Building Societies Act 1986 (Amendment) Bill

Jo Gideon Excerpts

2nd reading
Friday 19th January 2024 Commons Chamber

[Jo Gideon (Stoke-on-Trent Central) (Con)]

I congratulate the hon. Member for Sunderland Central (Julie Elliott) on bringing forward this important Bill. As has been said, she has support across the House. It is with some trepidation that I follow my hon. Friend the Member for Mid Norfolk (George Freeman): he has taken the debate into a much wider context, as I also intended to do, although from an urban and community banking perspective. He is absolutely right about the importance of civic activity and community-based financial services, and the Bill goes a little way towards triggering that by bringing about a level playing field between building societies and banks so that they can compete more fairly.

The Bill will support building societies to do more lending in a safe and secure way, and it is welcomed by many, as the hon. Member for Sunderland Central said, including the Building Societies Association. It is a great starting point, but the economic landscape continues to change and building societies need the opportunity to remain competitive, so secondary legislation will be required to ensure that changes to regulations for other financial service providers are matched by updating the framework for building societies. The Government consulted on similar changes in 2022, and the Bill largely mirrors the proposals from the consultation, which were welcomed by the industry.

There are some modest but fundamental changes in the Bill that are really important. Building societies were founded to help working people to own a home of their own, and their mutual status means that their sole purpose is to serve their customers. They direct a greater proportion of their lending to first-time buyers than banks do, but they are constrained by archaic legislation unfit for today’s economy. Without this small but important piece of legislation, the competitive playing field in lending is not as level as it could or should be.

Under the Building Societies Act 1986, building societies are subject to funding limits that their high street banking competitors are not. Those limits require at least half their funding to come from savings deposits made by retail savers. In areas such as Stoke-on-Trent, both the average savings and the number of savers are lower than in more affluent areas, and consequently smaller local building societies are restricted in the numbers of mortgages they can offer, even though they are needed.

The proposed changes to the 1986 Act will not alter the funding limit but, as the hon. Lady outlined, they will remove certain key impediments, thereby enabling building societies to lend more and ensuring that more mortgage loans are available to UK homebuyers at competitive rates, and, crucially, to first-time buyers, who are the lifeblood of the housing market, as well as those further up the ladder.

Indeed, the Bill seeks to unlock billions of pounds of extra lending for first-time buyers and homeowners. It is estimated that for every £10 billion of new lending capacity that is unlocked there is the potential to support an additional 20,000 average first-time buyers. Risk needs to be managed, but smaller building societies in particular should not be tarred with the same brush as high street banks. Regulation needs to be simplified and made easier for them, because within their customer base they cater for a group of people who are on the edge of mainstream banking.

If local building societies did not exist, some people would be entirely disenfranchised by banking, so their mission is a social one as much as a financial one. The banking sector has essentially become a risk management business. As building societies grow, they manage more risk and the regulators are not keen to take that on. Although the inertia that creates is understandable, it makes it incredibly difficult to change the system. One particular issue on which I have campaigned for some time is the one-size-fits-all regulation that burdens smaller lenders and stifles innovation in the banking and non-banking financial sector.

The Netflix movie “Bank of Dave”, which tells the story of Dave Fishwick’s journey trying to open a community bank in Burnley, hit the top 10 in America four days after its release and captured the imagination of the British public last year. Dave’s innovative ideas make sense to the nation, but the existing regulatory framework does not seem able to adapt and respond to them. I have been working with Dave Fishwick and forward-thinking organisations in the financial services sector to push for a simpler regulatory framework and to enable a model that can provide the template for the creation of community banks throughout the country.

We do not have enough regional banks or facilities such as building societies, where those who serve local people understand their needs. People do not want to be faced with a computer that simply says no. If anywhere needs a healthy local banking system in which local people feel included, it is Stoke-on-Trent—as well as Norfolk, of course. We need small businesses to be able to access loans and homebuyers to be able to secure mortgages from those who understand the people they are serving, and whose bottom line is helping their community, rather than maximum profit.

In our quest for economic growth, we know that the biggest growth sector is small businesses, which represent more than 95% of all business, yet high street banks are not lending to them because they represent the highest risk levels. Many small businesses need to borrow to grow, and the current options are not adequate, so let us enable the smaller challenger banks and community development finance institutions to flourish, and make it easier for building societies to lend more to first-time buyers.

Building societies offer a huge opportunity. They are communities paying for the community, which matters hugely in places like Stoke-on-Trent where there is a great sense of place and pride and people want to help each other. Building societies can offer more to the community than high street banks because they have a social mission. I recently spoke to Hanley Economic building society in my constituency, and it shared its plans to use funds from dormant accounts to invest in local projects. It still protects the dormant account holder 100%, but in the meantime wants to use the business to make a difference in Stoke-on-Trent. It makes sense, because it uses local people’s money to invest in local projects.

Modernising the legislation on building societies is long overdue. Building societies were founded to help working people to own a home of their own and are an essential part of our communities. In order to be sustainable, building societies need to be allowed to grow, at least at the pace of the rest of the sector. In order to do that, they need to lend, but without the retail funding that the Bill would allow, they cannot do so effectively. Other sectors, whether that be mutuals or friendly societies, have had similar updates to bring their regulation in line with competition in the sector, so this is a crucial opportunity to enable building societies to do the same.

The Bill is an important starting point, and primary legislation is needed, but as the economic landscape changes building societies need the opportunity to remain competitive, so secondary legislation will be necessary to ensure that the legal framework is up to date. That includes measures to tidy up anomalies in the 1986 Act. One long overdue piece of legal housekeeping is to make the directors’ retirement age provisions in the Act explicitly consistent with the Equalities Act 2010. Section 60(8) of the 1986 Act states that the normal retirement age for a director of a building society is 70. A retirement age for plcs used to be set out in the Companies Act, but after the Equality Act 2010 outlawed age discrimination, the provision was deleted from the Companies Act. Nevertheless, the statutory normal retirement age has not been removed from the 1986 Act.

It may seem like a silly example, but it currently means that there are two contradictory statutory provisions. It would be much better if the retirement-age provisions of the 1986 Act were removed, as has happened for plcs. Simply because a director has just had their 70th birthday—I feel this personally—does not mean they are no longer competent. They have huge amounts of experience, they understand the market, and firing them would be demonstrably wrong for the business.

The Bill will support building societies to better weather periods of financial stress and help to minimise risk in the banking sector. Building societies have around 1,300 branches. As we heard earlier, that is down by around a fifth compared with 2015, but the number of bank branches has declined even faster, more than halving since 2015, so there is a real need for more locally based lending in communities throughout the country, as well as more encouragement of savings that stay in the community to support lending.

The changes in the Bill will help to level the playing field for building societies to compete more fairly with banks, and will support them to do more lending. Crucially, as the building society sector directs a greater proportion of lending to first-time buyers compared with banks, that will benefit more people looking to get on to the housing ladder. Increased lending is essential to the UK’s future prosperity and economic growth.

In 2021, the Bank of England launched a project called “Strong and Simple”, the aim of which was simplification and which goes to the heart of what I was saying earlier. Smaller building societies, and smaller banks and other lending institutions, spend far too much of their time having to comply with regulations that were written for high street banks and large global billion-pound or billion-dollar businesses. If things were made less onerous for them, they could innovate more and proliferate throughout the country.

“A strong and simple prudential framework for non-systemic banks and building societies”, published by the Prudential Regulation Authority, set out a vision for simplifying the prudential requirements for smaller, domestic-focused banks and building societies while maintaining those firms’ resilience. The invitation to comment seems to have met with resistance from the risk-averse industry, which in my view is based on penalising the minnows while protecting the giants, so inertia reigns and progress is slow.

I hope that small changes such as those proposed today to make for fairer competition will be the forerunner of larger reforms, such as a new framework for small domestic deposit takers that will enable the financial services sector to embrace change for the benefit of the most marginalised and under-served communities and businesses.