I welcome this comprehensive and coherent Bill which will allow building societies to build on their past success. The Bill will achieve a good balance between supervision and the commercial freedom of all interested parties, between the societies and their members, between the rights of investors and borrowers. It will also give a better deal to the house purchaser, to the building society investor and to various customers of these financial institutions. It can bring benefits to the housing area and the construction industry and I hope it will stimulate urban renewal. It is a progressive move in the development of the building society movement.
During the past ten years more than six out of every ten people who have financed the purchase of their own home have done so by means of a loan from a building society. Membership of these societies is now approximately 1.25 million, while the total assets of the societies are in excess of £3.5 billion. They hold almost 20 per cent of the total accumulated savings in the country. In 1976 total assets of the building societies were in the region of £350 million, scarcely one tenth of today's figure. While total assets have grown, the number of societies has declined from 17 in 1960 to ten today. Clearly building societies have grown in tandem with the rapid increase in the rate of home ownership. The existence of a healthy building society movement has been a major contributory factor to our having one of the highest rates of owner occupation in Europe. The present scale of the operations of the societies is a measure of the confidence which the investing public and house purchasers have come to place in building societies.
In 1987 the dismal condition of the national economy had driven mortgage rates up by three percentage points. Other countries had been modernising their legislation in regard to building societies. At that time the societies were feeling the effects of the termination of beneficial composite tax rates on investments and the introduction of the DIRT tax. The banks were for the first time offering aggressive competition in the contracting mortgage market. Other challengers have loomed much larger — continuing and rapid changes in the financial services sector, new technology and the imminence of competition from abroad in the EC internal market.
One of the first decisions taken by this Minister was to set up a working party involving the Government, the Central Bank and the Registrar of Building Societies. They reviewed the existing legislation and this Bill is the result of their deliberations. There is a need to remove the legal restrictions on societies by having this Bill passed into law. Building societies must be allowed to compete more effectively. There is scope for the societies to become involved in a broader and more direct way in the housing market and in the provision of services associated with it. Developments abroad, particularly in the EC, make it imperative that all sectors of the Irish financial services industry be in a position not only to defend their home markets but also to avail of the opportunities that will arise in 1992. A basic prerequisite for the development of societies to deal with these challenges is a modern legislative code. The main constraint will be their own capacity to broaden and intensify their business without prejudicing the funds of their investors.
The broad objectives of the Bill are 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. The Bill also seeks to establish a modern and effective supervisory regime for the societies. This will mean the replacement of the Registrar of Building Societies by the Central Bank, who will have a bigger input in the workings of the societies. The Bill is also designed to encourage societies to broaden the extent of their involvement in housing and to provide a satisfactory mechanism for conversion to company status.
The Minister referred to 1992. On 24 January 1985 the EC Commission adopted a proposal for a Council directive on the freedom of establishment and the free supply of services in the field of mortgate credit. This was submitted to the Council on 28 January. Following consideration by the European Parliament and the economic and social committee of that parliament and in the light of the recommendations made by these bodies, the Commission adopted an amended proposal in May 1987, which was submitted to the Council on 27 May. The proposal covers freedom of establishment, that is the right to establish a branch in another member state, and the freedom to provide services, that is the right to provide mortgage credit in a member state without establishing a branch there. The proposal is under examination at working party level in the Council. Progress has been slow so far, with many different viewpoints remaining to be reconciled. An amendment of the Commission's draft can be anticipated within the next few months.
Mortgage credit institutions already enjoy a right of establishment and to some extent a right to provide services by virtue of Articles 52 and 59 of the Treaty. These are legally enforceable by those institutions by virtue of the Treaty's provisions alone. However, the institutions which the Commission's present proposal is designed to benefit already come within some of the Council's directives. Directive 77/780 stipulates the minimum requirements for the authorisation to credit institutions in a member state and provides for the supervision to be exercised by the appropriate authority in that member state where the business is being carried out. National laws may not discriminate on the grounds of nationality. Nationals of other member states can establish a building society in Ireland by complying with the provisions of the Building Societies Act, 1976.
However, there is a wide difference between the methods of funding and lending employed by mortgage credit institutions throughout the EC member states and between national laws governing these institutions. The main beneficiary of the 1977 Directive has been the credit institutions which are engaged in general commercial banking while institutions specialising in mortgage credit have been confined to their national markets. Hence, according to the Commission, a need for a new directive arises.
The making of loans on security of a mortgage or property is common in all national systems but there is a wide variation between the savings and lending techniques employed in these systems. In Ireland and the United Kingdom building societies accept short term deposits at market rates and lend long term, also at market rates. In other countries, for example in the Federal Republic of Germany, a borrower from the bank may qualify for a loan but he must first save a substantial proportion of the sum required at a rate of interest below the market rate. The interest on the mortgage eventually granted by that institution to the individual is also below the market rate. Moreover, the provision in Irish and British building society mortgages, that the rate of interest is variable at the discretion of the building society, would be illegal under some of the continental systems.
In the area of mortgage credit the EC Commission has rejected harmonisation as being impracticable and commentators have accepted that it would be an enormous task, if indeed possible. The Commission has adopted for the mutual recognition of the financial technique operated in different member states so that if the proposed directive is adopted mortgage credit institutions will be free to operate throughout the Community in the same manner as they do at present in their home countries.
The question of exchange control also arises. Effectively the objective of the proposed directive will not be achieved unless obstacles presented by exchange control restrictions are removed in member states, such as Ireland, where those restrictions still exist. This problem has not been addressed in the present proposal but the Commission has indicated its intention to propose a new directive which will liberalise those capital movements and which are related to the operations mentioned in the present EC draft directive.
The credit institutions covered by the proposed directive are those which raise finance by taking deposits from the public or by issuing mortgages or other bonds or securities and which grant loans secured by mortgage for the purpose of acquiring or retaining property rights in building land or in existing or projected buildings. The amended proposal makes it clear that the directive will apply not only to specialised institutions such as building societies but also to institutions such as licensed banks whose activities consist, in part, of the foregoing activities. The Commission also stated that the activities covered by those constitute essentially the granting of mortgage credit for the purpose of building or acquiring residential property but they also cover commercial properties.
The key provision of the directive will enable credit institutions to operate mortgage credit business in other member states in accordance with the funding and lending techniques authorised in their home member states. The home and host member states will be obliged to amend or adapt their national laws to whatever extent may be necessary to secure these objectives. In this process the existing rights of institutions are not to be restricted and where the introduction of new techniques affects the competitive position of home institutions, they may be permitted to adopt these new techniques. However, by way of exception to the general rule and pending further consideration, the host member state may require the issue of bonds in its own territory to be subject to its own laws.
All branches of mortgage credit institutions whose head offices are in member states will, under the proposed directive, be under the supervision of the competent authority of the host member state and after this Bill is passed it will be the Central Bank in Ireland. This is in accordance with the national laws of the host country but close co-operation with the supervisory authority of the home member state will also be required. The credit institution which proposes to transact business in another member state must notify the supervisory authority in its own State indicating the type of business proposed and the conditions under which funds will be raised and loans granted. Unless it has doubts as to the financial soundness of the institution, the supervisory authority will send the information to its counterpart in the host member state but a refusal to forward the information will suspend the institution's right to provide the proposed services. Supervision will be carried out by the home country supervisor in consultation with its counterpart in the host country. There will be a greater emphasis on the role of the former supervisory authority in so far as supply of services is concerned.
The commercial implications of this directive are worth noting. If the directive is adopted in its present format it may provide an opportunity for house buyers in this country to borrow foreign currency in ECUs at attractive interest rates from continental institutions. However, exchange rate risks would be likely to be an inhibiting factor for most borrowers. Moreover, it is not anticipated that continental institutions are likely to be attracted by the relatively small Irish market. Many of them would find it difficult to compete if they had to adhere rigidly to the techniques employed here. It seems more likely that large British institutions might, from their home base, seek to provide mortgage credit facilities here. It is thought that such competition could create considerable problems for Irish institutions, building societies and banks.
The flexible techniques employed by Irish building societies could prove attractive on the European market provided, of course, that they are free to operate there as they do at home. Of course, they would have to develop the expertise to market their products, raise funds at competitive rates and minimise exchange risks exposure. They may well find it more attractive, at least in the short term, to seek entry to the British market if the proposed directive is adopted.
Irish banks already enjoy under EC law the right to establish branches in other member states in order to transact banking business, including mortgage credit, and foreign EC banks enjoy a corresponding right here. Banks, therefore, will be affected only to the extent that the freedom to provide services without establishing a local branch here is extended.
A new banking directive is proposed by the Commission and this will radically alter the position of the banks. The whole question of a supervisory authority is dealt with at great length in the Bill and the concept of the authorisation is now, to a large extent and in so far as societies are concerned, taken out of the hands of the register and put into the hands of the Central Bank. Under the new arrangements a society will be required to obtain the authorisation from the Central Bank before it can raise or solicit funds other than from its founding capital. The Central Bank will be able to impose whatever conditions it considers necessary on an authorisation which will correspond to a banking licence. The proposed approach brings the procedure for authorising societies to raise funds into line with the requirements of the first EC banking directive.
Part III of the Bill sets out the powers of the building societies. As well as restating existing proposals it contains extensive and important new powers which will enable societies to compete much more effectively in the marketplace. It will give them the chance to offer a better range of services to their members, house purchasers and the general public. These new powers will enable societies to develop and thrive in the rapidly changing financial services sector, and thus continue to be a major source of funding for housing through the provision of mortgage loans and direct investment in residential property. In addition to traditional lending secured by the mortgage of land, societies will be able to offer loans on second mortgage, bridging loans, loans for payment of deposit for the purchase of property and loans backed by other securities or guarantees as may be approved by the Central Bank. These provisions will also allow the building societies to offer more flexible types of house purchase mortgage, such as low start, index linked and equity type mortgages. This Bill will enable building societies to set up subsidiary companies or to take a stake in the equity of other companies. It will probably transpire that the best way to provide some of the proposed new services will be in the form of a partnership with an existing company or to set up a subsidiary of the society in question. It should be noted that the power to invest in companies is generally limited to the companies whose objects do not allow them to engage in activities outside of the powers of the society. This Bill will also permit societies to link up with and assist voluntary housing bodies. This is a very positive part of this legislation. The societies will also be able to offer a wide range of financial services to their members and to other persons, and to offer a range of services relating to the acquisition, development and disposal of land. This is a natural progression from the existing powers of societies based on their long experience in the housing sector. It is important that we should build on the experience the building societies have had in this area.
This Bill will enable them to provide conveyancing services subject to regulations to be made by the Minister for Justice. This is a new departure and I compliment the Minister for bringing this proposal forward. The Minister has stated that he will be very careful about this provision and that the Minister for Justice will be brought into the discussions on this matter.
This Bill will allow building societies to provide auctioneering and other services relating to property, such as valuation, surveying and management. Thus societies will be able to offer a package of services to the home buyer. The Bill has potential for conflicts of interests in these areas, and the need to prevent building societies from taking undue advantage of their position in the housing market must be of prime consideration for the Minister. He has acknowledged that fact. This is an area that will need to be monitored very carefully. 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 the purchaser of the same property is prohibited, thus removing the greatest potential source of conflict of interests.
The regulations which have to be made before societies can offer conveyancing services will be able to make further provision in relation to conflict of interests, compensation for negligence, qualifications of persons providing these services, and so on. Similar regulations can be made in relation to other property related services if this is shown to be necessary.
Provision is also made in this Bill to allow societies to operate abroad. Even with this power a building society incorporated and authorised in Ireland could not under the present legal position, set up, for example, in the UK on the same basis whereas UK societies can set up subsidiary companies here without the authorisation of the Bank of England. However, with the implementation of the proposed EC second banking directive and mortgage credit directives, which I have already referred to, all this will change and the Irish building societies will be able to operate throughout the Community under the supervision of the home supervisor, the Central Bank.
There are disciplines in relation to the exercise of these powers. Basically all powers other than those relating to secured lending, must be adopted by special resolution and must have Central Bank approval. We must bear in mind that the diversification of societies into these new activities would involve new and different kinds of risk and raise prudential issues. Accordingly, the Central Bank will have wide powers to control the investment of societies in the provision of new services and to impose whatever conditions and requirements it considers appropriate. The Central Bank will be able to require societies to maintain specific ratios, and to impose requirements relating to the structure and composition of liabilities and assets, for example, liquidity requirements. It will also be able to revoke a society's authorisation in certain serious circumstances and to give direction to a society to suspend for a specific period the raising of funds or the making of payments.
Section 40 of this Bill outlines in considerable detail the circumstances in which the Central Bank may either revoke an authorisation or suspend the operation of a building society. The Central Bank will also have wide powers to carry out an 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 building societies and to call a special meeting to mount a formal investigation of a society's affairs. These are very wide ranging and detailed powers which the Central Bank as the regulatory body will have and the Minister is to be commended for giving the Central Bank these powers. The powers available to the Central Bank will be more extensive and flexible than those currently available to the registrar. It is important that they should have this extension of power.
It is in line with the completion of the internal market by 1992 that there be a common market in mortgage credit. In the area of mortgage credit for house purchase, there is a need for adequate supervision of the institutions involved in providing that credit so as to ensure the financial stability of those institutions and the protection of the customers of those institutions. Under the régime proposed by the EC Commission, institutions operating various techniques will be exposed to exchange rate risks and foreign financial systems of which they may have little experience. In my view, the supervision of the activities of these institutions should at least, in the first instance, rest solely with the host country. The supervisory authority of the host country should be entitled to satisfy itself regarding any mortgage credit institution seeking to establish or provide services in the host country. The commencement of such activities should be subject to the prior authorisation of the supervisory authority of the host member state which should also have the right to exercise supervision over these activities as long as they are carried out in the host country.
What constitutes a financial technique needs to be clarified. Article 10 of the draft directive before the Commission at present, enables a host member state, after certain preliminary stages to determine the provision of services by a mortgage credit institution which does not comply with local legal requirements. If the proposals for supervision are left unchanged it seems essential to know where the line is to be drawn between the provision of services through an intermediary and the exercise of the right of establishment. The Joint Committee on secondary legislation have been informed that for the purposes of the Council's working party the definition of mortgage credit being used is confined to loans secured on residential property. However, the definition of mortgage credit clearly indicates mortgages on commercial property. Presumably this type of business would be of more interest to the banks than to building societies.
I commend the Minister for bringing this Bill forward in such style. The working party set up by the Government did a fine job and this legislation is in everybody's interest. It brings the building societies into the 20th century. It is also of great benefit to the customers of building societies be they investors in the societies or people who have acquired mortgages from them. I wish the Bill a speedy passage through the Dáil and I hope it will not be too long before it is enacted.