Building Societies Act 1986 (Amendment) Bill

Baroness Kramer Excerpts

2nd reading
Friday 10th May 2024 Lords Chamber

[Baroness Kramer (LD)]

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.