Financial Mutuals

Tom Greatrex Excerpts

Wednesday 16th February 2011 Westminster Hall

[Mr Thomas]

I end up at the same point as the hon. Gentleman, although I took a different journey to get to that point. I will come back, if I may, to the excellent work he has been doing in chairing the all-party inquiry into financial mutuals.

An expert think-tank based in the university of Oxford set out in September 2009 how and why Northern Rock could and should be remutualised, ensuring that its debt to the taxpayer was paid down, creating a stable financial services provider and constraining it from making the previous mistakes, while helping to secure a more competitive retail financial services market.

The next step, which the hon. Member for Cardiff North (Jonathan Evans) hinted at, would be a full feasibility study examining in detail the financial, governance and leadership issues in respect of a remutualisation. Will the Minister encourage such a feasibility study to be undertaken, either as a Green Paper examining the issues in all their complexity or, if the Treasury wants to maintain some distance, requiring UK Financial Instruments to do that instead? In short, will he now actively investigate the feasibility of the case for remutualisation?

In 2003, PA Consulting Group—not a body that one would naturally think of as being on the left—published an interesting analysis of the relationship between the profits of commercial banks and the market share of mutuals. In short, as mutuals gain market share—in other words, as competition between the various private banks and their mutual competitors increases—bank profits from the retail banking market come down. Potentially, that gives the Minister a significant opportunity to deal with the criticism that, under a Tory-led Treasury, it is business as usual for the banks; he can promote greater competition through the growing mutual sector.

The biggest advantage that mutuals can offer is their long-term view. They are not faced with the short-term need to secure profits. Indeed, Nationwide estimates that the mutual pricing benefit that it enjoyed between 1997 and 2007 because it did not have to put shareholders ahead of members totalled some £3.7 billion. New research, using the published accounts of six shareholder-owned insurers, shows that more than £2.2 billion was paid to shareholders in dividends. That is the dividend drag—the loss incurred by all who seek insurance as a result of buying from a business owned by shareholders. That helps to explain why mutuals, which do not suffer that drag, typically pay higher investment returns, provide better standards of service and pay more claims.

Treasury and Financial Services Authority orthodoxy appears to be that corporate form does not matter, but that what counts is what those various corporate bodies do for their consumers. Such a view is simplistic and not sufficiently considered to warrant the hands-off approach to corporate diversity that often appears to characterise the approach of the FSA and the Treasury. Let me be clear: I do not advocate a mutual-only way, but robust diversity is important in ensuring real competition and giving consumers a real series of options in the market.

New capital rules being introduced in the wake of the global financial crisis may give rise to insufficient care being given to protecting and increasing the remaining strength of the building society movement. The FSA’s new interpretation of the rules on capital may, over a number of years, bring about the end of friendly societies. Both sets of draft capital requirements could profoundly damage the competitiveness of financial mutuals, and they do not reflect the fundamental difference between financial mutuals that are run for members, and the basic banks or private insurers, which are run for shareholder gain.

The European capital requirements directive is designed to enable financial services businesses better to absorb losses following the introduction of the new Basel standards. I accept that that is an important part of the response to the global financial crisis; it focuses on improving the quantity and quality of capital, particularly what is called core tier 1 capital. Over the last 20 years, building societies’ capital reserves have been supplemented by permanent interest-bearing shares. However, they will not meet more demanding definitions for core tier 1 capital.

I recognise that building societies need to have access to new ways of securing capital that are permanent and that fully absorb losses. At the moment, the rules are being framed with only one type of corporate form in mind—the private bank. They do not recognise the fact that mutuals are structured and function differently, providing value to their customers over the medium and longer term. If building societies are forced to adopt plc-like capital, they will have to adopt plc-like behaviour. Building societies are trusted, safe and responsible precisely because they are not part of what “St Vince” calls the casino economy. Surely it would be a mistake to force upon them a new type of equity capital that would import excessive risk-taking.

I realise that there has been movement in the discussions between building societies and the Government on this matter, but I ask the Minister what progress has been made—and, just as important, what has he done personally to move things forward with his European counterparts?

There has been less progress in discussions with friendly societies. The FSA, revisiting its own rule book, seems hellbent on clinging to a piece of legal advice that has not been shared with the industry and which is at odds with every legal opinion that the industry has received. It seems to be based on a ministerial view from the mid-1990s that the then Minister publicly acknowledged was not intended for mutuals. Why cannot the FSA share its legal advice with the industry? If its motivation is that it does not want to damage friendly societies, why cannot a joint solution be found? If a solution cannot be found, mutual insurers would have to pay out a significant proportion of the capital held in their organisations; the consequence of that could be that they had little or no working capital and would have to shut up shop or demutualise.

I am grateful that Hector Sants attended the inquiry of the all-party group on building societies and financial mutuals, but frankly I doubt whether he has yet grasped the seriousness of the situation that friendly societies face as a result of his organisation’s proposal. Even now, I hope he will agree to an urgent review of the FSA’s legal advice and step up efforts to find a solution. If he does not, and if the Minister does not intervene, consumers will have less choice, plcs will take greater profits and customers will face higher charges. I would welcome the Minister’s response.

The Minister is responsible for ushering in changes to financial services regulations. They offer the opportunity to lock in a new requirement to champion corporate diversity and, crucially, new structures to ensure that we have people of sufficient calibre and status in the regulatory landscape to deal with building societies and friendly societies. Will the Minister support a requirement to promote corporate diversity in financial services when bringing forward the Bills to set out new arrangements for the City? What action is he taking to ensure that mutuals will be the responsibility of those high enough in the pecking order to make a difference when needed?

I turn to credit unions. The Minister will recognise that there is widespread concern about high interest rates for consumer credit and the activities of illegal loan sharks. I hope he realises the opportunity that properly managed credit unions can provide in meeting the needs of those wanting relatively small sums of money at affordable rates. Access to credit unions in the UK has been growing. For example, I understand that Wales has a credit union in every part of the country. That is not the case in England, although things have been slowly improving in recent years.

[Tom Greatrex (Rutherglen and Hamilton West) (Lab/Co-op)]

My hon. Friend may be aware that access to credit unions in Scotland has improved of late. I hope he will join me in paying tribute to Hamilton credit union, which is developing financial services for children and young people to help get them into the culture of saving, so that in future they will be more financially responsible.

[Mr Thomas]

I welcome the progress that has been made in Scotland, and particularly the work of the Hamilton credit union outlined by my hon. Friend. What action will the Minister take to champion the further growth of credit unions across the UK?

Mutuals make a vital difference by generating more competition in financial services, and they help to create more value for the consumer, as opposed to the shareholder. I look forward to the Minister’s response to my questions.