Contribution
My Lords, I am very grateful to the Minister for setting out the purpose and effect of the order. We on these Benches welcome it. It is a broadly deregulatory measure, and it should reduce unnecessary constraints on building societies and make their day-to-day operations easier.
Building societies play an important role in our financial system and in local communities, as the Minister said in his very clear introduction. Indeed, as the noble Baroness, Lady Kramer, said, they are also very important for first-time buyers. I certainly got my first mortgage from a building society: the Bedford Building Society. Building societies’ mutual model helps to promote diversity and competition, and they remain significant providers of mortgages and saving products. It is right that the law should preserve the distinctive character of building societies without requiring them to operate under legal and regulatory arrangements, which have failed to keep pace with developments elsewhere.
The first part of the order is a practical modernisation. It brings the rules governing common seals—not the seals I saw on the Norfolk coast during my recent holiday—and the execution of documents by building societies more closely into line with company law. In future, a building society may have a common seal, but it will no longer be required to have one. Documents will also be capable of execution using authorised signatories. The order also, interestingly, makes corresponding provision for deeds, powers of attorney, the position under Scots law and the use of official seals abroad.
The changes to the funding limits are, however, the more economically significant part of the order. The requirement that at least 50% of a building society’s funding liabilities should be derived from members’ shares is an important safeguard of mutuality. It distinguishes building societies from wholesale-funded banks and helps to ensure that they remain rooted in their members.
At the same time, the framework must recognise that modern prudential regulation imposes requirements which were not envisaged when the original funding limit was designed. It would make little sense for a building society to be pushed closer to that limit simply because it had used a Bank of England liquidity facility or issued debt in order to meet MREL requirements, or to comply with PRA liquidity rules. By excluding those liabilities from the wholesale funding limit calculation, this order should make it easier for societies to meet modern regulatory requirements, issue MREL-eligible debt and make appropriate use of liquidity facilities.
I would, however, be grateful if, in addition to answering the very good questions from the noble Baroness, Lady Kramer, the Minister could address some of mine. First, to what extent does the Treasury expect the changes to improve the competitiveness of building societies relative to banks? The Explanatory Note says that no significant impact is foreseen, and no full impact assessment has therefore been produced. That is disappointing, since the Treasury’s financial services impact assessments are usually very good and very helpful to us in this House. It would therefore be good to understand what practical or economic benefit the Treasury nevertheless expects the order to deliver and to know of any hidden costs to businesses.
Secondly, will the benefits be distributed evenly across the sector? The exclusion for secondary non-preference debt would appear particularly relevant to the larger societies, which are subject to MREL requirements. Does the Treasury expect smaller societies to benefit?
Thirdly, has the Treasury estimated whether the additional flexibility created by the order could support greater mortgage lending or investment by building societies? How will it monitor whether the reforms release capacity, which is then used to support customers and the wider economy?
Fourthly, Article 4 requires the Treasury to review the order within five years and at intervals of no more than five years thereafter. What metrics will be used? In particular, will it examine the effect on competitiveness?
Finally, does the Treasury regard this order as the final stage in implementing the reforms enabled by the 2024 Act, or are further measures being considered to modernise building society legislation?
Subject to these questions, we regard the order as a positive and proportionate measure. It removes outdated administrative rules, supports compliance with PRA and Bank of England requirements, and gives building societies greater flexibility without undermining the important principle of mutuality.