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

My Lords, I thank the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby, for their contributions to this debate. I fear that I shall never quite achieve the high standards that the noble Baroness sets, but that does not sadden me because it is a continued encouragement. I know that I may not make the mark but I like to feel that occasionally I make some progress in closing the gap. I give her the benefit of the doubt; I do not think that she raises the bar whenever she thinks I am getting closer. However, I shall hurry back to the Treasury, fiddle with the technology and try to make sure that the website is correct. At the same time, I shall satisfy myself that this was not some cunning plan to outfox the noble Baroness by putting the wrong information in the wrong place, although I cannot think why anyone would want to do that to help the Minister. I greatly appreciate the support expressed by both the noble Baroness and the noble Lord for the matter before the Grand Committee. Consolidation is an inevitable feature of financial markets. I think that it is happening globally in banking, in mutuals and in insurance. There is probably no developed market in the world in which a process of consolidation has not occurred, and of course that applies to building societies as much as anything else. I do not think that the continuing trend to merge building societies is in itself a sign of distress; in fact, in some cases it creates more critical mass, it shares resources and it reflects the fact that, in a very competitive retail market, organisations constantly have to press to improve their efficiency. However, I am delighted that there is still room for small building societies. A particular favourite of mine is the single branch Stafford Railway Building Society, which I cited this morning to the Which? Banking Commission as an exemplar of good governance and good, responsible behaviour. However, I think that that explains the consolidation. The problems of the Dunfermline Building Society were idiosyncratic and came back to my old hobby-horse of poor governance being a critical contributory factor. Last year, the Government set up an expert group, commissioned to look at reforming financial markets. It has addressed various challenges facing the building society sector, and we will have rather more to say about that in the Budget next Wednesday. The Banking Liaison Panel will be greatly encouraged by the noble Baroness’s comments about the success of this venture. The people who sit on that panel work hard and diligently in getting to grips with some quite technical issues. We all benefit from the quality of the work that it does. The noble Baroness asked what the practical impact is of the wider definition of financial assistance. There may be a case where there is not a wider threat to financial stability but where it would still be appropriate to give assistance to an individual society. Such a decision would be made on a case-by-case basis but it is certainly not central to our planning here that we would be obliged to step in and support individual societies. Indeed, I have said that one of the tests of financial reform has to be to get to a position where financial institutions are allowed to fail without that doing damage to either retail depositors or the system. One of the lessons of the past few years is that we were not able to allow banking businesses to fail. As a result, the salutary consequences of failure were not always brought upon shareholders—subordinated to creditors—and the management of banks to the extent that a perfect model would have sought to achieve. The noble Baroness asked why the range of qualifying institutions needed extending. Under the existing order, statutory barriers that might otherwise prevent building societies accessing financial assistance from the Bank of England are removed. However, as has been seen during the financial crisis, financial institutions may also receive financial assistance from other sources, such as central banks in other European countries or the European Central Bank. The Government are of the view that societies should wherever possible have the same ease of access to financial assistance as banks. By extending the definition of "qualifying institution" to include the Treasury, the ECB and other EEA central banks, the order better enables building societies to access the broader range of financial assistance that may be available to banks, particularly in the form of loans secured by a floating charge over their assets. It was asked also why the order was necessary, as building societies are already able to get emergency liquidity assistance from the Bank. Does it mean that specific building societies are in trouble now, or are we anticipating something of that sort happening? I endeavoured in my opening comments to make it very clear that the order was not triggered by anything of the moment, but rather is prudent and anticipatory action that would contemplate increasing the range of options open to us should a building society experience difficulty in the future. The proposals in the order are therefore purely precautionary and the timing is routine. While the existing order under the Banking (Special Provisions) Act is not subject to a sunset clause, it is desirable that this wider order be made so that the financial assistance can be provided by a range of qualifying institutions. The changes are intended to place building societies on a similar footing to banks, not to single them out for special treatment. At this stage, it is not possible to answer hypothetical questions about circumstances in which assistance might be provided by the ECB or another EEA central bank. I say simply that it is possible to envisage those circumstances, and it is wise and sensible to ensure that we do not find ourselves over a weekend—it is my experience that problems always seem to happen over a weekend; banks seem to manage to teeter through to a Friday before they experience real difficulty—suddenly realising that some restriction stops us reaching for an available and attractive source of liquidity and support. I think that I have answered the questions raised by the noble Baroness and the noble Lord. If that is the case, I commend the order to the Committee. Motion agreed.