Building Societies Bill, 1974: Second Stage.

Question proposed: "That the Bill be now read a Second Time."

Minister for Industry and Commerce (Mr. Keating)

The purpose of the Bill before the House is to simplify the procedures required under the Building Societies Acts, 1874 to 1942, in effecting mergers of societies and to provide for the guaranteeing by the Minister for Finance of certain borrowings by building societies.

Section 33 of the Building Societies Act, 1874, and section 19 of the Building Societies Act, 1894, deal with amalgamations and mergers of societies—or unions and transfers of engagements as they are called in the Acts. At present a union or transfer of engagements is a two-stage process. Firstly, the proposal must be agreed at a general meeting of each society by three-fourths of the members present. Secondly, the agreement must be confirmed in writing by the holders of not less than two-thirds of the whole number of shares of each society.

The Building Societies Association have represented that these requirements are unworkable in practice. The difficulty of fulfilling the requirements will be appreciated when it is realised that some of the larger societies may have upwards of 30,000 shareholders.

The rationalisation of the building society movement in this country is desirable as at present it is somewhat fragmented. A trend towards larger and fewer societies should mean greater efficiency and economy and should give rise to savings in management expenses. Such savings should lead to the provision of a better service for both borrowers and shareholders. From the viewpoint of the housing programme, rationalisation is desirable to ensure better co-ordination in the use of the substantial amounts of money which the societies provide in housing loans and to strengthen the financial standing of the movement as a whole.

I know that preliminary steps have been taken towards one desirable merger of existing societies. It would be unfortunate if the rather onerous requirements of the existing law were to prevent such a merger. The Government, having given careful consideration to the position, have decided that, even though a comprehensive review of the Building Societies Acts is being undertaken, the present short measure should be promoted.

As I have already explained, under the existing law a union or transfer of engagements is a two-stage process. The proposal must first be agreed at a general meeting of each society by three-quarters of the members present and then this agreement must be confirmed in writing by the holders of not less than two-thirds of the whole number of shares of each society. The aim of sections 2 and 4 of the Bill is to simplify this somewhat cumbersome procedure by reducing the majority required for the first stage to a simple majority, and by providing for confirmation of the union or transfer by the Registrar of Friendly Societies as an alternative to the second stage. This alternative is much more practical than seeking the approval in writing of perhaps some tens of thousands of shareholders. Such a situation was hardly envisaged when the legislation was enacted a century ago. The reduction of the three-quarters majority in the first stage to a simple majority should not adversely affect shareholders or creditors since the proposed union or transfer must be registered by the Registrar of Friendly Societies. The registrar may, of course, refuse to register if he feels that there are circumstances which make this desirable.

The purpose of section 3 of the Bill is to make statutory provision for the guarantee by the Minister for Finance of special borrowing facilities which, at the instance of the Minister for Local Government and in co-operation with the Minister for Finance and the Central Bank, were arranged in October last between the Associated Banks and certain building societies. The background to this provision is that the Minister for Local Government became aware that, in the light of the trends in interest rates which prevailed in 1973 and the resultant uncertainties in relation to the inflow of new funds, the societies found it difficult to assume forward commitments for loans on a scale appropriate to the needs of the private housing programme and of the house-building industry. A series of discussions on this problem took place among the parties involved. It was clear that the societies' needs were not for immediate recourse to borrowing facilities but for an assurance that, in the event of their embarking on an extended programme of loan approvals, fall-back borrowing facilities would be available to them at a later stage to meet any shortfall that the expansion might create in their net inflow of new funds. The Associated Banks, I am glad to say, co-operated fully in making available the kind of facility that was seen to be required and the societies for their part responded positively by means of an immediate relaxation of their lending policies. The total amount involved in the arrangement was £6 million. This amount may be drawn on at any time up to 30th June, 1974, and is to be repaid during the period of 12 months commencing in July, 1975.

I should point out that the Minister for Finance simply guarantees loans which may be made by the Associated Banks and it is not expected that there will be any charge to the Exchequer.

The provision in relation to the guarantee which is set out in the section is standard.

The Bill now before the House is aimed principally at the rationalisation of societies by simplifying the procedures for unions and transfers of engagements. It is relevant, I think, to mention in this connection that I have become aware recently, in the context of my responsibility for the Registry of Friendly Societies, that there has been a rush to register new building societies. It appears that the increased activity is related to the Government's proposals to introduce comprehensive new legislation governing all aspects of building society operations.

I think it is right that I should use this occasion to emphasise that the comprehensive Building Societies Bill will provide for new requirements in connection with the establishment and registration of societies and that we regard it as reasonable that means should be found of ensuring that societies which have been registered as a result of the recent spate of applications, and other societies which in effect have evolved from a reactivation of old dormant societies, will comply with the requirements to be prescribed for new societies.

There is, therefore, nothing to be gained in terms of legislative control by registering a society now rather than after the comprehensive legislation comes into force. It is well, I feel, that persons who are thinking of setting up new societies or who are engaged in the preliminary processes involved in the registration of new societies should be made fully aware of this situation.

I recommend this Bill to the Seanad.

Mr. Lenihan

I must say that the Minister's warning in the last part of his statement is very necessary because with the present stage of building society development and loan finance for housing, generally, it would be undesirable to have any rush of new building societies. The whole purpose of this legislation is to facilitate the reorganisation and rationalisation of existing building societies. The warning in this Bill is timely. The comprehensive control Bill, which is envisaged by the Minister, will deal with any societies that are established as from now.

This Bill quite clearly deals with two matters. First, it provides for the improvement of the outmoded voting procedures between shareholders, which dates back to the 1874 and 1894 Acts, which have up to now frustrated appropriate amalgamations of building societies. As in the case of co-operatives, that type of improvement is very necessary. In our society what we do not want is more building societies what we do want is efficient and viable building societies that can raise the necessary finance and be in a position to meet the basic needs of house purchasers. The difficulties which have been encountered in recent times have resulted in non-viable building society organisations.

As the Minister said in his statement, we want to organise a situation here in which we will not encourage the growth of any more of those, and the positive part of the Bill seeks, by modifying and improving the voting procedures, to encourage amalgamations and mergers of societies.

The other main matter is concerned with section 3 where the finance which has been guaranteed to the building societies by the Associated Banks has been given statutory approval in regard to fall-back borrowing facilities. It is a measure which is fully approved both in the practical implementation and in regard to statutory effect.

Arising from the Bill generally—it is accepted on this side of the House as a welcome measure. However, there arises the whole question of future mortgage rates as they affect the ordinary house purchaser. There is a social problem involved in mortgage rates, fluctuating as they have been. There is a situation where a small dwellings loan from a local authority is at a fixed rate of interest whereas the mortgage rate return from building society loans has fluctuated during the years and still fluctuates and will continue to fluctuate. The help given by the Associated Banks, which is now being given statutory effect here, is designed to assist the building societies in some way to meet loan applications.

There is still the situation where a bargain is made by the house purchaser with the building society. That bargain is made for £X at X interest rate; that interest rate continues to fluctuate. I appreciate in regard to building societies that they have money on short call, but I would suggest that there should be some radical examination of the whole structure of building societies.

I think this Bill is necessary but I would advocate going further than this Bill. I feel very strongly that if a house purchaser enters into a contractual commitment in regard to a loan with a loan agency the repayment should remain at a fixed rate. Fluctuating interest rates in regard to mortgage payment are altogether wrong and immoral as far as the purchaser is concerned.

If one makes a deal with a bank for a loan it is at a fixed interest rate for a specific sum. In regard to the local authorities under the SDA scheme it is again a fixed repayment in regard to interest. It is a matter that requires investigation.

I have been making some practical suggestions which strictly are not relevant to the Bill but arise from it. In my view, the necessity for having fixed interest repayments on mortgages for house purchasers is the big social area of discontent at the present time. I know this flows from the financial structure of building societies. This is a Bill which I welcome in that I can see it progressing towards a larger legislative measure, which the Minister for Industry and Commerce obviously has in mind, to deal with the whole financial structuring of building societies into a situation where they can give fixed interest loans as far as house purchasers are concerned. This is the situation at the moment in regard to local authority loans and in my view improvement should be in that direction. The step that was taken by the Government, and given statutory effect to here in section 3, is a move in that direction.

There is one more suggestion I should like to make in conclusion— and I think it is open to the Government to implement it. It is possible for the Government to do something of a practical kind without waiting for any restructuring of building societies and without introducing any new legislation. If building societies were relieved of their liability to pay income tax in regard to the whole area of house purchase business, they could, I am informed, substantially reduce their present repayment rates to house purchasers. The reduction could very easily be of the order of 1¾ per cent to 2 per cent. That would be a substantial reduction. However, it is a matter of financial ramification, vis-a-vis the Minister for Finance—it is a Government matter. But it is a comparatively easy way in which interest rates could be reduced fairly quickly, pending the greater restructuring of the code as a whole. It is a suggestion; I believe it can be done and that it simply requires an amendment of the Finance Act to that effect. It has been estimated that overall the financial saving to the building societies would be of such a nature as to make it possible for them to reduce interest rates to house purchasers. In other words, the thing could be wrapped up in some sort of package so that you would not be just relieving them for the purpose of relief but relieving them in regard to their income tax liability side by side with the mandatory direction that they reduce interest rates accordingly.

That is all I will say. The Bill is welcome. I look forward to the fundamental legislative measure which was promised by the Minister and which will deal with the basic restructuring of the building societies, which, in my view, are highly unsatisfactory in their organisation of financial structure. Most of the trouble arises because basically there are too many of them. They are too weak in the financial sense and not viable to cope with a problem which is a growing one in this country and in any developing country. There will have to be basic thinking done on the whole financial restructuring and reorganisation of building societies and their relationships with the banks, local authorities and the State generally. I would not exclude any radical remedy in dealing with that very fundamental problem.

Mr. Russell

I welcome the Bill as a very useful measure towards the rationalisation of the building societies. It is necessary that building societies should be strong, although I would be very sorry to see anything like a near monopoly situation created in the building society industry. I for one would never accept that because a thing is big it is necessarily efficient or good for the community. I think, and I am sure the Minister would agree, that it is necessary to ensure that in our society there will be adequate competition between the building societies. It is obvious that for various reasons building societies must have a measure of strength not only from the point of view of being able to service loans and to provide facilities for house builders, but in order that the depositors' money can be safeguarded. In order to encourage deposits in any building society, the society must have the reputation of being a strong society. It would, as Senator Lenihan suggested, be very desirable if you could have fixed mortgage rates over a period of years. But in these days of bounding interest rates it is unrealistic to suggest that a building society could borrow today and give a loan for 35 years without any variation in the rate of that loan. Building societies of their very nature borrow short and lend long. Any run on their resources would have very serious consequences. It is true of course that their collateral, in buildings and houses, is the best collateral of all. They would not have any difficulty in raising funds to meet any run on their deposits. That would be an undesirable situation. Like every other business, building societies must maintain an efficient and liquid position if they are to carry out their business efficiently.

This Bill is also—I say this in view of some ill-timed and ill-informed criticisms of building societies which we have listened to recently—a recognition of the fact that the building societies have a very important rôle to play in the provision of capital to prospective house owners. I would like to underline the words "house owners", because it is not unknown that building societies have been utilised by certain building interests to acquire funds for building operations. I think it should be clearly spelled out to all the building societies that their sole function should be the provision of funds to prospective house owners, not to house builders. Any speculative builder who requires finance for his operations should acquire them from another source. The building societies should be left to do the job they were originally established to do more than a century ago.

I agree completely with Senator Lenihan's suggestion that the building societies might be relieved of the requirement to pay income tax. I do not know what the resultant reduction in the rates would be. It might not be as great as Senator Lenihan anticipates, but it would be of assistance to them. If this is possible, the Minister might keep it in mind. I hope the investigation which is taking place currently into the affairs of the building societies will take this proposal into account.

The assistance of the banks, the underwriting of the fallback facility of the banks, is to be welcomed. It is a very difficult thing in this day and age to borrow money to lend at competitive interest rates, and building societies in many instances are in a disadvantageous position vis-a-vis merchant banks and companies or corporations who engage in hire purchase transactions. They are competing in a very strong market for funds and in the present day and age some very attractive offers appear in our daily newspapers for those who have funds to lend. It is therefore necessary to ensure that the building societies are put in a competitive position, first of all by relieving them of income tax if this can be done—and I think it should be done—and secondly, by being given the type of assistance that the Government have been giving them during the past year or two. They have a very useful rôle to perform and they should be allowed to continue in that rôle. I think there should be competition between the building societies.

This measure should ensure that we will have in the country strong societies, strong in the sense that they will be able to provide funds for house owners and in the sense that they will be able to encourage deposits from people who have money to lend. At the same time, there is an obligation on the Ministers for Industry and Commerce and Finance to keep a close watching brief on the activities of the building societies. I do not think they were ever intended to be bonanzas for directors, depositors or other interests. They were primarily intended to provide funds for prospective house owners at the lowest possible interest rates on the longest possible terms. I welcome the Bill.

Mr. Harte

I merely wish to seek clarification of one point. I welcome the Bill. The evidence is there that the building societies are mushrooming. In other areas where things mushroom like this you very soon lose control. There are some industries that go out of their way to provide money through building societies. They are registered building societies in the normal way. I am wondering if there is anything in the Bill that might be an impediment to people who envisage doing this in certain types of industries. Would there be anything in the Bill to discourage them?

Mr. Dolan

I, too, am in favour of the Bill. In the past building societies have played a very important rôle in our society particularly in the provision of money for people who wished to build or purchase their own houses. I would agree with what Senator Russell has suggested, that a special eye might be kept on them so as to ensure that if at all possible funds and energies will be spent in that direction, because there is nothing more encouraging to a citizen than to be in a position to buy out and own his own home. From my experience on local authorities it is much better that the person himself receive the encouragement to provide his own house rather than expect a local authority or such institution to provide it for him. Anything that can be done to help the building societies to perform that useful service should be done.

Minister for Industry and Commerce (Mr. Keating)

From the fact that Senators concerned themselves with the broad issues in the Bill and with thoughts about the future, it is evident that there is broad agreement on the contents of the Bill.

On the value of having a small Bill now and not waiting until the big Bill was ready, one reason given was the simple urgency of the merger which is already fairly well advanced in negotiation. I now see another advantage in the small Bill, because in the course of the Dáil debate and the debate here, useful points about more general questions have been made which will certainly be taken into account when we are putting the final touches to the larger measure. Let me try to deal quite briefly with these major points which were raised, perhaps in reverse order in order to dispose of the last or the second last point made—the practical question of Senator Harte as to whether this Bill would in any way interfere with the activities which do have a building society structure by which they can help their employees. The answer is an uniquivocal "No". There is nothing in it that would bear on them at all. It is a useful point to have raised precisely for the reason that we will keep it in mind in connection with the larger legislation when that is coming along.

In regard to what Senator Lenihan says, first, he has isolated this social problem of mortgage rates. All of us agree that this is an immense social problem and one that is embarrassing to every public representative, but to people on the Government side of the House—people like the Minister for Local Government, the Minister for Finance and myself—more than to anybody else. It is proper that this embarrassment should be primarily on our desk, as it were, because we are the people directly involved in this.

This is a huge problem and an immensely difficult one, because the question of the cost of money is not a question which finds a restriction inside the boundaries of this country. First, we are part of the sterling area and, secondly, interest rates overflow from one currency to another. One has to bid for money and stay in the hunt or the money gets away to wherever there is a higher interest rate. At times of raging inflation, which the world is now experiencing, we have this unprecedentedly high cost of money which is embarrassing everyone. It is embarrassing to the man who holds stock for his business on the basis of bank borrowing. It is embarrassing to every section of the community and none more than the mortgage holder whose rates are fluctuating.

What should be done? I think I ought to re-emphasise that, quite apart from the £6 million—which is only something that the State has guaranteed and which therefore is not anything on which we anticipate we will have to make any actual expenditure— there has been an expenditure of £2 million in the form of a subsidy which has had the effect of reducing the mortgage rates, dreadful as they are, by 1¼ per cent, not as much of a reduction as one would like, but still a significant and measurable reduction. The question is: can one have fixed interest rates? I think Senator Russell answered this within the framework of existing building society attitudes, which is to say: as long as you lend on a long-term basis and borrow on a short-term basis, you cannot. I welcome the suggestion of Senator Lenihan that this should be looked at in a very fundamental way in connection with the oncoming Bill. Nothing should be ruled out as a solution because the problem is a desperate one. It is iniquitous that people who contract in at the level of 6 and 7 per cent, as people did, should find themselves paying twice that and have their whole projections knocked sideways.

The alternative of subsidy is the sort of open-ended commitment—and Senator Lenihan will appreciate the imperatives of these sort of decisions —that Governments hate, because one never knows how big it is going to get. One could start off with that sort of subsidy costing a couple of million pounds and then find oneself in an explosive situation of interest rates in which it was costing £25 million or something like that. It is certainly a real difficulty, but I think the value of that contribution was that we must look at all the options in connection with the oncoming legislation. It may mean a lot of State money, and if that is so it can only come from taxation, so that we may be shifting wealth. Governments do not generate wealth; they just distribute it. If we have to shift it it may be a correct decision to do so, because this is bearing very heavily on people who should not have that sort of imposition. However it is certainly worth considering.

In regard to the matter of taxation, I think it fair to say—again this is for the record—that total removal of taxation may be extremely expensive. I will not invade the proper area of responsibility of the Minister for Finance, but it is no harm to put on the record in reply to the remarks that have been made that there are valuable income tax concessions made to the societies themselves and also to shareholders and depositors. Of course the value of the latter is that it encourages people to put their money in and the more money the societies get in the more they can put out.

There is the exemption from corporation profits tax. The White Paper on Company Taxation proposes to give this a statutory sanction. There is the freedom from income tax on the interest to shareholders and depositors which makes depositing with the societies relatively more attractive. There is the reduction to 70 per cent of the standard rate. There is a complete rate of income tax payable by societies which is complicated but which is 70 per cent of the standard rate. Then there is also an arrangement for the purposes of surtax assessment where the assessment, the interest paid to shareholders and the depositors is based on the surtax of the interest-free amount rather than on the gross amount.

These are concessions of significance though they are not enormous. Again if one makes the concession of removing income tax totally then one raises the tax elsewhere because the money is needed. It is a matter for decision as to distributions of resources whether one should or should not. It is certainly a valuable suggestion which should be seriously looked at. I thank the Seanad for its consideration and valuable suggestions, and I recommend that the Bill be read a Second Time.

Question put and agreed to.

Agreed to take remaining Stages today.

Bill put through Committee, reported without amendment, received for final consideration, and passed.

Seanad Éireann debate - Wednesday, 15 May 1974