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Building Societies (Insolvency and Special Administration) (Amendment) Order 2010

My Lords, I shall speak also to the draft Building Societies (Financial Assistance) Order 2010, which modifies the law applying to building societies to make it easier for building societies to receive financial assistance from a qualifying institution—the Treasury, the Bank of England, the European Central Bank or another central bank in the European economic area. The Building Societies (Insolvency and Special Administration) (Amendment) Order 2010 makes technical changes to the building society insolvency procedure and the building society special administration procedure. The building society sector has weathered the financial crisis relatively well in the light of the especially harsh business environment of the past few years. During that time, however, there has been consolidation in the sector and one failure—the Dunfermline Building Society. The sector continues to provide valued services to members and customers throughout the United Kingdom, and the Government remain committed to supporting the financial mutuals sector as a viable alternative to banks and an important way of ensuring a more competitive financial services sector. I turn, first, to the Building Societies (Financial Assistance) Order 2010. While the sector has generally held up well, the financial crisis brought about the need for liquidity assistance for financial institutions of all kinds. Liquidity support such as provided by the Bank of England under the special liquidity scheme was only one example of the type of schemes in place across Europe and elsewhere. Improving building societies’ ability to access emergency funding from central banks strengthens the resilience of an institution against potential failure and, in so doing, protects the interests of building society customers, who are also their members. In most respects, the order replicates the provisions of the Building Societies (Financial Assistance) Order 2008, which was made under the Banking (Special Provisions) Act 2008. In particular, it modifies the application of Section 7 of the Building Societies Act 1986 to ensure that relevant financial assistance from a qualifying institution is not taken into account for the purposes of the 50 per cent limit on building societies’ non-member funding. It also disapplies Section 9B of the 1986 Act, which restricts the creation of floating charges, and applies insolvency law provisions on administrative receivers to make it possible for a qualifying institution to appoint an administrative receiver under a floating charge. However, the order makes wider provision than the existing order. Whereas the 2008 order applied only to financial assistance offered or provided by the Bank of England, this order will apply in respect of financial assistance offered or provided by the Treasury, the Bank of England, another central bank of a member state of the European economic area or the European Central Bank. It therefore widens the sources from which financial assistance can be granted. In addition, whereas the 2008 order applied only where the financial assistance is provided, ""for the purposes of maintaining the stability of the financial system in the United Kingdom"," this order will apply where financial assistance is provided for any purpose, even where there is no wider threat to financial stability. Prior to laying the order, the Treasury consulted in July 2009 on a wider order that would, first, modify building society law to make it easier for building societies to receive financial assistance from a central bank; and, secondly, allow building societies to grant floating charges in favour of payment and settlement systems to help them take advantage of such financial assistance. The consultation closed on 31 October 2009. Respondents to it expressed the view that both the provisions would be useful for accessing financial assistance. However, in light of further consideration, I have decided that it is appropriate to make an order that is a little more limited in scope. The wider order would have enabled building societies to grant floating charges for reasons unconnected with financial assistance. It would have given a general and indefinite permission to building societies to grant floating charges so that they could access settlement and payment and settlement systems directly. To do that would increase risk in the sector, and goes beyond the intention of the policy. The order therefore puts in place only the first of the two provisions, which will make it easier for financial assistance to be granted to building societies from a wider range of sources. I make it clear that the proposals in the order are purely precautionary. They are intended to place building societies on a similar footing to banks, not single them out for special treatment. Extending the financial assistance order to cover assistance from the Treasury, the Bank of England, the European Central Bank or another central bank in the European economic area has been widely supported by stakeholders, including the building societies and their association. The Government believe that the order represents sensible and prudential contingency planning on the part of the authorities, improving the position of building societies and bringing them on to a similar footing as banks with regard to financial assistance. I turn now to the Building Societies (Insolvency and Special Administration) (Amendment) Order 2010, which will make changes to the building society insolvency procedure and the building society special administration procedure. These were created on an urgent basis in March 2009 to enable the resolution of the Dunfermline Building Society. It was not possible at that point to undertake public consultation before making the necessary secondary legislation. The Government therefore committed to public consultation, and to bring forward an amending instrument if necessary. The Government conducted a full public consultation from July to October 2009, and has received advice from the Banking Liaison Panel which has been published on the Treasury's website. Stakeholders supported the policy proposals, and the BLP has made three technical recommendations, which are set out in its published advice. In relation to building society insolvency, the BLP made two recommendations—that the FSCS should have certain conditional rights in the insolvency, and that building society members should retain rights to participate in the insolvency and to be informed about its progress. Those are matters for the statutory insolvency rules. The Government agree with the BLP's proposals, and they will be included in the rules when they are made in due course. The BLP proposed that provision be made to ensure that the building society special administrator could change the name of the residual society after a partial transfer. Under the BSSAP as it stands, there are various routes by which the special administrator could pursue that goal, and he or she would ultimately have recourse to the courts. To put the administrator's ability to change the name of the residual society beyond legal doubt would require significant revisions to building society law. The Government do not believe that such wide-ranging change would be appropriate. The order therefore limits itself to making essentially minor and technical amendments, some of which respond to the points made by the Joint Committee on Statutory Instruments when the original order was made.