This is an opportune debate, which I sought last week before the news broke at the weekend about the future of the Dunfermline building society. Mainly, it has been a black week for Dunfermline. After 140 years of trusted service to the community, the Dunfermline is no longer an independent Scottish mutual. It has been a friend to many and has been safe and sure. This week, there have been tears, confusion and, most of all, anger that such a fine institution has come to this.

For the record, I wish to declare that I am a member of the Dunfermline building society; it is an organisation that my family and I have trusted for a number of years. The break-up of the Dunfermline is another clear example of the failure of the regulatory system. We need some clear answers to why the so-called reckless behaviour was allowed to go unchallenged by the regulator for so long. Why was the Dunfermline allowed to ramp up its commercial loan book from approximately £270 million at the end of 2007 to more than £650 million in early 2008 when the property implosion was plain for all to see?

We should remember that, in early 2008, several months had passed since the problems of Northern Rock, Freddie Mac, Fannie Mae, Lehman Brothers and others. How could this have been allowed to happen? I understand that the Financial Services Authority was well aware that building societies—not just the Dunfermline—had adopted a change of strategy to a more risky business model. That change of strategy was openly discussed, yet effective permission was given for the Dunfermline to proceed. The FSA knew about the loan books that had been bought from GMAC-RFC and that they had been sold as a full status when, in fact, they were risky self-certification loans. What was the FSA’s response? No action was taken against GMAC-RFC and there was no direct intervention at the Dunfermline. The only action taken was a round-robin letter sent to all the building society chief executives about their due diligence responsibilities. That is a completely inadequate response, which allowed the society to continue its road to ruin.

At the Dunfermline, it is my understanding that the due diligence stress tests and professional assessments of the proposals to buy a range of loan books from GMAC-RFC and others were overruled. Why was that not also identified by the FSA? Before the old building society regulator was subsumed into the FSA, it had a special focus on building societies. If that structure had remained, we might not be facing the situation that we have today. Bringing two different cultures together under one organisation led to a common set of values and standards that do not reflect the different priorities and culture of the banks on the one hand and building societies on the other. Will the Minister tell me what lessons have been learned in the Treasury, the Bank of England and the FSA about this episode?

On Sunday, the perhaps now former chairman of the Dunfermline building society was asked whether he thought that the Treasury was guilty of sacrificing the Dunfermline. He said that he felt that the Treasury had sacrificed it. As the Member for Dunfermline, is that also the hon. Gentleman’s view?

The issue is covered in fog. Jim Foulds was very emotional on Sunday, and he obviously felt strongly about the society. I had an initial fear that a barrier to getting the necessary deal would be the fact that the Prime Minister lives in Fife and has a seeming attraction and closeness to the society. I also feared that setting a precedent of that nature might be a disadvantage to the Government if there are difficulties with other building societies. I have since had discussions with the Government and many others, and although I think that an awful lot was done to try to save the society, it was not sufficient. However, we will leave the issue of whether the society was sacrificed to the academics and historians.

Will the Minister say whether there has been an investigation into this episode within the FSA? In addition, have all the mistakes that were clearly made with the Dunfermline building society been highlighted and lessons learned so that the culture changes? I am sure that this is not the only episode from which the FSA has had to learn, but it is essential that the lessons are learned. I also want to know what changes will be introduced and if any changes have been agreed so far?

I was grateful to the Chancellor for giving a statement on Monday. I was pleased because it allowed the House to express its views and concerns about the decision. The Chancellor’s tone and approach on Monday was much appreciated; it was sensitive to the staff, Fife and Scotland as a whole. I was appreciative of that, but there are still a number of outstanding questions. On Sunday, the Secretary of State for Scotland said:

“But also by some reckless decisions by previous management because of over-exposure to commercial loans, involvement in the subprime mortgage market in the US and really bad decisions on their technology.”

However, it is my understanding that the mortgage book was not from the United States. I would appreciate clarification on that because it has upset many in the society who believe that that is a complete misrepresentation of the facts. The Chancellor did not refer to that matter clearly in his statement on Monday, so I would like the Minister to state clearly that there was no involvement in the American markets at all.

I also saw that interview and part of the answer that the Secretary of State gave was perhaps a first for a Cabinet Minister in that he said there was sub-prime in the English market. If I have understood what the Prime Minister has been saying, sub-prime is an American problem. Is that the first time there has been an admission by a member of Cabinet that sub-prime is also an English problem or, as the Secretary of State put it, a UK problem?

There are different definitions. I understand that they use sub-prime in the States but that there are subordinate, unsecured mortgages in the UK. I do not know if that statement is necessarily new, but perhaps the Minister can clarify that.

In the Chamber on Monday, the Scottish National party spokesman compared the £1.6 billion of net financing provided to the Nationwide with the suggested £60 million for capitalising the Dunfermline. I understand that that is not comparing like with like and that they are different sums, so it is not appropriate to compare them, but does the Minister believe that the Nationwide deal will be more or less expensive than the proposed deal for the Dunfermline? Alternatively, have other factors come into play, such as issues about stability and other matters. We were led to believe that it would have been more expensive to do the Dunfermline deal, but I am not absolutely sure that that is the case. Will the Minister clarify whether it is?

The break up of the Dunfermline will result in some call on the Financial Services Compensation Scheme. Will the Minister say what the estimated cost of that will be because building societies and banks will find such a burden difficult to bear at this difficult time? If the Minister can come up with a figure at this stage, exactly how much does he think it will be?

Finally, the Chancellor said that it was clear that the Dunfermline could not have survived. However, if it was clear, why did it take six months to reach that conclusion? I do not think that the decision was that clear and if it was, it should have been identified six months ago. Was there a resource issue? Was the FSA finding it difficult to cope with the multitude of problems that it had in the autumn of last year when problems were first raised by the Dunfermline? If the resources were available at that time, could we have reached a resolution that would have meant that the Dunfermline remained an independent Scottish mutual, which I believe was the ultimate goal in relation to all the issues that were going around?

I also wish to raise a couple of issues that I mentioned in the debate on the decision. First, Dunfermline had to pay around £7.2 million towards the Financial Services Compensation Scheme as a result of Bradford & Bradford, the Icelandic banks and the London Scottish Bank. That put extra pressure on the society at a time when it did not need it. Two weeks ago, I raised that issue in this Chamber—in fact, I was in this very chair—when the Economic Secretary to the Treasury responded.

There needs to be a review of the scheme, because it puts a huge burden on societies that are supposedly relatively safe. There is not an appropriate balance between risk and value. Contributions are based on the deposit book rather than the risk that an organisation poses. I would like the Minister to commit to having a review. I know that the Government are looking at issues around that, but I would like a proper review with a proper deadline, so that we can draw a line under the matter and have a system that is fairer to building societies.

The second issue is excessive capital requirements, which I understand put an extra burden of an estimated £30 million on the society at a time when it needed ultimate flexibility. Lord Turner of the FSA recently recommended that we should have a more flexible approach, and that the capital requirement should be reduced from 7 per cent. to 4 per cent. during times of economic difficulty, but he did not practise what he preached. It was 8 per cent., which put an unnecessary straitjacket on the Dunfermline building society at a time of difficulty. I would like to know whether the Minister will adopt Lord Turner’s suggestion.

For all those reasons, I believe that it was incumbent on the Government to save the society, which they failed to do. I have heard all the explanations, but the reality is that the Government presided over the demise of Scotland’s largest building society on their watch. They will have to live with that, and they will have to explain it to the people in Fife, Dunfermline and, more widely, Scotland.

Until now, my focus has been on the Government. I have tried to squeeze every last penny and concession out of them to get a good deal for the society and to keep it an independent Scottish mutual, but, ultimately, that failed. I could stand here and berate the Government all afternoon, but that would not move us any further forward or change the facts. However, I do want the Government to learn the lessons from this episode, because they are important.

If it had to be anybody, I am pleased that it is the Nationwide that is taking over. It has a proud, strong reputation for recognising value and quality brands. I am heartened to know that it has kept the Derbyshire and Cheshire brands, and their separate headquarters and branches, which is good. I was also pleased to hear the hon. Member for Macclesfield (Sir Nicholas Winterton) say in the Chamber on Monday that, increasingly, the Nationwide is seen as a lifesaver. He has had a positive experience, and I hope that we do as well.

I have had positive discussions with the Nationwide this week and have agreed to assist as much as possible in its transition into Dunfermline. Dunfermline and Rosyth are mini-centres of finance. They have an expertise that I am sure the Nationwide will find extremely valuable. HBOS, Lloyds TSB and Intelligent Finance are in Dunfermline, with about 2,800 jobs. The Nationwide will find it a good place to do business, and I will work with it as much as I can to ensure that it is able to grow and prosper.

However, I have several questions about the immediate future. The first is about the pension scheme, which was transferred to the Treasury when the society went into administration. There is concern among the approximately 150 employees of the Dunfermline, now the Nationwide, about the final salary scheme. They want to know whether the payments will be honoured. I understand that the Bradford & Bingley used the Pension Protection Fund to guarantee payments. Will it be the same for the Dunfermline? An early decision and announcement on that would be good for the confidence of the employees, who have been through a difficult time.

Secondly, the society recently announced that it was committed to another £30 million in social housing schemes across Scotland in places such as Fort William, Glasgow, Stirlingshire and beyond. It has a great tradition and a reputation for social housing in Scotland, which I would like to see continue, but the social housing fund has been put into DBS Bridge Bank Ltd, which is under the control of the Bank of England.

I would like to know what will happen to the fund. Will it be put back into the Nationwide-Dunfermline fold? That is where it should be. Others have suggested that perhaps we could create a separate Scottish social housing bank, but I am not sure whether that would be viable. I would like the Minister to consider having a meeting with me and representatives of the social housing sector in Scotland, so that we can explore the issues.

I wish to thank Jim Willens, the chief executive of the Dunfermline building society since December, for his sterling efforts to try to save the Dunfermline as an independent mutual. His valiant effort ultimately failed, but I thank him none the less. He did a tremendous job.

I also wish to praise the hundreds of members of staff at the Dunfermline for their service to the society. Some have served for many years. They are not to blame for this episode—they have been let down. People are angry, confused and depressed about the Dunfermline. They know that some serious errors of judgment were committed in the society. Yes, the Government contributed to the difficulties, but the employees know that mistakes were made at the top of their society by people who must bear responsibility along with the Government.

People want answers, but I have absolutely no desire to have a crude witch hunt. That is not our style in Dunfermline; it is not how we do things. However, members, staff and the community want to understand what happened. They want to know how such a fine institution for 140 years could be wrecked in a few months. They want to understand why reckless decision making caused that to happen. I urge those who were responsible—those who were in charge—to step forward, explain and apologise. We will treat them with respect and we will listen but we ask them please to accept that request. The society of 140 years deserves it.

I congratulate the hon. Member for Dunfermline and West Fife (Willie Rennie) on securing this important debate and on the work that he has done on behalf of his constituents in pursuing the matter over recent months.

I agree with the hon. Gentleman: it is sad that an institution such as the Dunfermline building society, with a distinguished history and a record of good service to its local community over such a long period, came to an untimely end in a way that no one would have wished—although, as he said, the identity of the society will continue.

My right hon. Friend the Chancellor made it clear when he spoke in the House on Monday that the Government are well aware of the high regard that local people have had for the institution. It is a substantial business, as the hon. Gentleman said. It has 34 branches, some 500 employees and around 300,000 members, making it the 12th largest building society in Britain.

The decision to transfer the main business of the society to the Nationwide was made to protect depositors and to safeguard financial stability more widely, as well as to protect the interests of the taxpayer. The decision was necessary because of a deterioration in the society’s financial position in the past few months. On Saturday, the Financial Services Authority had to take the decision that the Dunfermline building society was likely to fail to meet the conditions laid down in the Financial Services and Markets Act 2000, which would permit it to remain open for business, and that it was not reasonably likely that action could be taken by the society to enable it to satisfy those conditions.

The situation arose for several reasons, but there were three particularly significant ones. First, the management of the society decided to go into large-scale commercial lending—more than £650 million at the top of the market in 2005 and 2006. Many of those loans are now not being repaid.

Will the Minister answer the question about whether those were American mortgages?

I am coming to that point. The second factor was that the management decided to acquire more than £150 million-worth of high-risk UK mortgages from subsidiaries of two American companies, GMAC and Lehman Brothers, just before the global market for such loans collapsed. There is a significant US dimension, but the mortgages themselves were with UK borrowers.

Thirdly, last year, the society needed to write off £10 million from the purchase of an IT system for which it was charged £31 million. All those issues contributed to the society making an expected loss of more than £24 million last year.

Many people, the hon. Gentleman among them, have quite properly asked why it was not possible to rescue the society—why the Government could not inject more capital, perhaps with contributions from other building societies through the Building Societies Association. I assure him, the House and others that the idea was seriously considered, but the Financial Services Authority advised that a minimum of £60 million would be required just to allow the society to carry on trading and that that would not have provided a long-term solution. The judgment of the tripartite authorities was that, even with a £60 million injection, the society would have been very unlikely to have an independent long-term future; instead, we would have been back in this position, dealing with exactly the same problem, before too long.

I hear what the Minister says about the £60 million, but Jim Faulds, the chairman of Dunfermline building society, said in an interview on Sunday that that was the first time he had heard the figure, and he was critical of what he called “faceless mandarins” advising Ministers. He was critical also of the fact that he had been blue in the face for six months, trying to make some contract with the Treasury and the FSA. Does the Minister think that the Treasury could have been more proactive in discussions with the building society to find a way forward far earlier than March? The building society seems to have been looking for that way forward for quite a while.

I heard those remarks by Mr. Faulds and was puzzled by them. For example, he met my colleague the Financial Services Secretary on 13 February, together with the chief executive and the chairman of the Bank of England’s audit committee, so there have been discussions with him and the society over a period. There was also a meeting with the society’s former chief executive as early as last November. I do not quite understand the background to those comments.

If we had come forward, as suggested, with that figure, the society would not have been able to service or repay that amount of new capital. As my right hon. Friend the Chancellor said, the society

“has never made an annual profit of more than £6 million”—[Official Report, 30 March 2009; Vol. 490, c. 660.]—

not even in the good times of the past few years. That amount of profit would not have dealt with the commercial property loans and high-risk mortgages—some £800 million in total—that the society held. We needed to find a long-term solution to protect the interest of the society’s members, above all, and to do the best that we could on employment in the society and on wider financial stability. The tripartite authorities concluded that the best way to do that was to transfer the core parts of the society to another building society—one, as the hon. Member for Dunfermline and West Fife rightly recognised, that has a good reputation and is widely respected. Those core parts include the Dunfermline’s retail and wholesale deposits, its 34 branches, its head office and its residential mortgages.

Savers who are retail depositors with the Dunfermline and with the Nationwide, and some may have accounts with both, will continue to benefit from separate Financial Services Compensation Scheme limits—£50,000 per person per authorised entity. The brand, as the hon. Gentleman acknowledges, will be maintained, and assurances have been given that there will be no compulsory redundancies in branches for the next three years.

The social housing loans of Dunfermline’s customers have been transferred temporarily to a bridge bank that is owned by the Bank of England.

I was just mentioning the DBS Bridge Bank, which is owned by the Bank of England, which will continue to provide support for the Dunfermline’s social housing commitments while we talk to a number of other parties, including the Scottish Government, about securing a long-term future. The remainder of the Dunfermline’s business, including commercial loans, high-risk mortgages and subordinated debt, has been put into administration under a new procedure that the Banking Act 2009 provides.

In line with previous resolutions of this kind where the retail deposits have been transferred in full, the assets to back them have been provided in the short term by the Treasury. An amount broadly equivalent to the capital reserves belonging to the Dunfermline’s members is also being transferred, along with the rest of the business, and will support prime residential mortgage lending.

The Treasury will reclaim that from the proceeds realised from the assets placed in the administration and, if necessary, from the Financial Services Compensation Scheme, by requiring the scheme to make a contribution to the costs of resolution at the end of that process. Any contribution from the FSCS will be capped, under the requirements of the new provisions made by the Banking Act, at the compensation that the FSCS would otherwise have had to pay if the society had gone into default, less the recoveries that would then have been made from winding-up the society.

Although the final cost to the taxpayer will be significantly less than £1.6 billion, we obviously cannot be precise about the amount at this stage, but we are clear that this option represented better value for money for the taxpayer than the other options on the table.

The hon. Member for Dunfermline and West Fife made the point forcefully that he feels more should have been done. Other hon. Members made similar points. Let me attempt to reassure him that a great deal was done. There has been a lot of contact with the society, as I have said, much of which was behind the scenes and most of the content of which was in discussions between the FSA and the Dunfermline.

The FSA is the society’s regulator and the sole body that must decide whether the society met the threshold conditions laid down in the Financial Services and Markets Act 2000 and whether it could continue to be allowed to accept deposits. Among other things, the FSA commissioned an independent audit of the society’s commercial book and subsequently of its strategic plan.

In discussions over recent months, the FSA has recognised that improvements need to be made in how things operate. I can tell the hon. Gentleman that we have asked the chairman of the FSA, Lord Turner, for a report on the Dunfermline. The FSA’s chairman and chief executive have made it clear that a significant shift in regulatory approach is now required. The FSA will complete its supervisory enhancement programme to deliver that major shift, and as part of that, it is devoting more resources to supervising high-impact firms, particularly large, complex banks; taking a more intrusive, systematic approach to supervision; intensifying its role in bank balance sheet analysis and the oversight of accounting judgments; and increasing its willingness to challenge banks’ judgments.

The hon. Gentleman pressed me about whether lessons would be learned. He may take some encouragement from the fact that the National Audit Office report published about a fortnight ago that covered some of our previous problems, starting with Northern Rock and Bradford & Bingley, made the point that lessons learned from the experience with Northern Rock were applied in the case of Bradford & Bingley. I hope that he will take encouragement from that that lessons for the future are being learned from these incidents.

I am grateful to the Minister for giving way; he has been generous. Does he believe that Dunfermline customers should be treated in the same way as existing Nationwide customers? For example, should they be able to access lower-rate mortgages of around 2.5 per cent. as opposed to 5.49 per cent., especially when the base rate is 0.5 per cent? Will there be parity of esteem and treatment for new Nationwide customers from the Dunfermline?

That is a matter for the Nationwide, and I am not aware of the commercial terms that it is offering to its new customers. We know that the Dunfermline brand will be kept separate, which is important because Dunfermline depositors will enjoy separate cover from the FSCS for their Dunfermline accounts, as well as for their Nationwide accounts if they have both. We certainly expect Nationwide to treat its new customers fairly, but precisely what terms it will offer to new customers is a matter for the Nationwide.