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Building Societies (Limited Credit Facilities) Order 1987

Volume 490: debated on Tuesday 17 November 1987

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7.20 p.m.

rose to move, That the draft order laid before the House on 21st October be approved. [4th Report from the Joint Committee.]

The noble Lord said: My Lords, in moving that the draft order be approved I should like, with your Lordships' permission, to speak also to the Building Societies (Provision of Services) (No. 3) Order 1987.

Nearly a year has now passed since the Building Societies Act 1986 came into force. The intervening period has seen many changes in the financial background against which the Act was conceived, not least in the evolution of the functions undertaken by building societies. The Act enabled societies to provide a number of services for the first time, and I believe that they have risen to the challenge. The range of new activities permitted from January this year under the new Act was quite extensive and included lending on non-residential property; unsecured lending; ownership of land; wider borrowing from wholesale markets; money transmission services; provision of personal pensions and PEPs; and the ownership of estate agents.

There are two orders before the House. Both are intended to remove certain restrictions currently placed on building societies by the Building Societies Act as it now stands, and which the Government believe to be unnecessary. Societies have had for some time the power to issue credit cards, acting as agents for banks, and a number of building societies already issue such cards to their customers. Under this arrangement it is the banks, not the building societies, which provide the credit to card users. The building societies are not currently directly involved in the transaction.

Section 16 of the Building Societies Act 1986 gave building societies the right to extend unsecured personal loans. It was assumed that they would be able to act as principals rather than just agents in issuing credit cards. But they have been prevented from doing so by a technical problem in the way the Act is drafted. The Act sets a limit of £5,000 on the total amount of unsecured lending to any individual. This does not cover the situation where a borrower deliberately or inadvertently exceeds his credit limit. Should that happen, a society would automatically be acting ultra vires, even if it immediately took steps to recover the situation. Societies cannot take that risk. So they cannot issue credit cards as principals.

The same problem applies to certain other transactions, particularly those relating to electronic funds transfer. The Building Societies (Limited Credit Facilities) Order removes this problem. The £5,000 limit is retained but societies will not be acting ultra vires if they take steps within a reasonable time to remedy the situation by recovering the debt. I think this is a sensible step and one which societies will welcome. The Building Societies Commission will expect credit card lending by societies to be subject to rigorous credit assessment procedures and will take a particular interest in societies' systems in this area of lending as part of their normal prudential supervision.

The second of these two orders will allow building societies to provide their customers with advice on a wide range of investments, such as gilts, equities and debentures. Societies are currently restricted to providing investment advice on insurance and their own products. This includes advice on unit trust linked life assurance and on personal equity plans, but not on unit trusts generally. The order will also correct an unexpected effect of the Act which requires building societies—alone among financial intermediaries—to channel customers' unit trust orders through a stockbroker. The order provides that customers' orders may be passed direct to the fund manager.

These orders are intended to have the effect of allowing building societies to provide their customers with a better service, by developing societies' range of personal financial services. It should increase consumer choice and hence be a useful competitive stimulus to banks and other financial institutions now operating in these fields.

There has been some debate about the extent and nature of the financial services that building societies should be able to provide and, as your Lordships will be aware, the Economic Secretary last month announced a review of Schedule 8 to the Building Societies Act, which lists these services. This will do two things. First, it will examine how far the structure of Schedule 8 can be revised so that it describes in broad terms what societies can do and specifies within that those activities which are expressly forbidden. This would change the presumption at the margin that societies can do things rather than that they cannot do them, and hopefully remove as far as possible many of the irritations societies have experienced in operating within their new powers.

The review will also consider the various requests societies have made for extensions of their powers into new areas. Any change to Schedule 8 will require an affirmative order to be debated in this House. It is hoped that this order can be brought forward early in the new year. In the meantime, I commend these orders to your Lordships.

Moved, That the draft order laid before the House on 21st October be approved. [ 4th Report from the Joint Committee.]—( Lord Beaverbrook.)

My Lords, I hope that the noble Lord's customary calm will not in any way suffer by my assurance that we support him in these orders. In regard to the first one to which he referred, I have very little to add to the comments that were made in another place by Mr. Chris Smith, who spoke on behalf of the Opposition. In general, we support this new action which to some extent extends the powers, the competence and indeed the opportunities available to building societies. They have suffered one or two reverses over the past two or three months, or perhaps even longer, when large sums were withdrawn in order that members could invest in privatisation equities.

Happily, in a number of cases, after having sold their shares in the privatised industries they returned their funds to the building societies. I am quite sure that this militates to the stability of the savings movement of this country and acts as a salutary check against undue and speculative adventures into the privatised equity market. We give our blessing to the first order.

Although we support the second order in general, there remain one or two matters to be cleared up, which I am quite sure the noble Lord will be able to do. Paragraph 3 of the order states:
"The list of services in Part I of Schedule 8 to the Act shall be varied by the addition of the following
"after the service numbered 6—
'6A. Giving investment advice.
6B. Arranging for the provision of units in a unit trust scheme."'.
I should be grateful if the noble Lord could confirm that polarisation still applies to the building societies and that the building societies can choose either 6A or 6B, or, if they elect to choose both, that 6B shall not apply to those building societies that are themselves owners of or linked with specific unit trust schemes. The noble Lord will agree that within the general provisions of the Financial Services Act it would be against the principle of polarisation that building societies should be able to recommend their own unit trusts. I should be glad if the noble Lord could give me some assurance on that point.

The next matter relates to paragraph 4 of the order, which states:
"Part III of Schedule 8 to the Act shall be varied by the insertion of the following paragraph after paragraph 5—
'Giving investment advice.
5A. The power to give investment advice is restricted to giving advice to individuals."'.
The term "individuals" within the Building Societies Act 1986 shines out like an occasional beacon. Throughout the Act, apart from Section 76(9) and Section 83, the first two subsections, the Act refers to "persons". Your Lordships will be aware that under the interpretation of legislation Act 1979 "persons" has a vastly different connotation from "individuals". "Persons" encompasses even bodies corporate. So far as I can see from the interpretation clause of the Building Societies Act 1986, "individuals" is nowhere defined.

This is important for this reason. If your Lordships will recall, "individuals" are referred to in Schedule 8 at paragraph 2 of Part III, which refers to foreign exchange. It says:
"The provision of foreign exchange services is restricted to their provision to individuals".
But the term "individuals" in connection with foreign exchange may surely be somewhat different from investment advice. Investment is rather different from foreign exchange dealings.

What happens, for example, where a husband and wife have a joint portfolio? Is the joint portfolio of husband and wife to be denied advice? What happens to the trustee or trustees of funds? Does the term "individuals" cover that?

These may appear to be somewhat carping criticisms, but the function of your Lordships' House in these matters is to be particular and to elicit information on particular points. They are not raised in any mood of censoriousness so far as concerns the noble Lord but merely to elicit information for clarification. On the assumption that the noble Lord is able to provide the information in response to the questions I ventured to lay before your Lordships, we shall of course on this side of the House support both these statutory instruments.

7.30 p.m.

My Lords, I am most grateful to the noble Lord, Lord Bruce of Donington. He brought up two points. I shall take up his point on polarisation first of all. At present, building societies are empowered under the Building Societies Act to give advice on insurance products but cannot themselves underwrite insurance or offer insurance-linked products.

They can also give advice on any of their own products, including those such as unit-linked personal pensions which are investments under the Financial Services Act. Building societies are covered by the terms of the Financial Services Act to the extent that they are engaged in investment business. Both unit trusts and many forms of insurance are investment businesses. Giving advice on those products therefore falls within the ambit of the SIB rules.

The order allows societies to give advice on all investment products; that is, investment as defined in the Financial Services Act. They will therefore be able to advise inter alia on all unit trust products as well as on insurance products. This will unequivocally allow them to become independent intermediaries under the SIB rules.

Most large building societies are expected to become independent intermediaries. To date only one, the Abbey National, has opted to be a tied agent, in this case to the Friends' Provident. Societies acting as independent intermediaries which wish to offer their own investment products—that is, unit-linked personal pensions—will have to offer their products through subsidiaries.

Branch staff giving advice on investments generally will not be permitted to advise on societies' own unit trust linked personal pension products. Rather, they will have to refer customers interested in this product to a subsidiary. Therefore, polarisation does apply but the societies can offer both those matters listed under 6A and 6B. Those in 6B merely mean that the societies can pass unit trust orders directly to unit trust managers when acting as an agent. But if it is a question of advice on unit trust investments, polarisation does apply.

I now take the second point raised by the noble Lord on "individuals". "Individuals" means individual members of the public, not companies, both for foreign exchange and investment advice. Husband and wife would mean the same as an individual member of the public. There are a number of restrictions placed on the societies' provision of these services. For example, the provision of unit linked personal pensions, personal equity plans, and estate agency services must be done through a subsidiary, as I have already said.

The power to arrange foreign exchange in investment services can only be provided to individuals; that is, not to the corporate sector. The power to manage land as an agent is restricted to residential land. There are various reasons for these restrictions; for example, to prevent societies from engaging in property speculation and to avoid conflicts of interests for societies' staff. I hope that I have answered the two points raised by the noble Lord, but if I have not no doubt he will now let me know.

My Lords, I am most grateful to the noble Lord. There is just one point he has not dealt with; that is, the trustees. Are they incorporated as an individual?

My Lords, if the noble Lord finds it acceptable perhaps I may look more carefully into that matter and write to him as soon as possible as I do not have an answer with me on that point. Perhaps he will find it possible to take that course this evening.

My Lords, with the leave of the House, I am obliged to the noble Lord. I should be obliged if he would place a copy of the letter in the Library at the same time.

My Lords, of course I shall do that. I commend this order to your Lordships.

On Question, Motion agreed to.