Building Societies Act 1986 (Amendment) Bill

Julie Elliott Excerpts

2nd reading
Friday 19th January 2024 Commons Chamber

[Julie Elliott (Sunderland Central) (Lab)]

I beg to move, That the Bill be now read a Second time.

It was a privilege to come out at the top of the private Member’s Bill ballot for this parliamentary Session. It is a ballot I have entered at every opportunity since I was first elected in 2010, so it was great to be drawn, but to be drawn first is a huge responsibility. I was on my way to get the train to my constituency in Sunderland, and when I got off the tube at King’s Cross, my phone had dozens of messages. My immediate reaction was that the Government must have called a general election, but no—that is something else we can look forward to in the year ahead. I had, in fact, been drawn at the top of the ballot.

I am delighted to be here in the Chamber to present a Bill that will make important and long-awaited amendments to the Building Societies Act 1986. It is a Bill that the sector wants; a Bill that is true to Labour and Co-operative values; and, importantly, a Bill that has received Government support. Although it will not solve all of the issues in the broken housing market, it could free up and make available more money to lend in mortgages, and because building societies lend more in percentage terms to first-time buyers, it should enable more first-time buyers to get on to the housing ladder. Clearly, there also needs to be wholesale reform of the rental market, in order to address the housing crisis that we have in this country today.

I must take this opportunity to thank everyone who contacted me about issues and with proposals for potential Bills. I would have happily taken many of them forward, but I could choose only one Bill. However, I feel that the Bill I have chosen can make a real difference to people’s lives, especially young people’s lives. I hope it will support first-time buyers and more community-based banking, in the interests of working people.

[Christian Wakeford (Bury South) (Lab)]

The entire point of building societies was to compete with banks on a truly level playing field—they were founded to enable working people to own their own home. That is why this Bill is so important. As my hon. Friend says, it will expand that ownership, particularly to young people and first-time buyers. Does she agree that not only should we absolutely be doing this, but it should already have been done?

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[Julie Elliott]

I absolutely agree, but the bureaucracy of Government sometimes gets in the way of things happening.

The Bill will help level the playing field, enabling building societies to compete more fairly with banks. It will support them to lend more money in a safe and secure way. Over half of building society lending—55%—goes to first-time buyers. Crucially, as the building society sector directs a greater proportion of lending to first-time buyers than banks do—there is a theme here—that will benefit more people looking to get on to the housing ladder.

Modernisation of building society legislation is long overdue. There are some archaic requirements about the way building societies fund themselves that put them at a competitive disadvantage compared with banks. Competition in banking is good for consumers, and given that building societies drive innovation, particularly in supporting first-time buyers, strengthening the sector is a great route to supporting aspiration across the UK at the same time as supporting a sector that works co-operatively and mutually. Building societies work for the benefit of their members up and down the country, engaging in a system of co-operative banking for mutual benefit, not for profit.

We are lucky to have three building societies in my Sunderland Central constituency: Newcastle, Yorkshire and Nationwide building societies all have branches in Sunderland, so I see at first hand the excellent support they give to members. It is incredibly important to my constituents to have a branch that they can visit to talk through any financial issues and receive the support they need face to face. I see the work of building societies as both a strong British tradition and a strong Labour tradition. I am delighted to have the support of the Co-operative party and the Building Societies Association, which represent both traditions.

The first form of a building society was in 1775, when Richard Ketley brought people together in a pub—in what is now the constituency of my hon. Friend the Member for Birmingham, Ladywood (Shabana Mahmood) —to put money into a shared fund, collecting regular subscriptions until there were sufficient funds to be able to provide a house for one of them. They drew names, very much like the drawing of names for a private Member’s Bill, to decide which member would be the next beneficiary; this continued until all members of the group had a house. The arrangement required trust, hope and a commitment by the community that no one would be left behind.

At that time, most building societies were created as terminating societies, which meant that the building society terminated trade once all its members were housed, so many were created, housed their members and then disappeared. That practice continued until 1980. By 1825—50 years after the first building society was created—over 250 terminating building societies were in operation, although it took until 1845 for the first non-termination society to be formed: the Metropolitan Equitable.

In 1836, the first legislation dealing with the industry was introduced, recognising building societies for the first time in this House through the Regulation of Benefit Building Societies Act. The legislation, along with previous court cases, led to the formal recognition of the rights of building societies as entities, resulting in a boom in the sector. By 1860, the number of building societies had risen to almost 3,000. In 1874, the Building Societies Act was passed—an historic precursor to the Building Societies Act 1986, which I hope to amend through my Bill.

The history of building societies has played an important role in the history of working people supporting each other in their mutual ambition of owning their own home, and in financial institutions serving the communities they represent. It is a trend that is even more prevalent today; as banks shut branches at an alarming rate, building societies are gradually taking a bigger share of branches in the community that remain open. Building societies now account for 28% of all high street branches in the UK, as opposed to only 14% 10 years ago. Although this may be caused by the closure of bank branches in the main, it shows a commitment to keep branches open by building societies, on which so many of my constituents rely. That face-to-face engagement, personal support and visibility is so important to many people. Branches are so much more accessible to those who have specific needs, especially in the digital age, where those with internet access often have the best opportunities and access to the best deals.

The original purpose of building societies embodies the famous phrase in clause 4 of the Labour party’s constitution, that

“by the strength of our common endeavour we achieve more than we achieve alone”,

with communities coming together to support each other and provide a strong and secure economic foundation for their collective futures. Families in Sunderland and across the country are struggling to find a secure home. Research by the Resolution Foundation shows that 80% of 25 to 34-year-olds would prefer to buy their own home than to rent. Home ownership is something many strive for, to provide financial security and ultimately to turn a house into a home. My Bill aims to support them in doing just that.

As I have said, it is quite clear that there is a housing crisis in this country, for homeowners and renters. We must at this point consider the damage done by the previous Prime Minister and her Chancellor, and the economic damage caused by her Government to the country, especially people with mortgages. I believe we also need reform in the rental sector to sort this out. The system is broken and is not working for people. The Bill will go some way towards making the housing ownership landscape easier for all.

[Sir Oliver Heald (North East Hertfordshire) (Con)]

I support the Bill, as I hope do Members across all parties. It is good to see something that will, hopefully, strengthen the principle of mutuality. Does the hon. Lady agree that is an important principle to retain, and is she confident that her Bill will do that? Will it lead to a situation in which there is less desire among building societies to become banks?

[Julie Elliott]

I agree. Building societies were certainly part of my life when I was growing up. I got my first mortgage with a building society—a very long time ago, because I am getting old. The principle of mutuality is really important and does set building societies apart from banks. They are a very different model and serve communities in a much closer way than banks do.

By introducing welcome flexibility to a sector that does so much for first-time buyers and others, the Bill, although it does not directly provide provision for the building of homes or assure the retail customer of any extended product lines, does provide more room for the sector to work in, given that its use of finance is different from that of banks as it lends significant amounts of money to first-time buyers.

The building society sector is made up of 42 separate building societies and currently has almost 26 million members. It holds over £352 billion of mortgage assets and £313 billion of savings from individuals. It is not a small sector, but it is a sector that can grow.

Building societies face significant challenges. The Bill has the potential to unlock billions of pounds in additional lending capacity for them. It is estimated that for every £10 billion of new lending capacity, the sector could support an additional 20,000 mortgages. As we know, over half of building society lending goes to first-time buyers, so the potential impact of the Bill is huge. Since 2020, building societies in the north-east and Cumbria have lent £3.4 billion to first-time buyers. In the first nine months of last year, they supported nearly 4,000 first-time buyers—4,000 people who last year started their journey of home ownership, with all the financial security and benefits that brings. Increasing lending capacity is incredibly important in supporting hard-working people. It is essential to the UK’s future prosperity and desperately needed for economic growth.

I want briefly to run through the four clauses of the Bill and the impact the changes will have. It is not a standalone Bill; it amends the Building Societies Act 1986 by inserting new provisions. Clause 1 deals with funds that can be disregarded by a building society for the purpose of calculating its wholesale funding limit. The 1986 Act currently requires them to obtain at least 50% of funding from their members—from individual member deposits. The retention of this 50% minimum requirement ensures that the members remain the primary owners of building societies; it is what makes the sector so unique. The other 50% can come from external sources. This balance will not be changed, but there is a need to modernise the rules governing the sector in order for building societies to compete with banks on a level playing field.

The Prudential Regulation Authority and the Financial Conduct Authority engaged with the sector on this issue in 2021. The conclusion of the Government’s consultation recommended the exclusion of some sources of funding from building societies’ wholesale funding limit calculations, as well as the modernisation elements that come later in the Bill. The recommendations were never implemented, which is why the Bill is needed.

Clause 1 will disregard the following from the 50% wholesale funding limit: Bank of England liquidity insurance facilities, debt instruments raised to meet the minimum regulatory requirement for own funds and eligible liabilities requirements, and sums received under sale and repurchase agreements, with a view to complying with Prudential Regulation Authority rules.

These changes will not dilute the unique ownership model under which building societies operate. They will not increase the financial risk to the sector, because these liquidity insurance facilities, the debt instruments and the sale and repurchase agreement sums will be effective tools at a time of national economic crisis to ensure that building societies remain comfortably solvent and active in the interests of their members. These changes will help to future-proof building societies from external factors, economic shocks or periods of financial stress.

The specified facilities and so on will be described in a statutory instrument laid by the Government of the day, which will provide additional detail to allow the funding disregards broadly described in subsection (2) to be activated. The Bill is designed so that any Government at any given time can react to the needs of the building society sector, the Bank of England and the Prudential Regulation Authority. Enabling such changes in regulation to be made by means of secondary legislation will make the sector much more sustainable and able to react to changes in circumstance.

The changes presented in the Bill formed part of the Edinburgh reforms. All the responses to the Government consultation were in support of these changes. Prudent lending is crucial to the UK’s economic growth. Making this change will make building societies safe, more secure, and competitive in the long term, without affecting their status as mutuals.

Clause 2 is about modernisation. It amends the 1986 Act to explicitly allow the option of real-time virtual member participation in building society meetings. The change presented in the Bill aligns the sector with modernisations made to company law by section 360A of the Companies Act 2006. It will allow virtual attendance and voting as part of hybrid meetings, making it clear that nothing in the 1986 Act precludes this. Allowing hybrid meetings will improve accessibility and will hopefully allow engagement from members who cannot currently travel to meetings, enabling a broader cross-section of members to participate.

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 companies. 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 IV defines the territorial extent of the Bill, which covers all four nations, and specifies that the Bill

“comes into force at the end of the period of two months beginning with the day on which it is passed”—

the standard period set out in legislation.

The Bill has no implications for public funds, as the impact assessment shows, and does not contain any provisions that will require a money resolution or a Ways and Means resolution.

Ultimately, the Bill does a lot of things in a succinct way. It will enable the modernisation of the building society sector and brings it up to date; it will put the sector on a more level playing field with banks; and it will potentially allow them more scope for supporting their members or future members. The Bill has overwhelming support from the sector, including from the Building Societies Association, the representative body of the sector, and its members. The BSA was founded in 1869 and is now the voice of the sector, representing 42 building societies and seven credit unions, and serving 27 million members up and down the UK.

The sector has helped 3.5 million people to buy a home with mortgages totalling over £375 billion. That accounts for 23% of total outstanding mortgage balances in the UK. The building societies that the BSA represents account for 19% of cash savings in the UK, and 40% of all cash ISA balances. Across the country, the sector employs 51,500 people, both full-time and part-time, working in around 1,300 branches in the UK. The BSA contributed greatly to the consultation process in 2021, and I am proud that it supports the Bill. I also wish to thank His Majesty’s Treasury for the support it gave me in preparing for today’s Second Reading.

The Bill will make building societies lend on a similar basis to banks, freeing up more money to help more working people in the UK. It has the potential to unlock billions of pounds of additional lending capacity at a time when so many people need it. I commend it to the House.

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[Julie Elliott]

With the leave of the House, let me say what a pleasure it has been to speak in a debate in which everyone is on the same side—it is a refreshing change. It is not usual and the Minister must not think it will be the future of our confrontations. Let me thank so many Members for coming in this morning and taking part in the debate. All of them have given a slightly different perspective on why building societies are so important, and I want to refer to just a few of the points raised. I certainly did not expect this morning’s debate to contain so much political history, be it on civic Conservatism or Labour history. However, I have to inform the hon. Member for Mid Norfolk (George Freeman) that the clause IV to which I referred was clause IV of the new Labour party, under the leadership of the former right hon. Member for Sedgefield, which was introduced in 1995—a very different clause IV from the old one.

I also want to thank the hon. Member for Mid Norfolk for raising the issues of rural communities and villages. I come from a beautiful village called Whitburn, in the constituency of my hon. Friend and neighbour the Member for South Shields (Mrs Lewell-Buck), so I completely understand the way in which villages rely on the services of local shops and businesses. The hon. Member may not be surprised to learn that the more deprived parts of the country, most of which are in my constituency, face many of the same issues as rural communities.

I must also mention the contribution of the hon. Member for Dover (Mrs Elphicke), who has so much experience in this context. In fact, I first met her when she was doing her work in building societies. She has done a huge amount of work and probably understands the Bill better than anyone in the House, including me—this has been a sharp learning curve. It was nice that she quoted Ramsay MacDonald, the first Labour Prime Minister. As we have been presented with such an array of political history today, I should add that Monday will be the 100th anniversary of the first Labour Government.

As I said in my opening speech, this Bill is simple, straightforward and modernising. These are little measures that can make a massive difference, and I hope that when we discuss housing in the future, we can refer back to the difference they will make in freeing up more money and modernising the system to enable more people, particularly first-time buyers, to get on to the housing ladder.

Question put and agreed to.

Bill accordingly read a Second time; to stand committed to a Public Bill Committee (Standing Order No. 63).