Draft Building Societies (Restricted Transactions) (Amendment To The Prohibition On Entering Into Derivatives Transactions) Order 2018
Draft Financial Services Act 2012 (Mutual Societies) Order 2018
Draft Co-Operative And Community Benefit Societies Act 2014 (Amendments To Audit Requirements) Order 2017
(6 years, 9 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Building Societies (Restricted Transactions) (Amendment to the Prohibition on Entering into Derivatives Transactions) Order 2018.
The Chair
With this it will be convenient to consider the draft Financial Services Act 2012 (Mutual Societies) Order 2018 and the draft Co-operative and Community Benefit Societies Act 2014 (Amendments to Audit Requirements) Order 2017.
John Glen
It is a pleasure to serve under your chairmanship, Mr Robertson, for I think my first time as a Minister. Today’s three orders relate to the mutuals sector, which encompasses co-operatives, community benefit societies, credit unions and building societies.
In the mutuals sector, the interests of members, not shareholders, are paramount—hence mutuals offer a viable and accessible finance alternative to millions of British people. Mutuals are an important part of Britain’s diverse and resilient economy, and we wish to keep it that way. Building societies are responsible for 27% of mortgages and hold 21% of the UK’s savings, and they offer important diversity and competition in the financial services sector. Their mutual structure means that members own the business, and all profits are returned to them rather than any shareholders. That gives them the ability to provide members with a more bespoke service. Credit unions are another mutually structured financial institution, offering their 2 million members affordable and responsible credit, savings and financial education, particularly focused on lower-income and financially excluded people.
Mutual societies allow millions of UK consumers to access the financial services that they need on a daily basis. This issue is very close to my heart—I am a passionate advocate for responsible capitalism and ensuring that the financial services sector does its bit. That is why I am chairing the Government’s financial inclusion policy forum with the Pensions and Financial Inclusion Minister, my hon. Friend the Member for Hexham (Guy Opperman). The forum will look at what more can be done to ensure that individuals, regardless of their background or income, have access to affordable financial products and services.
We are here today because the Government have introduced a package of measures to provide further support for the sector, and to help to level the playing field between mutuals and companies. The proposed legislative package does multiple things: it helps to reduce burdensome auditing requirements for co-operative societies; it allows building societies to join central clearing houses; and it consolidates the registration and regulation of Northern Irish credit unions. Those measures have all been requested by representatives of the mutuals sector and are practical ways for the Government to support it.
I will first introduce the Co-operative and Community Benefit Societies Act 2014 (Amendments to Audit Requirements) Order 2017. There are nearly 7,000 co-operatives in Britain today, which together contribute more than £36 billion to the UK economy. Those co-operatives employ more than 200,000 people and are part-owned by 13.6 million members of our society. The Government recognise the value of co-operatives and the need to ensure that their administrative requirements are proportionate and that they are not disadvantaged compared with companies of comparable size.
Since 2012, small companies have enjoyed an exemption from the requirement in the Companies Act 2006 to have their accounts fully audited. The order will increase the thresholds at which co-operatives are required to appoint a professional auditor, bringing their auditing requirements in line with companies legislation, which had its auditing threshold increased to keep pace with inflation. That means that co-operatives will enjoy a more proportionate auditing regime, but I should note that appropriate controls remain in place: members must vote to apply the exemption—they are not obliged to do so—and the regulators can still demand a full audit if they have concerns about the management of the co-operative. Furthermore, co-operatives that disapply the requirement to appoint a professional auditor will still be required to prepare a less onerous audit report. That will help co-operatives to save money and ensure that they are not saddled with unnecessary administrative burdens.
The next draft order before the Committee relates to building societies. Building societies serve more than 20 million UK customers and are an integral source of loans to first-time buyers, providing £2.9 billion in net mortgage lending in the last quarter. That constitutes a 27% market share of total net lending. In order to offer fixed-rate mortgages safely, building societies must hedge against the risk of interest rate changes, and may do so by buying derivatives.
The European market infrastructure regulation of 2012 requires all derivatives to be centrally cleared, which means that building societies must either become direct members of a clearing house or clear through third-party members. In practice, however, the legislation works to prevent building societies from complying with the membership rules of the main UK clearing house. As a result, building societies must clear indirectly through third parties that are members, incurring expensive broker fees and placing them on an uneven footing compared with other financial institutions.
The draft order will amend the Building Societies Act 1986 to allow building societies to trade derivatives—not only to hedge their balance sheet but to comply with the membership rules of a clearing house. That will help building societies to reduce costs and manage risks more effectively, all of which will support them to compete on a level playing field in the mortgage market.
The last draft order before the Committee concerns mutuals in Northern Ireland, including credit unions. Under the Financial Services and Markets Act 2000, mutuals in Great Britain are registered with, and regulated by, the Financial Conduct Authority and the Prudential Regulation Authority, and previously by the Financial Services Authority. Following the failure of the Presbyterian Mutual Society in October 2008, at a cost to the taxpayer of £50 million, Northern Ireland Ministers and the Treasury agreed that responsibility for regulating Northern Ireland credit unions and other mutuals should transfer to the FSA. Responsibility for that regulation was actually transferred in 2011. The aim of that transfer was to provide members of those mutuals with access to the Financial Services Compensation Scheme and the Financial Ombudsman Service, among other benefits.
Today we are completing that work by consolidating the registration and regulation of Northern Ireland mutuals by the FCA and the PRA. A good deal of preparatory work has now taken place, and officials from the Department for the Economy and the Foreign Office are working together closely to ensure that Northern Ireland’s mutuals are supported during the transfer or registration. Societies previously registered with the Department for the Economy will not have to re-register; their records will simply transfer to the FCA. The draft order will create a more sensible regulatory and registration regime for Northern Irish mutuals. It is clearly logical for registration and regulatory oversight to lie with a single authority, as it reduces complexity and red tape for both the mutuals and the regulators.
I trust that the Committee will agree that the draft orders are a welcome update to mutuals legislation, for the wider benefit of the sector across the country. I commend them to the Committee.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
Thank you, Mr Robertson, for calling me to speak on behalf of the Opposition.
Building societies and other mutuals certainly perform a vital role within the UK financial services industry. As a Labour and Co-operative MP, as are a number of my colleagues on the Committee, I have always taken a strong personal interest in creating a well-regulated and supportive environment that is conducive to a strong mutuals sector. In fact, one of my formative political memories, having grown up in the north-east, is the demutualisation of Northern Rock in the late ’90s, when everyone was seemingly offered free money with no catches. However, 10 years later, the situation looked somewhat different.
I want the Committee to pay particular attention to the second draft order that the Minister described, on building societies, which I think will bring about the most substantive changes of all the draft orders. Mutuals need a level playing field between building societies and their retail banking counterparts. That has to include the ability to manage risk directly by hedging their activities using derivatives, which is clearly essential for any major financial institution. As the Minister said, that is not the case at present, given that building societies are obliged to use brokers given their inability to be a member of a clearing house themselves. It is reasonable to consider changing that asymmetry, which inhibits the ability of building societies to operate as independent market participants.
All efforts to improve the resilience of our financial systems since the catastrophic events of 2008 certainly have the Opposition’s full support. The establishment of clearing houses has been essential to creating a more robust derivatives infrastructure. It makes sense to us that building societies might want to hedge their risk, while complying with this new regime that will help make markets safer. As long as they cannot be members of clearing houses themselves, they will have to remain dependent on brokers for market access, which means that they are unable to manage risk in the same way as a retail bank. The legislative changes proposed today would enable building societies to compete on a level playing field, and we are certainly sympathetic to that.
I seek clarity from the Minister on one outstanding point. Will he provide a more detailed outline of how a building society would be impacted in the unlikely event that a central clearing house should collapse in its entirety? That issue was raised in the Lords debate earlier this month, and Lord Young committed to write to Baroness Kramer with further details. I request that copies of that letter be placed in the House of Commons Library and sent to me, so that we can all be better informed about how such a scenario would unfold in practice.
John Glen
I am grateful to the hon. Gentleman for his observations. I will seek to ensure that that letter is relayed to him and his Front-Bench colleagues.
On the specific question of the failure of a clearing house, since the financial crisis, the expansion of clearing has played a major part in the reforms to make derivative markets more transparent and resilient, and the UK has worked with global partners to develop international principles in regulating clearing houses to ensure that they are robust. The scenario the hon. Gentleman suggests is extremely unlikely. The strictest standards have been agreed to ensure that clearing houses are resilient and their members are protected, even in periods of extreme market distress. The Bank of England and the European Securities and Markets Authority conduct regular stress tests on the clearing houses and have found that they would remain solvent under the most severe extreme market scenarios, including the last financial crisis. I would respectfully submit that the situation the hon. Gentleman suggests is so unlikely to happen as to not be realistic, but it would be a matter for the PRA, the FCA and the Bank of England to deal with, in a crisis that I cannot foresee.
In the spirit of trying to abbreviate the proceedings as reasonably as I can, and given the widespread agreement, which I had hoped for on laying these measures before the House, I will now conclude. I hope that the Committee will agree to them.
Question put and agreed to.
DRAFT FINANCIAL SERVICES ACT 2012 (MUTUAL SOCIETIES) ORDER 2018
Resolved,
That the Committee has considered the draft Financial Services Act 2012 (Mutual Societies) Order 2018.—(John Glen.)
DRAFT CO-OPERATIVE AND COMMUNITY BENEFIT SOCIETIES ACT 2014 (AMENDMENTS TO AUDIT REQUIREMENTS) ORDER 2017
Resolved,
That the Committee has considered the draft Co-operative and Community Benefit Societies Act 2014 (Amendments to Audit Requirements) Order 2017.—(John Glen.)