I move: "That the Bill be now read a Second Time."
That building societies are always newsworthy is no surprise considering the important role they have come to play in modern life. Building societies impinge on the lives of hundreds of thousands of people through the savings and lending services they provide. In the past ten years more than six out of every ten persons who financed the purchase of their own houses have done so by means of a loan from a building society. Membership of societies is now about 1.25 million while the total assets of societies are in excess of £3.5 billion. They hold almost 20 per cent of the total accumulated savings of the community.
Building societies — a concept imported from England in the 19th century — had in the earlier years only a limited role in providing housing for various vocational groups. In 1922 there were 23 societies in the State with total assets of little more than £500,000: by 1941 their assets were at £1.5 million. Since then there has been a constant acceleration in growth. By 1961 their assets had increased to £19 million and had nearly doubled again by 1965 to £36 million. At the time of the last comprehensive piece of legislation in 1976 total assets amounted to £350 million, scarcely one-tenth of what they are today. While total assets were growing the number of societies has declined — from 17 in 1960 to ten now.
Clearly, building societies have grown in tandem with the rapid increase in the rate of home ownership and I think that the existence of a thriving building society movement has been one of the major factors that have contributed to the fact that we have one of the highest owner-occupation rates in Europe. The present scale of operation of societies is a measure of the confidence which the investing public and house purchasers have come to place in them.
That is the success story of societies in historical terms. However, when I came into the Department of the Environment in the spring of 1987 I found the building societies in a state of considerable uncertainty. The dismal position of the national economy had driven up the mortgage rate by 3 percentage points at the end of 1986. Other countries where building societies are to be found had been modernising their legislation. At that time societies were feeling the effects of the termination of the beneficial composite tax rate on investments on the introduction of the DIRT tax. Finally, the banks were for the first time offering aggressive competition in a contracting mortgage market. In the circumstances the anxiety felt by societies was understandable. Since then other challenges have loomed much larger — the continuing and rapid changes in the financial services sector, new technology, the imminence of competition from abroad under the EC internal market.
One of my first decisions as Minister was to set up a working party in which the Government with the Central Bank and the Registrar of Building Societies would review, in consultation with the societies, the shape of the new legislation which was so obviously necessary. This Bill is the culmination of that process and I am pleased I have been able to bring it before the House in what is, by the standards of large Bills, a relatively short time. There is, in my view, a need to remove the present anachronistic legal restrictions on societies by having this Bill passed into law within the shortest time possible.
The fact that societies in the past thrived in a segmented financial system that is now undergoing radical change is no guarantee that they would survive in the new milieu. Indeed, it is difficult to see how any participant in the very competitive financial arena could fight successfully in the straitjacket now worn by societies. It is to the credit of the societies that they are already responding so positively but they must be allowed to compete more effectively and that is what this Bill is all about. They must contribute to the changing structure of our financial system, and indeed be part of that change. The extra dimension which the societies will bring to competition in financial and property services will have benefits all round — in terms of quality of service, price and efficiency. Societies have considerable financial and human resources and they should, I believe, be given the opportunity to utilise these resources effectively not alone for the good of the societies themselves but also for the benefit of the country generally. There is, I believe, scope for societies to become involved in a broader and more direct way in the housing market and in the provision of services associated with it. I have in mind here the provision of rental housing and involvement with the voluntary housing movement, for example.
Developments abroad, particularly in the EC make it imperative that all sectors of the Irish financial services industry be in a position not alone to defend their home markets but also to avail of opportunities that will arise with the inter-nationalisation of financial services. A basic prerequisite for the development of societies to deal with these changes is a modern legislative code.
Therefore, this legislation is of necessity liberal in nature. It sets very few boundaries to the future role and scope of societies. The main constraint will be their own capacity to broaden and intensify their business without prejudicing the funds of their investors. A Bill which imposed absolute statutory limits on the pace or scope of future diversification could become outdated very quickly because of the unpredictable nature of future developments. The legal framework set up by the Bill will, I hope, be broad and flexible enough to last for some considerable time.
Before outlining the main features of the Bill it might be helpful if I indicated the broad objectives I set myself in preparing the Bill. They were, first, to allow societies to compete and develop in the context of the internal market by offering new services and broadening the scope of their business. Secondly, to establish a modern and effective supervisory regime for societies. Thirdly, to improve the statutory provisions governing the running of societies, their accounts and audit. Fourthly, to put societies on the same footing as banks in regard to savings protection. Fifthly, to encourage societies to broaden the extent of their involvement in housing and, sixthly, to provide a satisfactory mechanism for conversion to company status.
Given the reasons why the new legislation is necessary and the objectives I had before me in preparing it, it will be clear that another Bill amending an outdated code was not the approach to adopt. Accordingly, the Bill now before you is large and comprehensive. It is a thorough modernisation of the law relating to building societies and takes into account current proposals in company and banking legislation.
As the explanatory memorandum circulated with the Bill is comprehensive I do not propose to give a blow-by-blow account of the contents of the Bill. I will, instead, try to give a general overview of the main provisions of each of the 13 parts with particular reference to those areas that are of major importance or where noteworthy changes are proposed.
Part I contains the usual general provisions. Having regard to the need for consistency in the legislation governing companies, banks, and building societies, section 5 will allow for the extension to societies by ministerial regulation of relevant changes which the Oireachtas makes in company and banking legislation in the future. Section 6, which repeals existing building society legislation, makes particular provision continuing in force, for existing and future housing loans, those parts of the Building Societies Regulations, 1987, relating to property insurance, valuation reports, legal fees, mortgage protection and redemption fees. Borrowers, therefore, will continue to have the freedom to choose their own insurance company, obtain a copy of the valuation report and so on. Redemption fees will not be chargeable on variable interest rate loans but I do not propose to ban redemption fees in respect of fixed interest rate loans as such a ban militates strongly against the making of such loans. The other parts of the 1987 regulations relating to unsecured lending and the appointment of directors are superseded by other provisions of the Bill.
Part II deals with the definition and constitution of a building society, its formation, registration and authorisation to raise funds from the public. In addition to a set of rules, a society will also be required to have a memorandum setting out its objects and powers in much the same way as a company. Section 9 states that the objects must be within the scope of the activities permitted under the Bill but expressly requires that every society must have as an object the making of housing loans. Details of the matters to be covered by the memorandum and the rules are contained in the Second Schedule which may be amended by the Central Bank by regulation should this become necessary in the future.
The concept of authorisation is new in so far as societies are concerned. At present a society cannot advertise for funds without a specific approval from the registrar. Under the new arrangements a society will be required to obtain an authorisation from the Central Bank before it can raise or solicit funds other than its founding capital. The Central Bank will be able to impose whatever conditions it considers necessary on an authorisation which will, in fact, correspond to a banking licence. The approach proposed brings the procedure for authorising societies to raise funds into line with the requirements of the first EC Banking Directive. Existing societies that have permission to advertise for funds will be deemed to have an authorisation and whatever restrictions or conditions the registrar has imposed on a society in relation to the permission will become conditions on its authorisation. The Central Bank will have power to impose conditions on an existing authorisation and these conditions may be of an extensive nature including, if necessary, the removal of a director or other officer.
Part III sets out the powers of building societies. As well as restating existing powers, it contains extensive and important new powers which, I believe, will enable societies to compete much more effectively in the marketplace, to offer a better service to their members, to the house purchaser and to the general public. These new powers, prudently undertaken, will enable societies to develop and thrive in the rapidly changing financial services sector and thus to continue to be a major source of funds for housing by providing mortgage loans and by direct investment in residential development.
Prudence by societies in responding to the opportunities created by the Bill is paramount. This means that diversification must be within the context of properly structured strategic plans, that costing and other implications have been fully considered and they have the human and financial resources to do it successfully. The new powers which societies will have can be considered under five broad headings.
First, secured and unsecured lending. The lending powers of societies are set out in sections 22 and 23. In addition to the traditional lending secured by mortgage of land, societies will be able to offer loans on second mortgage, bridging loans, loans for payment of a deposit for the purchase of property, loans backed by other securities or guarantees as may be approved by the Central Bank, unsecured loans to individuals for house improvement, unsecured loans and overdrafts for general purposes. However, the amounts of individual unsecured loans will be subject to specific Central Bank limits. These provisions will also allow societies to offer more flexible types of house purchase mortgages such as low start, index linked and equity type mortgages.
Secondly, development of land and property. The direct involvement of societies in the development of land for residential and other commercial purposes is a logical extension of the traditional business of societies, namely, the provision of loan finance for such development. The new power to own and develop land will, I hope, be the basis for a new departure on the part of building societies in the housing sector. They will be able to invest directly in the provision of housing for sale or rent and I would hope to see them make a contribution to the urban renewal programme by becoming involved in mixed developments.
Thirdly, equity investment in subsidiary and other associated bodies. Section 28 will enable building societies to set up subsidiary companies or to take a stake in the equity of another company. It will probably transpire that the best way to provide some of the new services or to undertake some of the new activities that will be available to societies will be by the establishment of subsidiaries or involvement in joint ventures. The option to establish subsidiaries also offers the prospect of a means of raising some of the capital necessary to get involved in new activities. It should be noted, however, that the power to invest in companies is generally limited to companies whose objects do not allow them to engage in activities outside the powers of the society itself or to control further subsidiaries but the Central Bank may permit exceptions to this.
The setting up of subsidiaries cannot be regarded as a way of sidestepping prudential requirements or limitations upon the powers of societies themselves. The provisions of sections 118 and 119 of the Companies (No. 2) Bill, 1987, regarding the power of the court to require a holding company to contribute to the debts of a subsidiary will also of course apply, when enacted, to building societies. Section 28 will also permit societies to link up with and assist voluntary housing bodies.
Fourthly, financial services. Under section 29 societies will be able to offer a wide range of financial services to members and other persons. Financial services have of necessity been defined broadly and flexibly in view of the continually changing nature of these services. However, the provision of any of the services listed in section 29 will be subject to the terms of the Central Bank approval and any other legislation that governs the activity in question. Lending services are excluded from section 29 since these are covered by the other provisions referred to earlier.
Fifthly, services relating to land. Part III also contains a number of provisions which will allow societies to provide a range of services relating to the acquisition, development and disposal of land. Again, this is a natural progression from the existing powers of societies based on their long experience in the housing sector. Section 31 will enable them to provide conveyancing services subject to regulations to be made by the Minister for Justice. Section 32 will enable them to provide auctioneering and other services relating to property such as valuation, surveying and management. Societies will thus be able to offer a package of services to the house buyer. The resulting increase in competition holds out the prospect of greater choice and lower prices for the consumer. However, I also recognise the potential for conflicts of interest in these areas and the need to prevent societies from taking undue advantage of their position in the housing market.
The Bill contains a number of provisions aimed at avoiding these problems. In the case of conveyancing services, the provision of such services to both the vendor and purchaser of the same property is prohibited, thus removing the greatest potential source of conflict of interest. The regulations which have to be made before societies can offer conveyancing services will be able to make further provision in relation to conflicts of interest, compensation for negligence, qualifications of persons providing the services and so forth. Similar regulations can be made in relation to other property-related services if this is shown to be necessary. In addition, I have included provisions to ensure that societies do not engage in anti-competitive pricing, in the provision of conveyancing and auctioneering services. A society is also prohibited from requiring anyone getting a housing loan from it to use other services provided by the society or its subsidiaries.
Provision is also made in Part III for a number of other important matters. The requirements on societies in relation to the valuation and assessment of freehold and leasehold estate or interest as a security have been strengthened and will contribute to ensuring that conflicts of interest do not arise in cases where a society also provides auctioneering or valuation services.
Section 18 contains a very wide power for societies to raise funds in Irish or in foreign currencies. In addition to the traditional retail funding in which, incidentally, societies have been finding it increasingly difficult to maintain their share of the savings market, I expect that they will in the future also be looking to the wholesale market where they will be able to use their mortgages as collateral or even sell them off. However, there is a power for the Minister to regulate the securitisation of mortgages because of the consumer protection issues involved. For reasons relating to their mutual status and to the supply and cost of mortgages, societies will be required to maintain at least half of their total funding liabilities in the form of shares issued to members.
Provision is also made to allow societies to operate abroad. Even with this power a building society incorporated and authorised in Ireland could not at present operate in, for example, the UK on the same basis as a UK society nor could it set up a subsidiary to take deposits in the UK without authorisation from the Bank of England. However, with the implementation of the proposed EC Second Banking and Mortgage Credit Directives all this will change and an Irish building society will be able to operate throughout the Community under the supervision of its home supervisor, namely, the Central Bank.
In referring to the range of new powers that will be available to societies, I would draw special attention to section 36 which imposes important disciplines in relation to the exercise of these powers. Basically, all powers other than secured lending must be adopted by special resolution and must have Central Bank approval. We must bear in mind that the diversification by societies into these new activities will involve new and different kinds of risks and raise prudential issues. Accordingly, the Central Bank will have wide powers to control the involvement of societies in the provision of new services and to impose whatever conditions and requirements it considers appropriate. Also, provision is made to allow the Central Bank to restrict exercise of certain powers to specified categories of societies.
While on Part III, I would like to refer in particular to section 24, since the question of tiered interest rates has been the subject of some comment — not to say misunderstanding — since the Bill was published. The 1986 Act banned both the introduction of tiered rates on existing loans and the charging of tiered rates on future loans. Although designed to stop the charging of a higher rate on larger loans, in effect it means that building societies must charge the same interest rate on all loans of the same type. What is the point of that when the interest rate as such is not controlled and a society can simply overcome it by putting up their rates across the board? It certainly could not have been designed to help the small borrower or the first time purchaser. Whatever justification there may have been for it in 1986 there is none for continuing the ban on future loans having regard to the substantial changes in the market conditions since then and to the whole thrust of this Bill which is to allow societies to compete on an equal basis.
The fact that householders are now enjoying the lowest mortgage rate in 20 years has nothing whatsoever to do with the ban on tiered rates. It is due to market forces operating in the context of the Government's macro-economic policies. In our system interest rates will always be determined by market forces and artificial interventions of this type ultimately act to the detriment of a good mortgage market that serves to meet the need of the various types of borrower. Indeed, as if to prove this, competition over the past year or more has enabled many borrowers who had been legally liable for tiered rates pre-dating the 1986 Act to renegotiate lower rates on their mortgages. That said, section 24 contains important safeguards to ensure that existing loans are not affected by the removal of the ban and that future borrowers are not misled in any way. The mortgage rate on existing or future loans cannot be tired retrospectively.
Part IV contains the general provisions relating to the control and prudential supervision of building societies by the Central Bank. The statement of the Bank's general duty in regard to societies contained in section 37 makes it clear that the guiding purpose of the Bank in operating the supervisory system set up under the Bill is the maintenance of the good financial health of societies. Of course, this in no sense detracts from the inescapable responsibility of the directors to ensure that the affairs of each society are conducted in a manner calculated to maintain its financial stability and the protection of funds entrusted to it. The powers which the Bank will have are similar to those it already has or will have under the Central Bank Bill in relation to banks. In summary, the Central Bank will be able to
(a) require societies to maintain specified prudential rates;
(b) impose requirements relating to the structure and composition of liabilities and assets — for example liquidity requirements;
(c) revoke a society's authorisation in certain serious circumstances; and
(d) to give a direction to a society to suspend for a specified period raising funds or making payments.
The powers which the Central Bank will have in relation to a society's authorisation, that is, the power to impose conditions, to give a direction to a society to cease raising funds and to revoke an authorisation are central to the enforcement of the Bank's supervisory functions. Section 40 lays down in considerable detail the circumstances in which the Central Bank may either revoke an authorisation or suspend operations. The Central Bank will also have wide powers to carry out inspection of a society's books and records, to obtain information relating to the activities of the society, to control the form and content of advertising by societies, and to call a special meeting to mount a formal investigation of a society's affairs. The Bank will also have the power, should it consider it necessary to use it, to seek a High Court Order to secure compliance with certain requirements. On the other hand, the Bill contains important safeguards by way of procedural requirements and ultimately appeal to the courts in regard to the exercise by the Bank of its powers.
It will be obvious, therefore, that the powers available to the Central Bank will be more extensive and flexible than those currently available to the registrar. This strengthening of supervisory powers is a necessary aspect of modernisation of the legislation, is a necessary concomitant of the broadening of the scope of societies and will bring about a substantial degree of uniformity in supervisory systems. All in all, I am confident that the Bill will provide the basis for an effective system of supervision that will be sympathetic to the developments needed by the societies.
Here I would like to place on record my appreciation of the valuable work done by the present and previous registrars of building societies. They have discharged their statutory duties fairly and efficiently and the ultimate tribute to them is to say that no investor lost money in an ordinary building society since the foundation of the State. It is no reflection on the registrar's office that responsibility for the control and supervision of societies is being transferred to the Central Bank. As I have indicated, the transfer is being made for positive reasons and the registrar, I am sure, will be glad of the opportunity to redirect resources to the supervision of the many other varied organisations for which his office has responsibility.
Section 38 is a new provision which recognises the special importance of ensuring an adequate supply of mortgage finance for house purchase and improvement. It would be my intention under this section to regularly monitor the supply of and demand for mortgage finance in consultation with the Minister for Finance and to communicate the position to the Central Bank so that any impending shortage of funds would be anticipated and appropriate preventative action considered. It should be noted that we are talking here about the supply of mortgage finance from all sources, not just building societies.
Turning to the question of the running of societies generally, I have tried to strike the right balance between the role and responsibilities of directors and of the members. Boards of directors are responsible for the overall direction of the society and supervision of its day-to-day management and, as such, have a legitimate interest in the composition of the board so as to ensure that it will be capable of shouldering its responsibilities in a united fashion but in the final analysis it is the members who elect the directors and to whom the directors must account for their stewardship. Members therefore must be kept fully informed of major developments affecting the society, and members who have a commitment to the society must have a fair chance of putting forward a candidate for election as a director. Basically it is vital that societies should be seen to be run in the interests of their members.
Part V deals with the way societies are directed and managed. It requires every society to have a broad of directors elected by the members, a chief executive and secretary. It contains a number of changes in existing legislative provisions and substantial new provisions relating to the election and conduct of directors. The provisions as drafted will, together with those in Part VI, enhance the confidence of members in the manner in which directors are elected and subsequently conduct themselves as directors.
Sections 50 and 51 contain extensive provisions in relation to the appointment of directors. In fact, building society law contained no particular provisions regarding the election of directors until regulations were made under the 1986 Act prescribing certain requirements in relation to the eligibility and nomination of candidates, the circulation of an election address and retirement of directors. By and large, these provisions have been retained in the present Bill but with certain changes. The effect of these changes is that a society may (a) increase the maximum shareholding that may be required to nominate or join in nominating a candidate for election as a director from £10 to £250; and (b) increase the maximum number of qualified members that may be required to nominate a candidate for election as a director from ten to 20.
The new limits will allow societies to require candidates to demonstrate a reasonable level of support and those nominating them to have a reasonable commitment to the society. The special provisions regarding directors or candidates over 70 years of age are dropped because they appear to me to be discriminatory as they have no parallel in any other corporate legislation.
On the other hand, there are important new provisions designed to enhance public confidence in the electoral process. Firstly, a poll must be held on a contested election. Secondly, societies will in future have to appoint an independent person to supervise the conduct of elections and to report to the Central Bank on the conduct of the election stating whether in his opinion the election was conducted in accordance with statutory requirements and otherwise with fairness and integrity. Thirdly, canvassing by employees at their place of employment or at a meeting of the society will be prohibited. The Central Bank will also be able, if they consider necessary on the basis of the report from the person who supervised an election, to apply to the High Court for an order setting aside an election.
Sections 52 to 59 contain provisions on dealings between a society and its directors and correspond, with appropriate modifications, to those in Part III of the Companies (No. 2) Bill, 1987, as they apply to banks. They are designed to ensure that an unscrupulous director does not divert societies' assets for his own personal gain. The approach adopted is (a) to prohibit certain dealings between the society and a director or a person connected with him; (b) to require disclosure of all significant dealings between the society and a director or a person connected with him; and (c) to provide for civil liability and penalties in respect of dealings that contravene the requirements of the Bill.
In addition section 60 requires societies to maintain and make available for inspection a record of the amount of business being given by the society to any company or firm which has as a director or partner a director of the society. Although there is no corresponding provision in the Companies Bill, in my view such a provision is appropriate in the case of building societies.
Apart from the fact that these types of provisions should be the same in general terms as those which apply to companies, they are also particularly necessary in the case of large mutual organisations like building societies, where the accountability of directors to members is in practice much more diffuse than in the case of companies.
Section 64 deals with the disqualification of persons to be directors, officers or auditors of societies and generally parallels and complements the disqualification provisions in the Companies Bill.
Part VI pertains to meetings, resolutions and voting. Section 69 increases from £10 to £100 the maximum shareholding that can be required of a member to vote on a resolution or an election. The £10 requirement has become quite meaningless in terms of today's money values. Although the societies would like to see a higher figure, I think the figure of £100 proposed represents a minimum level of commitment to a society which merits enfranchisement. The section also makes it clear that in a special resolution or a resolution for the conversion of a society into a company each qualified member has one vote. This is in line with the court's interpretation of existing legislation. A special resolution may only be proposed in relation to certain major decisions such as changes in the memorandum or rules, the adoption of new powers and mergers.
Section 72 contains some new provisions to enhance public confidence in the voting procedures of societies. A society is required to issue one proxy form with the notice of a meeting but is prohibited from issuing further forms except at the written request of a member, and also to retain such forms and requests for a year to facilitate discovery by a court.
Section 74 gives any 25 voting members of a society the right to put forward a resolution on any aspect of the affairs of a society, except a conversion resolution. Subsection (9) of that section accommodates the unique position of the ICS Building Society which was recognised in the 1976 Act and reflects the agreement of August 1984 with the previous Government. In fact, under this Bill the ICS will be brought more into line with the generality of societies than heretofore.
Section 75 is, in my view, a desirable new provision which will ensure that societies have the option of deciding issues by postal ballot rather than by voting at meetings.
It is important that the law protects the rights of the ordinary members of building societies as mutual bodies and gives them a democratic say in the running of affairs. At the same time societies, as major financial institutions depending for their survival on public confidence, must not be made prey to irresponsible elements who have no real stake in the society. The difficult task facing us was to strike a balance between these two interests. I think that balance has been struck in this Bill.
Part VII contains provisions relating to the accounts and audit of societies and substantially updates existing provisions in these areas. It is very important that societies observe the best modern practice in keeping accounting records and publishing annual accounts. The provisions on these matters and relating to auditors in building society legislation have traditionally been based on similar provision in companies legislation and accordingly the provisions on accounting records, the appointment and removal of auditors, the rights of auditors and the auditors' report are based on similar provisions in the Companies (No. 2) Bill, 1987.
There are, however, additional provisions in this Bill: (a) it requires societies to have a proper system of control of their business and to have an internal reporting system to the board of directors; (b) it requires the preparation of a layman's summary financial statement for issue to members; (c) it gives the Central Bank power to veto the appointment of an auditor as is also proposed in the Central Bank Bill for banks; (d) it imposes special duties on auditors to report certain serious matters or to supply specified information to the Central Bank over the head of the society, as is proposed for auditors of insurance companies and banks; and (e) it requires that auditors be reappointed at every annual general meeting and does not provide for automatic reappointment.
I would make no apology for insisting that societies have proper systems of internal control and that auditors alert or assist the supervisor if something goes wrong. After all, no reasonable measure designed to protect the security of the public's savings should be omitted.
Part VIII contains a re-enactment of the existing provisions in relation to the settlement of disputes between the society and a member under the rules. It also provides that the Minister for the Environment may make regulations requiring societies to set up, either individually or jointly, a scheme for the investigation and determination of complaints by customers in relation to the services provided by societies. This type of "ombudsman" arrangement would apply to consumer complaints in relation to services provided by societies and not to disputes between a society and its members under the rules. However, such disputes if covered by the terms of the complaints scheme, could, with the agreement of the parties concerned, be dealt with under the complaints scheme. It is my hope that societies will come together to set up a voluntary arrangement for dealing with complaints. While I am not aware of any existing similar schemes in the financial services area in this country I think it would be another feather in the collective cap of societies if they took the initiative in this area. If the societies succeed in setting up their own scheme and if I am satisfied that it constitutes a satisfactory arrangement I will be quite happy to forego the regulation-making power in favour of the voluntary arrangements.
Part IX provides for the extension to savings held in building societies — whether as shares or deposits — of the scheme proposed in the Central Bank Bill for the protection of deposits with banks. The trend internationally is towards the establishment of some form of protection for smaller deposits taken by financial institutions — and the EC has already issued a non-binding recommendation in this regard. While societies have a very good track record in so far as the safety of funds entrusted to them is concerned, I think the arrangement now proposed is an opportunity to further enhance the confidence of small savers in our financial institutions and to put societies and banks on the same footing in this important area. The contribution of societies to the protection account in the Central Bank is set at 0.2 per cent of Irish pound shares and deposits, which will mean that societies collectively will have to maintain a deposit of something in the region of £7 million with the Central Bank as their contribution to the fund. This compares with £4.5 million currently maintained by societies under the 1976 Act. It should be noted that this is a once off deposit which will earn interest for the societies. Societies will only have to make further contributions in line with the growth in their shares and deposits or in the event of a payout from the fund.
Part X is essentially a re-enactment of similar provisions in the 1976 Act relating to the amalgamation of societies and the transfer of engagements between societies. The opportunity has been taken to clarify the process by which societies can amalgamate or transfer engagements. It is important that societies have a clear and well defined mechanism for effecting amalgamations and transfers particularly at a time when future developments in the financial area may give rise to some rationalisation of our existing building society configuration. By permitting the Central Bank to consent in certain circumstances to an amalgamation or transfer without having to go through the procedure of a general meeting, the Bill facilitates a quick rescue should such ever be necessary. Any proposed payment of compensation to directors or bonuses to members on foot of an amalgamation or transfer must be disclosed to the members or, as the case may be, must be acceptable to the Central Bank.
Part XI, which will enable building societies to change their corporate status and convert themselves into public limited companies, is a provision totally new to Irish building society legislation, but one that is now recognised in recent legislation in other countries where building societies are to be found — the UK, Australia and New Zealand. One could adduce arguments for and against conversion but in view of the changing nature of the financial industry and the impossibility of predicting its future shape, I think it would be inadvisable to exclude the conversion option from major new forward looking legislation like this. However, as demutualisation would be a quite fundamental change in the nature of a society, it is important that the law should lay down certain safeguards to ensure that the decision is taken after due consideration of all the implications by all those concerned. Accordingly, the conversion process laid down in the Bill is as follows: first, the society must consult with the Central Bank; secondly, the board of directors must draw up a conversion scheme as the actual instrument of conversion; thirdly, the society must pass a "conversion resolution"; fourthly, it must obtain the confirmation of the Central Bank and, finally, it must register as a public limited company. Section 101 requires the conversion scheme to cover 11 specific aspects of the conversion including the rights of members of the society in relation to the equity of the successor company or any distribution of the society's reserves. No conversion scheme may be circulated unless the Central Bank is satisfied that it complies with the requirements of the Bill. In order to prevent disruptive movement of funds in the expectation of quick windfall gains, any priority rights that may be given to members generally will not apply to members of less than two years standing.
A "conversion resolution" is a form of special resolution in which the borrowers vote along with the shareholders on the basis of one man, one vote to adopt the conversion scheme. Before members vote on a conversion scheme they must be supplied with a detailed statement indicating,inter alia, the reasons for the proposal and the future policy of the company in relation to housing loans and mortgage interest rates. I think it is only equitable that borrowers should be given an equal say with shareholders in the decision to convert, since it is a matter that could have potential consequences for them. Also, it will ensure that any converting society do not ignore the legitimate interests of mortgage holders.
After adoption by the society a conversion cannot become effective until it is confirmed by the Central Bank. Essentially, section 104 states that the bank must confirm a conversion unless it would be contrary to the public interest or unless it is unlikely that the successor would be granted a banking licence. The public interest safeguard is an important one since it would allow the bank to block a conversion if in the prevailing circumstances it considered, for example, that a conversion would be damaging to the overall financial system.
Section 105 contains an important safeguard, in the form of recourse to the High Court, for individual members who may consider that the terms of conversion do not respect their rights.
After conversion a society will become a bank regulated under company and banking legislation. However, in order to ensure that societies make their own decision on conversion without undue external influence and that they do not become subject to predatory attentions section 105 guarantees the continued independence of the successor company for at least five years. For the same reason the Bill makes no provision for the transfer by a society of their business to an existing company.
The net effect of all the provisions will I think ensure that conversion will be properly considered and carried through with due regard to the interests of all categories of members, that societies do not come under pressure to convert with a view to being taken over and that flows of funds will not be distorted by expectations of windfall gains.
Part XII is concerned with the winding up and cancellation of registration of a society and is mainly a re-enactment with modifications of existing provisions. The Central Bank is being given full standing in relation to a winding up, including the right to attend any meeting of creditors or to be a member of any committee of inspection. There is a new safeguard for mortgage holders in that a liquidator cannot sell off mortgage assets except on terms that the High Court considers just and equitable. Sections 111 and 112 are derived from the Companies (No. 2) Bill, 1987, and make provision in relation to the criminal and civil liability of any officer whose failure to keep proper accounts contributed to an insolvency.
Part XIII contains a number of miscellaneous provisions. Included in this part is the requirement on the Central Bank to keep a public file relating to each society containing specified documents provided by the society. Members of the public will be entitled to inspect these files just as they can inspect files relating to companies in the Companies Registration Office. Provision is also made for necessary amendments to the Banker's Books Evidence Acts and Bills of Exchange Act so that societies will be able to provide banking type services. Section 127 is designed to give building societies the same status as banks as depositories of money, for example, to hold client funds and to accept payment of wages.
Deputies will have noted that some of the new provisions are similar to relevant provisions in the Companies (No. 2) Bill and in the Central Bank Bill. I was conscious when drafting the Bill that it should, where relevant and appropriate, correspond in so far as possible and reasonable with those two other Bills.
I hope the House has found my explanation of the thinking behind the Bill and of its major provisions useful and helpful. Due to its length, I regret that I was unable to go into more detail but I will try to respond to any points or queries raised by Deputies in my reply to the debate. I am also prepared to consider any well-founded suggestions by Deputies for improving the Bill.
I believe that this Bill is comprehensive, coherent and well balanced. It will allow the building societies to build on their past success. I think it achieves a good balance between supervision and commercial freedom, between the boards of societies and members, between the rights of investors and borrowers, between societies and their customers. It will also give a better deal to the house purchaser, to the building society investor, to the consumer of financial services. It can bring benefits to the housing area and the construction industry and, I hope, stimulate urban renewal. As I have said already, I believe that it is a progressive charter for the development of the building society movement.
Accordingly, I commend the Bill to the House.