rose to move, That the Grand Committee do report to the House that it has considered the Building Societies (Financial Assistance) Order 2008.

The noble Lord said: The order derives from the Banking (Special Provisions) Act 2008 which contains powers that enable the Government, by way of an order, to remove existing statutory barriers that may prevent building societies from accessing emergency financial assistance from the Bank of England.

The building society sector continues to provide highly regarded services to members and customers throughout the United Kingdom. During the passage of the Bill, the Government promised, as a precaution, to put such an order before Parliament as soon as possible. I am pleased that we are fulfilling that promise and that Members of the Committee have an opportunity to debate the order. I remind the Committee that the Government are fully committed to legislative reforms that will improve financial stability and depositor protection generally. Global financial markets remain turbulent, and it is important that we have a strengthened framework in place both for now and for the future. The order forms a part of that programme of reform.

In January, the Government’s proposals were published. They included measures to improve building societies’ access to emergency financial assistance from the Bank of England, both in the range of methods that the Bank can use and the amount of assistance that building societies can potentially draw on. I should make it clear that in this regard the proposals are purely precautionary. They are intended to place building societies on a similar footing to banks, not single them out for special treatment. We regard the order before the Committee as sensible and prudent contingency planning on the part of the authorities, and it would be relied on only where there was a serious threat to the financial stability of the United Kingdom.

The Committee will also be interested to know that in response to consultation on the policy that this order will enact, the overwhelming majority was supportive. The Building Societies Association has made it clear that it welcomes steps to put building societies in the same position as banks. Improving building societies’ access to emergency funding from the Bank of England strengthens the resilience of an institution against failure, and thus protects against the consequent distress and hardship that this might bring to depositors and members.

The key elements of the order are as follows: under the Building Societies Act 1986, at least 75 per cent of the business assets of a building society must be residential mortgage loans. The order, if passed, will suspend this lending limit where the consequences of financial assistance from the Bank of England would cause the building society to be in breach of this requirement. The lending limit is restored after one year or, if later, once the financial assistance from the Bank of England has ended. Every building society is currently required by the Building Societies Act 1986 to ensure that at least 50 per cent of its funding is from its own members’ deposits. This is referred to as the “funding limit”. Certain items may be disregarded from the funding limit and the order will add financial assistance provided by the Bank of England to that list. Of course, building societies can and do take part in the Bank of England’s lending facilities during the course of normal business, and the normal funding limit in these circumstances will continue to apply.

Suspending the lending limit and excluding financial assistance from the Bank of England from the funding limit apply only in the case where there is a threat to financial stability. In these circumstances, the nature and extent of the financial assistance will differ from that of the usual money market operations that the Bank of England conducts. As I have said, suspending the lending limit and adding to the items that are excluded from the funding limit will allow building societies to be placed on a similar footing to that of banks.

The Bank of England, like a commercial bank, has a responsibility to ensure that its lending is prudent, especially where there is a risk to financial stability. Accordingly, in order for the Bank of England to provide emergency financial assistance to either a bank or a building society, it needs to ensure that its position as a creditor is not jeopardised. It does this by taking effective security. The order will remove statutory barriers that could jeopardise the Bank’s position as a creditor of a building society and therefore constrain speedy action in a crisis. I will explain a little more about these barriers. They include Section 9B of the Building Societies Act 1986, under which a building society may not create a floating charge, and Schedule 15A to that Act, which effectively prevents the appointment of an administrative receiver under a floating charge.

When providing financial assistance, the Bank of England needs to be able to secure its lending against the assets and undertakings of the bank or building society. This is wholly consistent with the Bank’s policy for lending in circumstances where there may be a threat to financial stability. This order will modify the restriction in Section 9B to allow a building society to grant a floating charge to the Bank of England over its assets. Again, I stress that a building society would be able to do this only where the Bank had provided financial assistance in extreme circumstances. There is no change to the restrictions on the normal business of a building society. It will remain impossible for a building society to create a floating charge in favour of other creditors.

The order applies the law on administrative receivers to building societies so that, should a building society to which the Bank of England has provided emergency financial assistance secured by a floating charge default, the Bank could appoint an administrative receiver. I should stress that in the circumstances we are debating, it is highly unlikely that the Bank would need to appoint an administrative receiver, but the Government believe it is sensible that the Bank, which would become a major creditor of a troubled building society for reasons of maintaining financial stability, should have the additional safeguards provided by this right.

Finally, a number of technical and consequential provisions will ensure that various other provisions of the Building Societies Act 1986 are consistent with this order. The Government believe that the order represents sensible contingency planning by the authorities, improves the position of building societies and puts them on a similar footing to that of banks with regard to financial assistance from the Bank of England. This has been widely supported by stakeholders, including the building societies. I beg to move.

Moved, That the Grand Committee do report to the House that it has considered the Building Societies (Financial Assistance) Order 2008. 17th report from the Joint Committee on Statutory Instruments.—(Lord Davies of Oldham.)

I thank the Minister for introducing the order. Given the sweeping powers that the Government took in the Banking (Special Provisions) Act earlier this year, the activation of the building society powers in this order, under Section 11 of that Act, should not delay us long. However the Minister would not expect me to let anything connected with the Northern Rock debacle pass through this Grand Committee without some further comment.

I start with the timing of the order. When the Banking (Special Provisions) Bill was considered by your Lordships’ House, the Treasury submitted a memorandum to the Delegated Powers and Regulatory Reform Committee in relation to Clause 11. The Treasury stated that it intended to make an order under this power “as soon as possible” after the passing of the Bill. It received Royal Assent on 21 February—some three months ago. Can the Minister explain why the Treasury has taken so long to do something that it asserted it would do as soon as possible? We are all accustomed to the peculiar use that the Government put to words such as “shortly” or “very soon”. I venture to suggest that no ordinary person, let alone an ordinary parliamentarian, would think that three months to produce an order that was to be made “as soon as possible” was reasonable. That is especially the case in the context of a Bill that was passed through both Houses of Parliament using the urgent and accelerated procedure. Can the Minister explain the reason for the delay?

Why has the order been produced without consultation? Once the heat of Northern Rock had passed in February, it seemed that the sense of urgency dissipated. I can understand why the Treasury would want to draw up a draft order for building societies, but I cannot understand how, given that the urgency has passed, it thought it appropriate to dispense with consultation. The Minister referred to consultation in his opening remarks, and I may have got this wrong, but paragraph 7.5 of the Explanatory Memorandum to the order states:

“There was no public consultation on the Order”.

Why have the Government bypassed the normal processes of consultation? That leads me to suppose that there may be something specific—perhaps a specific building society—behind this order. Is this order being rushed through because the Treasury thinks that one or more building societies may need to rely on the provisions of the order? If that is not the case, it is clear that the Treasury should follow the normal consultation provisions. Either way, we should be told.

Can the Minister comment on the contents of the banking reform Bill announced last week in the draft Queen’s Speech? The commentary on the Ministry of Justice’s website refers to that Bill as covering only banks. The Treasury’s website, as far as I could see, contained absolutely nothing about the Bill. Will it apply to building societies as well or do the Government intend for all time to rely on secondary legislation powers in the Banking (Special Provisions) Act or perhaps the banking reform Bill? It will take a lot to persuade us that relying on secondary legislation as the long-term way of legislating for building societies is the correct way to proceed.

Finally, will the Minister update noble Lords on the implementation of the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007? It allows, inter alia, for the proportion of wholesale finance that building societies can accept on a routine basis—not the Bank of England facilities but ordinary facilities— to rise from 50 per cent to 75 per cent. In a sense, this is intimately related to the order.

I am sure that the Minister will recall the passage of that Act. It originated as a Private Member’s Bill introduced in another place by my honourable friend Sir John Butterfill and was passed at a time of turmoil in the credit markets, so much so that the Minister made a quite extraordinary statement from the Dispatch Box on the debate on Bill do now Pass on 12 October 2007. Perhaps I may remind him that he said:

“The Bill allows flexibility for the future in relation to wholesale funding as the Treasury would be able to use the power in Clause 1 to increase by order the maximum level which building societies can borrow from wholesale markets to 75 per cent. Clearly, in the light of recent events in the wider financial markets, we will want to consider carefully whether such a power should be used”.—[Official Report, 12/10/07; col. 457.]

As I understand it, there has been no implementation yet of that Act. It remains in limbo waiting to be brought to life by the Government. What is the Government’s thinking on this? Will the Act be activated, and if not, why not?

My questions on the order which—as both the noble Baroness and the noble Lord said—was predicted, again largely relate to timing. Indeed, the noble Baroness has asked most of the questions, so I will not repeat them. The phrasing of the Explanatory Memorandum is slightly alarming in that it states that the order has to be introduced as soon as possible as an important contingency measure, so there has been no time for consultation. As the noble Baroness said, it should, first, have been possible to start a consultation considerably sooner than today, because it is not a particularly long order.

Secondly, that raises the spectre that one of the major building societies might be in difficulty. Because the terms of the order are such that only those building societies which, if they got into real difficulties, might have an effect on the financial system as a whole, are covered, the number of building societies that are in fact potential beneficiaries of this provision is small. The inevitable conclusion, on reading the terms of the order, is that the Government, the Bank, or both, are worried about one or more of the societies. So, as the noble Baroness said, it would be extremely helpful to have some clarity on that, if only in the form of reassurance. I suspect that this is one of those cases where, had there been consultation, given the nature of the order, there would not have been a huge raft of criticism. However, the way in which the consultation, or lack of it, has been dealt with is a cause for concern.

The other point that I wish to raise was also mentioned by the noble Baroness and concerns the banking reform Bill. My understanding three months ago, when we were discussing Northern Rock, was that the Bill was going to be brought forward significantly sooner than is now the case. I thought that the Government had said that it would be brought forward in this Session. Can the Minister explain why there has been such a delay that it is possible that the Bill will not be brought forward until at least 12 months from now? Certainly all the language used by Ministers implied that we could expect it before the summer.

As usual, I am grateful to the two noble Lords who have spoken, and I shall do my best to answer their questions. However, there is a hare being set to run that ought not to be released. No building society is in trouble. We are not bringing forward this order because of any anxiety or emergency. Indeed, I do not see that I can be chided by the noble Baroness on the one hand for being a little tardy in bringing forward the order, while on the other hand she is suggesting that it has been prompted by anxieties that a building society will need to avail itself of these provisions, and that is why the order is before us at all.

Neither of those positions is sustainable. The Government said during the passage of the Banking (Special Provisions) Act that it provided for us also to address protection for building societies in circumstances about which we all know. The noble Baroness has been kind enough to keep her remarks about Northern Rock to the absolute minimum, so I shall produce my riposte in minimalist terms. The Government acted effectively under that Act against a background where, we all recognise, the credit crunch is producing an enormous crisis for the financial sector. The Government have put in place the necessary protections against outstanding difficulties for institutions, of which Northern Rock was clearly one that required immediate action.

That is not so with other banks, nor with building societies. The Government made a facility available to the banks to increase liquidity—a position that did not draw much criticism from elsewhere. When we passed the Act, we said that we would extend its provisions on access to credit from the Bank of England to the building society sector. Did we consult? We did not go through a widespread public consultation, because it was a specific objective derivative from the Act, but we did talk to the Building Societies Association. That is why, in my opening speech, I was able to indicate its support for the order.

We have brought the measure forward at the proper point. I might be a little more concerned about the timing if I did not think that the noble Baroness had advanced a totally contradictory position on it. It is either too early or too late; that is dear old Morton’s fork, by which I am bound to be impaled on one spike on the other. I do not think that Morton’s fork exists here; this is a proper derivative from the Act that we introduced in January, which received Royal Assent in February. We have brought forward an order that the main representative body of the societies affected is entirely happy with.

Neither on timing, nor on the nature of the consultation, are the Government open to criticism. It is clear—as we recognised in the passing of the Act—that the building societies have a different legal framework. We had to have due regard to that, and we are producing an order that responds to it. I take criticism in good part, because I know that it is always constructive criticism from the noble Lord and, even more so, from the noble Baroness, but I am not going to let the canard flourish—I started off with a hare running, so I am getting my animal and bird metaphors mixed—that this is an emergency provision just before some institution declares that it is in great difficulty. Not so; this is an orderly process that we had foreseen and a protective process.

It is necessary, as I was forced to declare to the House earlier today in answer to a Question, because there is an international crisis in the financial sector unprecedented since the Great Depression. We are all facing challenges of whether our legal and institutional provision can cope with the difficulties. I reassure the Committee that this is a modest building block in that necessary rampart of support addressed to the building societies, and there is nothing more sinister in it.

I thank the Minister for giving way. He is being very interesting on the subject of the next banking reform Bill. May I take him through the timing? The powers in the 2008 Act relating to a failing bank expire on 21 February 2009. That is why everyone believed that the next Bill to replace the special provisions on a longer-term basis would be introduced before the beginning of the next Session, because in practical terms, especially given the likely timing of the Queen’s Speech, it is not possible to get through such a potentially contentious Act—it is certainly significant—any other way. Will the Minister clarify when the legislation is expected to see the light of day?

That is a good try, but I am not going to be drawn into detail about a Bill that is still being prepared. The noble Baroness, with her usual accuracy, has identified when the provisions of the Act will conclude. The Government, having proposed that timescale, are mindful of it, and that is why the Bill has been promised for this year and will be produced this year for consideration.

I would be the last member of the Government to be presumptuous about how rapidly we could get through a financial measure of such significance; unless the noble Baroness is offering on behalf of her party a level of co-operation unparalleled in the past so that we can see the Bill rapidly translated into legislation. The timing is an unknown factor as far as I am concerned and, in all honesty, it is probably an unknown factor as far as she is concerned. She cannot tie me down to dates regarding Royal Assent to a Bill that is still at the stage of consultation and preparation.

On the Butterfill changes and the Bill that her honourable friend in the other place introduced, the proposed changes to the funding limits for building societies form an integral part of the Butterfill Bill, and during debates in that House we promised to offer MPs and Peers the opportunity to comment further. We will do so at a later date, when we seek to finalise the rest of the provisions before we implement the provisions of the Butterfill Bill. There is unfinished business here, but we indicated that we would offer further opportunities for consultation, and we intend to do so as far as that measure is concerned. In the mean time, I think it might be regarded by the rather more neutral observers of our exchanges that we have strayed quite a long way from the order before us.

On Question, Motion agreed to.