Building Societies Act 1986 (Amendment) Bill

Bim Afolami Excerpts

Committee stage
Wednesday 7th February 2024 Public Bill Committees

[Julie Elliott]

I thank the hon. Gentleman for reminding me of that situation, which affected an awful lot of my constituents, as Northern Rock and the vast majority of its members were based in the north-east. People still tell me on the doorstep today that they lost literally tens of thousands of pounds. The issue of malpractice and bad practice within building societies is separate from what the Bill does. If things are not being run correctly, there are other checks and balances that came in after the Northern Rock crisis to stop that—particularly the protection for deposits up to £85,000. It is a relevant point, but the Bill will not make that possible again; I am quite sure about that.

The specified debt instruments are not named either. Notably, this function is not to introduce risk into the process—it is to help to support building societies to remain comfortably solvent at a time when they need it most. Proposed new subsection 7(3)(e) of the 1986 Act is quite clear about sale and repurchase agreements. Clause 1(3) inserts appropriate new definitions into section 7 of the 1986 Act and gives the Treasury power to make regulations specifying the detail of funds and Prudential Regulation Authority rules. The regulations will be subject to the negative resolution procedure.

The approach has been consulted on by His Majesty’s Treasury and was backed by industry. It is what the sector needs, and this clause has the power to unlock billions. The removal of these considerations from the 50% wholesale funding limit means that building societies that want to can run much closer to the 50:50 ratio than the 70:30 or 80:20 ratios they do now. That is where my point about unlocking billions comes from. When we look at how many people are supported already and what a difference giving that freedom to the building societies can make, we see there is huge potential to help many more people access a mortgage for the first time.

Clause 2 amends schedule 2 of the 1986 Act to modernise the building society sector’s relationship with its members in line with company law. It sets out the possibility of holding and conducting building society meetings in a hybrid way so that persons who are not present together in the same place may attend, speak or vote. First, that is important to allow access to meetings for those who are unable to attend in person due to health or geographical issues. For example, the Nationwide Building Society is, as the label says, nationwide, so having hybrid meetings opens up the ability for more people to attend, because a physical meeting can be held in only one part of the country. The situation may well be different for smaller, local building societies, but the change is still important.

The second main argument behind the clause is simply that the change brings the building society sector into line with businesses and retail banks as defined in the Companies Act 2006. Building societies should not be held to different standards. The important mitigation is that it is down to individual building societies to consider what is best for them; if a particular building society wants to make the change, its members will need to vote on it and agree to it. That means that the clause does not enforce anything, but gives building societies the ability to change if their members want it; it gives more flexibility. I hope that helps any Members who might have worries about the clause. It is about putting building societies on a more level playing field with retail banks, and it is what the sector has asked for.

Clause 3 is another modernising clause. In simple terms, it will enable the Treasury to introduce increased flexibility for societies in relation to common seals and the execution of documents, in line with company law. It reserves to the Treasury the right to make provision by regulations in future, upon which further consultation in the sector would be usual.

Finally, clause 4 states the territorial extent of the Bill, which covers all of the UK, and when the Bill will come into force. It also makes it clear that modifications of company law to which assimilation can happen as described in clause 3 cover those made both before and after the Bill comes into force.

The Bill does a lot for a sector that needs it and has asked for it. Building societies support millions of people up and down the country, and are much more adept at supporting first-time buyers than other parts of the sector. The Bill gives them much more flexibility to do exactly that.

[The Economic Secretary to the Treasury (Bim Afolami)]

It is a pleasure to speak to the Bill and, as always, to serve under your chairmanship, Mr Hosie. I congratulate the hon. Member for Sunderland Central on introducing it and on reaching Committee stage, which is no mean feat in this place for a private Member’s Bill.

It is clear from the hon. Member’s remarks that the Bill has the noble aim of supporting the future growth and success of the building society sector. As she said, it will do a lot for building societies, which have asked for this legislation—and the Government and the Treasury strongly support them. As my hon. Friend the Member for Mid Norfolk described, building societies are some of the best in the financial services sector for benefiting local connected communities, and that is the sort of activity we want to encourage.

The Bill will help by modernising legislation so that building societies can have more flexibility around their funding and certain corporate governance requirements. That delivers on the key asks from the sector. As the hon. Member for Sunderland Central said, it is rare that something gobbledegook can have a positive impact on people’s lives, but the technical amendments in the Bill—particularly around capital requirements, which I will explain briefly—will have a positive impact on the ability of building societies to contribute to their local communities in all our constituencies.

As member-owned financial institutions, the 42 building societies in this country work to support the financial resilience of communities throughout the length and breadth of the UK, because they encourage savings and responsible lending, and promote financial literacy and inclusion, which often gets lost. They also play a vital role in supporting their members to buy their own homes, and the hon. Member for Sunderland Central has spoken about the potential for the sector to further support first-time buyers. The Bill achieves all that by making provisions in three areas, which she has already set out, so I will give a shortened version.

First, the Bill amends section 7(3) of the 1986 Act. The year 1986 was a very—

[Jess Phillips (Birmingham, Yardley) (Lab)]

Were you born then?

[Bim Afolami]

I was. I just realised that it is almost 38 years later.

[Anna Firth (Southend West) (Con)]

An auspicious year.

[Bim Afolami]

Exactly—an auspicious year for me.

The Bill amends section 7(3) of the 1986 Act to exclude three specified sources of funding from the 50% wholesale funding limit for building societies. By excluding these sources of funding from the wholesale funding limit, building societies will be able to raise additional wholesale capital, which strengthens their arms to compete with retail banks while promoting competition within the financial services sector.

[Mrs Natalie Elphicke (Dover) (Con)]

My hon. Friend the Member for Mid Norfolk mentioned Northern Rock, which was a bank, not a building society, when it failed. Does the Minister agree that the provisions being brought in will allow greater access to capital so that building societies can flourish, while keeping in place the checks and balances that have made building societies so much better at being able to respond to the financial crisis than we saw with some of the banks?

[Bim Afolami]

It is worth explaining the dynamic, because it is not straightforward. In essence, the point of the Bill is to level the playing field between building societies and retail banks in this key area. Resilience, in terms of capital, will not be lower for building societies than for any of the retail banks with which we are all very familiar. That is the first point. The controls that are applied to retail banks by sophisticated people with sophisticated mechanisms will have the same capital requirements as building societies—so I agree with my hon. Friend.

Building societies will still be required to hold specified sources of funding for regulatory purposes. That is the key point. The reason we have the capital limits is that, if a shock happens—however rare or unusual that might be—we need to make sure that there is enough of a buffer of capital so that the building society or, indeed, the retail bank does not go bust. Over the last 15 years, we have been through a huge programme of reform to broadly increase the levels of capital by many multiples of what was required in the 2000s, so that that does not happen. Building societies will adhere to that in the same way as our retail banks. Moreover, building societies will still be required to ensure that at least 50% of their funding comes from their members—again, that is a critical way in which buildings societies are different from a typical retail bank—which ensures that the Bill has no impact on building societies’ important and unique ownership model.

Secondly, the Bill amends the 1986 Act to allow the option of real-time virtual member participation at building societies’ meetings, which, as everybody can appreciate, now happens across the corporate sector—it does not happen in Parliament, but that is for another day. This amendment can help to modernise the day-to-day practices of building societies, promoting wider membership engagement by making such meetings more accessible to a greater number of members. That matters particularly for building societies, because they have a membership model; the point is that members find them accessible and know what is going on.

Given that members can do things digitally and more flexibly in other areas of their lives, this small measure can have quite a big and positive impact on participation, but it is worth stressing that the decision on whether to hold hybrid meetings will be up to the members of each individual building society; the Government are not imposing the requirement for endless Zoom calls. If that is what people want, they can have them—they just have to vote in favour of making the relevant changes to the society’s rules by special resolution, which, if I recall my company law properly, requires passing a 75% threshold.

Thirdly and finally, the Bill will provide the Treasury with the powers to further align the constitutional provisions in part 2 of the 1986 Act that concern common seals and the execution of documents with modifications to company law. I do not need to explain to the Committee that common seals have sort of fallen out of general usage—although I have often fancied having one, because I think it would be rather fun to stamp various documents, rather than sign them. But that is now the past and we are bringing building societies into the modern day, which is positive.

Overall, the Bill will help to deliver important amendments to the Building Societies Act 1986 by modernising the legislation so that building societies can compete with retail banks, better serve their members and, to be perfectly frank, better serve the communities they are set up to support. The Government are fully committed to ensuring that all subsequent secondary legislation, which will be subject to parliamentary timetabling, is enacted as soon as possible. I commend the Bill to the Committee.