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Building Societies Act 1986 (Amendment) Bill

Volume 838: debated on Friday 10 May 2024

Second Reading

Moved by

My Lords, I am delighted to present this Bill to your Lordships’ House for its Second Reading today. I should declare to the House that I am a director of the London Mutual Credit Union, and while it is not a building society, it is a full member of the Building Societies Association, as it offers mortgages, and the BSA is very much in support of this Bill.

I thank all noble Lords who have signed up to speak in this debate and look forward to each of the contributions that will follow shortly. I am particularly delighted that my good and noble friend Lord Naseby will be speaking. We have worked together many times to support the co-operative and mutual sectors on legislative measures, and I am pleased to have his support again today.

In the last Session, I was able to get the Co-operatives, Mutuals and Friendly Societies Act 2023 on to the statute book following the success of my honourable friend in the other place, the Member for Preston, Sir Mark Hendrick, in steering it through the House of Commons. That Act of Parliament is permissive legislation that enabled mutual organisations to have the ability to opt into a restriction on the use of their assets. The co-operative and mutual sectors enjoy cross-party support, which is one of the strengths of the movement. This Bill has benefited from that cross-party and industry support. I am grateful to my honourable friend in the other place, the Member for Sunderland Central, Julie Elliott MP, for taking this Bill through the House of Commons. She did so with great skill, and we are all grateful to her.

Building societies were originally established to allow people to pool their savings and to buy a home. The world’s first building society was Ketley’s Building Society, founded in 1775 by Richard Ketley, the landlord of the Golden Cross, in Snow Hill, Birmingham. Since then, these important mutuals have played their part in enabling people to own their home. Owning the roof over your head is something that most people in the UK aspire to, and building societies have enabled generations of people to buy their own home.

I am grateful to the Library of the House of Lords and the Building Societies Association for their excellent briefing notes, and to officials at His Majesty’s Treasury for producing the Explanatory Notes explaining the purpose of the Bill in such clear detail. The Bill builds on the Building Societies Act 1986, which is a good piece of legislation that has worked well. The Bill allows for targeted, specific improvements to update and modernise the existing legislation. It comprises four clauses, which I will explain briefly.

Clause 1 amends Section 7 of the Building Societies Act 1986 and enables the Treasury to make secondary legislation, using the affirmative resolution procedure, to allow certain funds to be disapplied from counting towards the 50% retail funding limit. The funds to be exempted from the building societies wholesale funding calculation are set out in the Bill. These are Bank of England liquidity insurance facilities; debt instruments raised to meet minimum requirements for own funds and eligible liabilities; and sums received by the society under a sale and repurchase agreement entered by the society with a view to complying with a specified PRA rule.

Further, Clause 1 would allow the Treasury, through secondary legislation, to specify named funds, descriptions of funds and PRA rules relevant to the sums received under sale and repurchase agreements. Taken together, the clause allows for the exclusion of certain types of funding from the funding calculation, which requires building societies to obtain at least 50% of their funding from member deposits, thereby allowing them to acquire more funds without fear of breaching the funding limit.

Clause 2 allows for building society member meetings to be attended virtually, allows those members to speak and vote, and allows for proportionate measures to confirm the identity of those members attending and participating in the meeting.

Clause 3 extends the powers in Section 104 of the 1986 Act, again using the affirmative resolution procedure, with reference to common seals and the execution of documents, enabling provisions to be updated and processes to be modernised and allowing building societies to take advantage of them.

Clause 4 sets out that the Bill extends to the whole of the United Kingdom and comes into force two months after it becomes law—so it is small in size but not in its proposed effect. It will enable more funds to be made available to members, help more people own their own home, modernise processes and allow for greater participation of members and the more efficient execution of documents. All these changes need primary legislation, which is why we have this Bill today. Other measures will be introduced using secondary legislation outside of this Bill, which will help the sector further.

I was delighted, as I said earlier, when my good friend the honourable Member for Sunderland Central in the other place asked me to take this Bill through this House. In my 14 years of membership of this House, I have sat here as a Labour and Co-op Member of the House of Lords. I have been a member of the Co-operative Party for nearly 40 years. It has had an agreement with the Labour Party since 1918 to seek public office only jointly. The Co-operative Party has always sought to champion the positive role that co-ops, mutuals and friendly societies can play in our economy, in our society and in a variety of different spheres to improve people’s lives and give them the power to have a greater say in the things that matter to them. I am also delighted that Members from all parties support the Bill, and that it has the support of the Government. It is a really important measure which deserves support. I beg to move.

My Lords, it is a particularly exciting morning as far as I am concerned. I got up, the sun was shining; I then heard that, thanks to my Government, we are out of recession; and the icing on the cake is this particular Private Member’s Bill. It is a very exciting Bill because the building society movement is a dynamic element in our society. We see that at every level today and, as we move forward, I reflect a little on the fact that I took through this House one of the few other mutual Private Members’ Bills in my more than 25 years in this part of our Parliament, the Mutuals’ Deferred Shares Act. That was done with the support of the Government of the day, as this one has been, and that is very exciting.

I had the privilege, as noble Lords will know, of doing my national service training as a pilot in Canada. It was the first time, as a young man, that I took out a very small savings account, in the depths of the prairies just outside Moose Jaw, with a credit union. That was my first experience and I was delighted, when I was elected as the Member for Northampton South, to find that there was an active credit union there as well. Of course, the building societies themselves are much more than those relatively smaller areas of the mutual savings market. I had the privilege of being chairman of the Tunbridge Wells Equitable Friendly Society, now the Children’s Mutual, and that element too needs some help in the future.

The important part of this Bill is that the Building Societies Association has been lobbying for changes for some considerable time. I say a huge and sincere thank you to my noble friends on the Front Bench: my noble friend Lady Penn when she was there and now my noble friend today. They have both listened and have now acted, and that is a huge step forward for the whole mutual movement. When we look at the market on the ground, yes, it has been a difficult time for the United Kingdom, but which is the sector of the savings market that is not closing branches and making life very difficult for the citizens of the United Kingdom? The one area that is not closing branches is the building societies.

I happen to bank with the Nationwide, which is the biggest of them, but there are a considerable number of building societies, all of which are really active in the savings market. I say well done to them for coming through this difficult period. If we look at mortgages in recent times that are helping younger couples get on the housing ladder, we see that the vast majority come through the building societies movement. I do not need to go through the Bill in any detail. I will just thank my noble friend on the Front Bench and His Majesty’s Government for picking up what has been quite a long journey to get to this stage, and my noble friend on the Opposition Bench for his skill in taking the Bill through and for paying tribute to the Member of Parliament in the other place for picking it up as well.

All I will say, finally, is that the Bill has my wholehearted support and I will do anything possible at any time, any hour, to make sure that it gets on the statute book.

My Lords, it is a pleasure to take part in Second Reading. In doing so I declare my financial services interests as set out in the register as adviser to Ecospend Ltd. I fully support the Bill and congratulate my friend the noble Lord, Lord Kennedy, on bringing it. He, as much as anyone in this House, has backed mutuals, friendly societies, credit unions and all those organisations doing so much for so many people right across our country. It was also a pleasure to have the pilot of the Bill then followed by a pilot speaking on the Bill. I am going to keep my feet firmly on terra firma and stick to the financial facts, because in no sense is this a minority matter: 25.8 million of us avail ourselves of building society accounts and services, and they have assets racing towards £400 billion.

If we are talking about levelling up in this country, we should also talk about levelling the playing field for building societies, which do such good work in all our communities. In saying that, I thank the Library for its excellent briefing and the Building Societies Association for its briefing and for everything it does to represent this important part of our economy and society. This Bill will look not only at the capital requirements and some important corporate governance matters, but in doing that it will increase scale, growth and competition across our financial services sector. Those are three excellent elements at any time but are critical when we look at the current macroeconomics not just of the UK but internationally. I am delighted to support this Bill and its provisions. It also updates things by enabling virtual, real-time participation in AGMs. It aligns very much with what other countries have been able to enjoy for many years.

I have just three questions for my noble friend on the Front Bench. First, when will the secondary legislation be brought into being? The Explanatory Notes say “as soon as possible”—does that mean before the summer? It certainly sounds better than “in due course”. While the Bill itself is critical, it is as critical that we get the secondary legislation through in a speedy fashion to enable the full impact of these changes to be felt by people up and down the country, and indeed the institutions themselves.

Secondly, what is the Government’s current position on mutuals in general? So many elements of our society—so many economic and social issues—can be addressed by an increased focus on and enablement of mutual structures right across society. What is their current work on mutuals across the piece? They were extraordinarily influential when they first came into being and their potential impact could never be more needed than in the time we are currently experiencing.

Allied to our discussions this morning, have the Government considered a potential mutualisation of the Post Office—obviously once we are through all the current issues and the liabilities therein? Does my noble friend not agree that a mutualised structure could work incredibly well for such an organisation—a brand that has been part of our society and high streets for over half a millennium? We need a positive Post Office. We need to support all those excellent sub-postmistresses and sub-postmasters, up and down the country. What sensational new chapters could be written for the Post Office and the communities in which it operates? Mutualisation could be at the heart of that.

So I fully support the Bill. I think it will have a positive impact in short order. Scale, growth and competition will deliver economic, social and psychological benefits, increase financial inclusion and well-being and drive possibilities for individuals and small entities right across the United Kingdom. I wish it swift speed into statute.

My Lords, we on these Benches support the Bill. The main, important provision here is to exclude MRELs, minimum requirements for own funds and eligible liabilities, from the wholesale funding limit for building societies. I had rather hoped that the noble Lord, Lord Kennedy, would explain in opening what MREL was; he wisely avoided that task, so I will just explain it in one line for those who do not spend their time in financial services debates. In effect, it is a layer of debt that automatically converts to capital in case of a failure of the institution, with the notion that that would then protect the taxpayer. I hope that is an adequate summary.

This Bill carefully does not challenge the principle of having that layer of protection but stops the double-counting that goes on when the current rules are applied to building societies, in contrast to banks. I and other members of my party have been calling for years for the unique characteristics of building societies to be accommodated when the UK regulator sets the MREL rules. All of that is permitted under the Basel III regime from which MREL emanates—the regime that came into play after the financial crisis of 2008 to try to find ways of protecting global economies from failures within the financial services sector.

I am also very conscious that raising the non-preferred or subordinate debt, which is the typical constituent and primary instrument of the MREL layer, is very difficult for building societies to do at a reasonable price. It is a very limited market, so having double-counting in the building society system was, frankly, reasonably unforgivable. I take the view that the regulator could have sorted this all out without primary legislation; I am told that the Treasury for a while thought the same but has decided that primary legislation is necessary. So be it. If it is necessary, I am glad that we have it in front of us today.

Like others, we on these Benches are convinced that a revitalised building society sector can fill the geographic and demographic gaps in our financial services provision. The sector and mutuals generally play a crucial role in bringing financial services, including mortgages, to a broader section of our population, especially first-time home buyers.

However, in the context of what some would call an argument for weakening a resolution regime, I should say that I am not going soft. I remain deeply concerned at the steps taken by this Government and the financial regulators to water down the protections brought in after 2008 to prevent a repeat of that kind of financial crisis. Elements of Solvency UK, parts of the proposed Edinburgh reforms, the breaching of the ring-fence in HSBC’s purchase of Silicon Valley Bank UK and the lifting of the cap on bankers’ bonuses are all examples of key shifts that have begun to undermine the protections that were put in place. When these issues are raised, the Government typically say—I wonder whether they will do so again today—that we can afford to encourage much more risk in the financial sector because we now have a powerful resolution regime in place, of which MREL is a key part.

This is not the day to go into detail, but I hope that parliamentarians are aware that, in the two instances when we have had bank failures in the global banking sector following the creation of the resolution regimes, Governments have chosen not to use the regimes, because the collateral damage from enforcing the bank failure and the consequent almost wiping out of those who are holding the preferred debt that is part of MREL, as well as the shareholders, has been assessed as being so great that, in effect, the taxpayer has become the means of resolving the problem. The two examples are the failures of Silicon Valley Bank in the UK, including its UK operations, and of Credit Suisse. The US, UK and Swiss Governments all looked in the face of that resolution regime and decided not to exercise it. This stresses the importance of not having a crisis in the first place—which takes us back to making sure that those initial protections remain strong and powerful.

The other features of this Bill make sense to me, so I will not elaborate. I do want to say quickly that I am conscious that some noble Lords—I have had letters about this—wish to use this Bill to challenge some aspects of the Nationwide purchase of Virgin Money. It is important to say that amending this Bill will simply kill it, as it is a Private Member’s Bill, which would achieve nothing for anyone. So I hope others will support the Bill and I wish it swift passage.

My Lords, I congratulate my noble friend Lord Kennedy of Southwark on his opening speech and pay tribute to him for not only sponsoring this Bill but his lifetime of commitment to building societies, mutual and friendly societies, credit unions and the wider co-operative movement. I note that some of the principles of this sector are democratic member control, autonomy and independence—not, perhaps, principles you might always associate with a Chief Whip.

I also congratulate my honourable friend in the other place, Julie Elliott MP. Drafting a Bill that generates strong cross-party support and, hopefully, becomes law, is the result of tremendous hard work, working painstakingly over many months and engaging constructively with civil servants and Ministers. I know that she has worked closely with Labour’s sister party, the Co-operative Party, and the wider mutual sector, including the Building Societies Association and Nationwide.

We enthusiastically support the Bill. As my noble friend Lord Kennedy set out in his opening speech—and as the noble Lord, Lord Naseby, said—modernising the legislation around building societies is long overdue. The Bill would enable building societies to compete on a level playing field with banks. It would cut red tape by removing outdated corporate governance requirements, which building societies face but banks do not. Crucially, it would also support first-time buyers by enabling building societies to lend more.

Building societies direct a greater proportion of their lending to first-time buyers than any other part of the financial services sector; it accounts for over 55% of their lending. They supported 70,000 first-time buyers in the first three-quarters of 2023 and a total of 360,000 first-time buyers since 2020. That is over £63 billion provided to help people buy their first home.

That is why the Bill is so important: it will empower societies across the UK to raise more funds. It could unlock billions of pounds of additional lending capacity, helping families and boosting the UK’s future prosperity and economic growth. For example, every £10 billion of new lending capacity secured through these changes potentially supports an additional 20,000 first-time buyers.

Building societies have never been more important in the UK’s economy and public life. During the cost of living crisis, many families have needed to use their savings in the face of rising energy costs and food prices. But building societies have continued to support people to save, bucking the trend of the decline in saving balances that we have seen across the wider sector. In the first nine months of last year, they attracted £18.9 billion in cash savings, supporting people to build financial resilience during this difficult period.

That is why Clause 1 is so important: it allows building societies to exclude funds accessed from the Bank of England in stress scenarios, types of loss-absorbing debt instruments, and sale and repurchase agreements from the funding limit. It will level the playing field with banks and provide that extra level of protection for building societies during difficult times, so that they can continue to support their members for many decades to come.

In recent years we have seen many building societies adapt to new challenges and adopt exciting technologies and digital ways of working. During the pandemic, Leeds Building Society, finding that requests for mortgage deferrals had increased to 2,000 a day, increased their use of robotic automation technology to create a fully automated web form for customers. At Nationwide, a team of mortgage, technology and AI specialists trained the society’s virtual assistant to handle common Covid-related mortgage queries. Principality Building Society has delivered an online mortgage payment holiday service, in partnership with the fintech company Podium Solutions. The service allows members to access a mortgage holiday repayment calculator to better understand their mortgage outcomes.

These are examples of why the changes introduced by Clause 2, which would allow real-time virtual participation in annual general meetings, are long overdue. Building societies have proven time and again their ability to innovate and adapt to changing consumer behaviours. There is no reason to subject the sector to outdated restrictions that do not apply to the wider financial services sector. Likewise, Clause 3 paves the way for reducing the administrative burden of executing documents, with similar provisions already in place for banks.

Labour has long called for modernisation of the Building Societies Act to level the playing field with the wider financial services sector. Indeed, it was a key commitment in our financial services review published earlier this year. We believe that more can be done to unleash the full potential of building societies and the wider mutual sector. That is why our financial services review set out Labour’s pledge to double the size of the co-operative and mutual financial services sector in government.

I once again congratulate my noble friend Lord Kennedy on his opening speech and thank him for his sponsorship of the Bill. It is a vital and important step forward, and we gladly give it our full support.

My Lords, I congratulate the noble Lord, Lord Kennedy, on introducing this important Bill to your Lordships’ House. It will help to support the future growth and success of the mutual sector. The Bill has been warmly welcomed by the building societies sector and has cross-party support. It was a veritable highlight in the day of my noble friend Lord Naseby, and he is of course right.

My remarks will be relatively brief, covering two main elements. First, I will look at the detail of the Bill, although many noble Lords have already set it out very clearly. Secondly, I will set out further insight on the Government’s support for the mutual sector. It has been a widespread message from across all Benches in your Lordships’ House today that the mutual sector plays an important role in the UK economy.

Building societies are one of the best-known types of mutual organisations. There are 42 building societies providing mortgage and savings products to around 26 million members. When considering the future of these important institutions, it is right that we reflect on their uniquely British origins.

As the noble Lord, Lord Kennedy, noted, the global building society movement began nearly 250 years ago, in Birmingham, when Richard Ketley established Ketley’s Building Society. It had a very clear purpose: to combine resources from its members, and build a shared fund from those resources that members could draw from to purchase land and construct a home. Like all effective movements, it was much greater than the sum of its parts. As a result of its success, throughout the 19th and 20th centuries more building societies formed across the nations and regions of the United Kingdom. Today, the 42 UK building societies hold total assets of over £500 billion.

The mutual ownership model improves the financial resilience and inclusion of individuals by rooting these businesses in their local communities. The Bill will help to support the prosperity of the building society sector so that it can continue to anchor those roots and to grow.

On the substance of the Bill, the Government support the vision set out by the noble Lord, Lord Kennedy. We agree that the Bill will enable building societies to compete more effectively with retail banks and to better support their members. There are three key measures. First, the Bill will exclude three key sources of funding from counting towards the building society wholesale funding limits; I am grateful to the noble Baroness, Lady Kramer, for providing a little more insight into what exactly the funds are. Under the Building Societies Act 1986, building societies are required to obtain at least 50% of their funding from individual retail deposits, and that will continue. All that is happening is that some of the funds will be excluded from the calculation, meaning that the ownership model will not be diluted. This will enable building societies to raise additional wholesale funds.

The second element, as highlighted particularly well by the noble Lord, Lord Livermore, is that building societies will be able to continue to develop their use of technology. The second part speaks to enabling real-time virtual participation at building societies’ meetings. It will make meetings more accessible to members and might therefore encourage greater support and participation from the membership. It also brings building societies more in line with retail banks.

Thirdly, the Bill will provide building societies with greater flexibilities regarding their funding and corporate governance requirements in relation to common seals and the execution of documents, aligning them with changes made to company law. It will support them in their work serving their members, as well as providing diversity to the UK’s financial services industry.

It is important to note that the changes are supported by industry. As my noble friend Lord Naseby stated, it has been quite a long journey, though not too long as the consultation for the changes occurred from December 2021 to February 2022. There were five responses, with most building societies responding through a single response from the Building Societies Association. All responses welcomed the amendments that will be delivered through the Bill. There are other amendments that were consulted on and are not included in the Bill; the Government are currently progressing these through secondary legislation.

My noble friend Lord Holmes of Richmond asked when the secondary legislation set out in the Bill will be brought before Parliament. I am afraid I can go no further than to say that it will be following the Bill’s Royal Assent and when parliamentary time allows.

To reassure my noble friend Lord Holmes, I will now say a few words on the wider mutuals sector and confirm that the Government are absolutely behind the mutuals sector. There are 9,000 mutuals operating across many sectors in the UK. They are rooted in their local communities and they want to serve their members and work towards a better society. However, despite their social mission, mutuals are not charities. They are thriving businesses with a combined revenue of £88 billion in 2022, employing over 433,000 people. So it is indeed not a minority matter, as my noble friend Lord Holmes noted.

It is due to their economic and social significance that the Government have been and continue to be fully committed to providing an array of support for the whole of the mutuals sector. For example, we are funding the Law Commission to conduct reviews of the Co-operative and Community Benefit Societies Act 2014 and the Friendly Societies Act 1992. These pieces of legislation underpin the co-operative movement and friendly societies sector respectively in the UK. These reviews will set us up for the most comprehensive modernisation of the sector for a generation.

Last year, the Government supported the Co-Operatives, Mutuals and Friendly Societies Act, which achieved Royal Assent in June 2023. This enables the Treasury to provide co-operatives, mutual insurers and friendly societies with greater flexibility in deciding what to do with their surplus capital. The Government will consider the regulatory options to enact this legislation. However, in the first instance we are directing resources to the Law Commission review, to examine existing legislation. Finally, through changes that the Government have made via the Financial Services and Markets Act 2023, credit unions in Great Britain can now offer a greater range of products and services. This includes hire purchase agreements, conditional sale agreements and insurance distribution services.

My noble friend Lord Holmes asked whether the Post Office might be mutualised. I am aware that the trade body Co-operatives UK recently met with postmasters, postmistresses and the Department for Business and Trade to discuss what potential there is for mutualisation of the Post Office. So I welcome the views of my noble friend Lord Holmes and note that discussions are taking place. One does not know where they will end, but it is certainly an option that is on the table. The Government continue to seek opportunities to support the mutuals sector and those who might wish to join the mutuals sector in this country.

In conclusion, I have today outlined both the Government’s support for the mutuals sector and how this Bill will support the future success of UK building societies. I note again the support for the Bill from across your Lordships’ House and reiterate the point made by the noble Baroness, Lady Kramer, that any amendments to the Bill would probably cause the Bill to fail, which is not in the interests of the sector and not I think the will of your Lordships’ House. This is a worthwhile and necessary Bill. It updates the law in relation to building societies’ funding and corporate governance. Again, I thank the noble Lord, Lord Kennedy, for introducing this Bill to your Lordships’ House and hope that Members across the House will recognise its merits.

My Lords, I thank all noble Lords who have spoken in this debate. My noble friend Lord Naseby’s support for the Bill, and his support of the mutuals financial sector over many years, have been very welcome. He is highly respected in the sector. It has been a pleasure to work with him on these issues over many years.

The noble Lord, Lord Holmes of Richmond, in his support for the Bill, highlighted the updating that enables virtual meetings to take place. He made an important point about when secondary legislation would be brought into force. He used the words “scale”, “growth” and “competition”. I very much agree with the noble Lord on those points. We are in complete agreement. I am grateful to the noble Baroness, Lady Kramer, for her support of the Bill and for setting out MREL and explaining it much more clearly than I could have done. I thank her very much for that. It is much appreciated.

My noble friend Lord Livermore again gave the support of His Majesty’s Opposition for the Bill. I am grateful to him. He said how important the Bill was to enable additional lending capacity to enter the market, allowing people to borrow funds and buy their own homes. My noble friend referred to me being the Opposition Chief Whip. I view myself as a very friendly, happy and co-operative Chief Whip—particularly when people are agreeing with me.

I thank the Minister and the Government for their support. I agree with the Minister very much about the importance of the mutual sector and those organisations that are rooted in their communities. We clearly must keep pressing the Government to get the regulations sorted out. Maybe there is scope for a few Oral Questions. Maybe it will get me off leasehold. Anyway, we will come back to that at a later date.

Finally, I refer to the points that the noble Baroness, Lady Kramer, made about any well-intentioned amendments. We can always make things better, but can I plead with noble Lords here? However well-intentioned they are, any amendments will ensure that the Bill fails. It is really important that we do not have any well-intentioned amendments turning up. This Bill does what it says on the tin. The industry supports it, the Government support it—we all support it. We now need to get it through the House with the minimum of fuss.

Bill read a second time and committed to a Committee of the Whole House.