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

Jonathan Reynolds Excerpts

Wednesday 28th February 2018 General Committees

[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.