the other House should be applicable.
Presumably the progenitors of the amendments, which I understand from the hon. Gentleman to be the industry itself, will have considered the hybridity and European issues. Will he therefore give an indication of whether either or both of those considerations were discussed with the organisations from the sector that were involved in formulating the amendments, and if so, what their view was?
With his usual perceptive nature my hon. Friend will have noted that that issue arises in the next group of amendments, not this one. No doubt we shall deal with it in time—I am sure that Madam Deputy Speaker would be unhappy if I were to deal with it now.
This complex group of amendments has been thoroughly tested before being brought back to the House. We are happy that it achieves the objectives that we all wanted when the original Bill was first introduced in this place. We are now satisfied that the group does just that and no more. I therefore recommend the amendment to the House.
I want to make a few brief remarks about the group. First, however, I congratulate my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) on his success in navigating his third Bill on to the statute book—[Hon. Members: “Fourth.”] My hon. Friend’s record improves by the minute.
The Bill is important and the amendments in the group address a gap that was left unfilled after Report and Third Reading earlier this year. My hon. Friend said that the amendments in the group enable mutual insurers to take advantage of the provisions of the Bill. They also extend the Bill to other mutuals in the EEA. I want to touch on some of the consequences of that, because it potentially brings within the ambit of the Bill a vast range of co-operatives in other EEA member states. We need to understand precisely what the impact could be of Lords amendment No. 3, which introduces the definition of an EEA mutual society.
Before I deal with that issue in greater length, however, I turn to Lords amendment No. 1, which deals with hybridity, which my hon. Friend the Member for Christchurch (Mr. Chope) raised in an intervention on my hon. Friend the Member for Bournemouth, West. As I understand it, the issue arises in part because a number of mutuals are established by private Bill. There was a concern that if an order was introduced to deal with the merger of two mutuals, one of which had been established under a private Bill, the hybrid procedure might apply. Lords amendment No. 1 removes that risk by ensuring that where an order might be treated as a hybrid instrument, another order can be made to ensure that it proceeds through the House without the hybrid instrument process applying.
In the debate on the matter in the other place, Lord Evans of Temple Guiting asserted that the Government believed the amendment to be necessary,
“because an order under Clause 3 could make provisions giving members of a transferring mutual membership and other rights in the holding mutual.”
“That could require changes to the constitution of the holding mutual. Where the holding mutual has a unique legal form—a private Act of Parliament, for example—that could raise an issue of hybridity. The amendment excludes the hybrid investment procedure so avoiding unnecessary delay and complications in making the instrument.”—[Official Report, House of Lords, 10 July 2007; Vol. 693, c. 1358-59.]
We understand that the hybrid procedure can add delay. It is a thorough process; the hon. Members on both sides of the House who served on the Select Committee on the Crossrail Bill will remember the thorough scrutiny that that hybrid Bill went through. I am concerned that, by losing the hybrid instrument procedure, we will remove a level of protection and parliamentary scrutiny that would otherwise be available to members of a mutual who were dissatisfied with the proposals.
Hybrid Bills provide an opportunity for members of the public to petition a Select Committee and appear before it to express their concerns about the Bill and how it will affect them. That gives the Select Committee an opportunity to amend the Bill. If a member of the public was dissatisfied with a proposal and felt that their rights were being impaired, the hybrid instrument procedure would give them some protection. Will the Minister reassure us on this matter? Why does she think that removing the hybrid procedure is in the interest of the mutuals and their members? It offers protection at the moment, which they would lose if Lords amendment No. 1 were accepted today.
My hon. Friend is on to a good point here. It is significant that the explanatory notes on the Lords amendments make no attempt to justify the proposal that the hybrid procedure should not be applicable when private interests could be jeopardised. I am glad that he is putting the Minister on the spot and asking her to justify a measure that, while not setting a completely fresh precedent, should be used only in exceptional circumstances—namely, the removal of the hybrid instruments that are available to petitioners in the other place.
I am grateful for your guidance, Madam Deputy Speaker.
My hon. Friend the Member for Christchurch makes an important point. The explanatory notes explain clearly what is happening, but they do not explain why it is happening. Considering the Lords amendments this morning gives us the opportunity to give them proper scrutiny and to understand the purpose for which they were tabled. I am sure that the Minister will be able to expound on the merits of removing the hybrid instrument procedure. This debate gives us the opportunity to discuss that point.
Perhaps my hon. Friend the Member for Christchurch (Mr. Chope) has not read the explanatory notes fully. They clearly state:
“If the EEA mutual has a unique legal form that might raise a question of hybridity.”
That could be a problem. Our difficulty is that we do not know what the precise legal form of other EEA mutuals might be. The amendment has been included to overcome that problem.
I am grateful to my hon. Friend for that clarification. The uncertainty about the precise legal form of an EEA mutual—I do not know, for example, what the constitution of mutuals would be in the Czech Republic or any other EU member state—strengthens the need for a clear explanation of why the hybrid instrument procedure should be removed by Lords amendment No. 1; otherwise, a greater degree of uncertainty could be created. I am sure, however, that the Minister will be able to deal with that question.
Does my hon. Friend share my view that there is a distinction to be drawn between the question whether the hybrid procedure is relevant—my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) has suggested that it might be—and the question whether, if relevant, the procedure should be excluded by the provisions of the Bill?
That distinction can clearly be drawn, but I think that my hon. Friend the Member for Bournemouth, West has established why this is an issue. We now need to move on to the second part of the argument advanced by my hon. Friend the Member for Christchurch, and to ask why it is appropriate to remove the hybrid instrument procedure. I have not been privy to the discussions between the very innovative lawyers at Herbert Smith, their counsel and the Treasury, so I rather hope that the Minister will be able to shed some light on both parts of the argument about the hybrid instrument procedure. Why is it relevant, and why should it be removed?
I must point out to my hon. Friend the Member for Christchurch that this is not the only issue that I have with this group of amendments, and I should like to move on to my next point, as I am aware that other hon. Members wish to discuss other business this morning. I want to ascertain whether an order-making power that had been inserted by the amendments would be subject to the negative or the affirmative procedure. My hon. Friend the Member for Bournemouth, West will have a clearer memory of this than I do—indeed, he alluded to it earlier—but my recollection is that, on Second Reading and on Report, he and the Minister’s predecessor, the right hon. Member for Normanton (Ed Balls), emphasised the importance of ensuring that the affirmative procedure was used, as a means of providing further parliamentary scrutiny, given that this is predominantly an enabling Bill.
Lords amendment No. 3 talks about the Treasury specifying by order
“a body which is a cooperative or mutual undertaking”,
but it was unclear from the Bill, when it left this House in April, whether that would fall under the negative resolution procedure. Clause 3(6) of the original Bill seems to limit the affirmative procedure to orders made as a consequence of subsection (10) and to orders that amend paragraph (a) or (b) of subsection (11). We were led to believe that much of the Bill would be covered by the affirmative procedure to ensure that Members in both Houses had the opportunity to debate the issues, rather than relying on Members praying for the annulment of an order. I should be grateful for some clarification from the Minister on whether the order-making powers in proposed new subsection (c) in Lords amendment No. 3 will be subject to the affirmative or the negative procedure.
I want to turn now to the substance of Lords amendment No. 3. As my hon. Friend the Member for Bournemouth, West said, the original clause limited the different types of mutuals that could merge to building societies, friendly societies and industrial and provident societies. The amendment would allow that definition to be broadened to include mutual insurers by making reference to EEA mutual societies. We have broadened the Bill to apply to UK-based mutuals in order to include mutual insurers, and I am concerned that the drafting of the amendment would broaden the range of European co-operatives that could take advantage of the Bill.
Lords amendment No. 3 first defines an EEA mutual society as
“a body which is a European Cooperative Society for the purposes of Council Regulation (EC) No 1435/2003 (statute for a European Cooperative Society)”.
I took the trouble to print out the regulation to see what sort of mutuals might be covered—[Interruption.] I will resist the Minister’s entreaty to read it out, as I am sure that you would rule me out of order for straying from the point, Madam Deputy Speaker. However, I could not find any definition in the regulation that would restrict the type of mutuals that could merge with a UK financial mutual to comparable European financial mutuals. Paragraph (7), for example, states:
“Cooperatives are primarily groups of persons or legal entities with particular operating principles that are different from those of other economic agents. These include principles of democratic structure and control and the distribution of the net profit for the financial year on an equitable basis”.
It goes on to mention the various principles that a European co-operative society or SCE might have and it lists seven. I shall not read them out. If the Minister tempted me to do so, it would be to the regret of the whole House, as there are 24 pages of regulation.
My concern is that these provisions cover all sorts of co-operatives. I spent my holiday in France this year and the village we stayed in had a wine-making co-operative—as, indeed, did all the villages in the local area. However, there is nothing in the current drafting to suggest why wine-making co-operatives in France could not merge with a UK financial mutual. I am sure that that would not happen and it sounds preposterous until we consider the fact that at least one French insurance company that I am aware of owns a vineyard. There could occasionally be a conflict and other French wine-making co-operatives could acquire the taste for owning insurance companies. It may sound a somewhat frivolous point, but it emphasises my concern that Lords amendment No. 3 starts off by enabling any co-operative falling within the scope of regulation 1435/2003 to enter into a merger with a UK financial mutual. The Minister might say that the order-making power in the provision will be used to define the type of mutual that can acquire a UK financial mutual and to rule out the prospect of the French wine-making co-operative from doing so, but I shall be grateful for her assurance that that is indeed the case.
I am following and I am intrigued by the hon. Gentleman’s argument, but what evil is he seeking to prevent? If for some reason a British financial institution wanted to merge with a wine-making co-operative in the south of France, I presume that it would do so only because it thought it was in the best economic interests of the business. I am not completely clear about what precisely the hon. Gentleman is trying to prevent UK financial mutuals from doing. As far as I can see, they are motivated not by a love of wine, but by a love of profit.
Defenders of the mutual societies would say that they are not motivated by a love of profit, but by a love of serving their members. However, the hon. Gentleman makes an important point. In response, the Bill was given a Second Reading on the basis that it would facilitate the merger of different types of financial mutuals rather than create some mutual conglomerate that covers a whole range of activities from selling insurance to selling bottles of wine—pleasurable though that conjunction of activities might be. I am merely seeking clarification from the Minister of how she believes Lords amendment No. 3 will work. Does she envisage that an order will be introduced to define more clearly the types of financial mutuals that are covered by this particular regulation in order to prevent a merger with non-financial mutuals of whatever nature?
There remains one potential anomaly to which I would like to draw the attention of the House. On Second Reading, we had some discussion about the exclusion of credit unions from the legislation. We understood the reasons for that and I shall not depart from that consensus. However, I wonder whether a credit union based in another EEA state could merge with a UK financial mutual whereas a UK credit union could not. I am concerned that there could be an uneven playing field here as between other EEA financial mutuals and credit unions that can merge with UK financial mutuals and UK credit unions that cannot merge. Will the Minister clarify whether, under the order-making power in amendment No. 3(c), other EEA member state credit unions could be excluded from merging with UK financial mutuals? It is important for the House to understand how the amendment will operate in practice.
Does my hon. Friend agree that this is extremely complicated territory and that it would be easier for the House to follow what was happening if the Minister were to intervene on him when he raised these specific points? We would then be able establish whether we were satisfied before moving on to his next point.
My hon. Friend, who has great experience in these matters, makes a valid point. As a gentleman, I would always give way to the Minister if she sought to intervene as my speech progressed. I would certainly hate there to be any unanswered points at the end of the debate.
My hon. Friend makes an important point. I am not a parliamentary draftsman, so I bow to the experience of those whom he has consulted on this matter. However, I remain keen to ensure that the link between amendment No. 3 and its definition of an EEA mutual society cross-references clearly with the definition in clause 3(9) of a mutual society. Perhaps the Minister will clarify whether that linkage actually exists. It is a powerful point, because if established, it completely removes the problem of the French wine-making co-operative—[Interruption.]
I, too, bow to the greater experience of my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) in these matters, but I wonder whether there is a danger of putting too much faith in the Treasury. Amendment No. 3 (c) clearly refers to
“a cooperative or mutual undertaking of such description as the Treasury specify by order”,
so it could be subject to change at some future point. Whatever the Minister says is the current intention may well be superseded in the future.
Does my hon. Friend accept that a UK building society, financial mutual or mutual society would also be an EEA mutual society, because the United Kingdom is part of the EEA? Were the amendment passed, we would have two separate definitions: one of an EEA mutual society, and one of a mutual society. Surely the EEA mutual society and the mutual society are the same.
We are getting into some tricky territory relating to drafting and how the clauses interact. I would be concerned if amendment No. 3 overrode subsection (9) such that credit unions, which we agreed were outside the scope of the Bill, could be brought in by virtue of the definition of an EEA mutual. I am sure that the Minister will clarify that eloquently when she chooses to speak in the debate.
Extraterritoriality, whereby a Government seek to regulate activities that take place in other states, is a thorny issue in the financial services industry. I am a little concerned that the way in which amendment No. 3 interacts with clause 3(1) and (2) gives rise to the accusation of extraterritoriality. I am sure that the Minister is also wary of other states trying to regulate extraterritorially in the UK, and we would not want to be accused of introducing the same vice in the Bill.
Clause 3(1) gives the Treasury the power to modify transfer provisions as it thinks appropriate, to facilitate the transfer of business between mutual societies. Subsection (2) indicates the extent to which the Treasury can intervene by referring to membership rights and so on. Will the Treasury be able to stipulate conditions about membership of a new pan-European financial mutual, when an EEA financial mutual acquires a UK financial mutual? The excellent explanatory notes, in reference to Lords amendment No. 6 and the justification of the charging by the FSA, state:
“The extension of clause 3 to EEA mutuals will require certain safeguards to be in place, equivalent to those applicable to domestic mutuals, regarding membership rights in the holding mutual and further demutualization.”
Amendment No. 3 would therefore appear to give the Treasury power to stipulate the future activities of a pan-European financial mutual. I suspect that it would enable the Treasury to say that such a mutual could not demutualise. In the event of further mergers, the Treasury, because of its earlier stipulations on mergers, might be able to restrict the commercial freedom of a mutual as it develops and grows.
My interpretation would be that the Treasury could stipulate what happens within the jurisdiction of the UK but not necessarily elsewhere. Therefore, would not it be expedient for any pan-European organisation to operate as a subsidiary in the United Kingdom, to fulfil any of the British Government’s stipulations, and to operate on a connected but not identical basis in other parts of Europe?
The hon. Gentleman might be right, but we need some clarity. From reading the explanatory notes, I am not sure what the limits will be to the operation of the Treasury’s powers. If his interpretation is right, my concern is met, but that is not clear at the moment. An EEA financial mutual might choose not to merge with a UK financial mutual because it fears that the provisions that the Treasury can make under clause 3(1) could impede its future pan-European operations.
Guidance from the Minister on this point is probably helpful, but I suspect that it is a pretty open-and-shut case. Will the Minister confirm that any legislation that we pass today will only be relevant to activities within the jurisdiction of the British Government—those in the United Kingdom?
The Minister is nodding, so I suspect that she will confirm that the issue raised by the hon. Member for Fareham (Mr. Hoban) is resolved by the fact that the legislation that we pass now will only be applicable to countries directly overseen by the British Government.
The hon. Gentleman might be right, and the Minister might indicate that in her remarks. I would add, however, that people might become members of a pan-European financial mutual, so how do we protect their rights? We have one sort of regulations for European co-operative societies, but the European Commission proposed a harmonised set of rules for European financial mutuals, which might give greater protection on a pan-European basis. Those proposals, however, have been withdrawn.
My hon. Friend is being untypically—or atypically—naive. The situation is no different from that for banks. Santander, which bought Abbey, operates as a pan-European banking conglomerate. Its activities in the UK, however, are regulated by the FSA and the Treasury. There would be no difference between what happened in relation to a commercial bank and what happened in relation to a European-wide financial mutual: what it did in the UK would be regulated by the UK. I would have thought that obvious, and I do not quite understand my hon. Friend’s concerns.
Part of this process is to tease out what will happen when the amendments come into force. When mutuals merge, and a pan-European financial mutual is created, I am not clear how members rights will be protected in that larger organisation. If a mutual becomes a subsidiary of a pan-European mutual, how would that work in practice? I would be content if the Minister gave the House the assurances that the hon. Member for Montgomeryshire (Lembit Öpik) and my hon. Friend the Member for Bournemouth, West have offered. Some clarity would be helpful, however, given that the explanatory notes are not as full as they could be in explaining the matter.
I feel that I should leap to my hon. Friend’s defence in the face of the onslaught from my hon. Friend the Member for Bournemouth, West (Sir John Butterfill). Does he agree that the analogy given by my hon. Friend the Member for Bournemouth, West is not completely accurate, because while the activities of such a mutual relating to customers and consumers will be regulated by the FSA, in the same way as those of any bank, the issue of membership rights is totally different, and does not apply in the case of Santander and Abbey?
I do not want to go too far down this route. My hon. Friend makes an important point. UK shareholder rights are different from those for a shareholder in a Spanish organisation; shareholder rights are not the same across all EEA member states. I am sure that the Minister will clarify the situation.
I think that my hon. Friend is on to a good point. There is a distinction between members of a mutual society and shareholders in a company. The Abbey National used to be a building society with members, whose interests were bought out when it became a company; the company was then taken over by Banco Santander. What we are discussing in this instance is the possibility of a mutual building society being taken over by a European bank which is a company, and members of the building society in the United Kingdom being disadvantaged by what happens in the operation of that organisation elsewhere in Europe.
That is an important point. We may need to distinguish between a member of a mutual as a customer of that mutual and a member of a mutual as “a shareholder” in the organisation. What I am trying to tease out is how that distinction works in the case of a pan-European mutual. Presumably a member of a United Kingdom mutual that has been taken over would expect to remain a member of the pan-European mutual. How will his rights as a member of that pan-European mutual be protected? The Treasury has powers under clause 3(1) and (2) which I understand to apply to a UK merger. I should like to know how they would apply in the context of a merger between, say, a UK and a French financial mutual.
Lords amendment No. 6 gives the Financial Services Authority power to charge fees for any functions conferred on it under the Bill. I wonder whether the Minister has had any discussions with the FSA about the type of charges that might be incurred. Our debate on extraterritoriality demonstrated some of the complexities involved in these matters, and the amendment implies that complex situations could be involved in this instance as well.
My comments have been intended to probe, and to ensure that the House exercises its role of scrutinising legislation. A gap was left at the end of the last Commons stage, and I think it should be filled. We all want financial mutuals to be strengthened, and if the amendments would allow that to happen, I approve of them.
I congratulate the hon. Member for Bournemouth, West (Sir John Butterfill) on his prodigious production of legislation. Given that this is his fourth Bill of the session, I suggest that he is rather more successful at running the country than most Ministers. I also congratulate the hon. Member for Fareham (Mr. Hoban) on identifying so many causes of fear in just six amendments. I do not mean to be rude, but I feel that rather than this being a celebration of detail, there is a hint of paranoia over the possibility that the hon. Member for Bournemouth, West may be trying to slip one under the wire and cause the permanent descent of financial mutuals in the United Kingdom into the hands of the operators of vineyards in France.
The hon. Member for Fareham made an interesting point about hybridity. I should like to know the Minister’s views on that, but it seems to me that Lords amendment No. 1 reduces the risk of application of the instruments relating to hybridity. I can see why that is attractive to the industry: it streamlines the process and, as far as I can see, reduces the opportunity for public debate about such changes. Conversely, if the amendment does indeed work in the private interests of companies, it may not necessarily work in the interests of investors or the public in general. Perhaps the Minister could give us her perspective on whether there will be unreasonable restriction of the opportunity for public participation if the hybrid—instrument procedure is used less often.
The hon. Gentleman has summarised the single most important defence for any such change. It is true that there will already be a legal requirement for the most direct stakeholders to have an opportunity to vote on the matter. The Minister may wish to put something on the record for future reference in case the legislation is ever applied in controversial circumstances.
I do not share the hon. Member for Fareham’s concerns about Lords amendment No. 3. He spoke of the dangers of a potential merger between a financial mutual in the United Kingdom and a vineyard or wine-making co-operative in the south of France. I observe in parenthesis that judging by the current performance of my endowment mortgage I probably should have invested my money in French wine, so it may not necessarily be a bad decision. Nevertheless, there is a practical and strategic question to be posed.
If for some reason a financial mutual in the United Kingdom decided to merge with a co-operative of whatever sort elsewhere in Europe, presumably the usual channels would have to be pursued and the members of the financial mutual would have an opportunity to vote on it. So if the senior management of a financial mutual were able to persuade its British membership that the merger was indeed in the interests of the organisation, who are we to prevent it from taking place? It is obvious—in my view, at least—that the organisation would still be bound by the regulations as they pertain in the United Kingdom, and that the security of the investments of the stakeholders in the United Kingdom would therefore be preserved. I do not entirely understand what the hon. Member for Fareham fears could happen that would not be in the interests of the organisations concerned, and would not be authorised by the stakeholders.
That is probably a worthwhile request to the Minister. I too hope that she can clarify her understanding of the consequences.
As I have explained, I believe that the issue is resolved by the fact that the British legislation will apply in all circumstances in which the United Kingdom Government have jurisdiction, and will not apply in areas where they do not have that jurisdiction. The hon. Member for Bournemouth, West has already made an analogy with another financial institution that explicitly organises its operations following a takeover of a British-based financial institution in order to ensure that its British operations must adhere to British legislation, and that at the same time it operates according to the regulations as they apply in other European states.
I was interested by what the hon. Member for Fareham and others said about the difficulty of not having a harmonised system of regulations across the European Union as a whole. Far be it from me to suggest that that sounds like a curious plea from those on the Conservative Front Bench for fiscal and legislative harmonisation across the EU, which I personally feel—perhaps this makes me a Eurosceptic—would be taking things too far.
I should hate the hon. Gentleman to leave with an incorrect interpretation of my remarks. I merely drew attention to the absence of such harmonised regulations. We are left with the question of how it can be ensured that the interests of members are protected. I recognise that there are different rights in different member states when it comes to, say, shareholders of public companies. We should encourage the rich variety in the European Union rather than seeking to homogenise it.
I fully understand the hon. Gentleman’s desire to clarify on the record the position of those on the Conservative Front-Bench. For the avoidance of doubt, and because I know from painful experience that irony translates poorly in Hansard, let me reaffirm to the good people of the United Kingdom that I believe that, on balance, I am still more pro-European than the hon. Gentleman.
There is, however, an inescapable reality to do with harmonisation. In respect of any such proposed legislation it will be necessary for judgments to be made in the application of regulations in cases of potential mergers. So long as there is not a harmonised system of regulations explicitly defining the terms of mutuality and associated matters across the EU, we will have to depend on the common sense of those interpreting the regulations when a merger is proposed.
An interesting point was made about credit unions, but that highlights just one of a number of situations in which there could be a grey area and the legislation would have to be interpreted according to specific circumstances. I do not believe that it is possible to frame such proposed legislation so explicitly as to cover in black-and-white terms every possible eventuality. I seek the Minister’s guidance on this: will she furnish us with her judgment on whether, when the legislation is applied, there will still need to be a degree of interpretation?
In the real world, I expect there will be few circumstances in which such uncertainties arise. In the majority of cases, the arguments will be so clear and the mergers so well defined in established precedent that we will not have such a problem. It is also my experience that when we in this House analyse proposed legislation we often over-emphasise potential problems and undervalue the benefits of having professionals making judgments.
Although I hope the Minister can give some clarification on the issues I have raised, overall the amendments are sensible, as they have been framed with the industry in mind. There is also the ultimate insurance policy: when such mergers are proposed, the members will vote on them.
I congratulate my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) on the progress he has made with his Bill. I have the privilege of being one of the co-sponsors, and I look forward to it getting on to the statute book—I am probably almost as excited as he is about that prospect. However, that does not mean that we should not use the opportunity presented to us today to get a little more clarity, particularly from the Government on what their intentions are as they will hold all the cards under the powers we will give them under the Bill.
The fact that we have a decent chunk of time to discuss the Bill at this stage of the parliamentary Session is a great vindication of the decision taken a few years ago by a previous Leader of the House that we should have a sitting Friday after the long recess so that we can consider amendments from the other place to private Members’ Bills that we in this House have carried through to Third Reading. Under the previous arrangements, when the last Friday sitting was at the end of July, it would not have been possible for the Bill to make progress with the amendments made in the other place. There used to be a vicious circle: because of the reluctance of the other place to make amendments that they knew would kill a Bill, Bills were less perfect than they would otherwise be.
First, I should declare my interests, not only as a sponsor of the Bill but as someone who holds a mortgage with the Nationwide, which is a supreme example of a good mutual. I have my house insurance with the Liverpool Victoria, which I understand is a mutual insurer, and I have a great constituency interest in what we used to call the Portland building society—it has now been taken over by the Nationwide. Its headquarters are in my hon. Friend’s constituency, which is, perhaps, one of the reasons he has developed a strong interest in this subject.
I shall first discuss amendment No. 1. It was moved by Lord Evans of Temple Guiting on 10 July. At that stage, he was a member of the Government so he was speaking on behalf of the Government, but I understand he resigned on Wednesday. I am sure that the Minister will join me in paying tribute to his service, and in particular his contribution in helping to steer the Bill through the other place. He said that the overall purpose of the Bill was to ensure that there were
“helpful amendments to building societies legislation in relation to the wholesale funding limit and the position of their members in the event of an insolvency.”—[Official Report, House of Lords, 10 July 2007; Vol. 693, c. 1355.]
That is important. We discussed earlier in connection with safeguards what happens if a mutual organisation in our country is taken over by a mutual organisation outside the country and therefore outside the bounds of the regulatory control of our regulatory authorities, and that mutual then goes into insolvency. How will members based in the UK who are caught up in such a transfer be protected? It is important that the Minister gives us some assurances on that, particularly in the case of mutual insurance companies, which are much more vulnerable to the marketplace than building societies. The Minister whom I quoted was, of course, speaking before the Northern Rock crisis occurred.
My hon. Friend does not realise that the scenario he describes could happen today, without this Bill being enacted. The only difference is that it would happen only if one of the parties lost its mutuality. The members would have to vote for that. Any British mutual can be bought by an overseas entity of any type whatsoever, but its members would need to vote for that, and it would lose its mutuality en route. That makes no difference to the scenario my hon. Friend describes. It simply enables them both to remain mutuals.
Is that correct? I ask with great respect, as my hon. Friend is a much greater expert in this matter than I am. To go back to the example of the Abbey National, it was originally a mutual society, then its members chose to demutualise and benefited from that, and then in due course that company was taken over by Banco Santander. That had become a shareholder issue, and the shareholders in the company then became shareholders in the Spanish company. In the case of a mutual that is taken over by another mutual, that organisation does not lose its mutual status and its members want to be assured that they will still be members of an organisation that has value and that at some stage in the future they will be able to benefit from that. Therefore, I am unsure whether the issue of a mutual being taken over by a foreign mutual is the same as that of a mutual that becomes a company in this country as a result of a resolution passed by the members. Perhaps the Minister will be able to give some clarification on that when she responds to these points.
The Northern Rock example involves a building society that gave up its mutuality before losing much of its reputation—or perhaps I should say, its head. Many of the erstwhile mutual members of Northern Rock received shares in lieu of their mutual interest and are now, arguably, far worse off than if it had never given up its mutuality.
However, at least the Northern Rock scenario is under the control of a British regulator and the rules made by this sovereign Parliament. That would not be the case if Northern Rock had been taken over when it was mutual by another mutual somewhere else in the European economic area. That is the distinction to which we need to draw attention.
Well, okay—we will have that discussion in the pub later. Leaving that aside, surely the hon. Member for Christchurch (Mr. Chope) can see that any financial institution based in the United Kingdom must necessarily be subject to British regulations. Is he suggesting that a financial institution taken over by a foreign organisation would be subject to regulations from somewhere else, even though it was operating within the United Kingdom?
Obviously, the operations of such an institution within the United Kingdom, in so far as they dealt with retail issues—insurance or building society services, for example—would be regulated in this country. I am concerned about the regulations on the operation of such a mutual society. For example, what proportion of loans would it be allowed to take in comparison with the value of its members’ interests? One thing that prompted my hon. Friend the Member for Bournemouth, West to introduce this legislation was his liberalising desire for mutual building societies to be able to have access to the wholesale market for funds. It was that power that went to the head of Northern Rock and resulted in its current problems. I do not say that that was the sole cause, but it contributed. If Northern Rock had remained a mutual building society, it would not have been able to get access to those wholesale funds or to get into its current difficulties, which have resulted from recent events in the financial markets.
What mechanism can the hon. Gentleman foresee that would enable the people determining whether to make such changes in the status of financial institutions to decide what the strategic decisions of the management were likely to be? The hon. Gentleman cannot blame the structure of the organisation for the decisions that were made; if it were a structural issue, why was only Northern Rock affected and not other similar organisations?
I am grateful, Madam Deputy Speaker. You enable me to answer the hon. Gentleman’s other point on how we would introduce safeguards, in respect of which I have a bit of a problem with Lords amendment No. 1. At the moment, one of the safeguards is that before any approval, if the issue is a hybrid one, anybody who felt aggrieved could petition the other place under the hybrid instrument procedure. However, under Lords amendment No. 1, such a move would be excluded. Paragraph 6 of the explanatory notes on the Lords amendments refers to the justification for that, but it does not wash. Paragraph 6 states:
“Lords Amendment 1 ensures that any order made under clause 3 which may have effects peculiar to a particular mutual will not be dealt with under the hybrid instrument procedure…As a result of the addition of ‘EEA mutual’ to clause 3 it is possible that an order… could, for example, require an EEA mutual society acquiring a UK mutual to give transferring members full membership rights in the EEA mutual.”
Most of us would think that a good idea. However, the paragraph goes on:
“If the EEA mutual has a unique legal form that might raise a question of hybridity.”
Okay—so it raises a question of hybridity. If the hybrid instrument procedure were applied, members of the UK mutual subject to it would be able to decide whether, either as individuals or collectively, they wished to petition the other place under that procedure.
Lords amendment No. 1 would ensure, as paragraph 6 goes on,
“that the hybrid instrument procedure would not apply, should such a situation arise.”
Why should it not apply? What mischief could possibly result from the hybrid instrument procedure? The essence of that procedure in the other place is that an opportunity is given to petition, just as people can petition against a private Bill or a hybrid Bill. If the relevant people consider that they need to petition against it, they can; the petition is then considered by the relevant Committee in the other place. That can either reject the petition as being irrelevant or without substance, or say that the petition has substance and merit, and proceed accordingly.
I bring my hon. Friend back to the point that we would be dealing with two groups of members: the members of a mutual may be borrowers or depositors. In such cases, both the interest groups would be served. I cannot think of another group of people who would have locus standi by petitioning as my hon. Friend suggests. Will he say who they could possibly be?
We are talking about hypotheses. If my hon. Friend does not think that any group would have a locus standi to petition in the event that a hybrid instrument had been deemed, there would be no harm in allowing the hybrid instrument procedure, because it would not make any difference. Perhaps neither my hon. Friend nor I are wise enough to know exactly what is behind all this, but paragraph 6 is phrased as it is because somebody thinks that private interests might well be prejudiced as a result of the procedure. Under the hybrid instrument procedure, those interests would have a right to petition in the other place and “they” might wish—I do not know who “they” would be—to preclude that right or opportunity from those aggrieved petitioners.
My hon. Friend knows very well that in such circumstances mischief-makers could claim to have locus standi, that the procedure for establishing that is complex and long, and that the issue would go to the Court of Referees. People interested in delaying things—for whatever reason; another commercial company might want to take the building society over, for example—could make mischief knowing that, although they would not succeed, they could delay the whole procedure.
If one looks at the history of the hybrid instrument procedure, one sees that it has always been the last desperate throw of the people who have been challenged on the issue—to say, “We cannot afford to delay.” It so happens that there would be no delay if the petition were rejected and that in the other House there is what is called, I think, an expedited hybrid instrument procedure to cover the scenario to which my hon. Friend refers. We should not have too much haste if that is going to result in people feeling or being prejudiced against as a result of a takeover of an organisation, in which they have a mutual interest, by an EEA mutual.
Does my hon. Friend agree that my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) might well be right in saying that this provision would prevent unnecessary delay in any such mutual takeover or joining together? Does he further agree, however, that it might also prevent a necessary delay?
Exactly—my hon. Friend is absolutely right. That is why, when looking at this issue, their Lordships’ House and a Joint Committee of both Houses regarded the hybrid instrument procedure as sacrosanct—as a cherished means of preserving the rights of individuals, which should not be prejudiced by a hybrid instrument. The whole purpose of the procedure is clear. My hon. Friend the Member for Bournemouth, West says that he does not think that a set of circumstances will ever occur when it will be triggered. That is fine, but why not leave the power in the Bill?
Our noble Friend Lord Naseby raised this issue in the debate in the other place on 10 July. The Minister present said in response that, given the “sheaf of notes” that he had on hybridity, he would write a full letter about it to our noble Friend. That letter, dated 12 July, was placed in the Library of the other place on 17 July, as deposited paper 2007/563. I intend to quote briefly from it—if I can find it from among my papers. [Interruption.] The Minister, helpfully, has a copy. Perhaps she—
Exactly, Madam Deputy Speaker. Effectively, what the Minister who wrote that letter said was not very different from the explanatory memorandum. It is not satisfactory that we are being asked to allow the rules on hybridity to be disapplied, without any guaranteed safeguards for members who might otherwise be able to resort to those rules. The provisions in the Standing Orders of the other place have stood the test of time as a necessary safeguard. Those set out in Standing Orders Nos. 216 and 216A are clearly stated and do not involve an enormous amount of time; however, they do ensure that those who feel aggrieved can put forward a petition, which can then be considered.
As someone who did once petition this House in respect of a private Bill—a house in London in which I had an interest was over the proposed route of the Jubilee line tunnel—I know exactly how valuable the petitioning procedure can be. I point out to my hon. Friend the Member for Bournemouth, West in particular that it normally results not in a full hearing in front of the relevant Committee, but in a compromise between those who feel aggrieved and the promoters of the Bill or instrument in question. It is a safeguard that will probably not normally have to be exercised through time being spent in the other place. However, the knowledge on the part of the mutual society in question that, if the instrument is potentially hybrid, it needs to ensure fairness among all the private interests affected, concentrates minds and ensures that the society is more likely to satisfy an aggrieved party’s complaints in advance.
This procedure does have a very important role to play, therefore, in our parliamentary democracy and, indeed, in our constitution. In fact, that is exactly what happened in the case that I was referring to. As a result of our expressing concern that our houses would subside because of the tunnelling works, our local residents association was given cast-iron guarantees that, if any subsidence occurred, it would be paid for by those building the new Jubilee line. I am pleased to say that in the end, there was no subsidence. However, there were concerns that there might be, and without the private Bill procedure and the opportunity to petition, those concerns might have affected the value of houses in the area because people would have been worried about what would happen if subsidence did occur in future. So this procedure is not merely theoretical, but of constitutional significance.
It is worth telling the House that it is not the case that hybrid orders are never resorted to. First, however, I should point out that I have found three examples since 1 January 2000 of hybrid orders that did complete the hybrid instrument procedure. There were no petitions presented against the London Thames Gateway Development Corporation (Area and Constitution) Order 2004, which was subsequently approved by both Houses. I have not gone into the detail, but perhaps that was because the concerns expressed—similar to my experience with the Jubilee line—were addressed before the matter reached Parliament. The second example is the Thurrock Development Corporation (Area and Constitution) Order 2003, which was laid before Parliament on 2 July 2003. No petitions were presented against that order, which was subsequently approved by both Houses. The third example is the draft Policing of Airports (Belfast City) Order 2003. Again, no petitions were presented.
In case any of my hon. Friends are now thinking, “Well, is this procedure ever used?”, I can tell them that it was used in the context of the West Northamptonshire Development Corporation (Area and Constitution) Order 2004, which was petitioned against. The relevant Select Committee considered the matters complained of in the petitions against the order. They were gone into, and eventually the order was approved by both Houses. However, as a result, it was a better order than it would have been, and those who felt that it would particularly disadvantage them were able to have their say.
You will know, Madam Deputy Speaker, that the right to petition this House goes back to time immemorial—before the time when we began having Government legislation in the way we have it today. I cannot understand the reports in today’s papers saying that the Government have not got enough legislation for this House and, that as a result, we will be unable to sit so much next year.
It is indeed narrow, Madam Deputy Speaker, but may I submit that it is also very important, because it is on a subject that affects the rights of the individual subjects of our country?
As my hon. Friend the Member for Bournemouth, West has pointed out, there is a problem regarding the time that the procedure can take. However, as I did earlier, I draw his attention to House of Lords Standing Order No. 216A.
It provides for the expedited procedure, under which the Bill does not have to be considered in such detail, and states that the
“hybrid instrument…which, by virtue of the Act authorising it to be made, is, after the expiry of a period prescribed by that Act…to proceed in Parliament as if its provisions would, apart from that Act, require to be enacted by a public bill that is not hybrid…referred to as an “expedited hybrid instrument”.
The procedure for such an instrument differs from that applicable to other hybrid instruments.
The standing order continues:
“A petition…not to affirm an expedited hybrid instrument shall be…deposited…within ten days beginning with the day on which the instrument is laid”.
If the Hybrid Instruments Committee is of the opinion that there ought to be a further inquiry, it conducts that inquiry itself, forthwith. After 10 days, if there is some substance to the petition, the matter is inquired into; the Hybrid Instruments Committee does that itself. The procedure could not be used, as has been suggested, by potential rival bidders, although we know from what happens in the real world that such bidders often get up to all sorts of tricks. We have seen that in relation to a recent takeover of a bank, although we shall leave that to one side.
I took the liberty of asking the House of Commons Library about the implications of Lords amendment No. 1. Its reply states:
“In general terms those who would have wished to petition against a hybrid instrument would be adversely affected, as treating such an instrument as an ordinary instrument precludes the right to petition.”
“Exactly who those individuals or groups would be would depend on the provisions in the instrument.”
That almost goes without saying. This real issue could act adversely against members of mutual societies when they find that their directors have it in mind to sell their interests to other organisations in the European economic area. Those agreed members should have the chance to take advantage of the procedure that I have outlined.
The problem that I have about all this is that if we reject Lords amendment No. 1, it might jeopardise the whole Bill—it would depend on whether their lordships could be reconvened to accept our disagreement with it. I hope that the Minister will express her good intentions and those of the Government in respect of how those individuals who might be adversely affected will be protected if that cannot be done by the hybrid instrument procedure.
I am worried about the predatory action that may come from some EEA mutual insurers. Mutual insurers are basically known much more on the continent than in our country. I shall now translate a document from French. The international association of mutual assurance societies is based in Brussels, in what is sometimes described as the heart of Europe. It produced a helpful note on what mutual insurance is and why one must use it. Under the heading “opportunities”, it identifies the fact that the insurance market is still expanding because the universe of risks is doing so too. That universe is indeed expanding, but those are risks not only that people want to have insured, but they are risks for insurance companies. The larger the risks insured, the larger the risk to those companies. We know what happened to Lloyd’s members.
What happens when people invest in a mutual savings society and find that that society’s interests are taken over by a mutual insurance company which then, in order to buy insurance business, insures things that it should not have done and ends up going bust? Where does that leave the savers in the mutual society originally based in the UK, who may have lost everything? Surely we should safeguard against such a situation. We should be alert to the prospect of predatory action.
Before I turn to the other amendments, may I tell hon. Members that the issue of hybrid instruments was examined by the Joint Select Committee on Delegated Legislation in 1972-73? Those recommendations were accepted by both Houses. The Committee was chaired by the late Lord Brooke of Cumnor, the father of the current Lord Brooke of Sutton Mandeville, whom I had the privilege of serving for a short time as a Parliamentary Private Secretary when he was a Treasury Minister. That is a distinguished family of statesmen.
The Joint Select Committee on Delegated Legislation that examined the issue of hybrid instruments said that where those hybrid instruments were such that they might affect individuals, there should not be any removal of the right to use those hybrid instruments. Its concern was that although we have clear rules about what hybrid Bills are and the fact that people have the right to petition for such Bills, the Executive were trying to avoid the hybridity rules that relate to private Bills by trying to use subordinate legislation as the means for getting those hybrid instruments through.
That is why the hybrid instruments procedure was initiated. It was examined by the Committee, which concluded that the procedure has
“for nearly 50 years provided valuable safeguards for private interests affected by delegated legislation and should be retained.”
That is what is important in the context of this debate: that procedure should be retained and not swept away. If it is to be bypassed by the provisions of this Bill, it is incumbent on the Minister to articulate clearly what alternative safeguards will be available to people who might be adversely affected.
I turn to the other Lords amendments in this considerable group. I am grateful to my hon. Friend the Member for Fareham (Mr. Hoban) for raising a number of concerns that I had about their provisions, particularly Lords amendment No. 3. I hope that the Minister will be able to give us assurances about the insertion of a definition of an EEA mutual society, which as I said in an intervention, seems to be at odds with the Bill’s definition of a mutual society. Surely a UK mutual society is also an EEA mutual society, because the UK is in the EEA.
It would have been much clearer if the same rules applied everywhere. I hoped that the hon. Member for Montgomeryshire (Lembit Öpik) was allying himself with the Eurosceptic cause, but I can understand that his ambitions to become president of his party are unlikely to be realised—in the light of the leadership candidates—if he has such credentials. I do not blame him for suppressing them today. In any case, he expressed concerns and I hope that they will be addressed by the Minister.
I hope that the Minister will be able to respond to the concerns expressed. At the moment, the definition in amendment No. 3 of an EEA mutual society is not confined to financial mutuals, but the definition in the Bill relating to mutual societies—in other words, UK mutual societies—is confined to financial mutuals. My hon. Friend the Member for Fareham made an analogy with a mutual wine-growing co-operative. In this country we have a well known and ancient wine co-operative, of which I am privileged to be a mutual member, and that is the Wine Society. If anyone suggested that the Wine Society might be able to take over a building society, people would think that they must be barking. But on the face of it, the Bill would enable a co-operative vineyard in an EEA state to take over a mutual savings society operating in this country.
My hon. Friend also referred in passing to the concerns that have been expressed about cost, including the cost of the Financial Services Authority becoming involved at that vague dividing line between its responsibilities in the UK and how much it could be involved in regulating a mutual based outside the UK. I notice from the financial memorandum that the costs to be incurred would never exceed the costs actually incurred by the FSA, but implicit in that is that the FSA would be able to pass on its full costs to any mutuals involved. Concern was expressed in the other place that that might be a deterrent. I am not saying that that would necessarily be a bad thing, because it would be good to have some deterrent against all our mutuals being taken over by foreign organisations.
I hope that the Minister will be able to address the point that I put to my hon. Friend at the outset about reciprocity. At the moment, the Bill and the notes on it are phrased to suggest that a mutual society in this country could be acquired by or merged with a mutual society elsewhere. However, it would not appear to facilitate the taking over of a foreign mutual by a UK-based mutual.
I hope that the Minister will be able to address our concerns and give me some assurances, so that we do not have to divide the House and thereby jeopardise the further progress of this important piece of legislation, on which I once again congratulate my hon. Friend the Member for Bournemouth, West.
I, too, wish to congratulate my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) on getting yet another private Member’s Bill to this stage. He is on the threshold of getting another one enacted, and that is a considerable achievement.
I have followed the debate this morning with interest. Some of the arguments on the amendments are finely balanced, although my hon. Friend made a persuasive case for their incorporation into the Bill. However, my hon. Friends the Member for Fareham (Mr. Hoban) and for Christchurch (Mr. Chope) also gave some persuasive arguments about why we should be concerned by the amendments. I wish to tease out some of the issues and I hope that the Minister will be able to reassure the House that there is nothing sinister behind the amendments, whether intentional or otherwise.
It would also be helpful if the Minister could clarify which of the amendments are required to comply with EU law and which ones are just thought to be a desirable addition to the Bill. I am not entirely clear which ones we have to accept just to comply once again with our masters in Brussels.
My hon. Friend the Member for Christchurch made a persuasive case that hybrid instruments have stood the test of time. From the Committee proceedings that he quoted, they would appear to have been in place for some 80 years, so the Government need to do much more to explain why something that has stood the test of time for so long and been considered an important part of our procedure should be ditched for the purposes of this Bill. My hon. Friend suggested that that was a slippery slope that might be extended at some point to future issues, so it is important that the principle that hybrid instruments can be brought before the House is considered in detail. I would not like us to ditch something willy-nilly, after a short debate with few Members present on a Friday morning, for the sake of something that is not necessary. I hope that the Minister can clarify why Lords amendment No. 1 is necessary.
My hon. Friend the Member for Bournemouth, West said that he could not envisage anybody who might wish to bring the question of hybridity forward, and the only people who would wish to do so would be mischief makers. My hon. Friend has much experience in such matters, and he may well be right, so I shall not quibble with him. However, it says in the explanatory notes—Lord Evans of Temple Guiting made the same point in the debate in the House of Lords—that
“an order under clause 3 could…require an EEA mutual society acquiring a UK mutual to give transferring members full membership rights in the EEA mutual. If the EEA mutual has a unique legal form that might raise a question of hybridity.”
That suggests that the Government accept that the Bill might raise questions of hybridity and no one seems to dispute that point. The amendment is merely there to ensure that when a question of hybridity is raised, the hybrid instrument procedure would not apply.
My hon. Friend the Member for Bournemouth, West made the point that the amendment will prevent unnecessary delay and stop mischief makers causing trouble. That may well be right. It strikes me, however, that if the Government are acknowledging that a question of hybridity could arise, the amendment could prevent a necessary delay from taking place. I do not understand what huge advantage the amendment provides that justifies ditching an important tradition that has stood the test of time. The Minister should go into detail to explain why the amendment is necessary. It strikes me that it is required not for us to comply with EU law, but because the Government think that it is desirable. She should make the position clear.
Amendments Nos. 2 and 3 would widen the definition of a mutual society. We had an interesting discussion about mutual vineyard owners taking over financial institutions. The point behind that is important. Proposed new paragraph (c) in amendment No. 3 states that the body is
“a body which is a cooperative or mutual undertaking of such description as the Treasury specify by order”.
I tend to be cynical about such measures because they are deliberately vague and might allow the Treasury, perhaps at a later date, to do something that was not intended when the Bill was passed. Given that, it would help the House if the Minister made it clear which bodies the Treasury intends to specify by order, and if she made a commitment that that would not be extended without further parliamentary scrutiny.
I am grateful to my hon. Friend for once again reassuring me about the merits of his Bill, and that the safeguards are in place. I am sure he would agree, however, that it is important to tease out the full extent of its implications. When we have consensus on a Bill—and it seems that we have consensus on this Bill’s merits—certain things can slip through that were not intended when it was originally drafted. As my hon. Friend the Member for Christchurch said, given that we have time to discuss the Bill’s merits, it is important to make our points clear.
My hon. Friend has been in Parliament much longer than I have and knows all the tricks of the trade that Governments can use. Something that sounds reassuring at a superficial level may not be so in reality. I am grateful to him for reminding me of the dangers that he has outlined.
I would like the Minister to address another aspect of amendment No. 3. When we discussed that before, the then Economic Secretary to the Treasury, now Secretary of State for Children, Schools and Families, said that the mutual insurers had to be left out of the Bill because of the possibility of contravening EU law. He said:
“We have considered whether the Bill could be extended to cover companies limited by guarantee that are also insurers, but because insurance is regulated on a Europe-wide basis, we would have to allow the same procedures to apply where the transfer is to a subsidiary of the body corporate in another member state which is similar to a company limited by a guarantee…For that reason, and despite our efforts, we were not able to include mutual insurers in”—[Official Report, 27 April 2007; Vol. 459, c. 1156.]
the new clause in Committee. Given that that was turned on its head when Lord Evans said that the amendment
“is wide enough to encompass mutual insurers and, by permitting transfers under the new provisions to a mutual society established in any EEA state, it ensures that there will be no breach of EC law”—[Official Report, House of Lords, 10 July 2007; Vol. 693, c. 1356.],
it would be helpful for the Minister to explain how we have gone from the stage of something being specifically ruled out, because it would breach EU law, to the stage that we are at now, where something is going to be incorporated to ensure that it complies with EU law. That strikes me as a sharp turnaround in a short space of time. What assurances can she give that the legal opinion on which the amendment is based will not be subject to challenge and will be watertight for the future? I am not a lawyer, and my hon. Friend the Member for Christchurch knows much more about such things than I do, but if we can have a turnaround in a legal opinion in such a short time, I am not convinced that there cannot be a further turnaround in future.
We have not discussed amendments Nos. 4 and 5 very much, but it seems that they are necessary to comply with EU law. Perhaps the Minister can clarify that. Without them, a mutual in another EEA state would have to establish a UK company subsidiary to benefit from the changes, which might place it at a disadvantage. The changes would ensure that UK and EEA mutual societies were treated equally. The amendments’ purpose is not to benefit UK mutual societies in particular, but to benefit mutual societies in other EEA member states.
There is a potential slight contradiction between the hon. Gentleman’s comments and those of some his colleagues. They see the benefit of harmonisation of regulation across Europe, but he is concerned about that. Surely we would all benefit from a degree of harmonisation to ensure that we at least understand the terms. When a potential linkage or merger between a British-based financial institution and one based elsewhere in Europe is considered, some of the uncertainties and subjective determinations would at least be clarified.
The hon. Gentleman makes a good point. He may well be right that that would be a good thing and make sense, but why do we need the amendments? Will the benefits be felt by mutual societies in other EEA countries rather than mutuals here? What will be the consequences in practical terms?
Amendment No. 6 provides for the Financial Services Authority to charge fees for any functions conferred on it by the Bill. It is an eminently sensible addition. It would be perverse should the FSA be out of pocket as a result of the changes. I welcome the amendment. Perhaps the Minister will explain whether that would cover not just the costs of the work in front of the FSA at the time, but the costs of the extra staff that it may have to employ to deal with the additional workload. Lord Evans acknowledged that that would
“result in additional work and, therefore, costs for the FSA”.—[Official Report, House of Lords, 10 July 2007; Vol. 693, c. 1360.]
Presumably, that means that if it is providing additional work, we need additional staff to cope with it. I hope that the fees charged on that basis will cover those additional costs for the FSA as well as the costs incurred at the time when such things are being debated. I welcome the amendment if it means that the fee-charging powers would be extended in that way.
When I was talking about amendment No. 3, I forgot to mention an important point about its definition of an EEA mutual society. Will the Minister tell the House how many mutuals across the EEA will be brought under the scope of the Bill as a result of the amendments? What are the practicalities of that? Can she outline what the Treasury envisages happening as a result of the provisions, and which mutual societies it has in mind?
I welcome the Bill. Some of the amendments are absolutely necessary, but I share some of the concerns expressed by my hon. Friend the Member for Christchurch, especially about amendment No. 1. I look forward to the Minister addressing all the concerns that have been raised this morning.
I am extremely positively encouraged by Opposition Members’ forensic scrutiny of the Bill during today’s debate. I am grateful to the hon. Member for Bournemouth, West (Sir John Butterfill) for presenting the Bill and congratulate him on its success; it is a credit not only to him but also to the plethora of outside organisations, which I support, with which he has been working. The measure will lead to long-lived improvements in our economy.
I reassure Opposition Members that there are no scary and subterfugeal attempts to achieve anything from the amendments that is not blindingly obvious. I shall use the few moments available to me to—
In the few moments that I intend to use, given the 32 Bills listed for debate during the next couple of hours, I shall briefly set out our understanding of the amendments and respond to specific points that have been made.
The amendments fulfil the commitment given in the House to extend the Bill to mutual insurers, which answers one of the main points made by the hon. Member for Shipley (Philip Davies). The Government continue to be appreciative of the support from all those involved in developing the Bill and look forward to implementing its provisions for the benefit of the mutual sector. We shall of course support the amendments, given that we introduced them, with consultation and co-ordination, in the other place. I hope that both sides of the House will be able to support them, too.
Clauses 3 and 4 will make it easier for one type of mutual society to transfer to the ownership of another type of mutual society as a subsidiary company while retaining the important elements of mutuality; for example, individual members transferring to the subsidiary company may be given voting rights in the holding mutual society. Mutual insurers and certain European mutuals will be included as a result of the amendments made in Committee in the other place on 10 July. I shall explain how they fit into the Bill as it left this place.
Clause 3 concerns transfers to subsidiaries of other mutuals. Amendment No. 1 ensures that any order made under clause 3, which may have effects peculiar to a particular mutual, will not be dealt with under the hybrid instrument procedure, as has been much discussed this morning. As a result of the addition of the words “EEA mutual society” to clause 3—in amendment No. 2—it is possible that an order made under the clause could impose requirements on a mutual insurer or other EEA mutual society acquiring a UK mutual. That could include, for example, a requirement to give transferring members full membership rights in the holding mutual. If the holding mutual has a unique legal form, that may raise a procedural question of hybridity, as we have discussed.
The hon. Member for Shipley asked which amendments would comply with EU law. Amendments Nos. 2 to 5 fulfil the dual purpose of extending the scope of the Bill to mutual insurers, as we decided we wanted to do following the comments of my predecessor that the hon. Gentleman quoted, and thereby complying fully with EU law. Amendments Nos. 1 and 6 are necessary as a result of amendments Nos. 2 to 5. I hope that is clear.
The hybridity provision will ensure that the hybrid instrument procedure of the other place would not apply in the situation I described. It is a standard provision to exclude the hybrid instrument procedure, which will reduce complication and delay in making an order under clause 3. We have had considerable discussion as to whether that is a good thing and in that regard I shall refer to the letter that I think the hon. Member for Christchurch (Mr. Chope) was looking for—perhaps he would like to wave it at me—which makes it entirely clear that if one of the affected companies has a unique legal form, for example if it had been established by a private Act of Parliament, the provisions that we may or may not introduce as a result of the Bill could raise a technical question of hybridity. I believe that it really is a technical question. The important point is that the amendment is merely a precaution.
I shall be completely honest with the House: at this stage we do not know how this part of the Bill should be implemented. My firm view—and, I believe, the view of the hon. Member for Bournemouth, West—is that it is better to have proper democratic consultation on the specifics of how we can fulfil our aims under the Bill, and to look at all possible options, rather than to exclude, by not having the hybridity amendment, one of the possible options that we may subsequently decide to pursue. No decisions have been taken on the implementation of the Bill. We shall consider and consult on the various ways of implementing clause 3, to achieve the aims of the Bill while protecting mutuals and their members, so including the hybridity provision is mainly a precaution. Our consultation will be extremely democratic.
This is the first time I have had the privilege of hearing the Minister speak in her new role. She is obviously very much on top of the issue, and as someone who has much experience of the City of London she will be familiar with the concept of a blank cheque. Is she not asking us, in effect, to sign a blank cheque today? In light of what she has just said, might it not be better for the Bill not to make progress so that the consultations she describes can take place? The Government could then legislate on the matter, in their time, in the coming Session.
No, I do not agree with that. I do not feel that it is a blank cheque. I genuinely feel that technical issues may arise if we choose to implement the Bill in a certain way. We have not decided how to implement it yet, and hon. Members of all parties and representative interest groups can respond to the consultation with arguments that include the question of hybridity if they would like to. When we finally put forward our proposals, we will do so through the affirmative resolution procedure, and those issues can be discussed in that forum. I genuinely believe that that is a sensible way to proceed; it is not a way to stifle debate.
I would like to pick up on something that the Minister said earlier. She said that amendments Nos. 2 to 5 were required to comply with EU law. Much as I dislike having to pass laws to comply with EU law, I understand the need to do so under our current arrangements, but she said that amendments Nos. 1 and 6 were necessary as a result of those amendments. Would she clarify that point? I understood that amendment No. 1 is not necessary to comply with amendments Nos. 2 to 5. I understand why amendment No. 6 is necessary as a result of the other amendments, but not amendment No. 1. Is it not the case that the Bill could progress with all the amendments apart from amendment No. 1?
That is not my understanding. The amendments address the specific point that my predecessor made in Committee: if one wants to extend the Bill to mutual insurers, there is a corresponding issue of ensuring that the provision is not challenged under EU law, which I think is right and proper. I am simply telling the hon. Gentleman of what I have been technically advised.
I am grateful to the hon. Lady for accepting this final intervention. She referred to the precautionary principle, but since when has the precautionary principle been used by the Government to exclude individual rights, at a time when, by the Government’s own admission, they do not know how the Bill will be implemented or how those rights might be adversely affected?
I do not believe that I am excluding rights by addressing the point of hybridity at this point during the passage of the Bill. It is a correction of a potential technical anomaly that may become necessary later on as we consult and work together to ensure that the Bill is implemented in the right way.
Amendments Nos. 2 and 3 widen the definition of mutual society in clause 3 by inserting a definition of EEA mutual. There has been some discussion of that. An EEA mutual can be a European co-operative society, a co-operative society established in any European economic area state or any other type of co-operative or mutual body as specified by the Treasury in secondary legislation. That will ensure that any changes made under the Bill apply where the transfer is to a subsidiary of an EEA mutual, as well as where the transfer is to a subsidiary of another UK mutual. That incorporates the conversations we had this morning on proposed paragraph (c) in amendment No. 3, and the way in which it would be considered by Parliament.
In response to the Conservative Front-Bench spokesperson, I can clarify that primary legislation is considered under the affirmative resolution procedure. However, the power in proposed paragraph (c) in amendment No. 3 is subject to the negative resolution procedure, because it simply allows the Treasury to specify other co-operatives or mutuals, including those in other EEA states, to which a UK mutual may transfer. It may need to be exercised at short notice—for example, to specify a new kind of EEA mutual in a potential and live takeover situation. We believe that the negative resolution procedure is appropriate in that case. The power cannot be used to amend primary legislation, where of course it is right and proper that any such changes should be subject to the affirmative procedure.
I presume the hon. Gentleman is going back to the wine example. It is not for me to specify which sectors should be pursuing alliances with other types of sectors. It is theoretically possible that the situation he describes may happen, but that does not cause me any concern at all.
That is my understanding. The changes will allow mutuals in other EEA states to take over UK mutuals on the same basis that other UK mutuals may take them over. Only EEA mutuals specified in the Bill or an order made under it may benefit in that way. To reiterate, it is a matter for the bodies concerned to decide whether a particular takeover is appropriate.
Clause 3(9) specifies three types of UK financial mutual that could merge with other UK financial mutuals. I think that the Economic Secretary said that a UK non-financial mutual or a financial mutual that falls outside subsection (9) could merge with another financial mutual. That means that, for example, a credit union in the UK as an EEA mutual could merge with a friendly society, building society or mutual insurer. That runs counter to what was said on Second Reading.
My understanding is that the purpose of the proposal is simply to create a level playing field. A foreign or UK credit union could in theory acquire a UK mutual. As they are small bodies, credit unions are probably unlikely to do that, but it is possible.
Does the Economic Secretary feel, like me, that we are considering a moot point? If a UK financial mutual wished to merge with a Bratwurst-making co-operative in Germany, a pizza-making co-operative in Italy or a herring-pickling co-operative in Estonia, that would be a matter for them. Nevertheless, the insurance policy is the good business sense of the UK financial institution, plus the necessary requirement for authorisation from its members. Although we can theoretically play games, in practice it is not an issue.
I agree. It is not for the Government to start delving deep into the decisions that essentially private organisations may wish to make.
Lords amendments Nos. 4 and 5 would introduce the term “relevant company” into clause 3. That ensures that a mutual society’s business can be transferred under the modified procedures to a UK company or a body incorporated in any other EEA state, provided that that company or body is controlled by another mutual society.
Lords amendment No. 6 ensures that the Financial Services Authority has the power to charge fees for any functions that the Bill confers on it, extending the FSA’s existing powers to charge fees under the Financial Services and Markets Act 2000. The extension of clause 3 to EEA mutuals will require certain safeguards, equivalent to those that apply to domestic mutuals for membership rights in the holding mutual and further demutualisation. That answers some of the points that were raised. The FSA may have a role in that and, if additional functions are conferred on it in the order that implements the Bill, it may need to charge fees in connection with them. If the FSA exercises its power to charge fees, that could result in costs for businesses that wish to take advantage of the new procedures. However, any such fees would be paid directly to the FSA and would not exceed the FSA’s costs in the transaction in question.
I was probed slightly further on the power to charge fees, so I shall clarify the matter. Officials in the Department have discussed the principle of fees with the FSA. We will have further discussions at the time of consulting on and making the order. As I said, the FSA’s power to charge fees is in the Financial Services and Markets Act 2000. The amendments widen the power to cover costs relating to the new functions conferred under the Bill. The FSA could charge only its costs for ensuring that adequate safeguards are in place. That seems entirely sensible.
I was disappointed that, given the time available, the Economic Secretary was not prepared to take my other intervention. If the Bill goes through today, when will it be implemented? It sounds as though there is a long timetable. Has my hon. Friend any idea how long the process will take?
The last discussions that I had in the Treasury suggested the consultation would take some months, but I cannot be any clearer than that.
Lords amendment agreed to.
Lords amendments Nos. 2 to 6 agreed to.
Transfers to subsidiaries: distribution of funds
Lords amendment: No. 7.
I beg to move, That this House agrees with the Lords in the said amendment.
The Channel Islands and the Isle of Man were not included within the scope of the original Bill. It is my understanding that it is usual for us to consult them before making legislation that would affect them. It is also my understanding that they have indicated that they would like to be included within the legislation, but no doubt the Minister will able to confirm that. I can see no reason why the Channel Islands and the Isle of Man should be excluded. If the rest of the EEA is included—they are, of course, outside the EU—they should, as part of the United Kingdom, be included.
I doubt it, is the answer. We have heard all sorts of strange suggestions as to who might merge with whom. All such mergers would require approval by the Treasury and the FSA. I am reassured that they are sensible enough to make sensible decisions.
Can my hon. Friend tell us when he first approached the Channel Islands and Isle of Man authorities to find out whether they wanted to be included in the Bill and why it was not apparent at the outset, when he first launched it, that they wished to be included?
Few people would wish to quibble with Lords amendment No. 7. However, I hope that the Minister will both respond to my question about how it came about that those authorities wanted to be included in the Bill at such a late stage and say what she sees as the implications of that. We quite often hear complaints in the House that a different regulatory regime operates in, for example, the Channel Islands or the Isle of Man from that which Parliament imposes here, and that that regulatory regime is often less protective of consumer interests. For example, the other day I attended a breakfast at which the issue of health supplements was raised in that context. Concern was expressed that the Channel Islands’ regime for regulating health supplements was rather different from that which applied in the UK. What guarantees can the Minister give that the implications of extending the Bill to the Channel Islands and the Isle of Man are compatible with being able to look after the best interests of individual investors or members of mutual organisations?
I, too, would like to raise a query that I hope the Minister can address. Lords amendment No. 7 says:
“Her Majesty may by Order in Council provide for any of the provisions of this Act to extend, with or without modifications, to any of the Channel Islands or to the Isle of Man.”
I suspect that that is standard wording for a Bill of this nature. However, I understand that not all the current legislation covering mutuals is so extended to cover the Channel Islands and the Isle of Man. I wonder whether the Minister could touch on which legislation is and which is not, and what implications that might have, as I understand that all previous legislation at least has the capacity to include the Channel Islands and the Isle of Man. Perhaps the Minister could therefore clarify whether the amendment would, as a matter of course, apply to the Channel Islands and the Isle of Man or whether it just means that it could apply them, should they so wish at a future date.
I shall be happy to provide that clarification. My understanding is that the drafters of the Bill had not spotted the fact that other, similar types of legislation applied to the Channel Islands and the Isle of Man. When the Bill was being discussed in the House, during its earlier stages, there was not time to make the necessary consultations. We have a policy not to introduce such permissive extent clauses without consulting those involved—in this case, the islands—first. That has now happened and I am happy to confirm that they are content with being included, hence the amendment. I hope that that will answer the point raised by the hon. Member for Bournemouth, West (Sir John Butterfill).
I also understand that the Industrial and Provident Societies Act 1965 applies to the Channel Islands, and that there are powers to apply the Friendly Societies Act 1992 to the islands and the Isle of Man, which have not been fully used.
I am grateful. I was most interested to hear the Minister’s response to my hon. Friend the Member for Christchurch (Mr. Chope). Surely neither the Channel Islands nor the Isle of Man could implement the legislation before the British Government had done so, because it would be the British Government’s implementation of the different phases of the legislation that would trigger any subsequent actions that might flow from it.
I apologise for not being a world expert on the legal situation relating to the Channel Islands and the Isle of Man. I shall clarify the situation. The amendment will allow the Bill to be extended to the islands. It will be used only if the relevant mutuals legislation is extended, and it will then affect only those mutuals established in the Channel Islands and the Isle of Man. No time frame has been agreed at the moment; that will be sorted out during the consultation period. I must also apologise to the House and clarify that the Isle of Man could not implement the provisions before we had done so.
I commend Lords amendment No. 7 to the House.
Lords amendment agreed to.