Building Societies Act 1986 (Amendment) Bill

Oliver Heald Excerpts

2nd reading
Friday 19th January 2024 Commons Chamber

[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.

--- Later in debate ---

[George Freeman]

My hon. Friend makes an excellent point. I do not want to suggest that they are a total panacea; I am lauding and applauding Nationwide in Dereham because it is doing great work, but we need to make sure that the Bill is part of a broader approach. I hope that Treasury Ministers, thinking about the run-up to the Budget and looking ahead, will think about how we can encourage more choice, more competition and more presence from both building societies and banks. We need choice and competition in rural areas and other areas that are not well served as well as in areas that are.

The opportunity for rural renaissance was hit hard by the pandemic, as well as by the Ukraine war, with its impact on energy prices, Putin turning off the gas taps and the cost of living crisis that we have all experienced. It is in that context that the Bill represents a chink of light and has been hugely supported locally. I am delighted to have helped the hon. Member for Sunderland Central bring it to the House.

I want to say something about the banks, because over the 13 years for which I have been privileged to be the Member of Parliament for Mid Norfolk the closure of banks—a cause on which I remember fondly working with the former Prime Minister, my right hon. Friend the Member for South West Norfolk (Elizabeth Truss), in 2009—has gradually hit much of rural Norfolk. Everyone understands that we cannot have a hugely staffed bank branch in every village, but there is a contract at the heart of the state between citizens, Governments and operations such as banks that work under regulations. Banks are there to provide a service, too, and if they are not going to provide that service we need to look at who will.

[Sir Oliver Heald]

Given the number of people going into banks to do their business these days, it is not unreasonable that there should be some restructuring. I think the idea of banking hubs where all the main banks club together to ensure that there is a proper facility in a town or substantial village is a good idea. Does my hon. Friend think that it is important that they should take in cash and takings from small businesses, because they do not all do that?

[George Freeman]

I do. My right hon. and learned Friend amplifies exactly the point I was making. He is right that sparsely populated or rural areas will often require different solutions, in the same way as small rural schools require us to network and support them through multi-academy trusts. Similarly, we need to be imaginative in how we support cash access and banking and saving in rural areas. That touches on a deep problem that I have witnessed over many years: Whitehall tends to see these problems through an urban lens, and we need to think a bit about how rural areas often need a slightly different approach. I hope that the Bill and the cross-party support for it will help to encourage the Treasury to think about how we can do more to make this a moment to encourage greater choice and competition out in the market.

It is particularly sad that the banks have stepped back from the service I described over the two or three decades in which many of them have focused rather more on big, international and complex financial trading—the derivatives that led to quite a lot of problems we had back in the great crash. It is particularly sad in Norfolk given that it is where one of our great banks, Barclays, actually started, with the Gurney and Barclay families. The first bank had its roots in King’s Lynn docks. As people were required to pay duties, they required credit finance. I encourage anyone who has not been to King’s Lynn to go there, as it has a beautifully regenerated and refurbished Georgian dockyard, where they can see the plaque commemorating the first credit facility that became the great Barclays bank. It is particularly sad to see a bank such as Barclays step back from the place in which it started. Everyone has history, roots and heritage, and I am not such a romantic that I expect Barclays to put a bank in every Norfolk village, but I do think there is a responsibility on all these companies to make sure that the people they are there to serve are getting the service they need.

I wish, in particular, to highlight the importance of access to cash on high streets for small businesses, as it is becoming a serious problem. I know that the Minister understands it, and I am grateful for his acknowledgement of it. Across East Anglia, and I am sure this is happening elsewhere, we are seeing an increasing frequency of ATM raids, where JCBs are driven into banks and ATMs are taken out. However, that is the thin end of a bigger wedge, and many businesses in Dereham, Attleborough, Wymondham, Watton and Hingham are beginning to struggle with what to do with cash on a Monday morning, and many local people are struggling to find a bank they can access.

I know that many people wish to speak this morning, so I will not detain you or the House for too long, Madam Deputy Speaker, but I want to touch on mutuality, which my right hon. and learned Friend the Member for North East Hertfordshire (Sir Oliver Heald) addressed earlier. We need to talk about, celebrate, champion and promote it more in this House. Some 300 years ago, we were writing the rule book for modern capitalism, defining the joint stock limited company and setting out the legal framework in English constitutional law, in common law, that drove the industrial revolution. We created limited liability companies, which allowed people to invest, raise money and back projects, and that was a key part of what this country did.

In an age of globalised capitalism and high technology, we have a challenge to make sure that capital does not become disconnected from the people who are providing the money, the savers, and the people who need the money to build businesses. For capitalism to work, we need a connection between money, the people who are saving it and the people who are borrowing it. The last crash in the City was a clear example of what happens when a disconnection is allowed to get to crisis proportions, whereby people do not know where the money that they have deposited is going and people who buy a complex derivative bond do not know what it is built on or what is underpinning it. We then have a serious problem. I am not suggesting that we go back to an agrarian revolution of trading wheat for a lift on a cart into Dereham, but I think there is a real issue in our economy in respect of connected capitalism.

Conservative Members in particular, as card-carrying advocates for the market, need to continue to champion and make clear the fact that markets work when they have values, connection and people at the heart of them. When markets are completely disconnected, they have no sense of the requirements of the people putting the capital in or taking it out, they do not value that connection and regulators do not understand the importance of the bond of responsibility between people who are trading with each other.

Mutuality is a proud tradition at the heart of the old labour movement, but it is also a proud tradition in civic conservativism—it is Burke’s little platoons. In a spirit of cross-party philosophising on this Friday morning, perhaps I can put some wind in the sails of the movement for mutuality. I would love to see more mutuality in different sectors, such as in finance, banking and housing, where, clearly, the building societies have been a great reform—I would argue that the housing associations have also been a great Conservative reform in housing.

There are many examples of where we could blow on to the embers of mutuality and encourage more of it in different areas, particularly in some of our social care sectors and health provision. It should not be a stark choice between private profit and public state. There is a whole third sector of mutuality— membership organisations that can deliver public goods, with cost reimbursement and important disciplines of financial control that are not necessarily either public sector, with all the efficiency challenges that go with it, or private sector, with all the incentives for high profit. There is a whole raft of organisations out there that we could be deploying better—in health and care, but also in criminal justice and a whole range of areas where the state has struggled in the past few decades to achieve its stated objectives.

[George Freeman]

My hon. Friend makes an excellent point and encourages me to wrap up my philosophising. He is right—I am not at all anti-profit; it is about what is done with the profit. One of the geniuses of mutuality is that the profit is recycled back in to pursue the interests of those who put in the capital in the first place.

[Sir Oliver Heald]

I am grateful to my hon. Friend for giving way again—I must not keep trespassing on the House’s time, because I have a Bill coming up later. Does he agree that if we look at pension funds and the possibilities of extending that sort of approach into social care, there would be a lot in the idea of mutuality? Also, on the point about profit, if those funds were invested in national goods, such as important national infrastructure and things of that sort, we could all benefit, but of course it has a financial aspect to it as well.

[George Freeman]

Again, my right hon. and learned Friend makes the point even more eloquently than I was trying to do, and he is right. I make this point in all seriousness: in so many areas, such as infrastructure, as he says, I dream of a world in which people can put their own savings into mutual vehicles. I would love people to be able to invest in the Cambridge-Norwich railway development corporation to fund the regeneration of neglected stations, or to create and fund investment vehicles. There is a whole wealth of instruments, vehicles and bodies rooted in that fertile period of 18th and 19th-century English capitalism, and Scottish capitalism, too—the enlightenment in Edinburgh was a big part of it. We could draw on those models better in pursuit of many of our public sector objectives.

As I wrap up, I will return to the more mundane and practical issues. This is an important Bill for updating the law and giving building societies a chance to get back to where they were in the early ’90s. They were responsible for something like 60% of the market; they have dropped down to 20%. We want to help building societies compete and get back to providing their core service to help those who want to save in building societies, not banks, and first-time buyers who, particularly in my part of the world in Norfolk, do not have high salaries and are looking for a safe and reliable local building society that could hopefully help them acquire a local house built for them, rather than for commuters moving into Norfolk. We need to think about the people who are driving public services and the rural economy. For first-time buyers, this is an important measure.

As the hon. Member for Sunderland Central said in introducing the Bill, increasing lending capacity is in itself a huge step forward. I think the figure is £10 billion of extra lending capacity, which will allow the provision of another 20,000 mortgages. That is hugely important, particularly for first-time buyers. I conclude by genuinely congratulating and thanking the hon. Lady for bringing the Bill forward, the Government for working with her and us on it, and all those who have helped. The Bill strikes a small but important blow and sends a key signal that building societies are back. We want to support and help them as part of a broader commitment to civic, small, local-platoon connected capital that can help people in communities up and down this country to save and withdraw money in the way they need, which will support the local economies on which the national economy is built.