Building Societies Act 1986 (Amendment) Bill

Natalie Elphicke Excerpts

2nd reading
Friday 19th January 2024 Commons Chamber

[Mrs Natalie Elphicke (Dover) (Con)]

I am pleased to follow my hon. Friend the Member for Stoke-on-Trent Central (Jo Gideon), who made an excellent case for the importance of both the local aspect of building societies and the way in which they help people in her community, and other people in deprived communities who need to get on to the housing ladder.

I congratulate the hon. Member for Sunderland Central (Julie Elliott) on her good fortune in securing the top slot in the ballot, which is like winning the lottery for us parliamentarians on the Back Benches. Her choice of Bill is a tribute to the seriousness with which she has taken that good fortune and that responsibility. The Bill is important to my constituents in Dover and Deal and the local villages, and it will have an impact on the whole country, which really matters.

I strongly welcome the Bill’s aims: to begin to level the playing field between banks and building societies by updating the funding rules for building societies—which will enable them, as we have heard, to raise additional capital, and will open up competition for the benefit of customers in the mortgage and savings markets while retaining that critical mutual model, and without reducing financial stability—and also to modernise arrangements for meetings and the execution of deeds.

I am a proud member of Principality building society. I served for six years as a main board director and chaired the group risk committee. I have a passion for the importance of mutuals in general and building societies in particular. We have heard of other mutuals and other not-for-profit organisations such as housing associations, and I agree with what was said by my hon. Friend the Member for Mid Norfolk (George Freeman), but building societies are vital in having purpose as well as, for instance, providing funds.

During my time at Principality I faced an annual re-election to the board at the annual general meeting, as did every other board director, including the chief executive. Every year now, as a member of the building society, if I am unable to attend the AGM in person I can vote electronically. That annual act of receiving and responding to the AGM papers connects me directly and personally to my building society. I enjoy looking at the papers and considering the performance and the objectives of the society, and reading about the current board members.

Let me turn first to the Bill’s proposal to allow members to attend and speak at AGMs remotely, as well as to vote. Hybrid and, indeed, virtual-only meetings have become more common since covid. It will be important to consider how a decision to use hybrid arrangements will be made, and who will make it. For example, will members be consulted? Will it be the sole decision of the chief executive, or will it be a decision for the whole board?

It will be important to ensure that a decision to proceed with virtual arrangements does not diminish effective participation, and that the decision is not made for other reasons, such as to cut costs or to hold an AGM somewhere more difficult for members to get to, on the basis that they can participate virtually. This particularly matters because, as the House has recognised, physical attendance has a special value.

It should be noted that, in this Chamber, it is perfectly possible to have virtual debates, virtual questioning of Ministers and even virtual voting, all of which happened during the covid pandemic, but we now meet in person, debate in person, question Ministers in person and, over many hours and often late into the evening, vote in person. Although often considered, further modernisation of this place has been rejected. Many Members may share the view that more could be done to modernise Parliament further, but it must be noted that being together in one place has particular benefits that carry much weight.

On Lords amendment 22B to the Levelling-up and Regeneration Bill, we recently voted not to allow council meetings to be held with virtual participation. The basis of the Government’s position, set out by Earl Howe in their lordships’ House, included the need for councillors to interact with citizens and to be held accountable.

When I was a board member at Principality, I was subject to the scrutiny of the members who attended the AGM and the interaction and engagement that comes with that. I enjoyed and looked forward to those AGMs, which were well organised and well attended. Year after year, members would come to chat and have a cup of tea with the board of directors, which was really important.

I remember one of my regulars, Mrs Jones, who would come along with Mr Jones, who said rather less. Mrs Jones would invariably take me to task on the rate of interest on savings, asking why it could not be higher. Members would comment on financial performance and the savings rate, and many took huge interest and pride in the building society’s purpose and passion, be that the commitment to first-time buyers or the commitment to building homes.

Principality became the first building society in recent times to put “build” back into “building society.” Building societies are rooted in building homes for home ownership. I championed this renaissance at Principality, with the Ely Mill development creating quality, affordable homes and hundreds of new jobs on a brownfield industrial site in Cardiff. The first-of-its-kind project was led by Principality Commercial and the Welsh Government, leading the way for other building societies to consider how they could reconnect with their house building roots. The project was an exemplar in how to remediate brownfield land in a way that captures value and improves viability for development, and it showed again how the community purpose, focus and interest brought forward by being a building society rooted, embedded and committed to its community can make a difference.

I know at first hand that the discussions and feedback at an AGM are every bit as important for an effective board as the discussions and feedback we might have at meetings with our constituents, or in the Lobbies and corridors of Parliament, are for us. Although the provision to allow hybrid AGMs is a welcome step forward, we should not ignore the caution or concern to ensure that such changes improve, and do not detract from, engagement, all the more so because, while companies are already doing this, a building society is not just another company. It is something very special and very different. That difference means engagement, connection and participation with members. That is at the heart—in the very DNA—of what it means to be a building society.

The experience of companies has not always been to the benefit of shareholder participation. Indeed, in 2022 the Financial Reporting Council issued guidance for best practice in remote corporate meetings, with a particular focus on annual general meetings. The guidance provides helpful insights into the sorts of issues that may be beneficial for securing effective hybrid participation, including ensuring that virtual moderation is transparent, that any character limit for text questions is reasonable, and that there is fair representation between questions asked virtually and in person. If building societies choose to exercise that virtual opportunity, it will be important that they do so in line with similar best practice and their core values. They must never miss the wisdom and accountability that come from building society members such as Mrs Jones.

Clause 3 is a long-overdue amendment to align the execution of documents for building societies with that of companies. It will be heartily welcomed by company secretaries and lawyers alike. I must say, as a former transactional lawyer in banking and finance, that ensuring that the right authorities are in place, that the right people under those authorities sign the documents, and that the documents are completed in the right way, could not be more important. They are not legal unless that happens. As we consign those heavy seals to legal history, I look forward to them re-emerging in their new life as doorstops and bookends.

Let me turn to clause 1 on the funding structures of building societies. Building societies support a great number of our constituents, as we have heard. There are around 26 million customers of the 42 building societies, ably represented by the Building Societies Association. Some of those building societies are large and very familiar household names, such as Nationwide, while some are less well known nationally. Many have geographical names, such as Leeds Building Society, Coventry Building Society, the Principality, the West Brom and many others. That local aspect is key to understanding what makes building societies so special. They are not just mutual; they are rooted firmly in and for communities.

The funding structure with which building societies began, which has evolved—and the further evolution of which we are debating today—was not that of a bank. The description of their history has been set out fully and ably by the hon. Member for Sunderland Central. The clue, of course, is in the name: the building society. They were clubs of ordinary people who came together for a purpose: to get a home of their own. What an extraordinary and wonderful purpose. How very relevant that is today, as it ever was. The whole House knows that we are not building enough homes, and that the rental market is in dire need of urgent reform and, indeed, of reduction in favour of home ownership and affordable rented housing. Surely we must be due a revival of co-operative, mutual housing delivery that promotes and enables the funding and building of homes just like those early building societies. That may be something to consider further in Committee.

The Bill has secured cross-party support. In that spirit, I echo the words of the first Labour Prime Minister, Ramsay MacDonald, who said that no movement of co-operative self-help is more worthy of support than that of the building societies. He said:

“A house should be an expression of a personality, and wherever it is possible it ought to be owned, not merely rented. Would that every workman could own his own house, just as he owns his clothes.”

Those words resonate through the decades.

As we have heard, it is on the Conservative Benches that there has been a long-standing commitment to mutuality. The Conservative Prime Minister Mr Stanley Baldwin wrote of the expansion of the building societies movement that councils should use the powers of co-operation enabled by the Chamberlain Act to work with building societies: imagine—local authorities working closely with building societies to deliver homes for local people. He wrote:

“They afford abundant evidence of the growing popularity of the Building Society as a medium for the investment of savings, and of the success which has been achieved in the encouragement of thrift and independence, which was one of the main objectives of the founders of the movement. These figures indicate also a steady increase of the number of those who are becoming owners of their own homes… The work and aims of the Building Societies will commend themselves to all thinking people.”

How right he was.

As we look at this Bill, we should have firmly in the front of our minds those purposive elements of access to home ownership for working people to have a home of their own, and the public and private benefits of savings, thrift and independence; they are as relevant today as they ever were, and solutions to such issues for ordinary working people are needed as much as ever. Linking savings and home ownership is so important. Indeed, during my time at Principality I was pleased to have the support of the Treasury Committee Chair, my hon. Friend the Member for West Worcestershire (Harriett Baldwin), in my work to promote a building society ISA, which became the help to buy ISA, to make that link through a Government-backed housing deposit savings scheme.

Although building societies strive to maintain a distinct and clear purpose and function, the current regulatory and legal framework puts them at a disadvantage to the dominantly financial purposes of banks. Today we are looking at what the Bill will do to address that disadvantage and level the playing field, but I encourage Members to consider how they too might lead the way. In Dover and Deal, we have a proud tradition of MPs and mayors being directly involved in the building society movement. It was a mayor of Dover, William Clarke, who set up the Dover Investment and Mutual Building Society—one of the early terminating societies that we heard about earlier—and it was a Member of Parliament, Sir Brook Bridges, who headed the Dover Cottage Building and Improvement Society, based in Buckland in Dover. Local people and businesses have been involved throughout the history of the movement in Dover and east Kent.

In 1846, the Dover and East Kent Building Society and the Dover Investment and Mutual Building Society felt in competition with each another—at one point, there was much rivalry between different organisations. As the movement developed, there was also the establishment in 1850 of the Dover Permanent Benefit Society, which took in the Dover Cottage Building and Improvement Society that had been set up by Sir Brook Bridges MP some years before. The list goes on, with examples of people’s active engagement, active leadership, and active participation in creating, leading and delivering mutual models based and embedded in the communities they represent. All Members of Parliament and those in local governance roles have that opportunity to lead, establish and show the way. I very much commend the excellent history of those building societies in The Dover Historian—produced by local historian Lorraine Sencicle—as an excellent insight into the development and role of people and places for the benefit of providing housing.

Let me turn to today’s changes and the matter of levelling the playing field. The banking market dominates the mortgage markets but that was not always the case. As recently as the early 1980s, building societies held the dominant position in the mortgage market. Liberalisation of the banking market during the 1980s created a massive change in participation in the mortgage market by the banks and increased mortgage fund availability. But now a small number of players dominate the market. Lloyds Banking Group is the biggest mortgage lender by outstanding balances in 2022; it has a 19% market share of mortgages, which is nearly one in five mortgages across the country. The net effect of the changes was a near-reversal of the position of dominance of the building societies and that was a result of the financial market liberalisations and changes in legislation and regulation. That is to the detriment of competition, price and availability for customers.

The Bill will go some way to levelling the playing field between building societies and banks but there is more to do. Let us consider a responsibly run financial entity like Principality with its approval for running its own internal risk ratings basis. That means it is able to use its internal models to determine the risk rate assets and can decide, on the basis of these highly technical professional models, how much capital it needs to cover its risk. It can do that; it does not need to follow the standard one-size-fits-all for other organisations. This is a tough regulatory hurdle requiring detailed and extensive engagement with the PRA and the Bank of England, and I can say at first hand that it is a tough threshold requiring forensic and detailed work because I made it one of my key priorities to help secure that approval when I chaired the group risk committee at Principality. It is taken very seriously and only responsibly run financial entities with very good technical and risk management are allowed to do that.

We should compare that with other banks such as Metro Bank, which has been a failing bank due to poor financial controls and inadequate systems, including a serious accounting scandal. Time and again Metro has been on the financial brink so no wonder it has been rejected for its AIRB—advanced internal rating-based—approval. For too long successive Governments have not backed our established responsible building sector movement and instead have favoured failing or second-rate challenger banks. I hope this matter will be explored further in Committee, but I also hope the Minister will reflect further on it.

Turning to deposit funding, the context of clause 1 is that building societies must fund 50% of their funds from customer deposits—in other words, from customer savings accounts. As we have heard, the Bill does not change the percentage but does propose to change the calculation for three funding types. This will enable building societies to go further towards the 50% threshold than currently; it will give them greater flexibility and allow them to better manage their funding streams and the price and availability of products in the interests of both the customer and competition.

However, the current dominant deposit funding approach to customer savings that applies to building societies still puts building societies at a disadvantage to banks in other ways that are not fully taken into account. The Financial Services Compensation Scheme operates on the basis of size of deposits rather than size of the risk. That disadvantages building societies because they are financed largely by their deposits while the banks are financed largely by their wholesale markets. Building societies will have more deposits and therefore will have a larger amount of deposits with regard to their overall liabilities under the scheme.

Alongside today’s amendments, I hope the Bill Committee will consider the operation of the Financial Services Compensation Scheme to level the playing field for building societies, including increasing the deposit protection amount from £85,000 to £100,000 to capture more accounts, given the role of building societies in having savers; to provide better and separate protection for small and medium-sized businesses, which should be funded by those who provide SME banking services; and to provide faster access for customers in getting hold of their compensation when there is a failure, by funding it from the Bank of England, with recovery to follow either from the failed entity or, if necessary, the FSCS levies.

Finally, I will comment on the three proposed exceptions to the funding limit that we are addressing today. These will enable building societies to raise additional capital and open up competition for the benefit of customers in the mortgage and savings market, while retaining their mutual model and without reducing financial stability. The first change is to exclude the Bank of England’s support funds from the funding limits. Those funds are made available precisely for the purpose of managing financial stress events. They should not artificially dilute the calculation of savings ratios that are held by the building society. The amendment in the Bill will address that issue.

The third exception is to end the current double counting of sale and purchase agreements that support greater liquidity in challenging markets. That means that building societies will be able to better test and manage liquidity in a situation where there is a market event to which they will apply those sale and purchase of asset agreements. The second exception is to exclude financial instruments that are structured to act as a form of equity for regulated capital purposes, including—under the latest capital rules—core capital deferred shares, which are a form of common equity tier 1. Put simply, it is a form of capital raising that is entirely consistent with the mutual ethos and strengthens, rather than dilutes, the regulatory core equity limits required for financial stability. It brings in more capital to the building society, enabling it to do more for customers.

There is undoubtedly more scope for permanent mutual shares and bonds to bring significant long-term investment into building societies, housing and other assets. That has happened in some other countries, such as Australia. I understand that the Treasury has assessed that the overall effect of those three changes in relation to capital raising may be modest—but they should not be. There is an opportunity for a significant expansion of mutual funding structures. I hope that that will be considered further in Committee, including further steps to level the playing field and introduce effective competition from well-run and well-capitalised building societies.

I am grateful to the hon. Member for Sunderland Central for introducing this Bill, which I strongly support. As she has said, it has the support of Government, the Building Societies Association, and the sector and its members—it will be helpful. I would be very pleased to support the hon. Lady’s work in Committee if that would be helpful to her.