I am afraid this Bill will take a little longer than the last one, but because it is in the main non-contentious and one which has been welcomed by all sides of the House, I believe it should not take an unduly long time at this Stage.
Building Societies Bill, 1975: Second Stage.
Question proposed: "That the Bill be now received a Second Time."
We will have certain criticism.
Naturally. I believe that legislation belongs to the Houses of the Oireachtas and not to a Minister or a Government, and that if any reasonable amendments are put forward they should be fully considered, and, if they improve the Bill, included in it at a further stage. I make the promise here that in the event of reasonable amendments being put forward I shall be only too glad to look at them and, if they improve the text of the Bill, have them included at the next Stage.
The purpose of this Bill is to amend, modernise and consolidate the law relating to building societies. In this it is a legal milestone so that it would not be inappropriate for me to cast back briefly to the background to the Bill.
Building societies were in existence prior to 1795, mainly in the Midlands and North of England, but the first Act regulating their operations was not passed by the British Parliament until 1836. This merely extended to building societies the provisions in existing statutes for the control of friendly societies, thus conferring legal status on them. The 1836 Act gave rise to many court actions seeking to elucidate its provisions. As a result of reports by Royal Commissions set up in 1870 and 1871 to inquire into the law on building societies and friendly societies, the Building Societies Act of 1874 was passed which repealed the 1836 Act, and marked a major step in the development of the building society movement, enhancing considerably the status of the societies. All societies registered under it became bodies corporate.
Minor amendments in the law were made by subsequent Acts of 1875, 1877 and 1884, but the next important development in legislation was the enactment of the 1894 Act which resulted from a series of failures of British societies in 1892. The 1894 Act substantially amended the 1874 Act, giving wider powers to the registrar and clarifying provisions which had caused problems in the intervening years.
The Acts of 1874 and 1894 still comprise the basis of the legal code controlling the affairs of building societies in this country today. The only modern provisions were in an Act of 1936, which clarified the position of the registrar, an Act of 1942 which made a minor amendment relating to the amount which a society could accept from depositors, and the 1974 Act which provided a simplified procedure for transfers of engagements and unions as well as guaranteeing certain loans to the societies.
Two types of societies were identified in past legislation: permanent societies and terminating societies. The earliest societies appear to have all been terminating societies, that is, the number of shares to be issued and the duration of the existence of the society were determined in advance. It is of interest to examine the procedure by which terminating societies operated. The rules and regulations of the society were contained in a deed executed by every member. Each member paid a fixed subscription at regular intervals until he had contributed a specified total.
When a sufficient amount was available for the making of an advance, lots were drawn and the winner received his loan. He gave security by lodging the title deeds, with a bond for payment of interest, in addition to his ordinary subscription, which he continued to pay. When every member had paid the specified total subscription the society was terminated. Those who had received and paid off loans were given back their deeds, with a discharge, and those who had not received loans were given a refund of the amount they had subscribed. There were about ten terminating societies in this country in 1922 but they were gradually wound up and there are now no such societies nor is it considered that there is any necessity now to provide for them.
The first permanent societies were registered about 1845 and caused a radical alteration in the structure of the societies. In the case of the permanent society the funds were raised from one group, the investors, and were advanced on mortgage to another group, the borrowers. By 1874 the permanent societies had come to dominate the scene and the 1874 Act was generally orientated towards them.
In 1922 there were 23 building societies in this country, including the ten terminating societies. Their total assets amounted to something over half a million pounds. Their growth over the next 20 years was comparatively slow, their assets only trebling to £1.5 million by 1941. The growth rate then quickened so that by 1961 the assets were £18.7 million. Growth continued to accelerate; in the short space of four years, the assets doubled to £36 million in 1965, and by the end of December last they were over £300 million—a phenomenal rate of growth over the past decade. The size to which the movement has grown and the large numbers of persons now affected by the operations of the societies make it important to review the legislation under which the societies operate. What was appropriate in 1874 and 1894 is certainly not adequate for 1976.
If I mention that in the four years ended 31st December, 1974, the societies paid out a total of £150 million in loans for house purchase and that a further £65 million had been added to that total by the end of 1975, the House will appreciate the importance of the societies in the supply of funds for housing. The societies have made a commendable contribution towards improving our national housing conditions. From time to time they have had to overcome considerable difficulties—for example, the uncertainties of the world economic and financial climate, the high interest rates offered for funds by competitors, mortgage strikes and, at times, an unsympathetic press.
Notwithstanding their difficulties, and allowing for the effects of inflation on the value of money, the inflow of funds to the societies was never higher than in recent months. Equally, their loan approvals have been at record levels. The value of loans approved in the year ended 31st December, 1975, was the highest ever. While the Government, by reason of its special subsidy during a particularly difficult period, can claim some credit for the success of the societies, and no politician can resist making such a claim when it is justified, the credit must in the main, be given to the societies themselves for the manner in which they have weathered the problems of the past few years.
That the societies have been attracting funds on the present scale is a measure of the confidence which the public have in the building society movement as a whole and the aim of the present Bill is to reinforce that confidence with the backing of statutory provisions. So far as possible the investor with a building society should have equal security with the investor with a licensed bank. I am glad to say that this has been the case and, having regard to the rather anachronistic legal framework within which the societies have had to operate, it is a great tribute to the ingenuity and integrity of the society managements that they have been so successful in building up the movement to its present remarkable size.
As Minister responsible for housing I have, of course, a particular interest in ensuring the continued success of the societies' activities in encouraging house purchase and it is appropriate, therefore, that I should be promoting this Bill.
Many of the provisions in the Bill will have a familiar ring to Members of this House. As well as re-enacting and updating all the relevant provisions of the existing building society legislation, the Bill contains a number of provisions similar to those in the Companies Act, 1963, the Central Bank Act, 1971, and the Credit Union Act, 1966. The provisions imported from these Acts have been modified, where necessary, to meet the conditions peculiar to building societies. There are also several provisions which are entirely new.
The Bill will impinge on all aspects of the operation of building societies, from the procedure for their establishment to the manner of their winding up. In framing the proposals great care has been taken to ensure the rights of the members and depositors, the security of investments, the continued confidence of the public in the building society movement and a measure of control and supervision appropriate to one of the most important forms of financial institution in the State. In dealing with these matters we have been conscious of the dual function of the societies, first as the safe repository of a sizeable and steadily increasing volume of our people's savings and, secondly, as the provider of mortgage finance for a large part of the private sector housing programme. We are also conscious of the dedication, energy and integrity of the management of the societies who have constantly to balance the often divergent requirements of investors and borrowers. The Bill will provide a framework within which the societies can operate in modern conditions, will, I hope, enhance the confidence which the public have in the building societies and will thereby encourage the continued flow of funds to enable the societies to provide loans for intending house purchasers.
I have mentioned that one of the objects of the legislation is to enhance the public confidence which the societies enjoy. I recognise that an important element in this has been the confidentiality that exists between the societies and their investors and I have been given to understand that fears have been expressed that the Bill will somehow damage that relationship. I want to emphasise that there is nothing in this Bill, nor will there be anything in any orders or regulations made or directions given under the Bill which would in any way disturb the confidentiality which exists regarding the business dealings of the societies and their members and which is a vital factor in the attraction of funds to the societies from the investing public.
It is only fair to say that there are a number of things which the Bill will not do. One of the basic facts of life in the building society movement is that it borrows short and lends long. The vast bulk of the money invested with the societies is on call at three to six months' notice while the money which is advanced in loans is repayable over 15 to 25 years. The Bill will not provide a means by which the societies will be able overnight to solve the problems of borrowing short and lending long. Neither will it cause a reduction in the mortgage interest which borrowers have to pay on their loans. It will not contain provisions relating to income tax or to trustee status. Both of these are matters for the Minister for Finance. I might say here that although trustee status is a quite separate matter, the provisions in the Bill will ease the way for the Minister for Finance in conferring trustee status on societies and, based on its provisions, he has approved conditions for the grant of such status to building societies.
This is a long Bill of 96 sections dealing with all aspects of building society business. I consider it of importance to explain its principal features and I hope Senators will bear with me. Before dealing with the provisions in the Bill in the sequence in which they appear I think I should first refer to some of the innovations proposed.
The Bill provides that not fewer than ten persons may establish a society by agreeing on rules for the government of the society and by submitting copies of the rules to the registrar. Heretofore, any number of persons could proceed to establish a society, but the rules of the society had to be signed by three persons and the intended secretary. In addition to increasing the required number of founder members, there is a provision in section 18 of the Bill which will require each founder member to invest a specified minimum amount in cash in the society. He will also have to give an undertaking that the investment will remain with the society for at least five years and at no time during that period can the interest rate on his investment be more favourable than that paid by the society to any other shareholder of a similar class. The amount of the investment has not been specified in the Bill, but I have in mind a figure of about £10,000 per member. The objects of these provisions will be readily appreciated by Members of the House. Where funds are solicited from the public it is in the public interest that investors have security. One way to achieve this is to ensure that the founders have a substantial and continuing stake in the society they establish.
Section 18 also requires that a society incorporated after 5th December, 1975, which was the date of publication of the Bill, or a society incorporated before that date which had not commenced business at that date, may not raise funds unless the requirements relating to the founders' shares, to which I have just referred, have been complied with. There is the further requirement, to which I will refer in a moment, that the society must have lodged a deposit with the Central Bank. If a society fails to comply with the requirements of the section within specified periods the registrar will be empowered to have the registration of the society cancelled or to have the society wound up. There has been a tendency to register societies and then to let them lie dormant, sometimes for years. It is not seen that any advantage lies in having inactive societies on the records and consequently the registrar will be empowered to have them struck off.
Section 19 deals with the control of advertising. This section will apply to any society incorporated after the date of publication of the Bill, or any society incorporated before that date but which had not at that date assets of at least £1 million. Any society to which the section applies must obtain the permission in writing of the registrar before soliciting deposits or subscriptions for shares—an expression that is defined in section 2 of the Bill on the lines of a similar provision in section 27 of the Central Bank Act, 1971. The intention of the section is that the registrar will not give permission unless he is satisfied on a number of matters relating to the society, including the manner in which it has conducted its business, its liquidity, its ability to meet its obligations to creditors and its compliance with the requirements regarding founders' shares and the deposit at the Central Bank.
I appreciate that a number of small societies will be affected by this section. I am satisfied that some of these societies have been operating in a relatively small way over the years and in so doing have made a contribution to the building society movement. I do not envisage that the provisions in the section will prevent such societies from continuing. On the other hand, societies whose activities appear more appropriate to commercial lending companies will have to satisfy the registrar that they are bona fide building societies as defined in the Bill and that they carry on their business in accordance with the Bill's requirements.
I have referred briefly to a requirement to make a deposit with the Central Bank, provision for which is contained in section 20. All societies will be required to lodge with the Central Bank an amount varying, according to the size of the society, from a minimum of £20,000 to a maximum of £500,000. Existing societies will be given time in which to lodge the deposit. This requirement corresponds with that for licensed banks contained in the Central Bank Act, 1971. It is considered appropriate that the statutory provisions for financial institutions of the size and importance of building societies should be similar in respects such as this to the requirements for banks; indeed, it is a measure of their high standing as financial institutions that they are being required to do so. The deposit will earn interest from the bank, will rank in assessing a society's liquidity and will provide security for investors.
Section 37 enables the Minister for Finance to require a society to maintain a specified ratio between its assets and its liabilities. At present, apart from the limitation on the amount which a society may accept in deposits, there is no statutory requirement in regard to the relationship between the assets and liabilities of a society. Such a statutory requirement is considered important for building societies and it has been decided as appropriate to apply the type of control in this vital area which applies to the banks. I think it well to point out that this requirement will apply to all societies and may be a separate matter from the ratios that will be required in the case of societies which seek trustee status. It is not proposed that the powers in the section should be used as any form of monetary control; the ratio will be merely a basic requirement to ensure the stability of the society and the security of the investor. The section allows different ratios to be prescribed for different classes of societies. Here I might say that the reference to different classes of societies occurs throughout the Bill and is to enable requirements to be tailored to fit the specific needs or circumstances of the different types of societies. What may be appropriate for a society with assets of £50 million may not be relevant at all to a society with assets of £100,000.
I would like to refer now to two other areas in which direct control over aspects of the societies' operations is proposed. Section 76 provides for the making of regulations to secure the proper and efficient management of societies or to promote the orderly and proper regulation of building society business. The section specifically provides that the regulations may lay down limits on the management expenses of a society and may also provide for a code of practice. Might I emphasise that while there has, from time to time, been criticism of societies because of the level of their management and advertising expenses and there has been unfavourable comment on the comparison between their levels of expenditure and those of societies in Britain, I have no such criticisms to make of the members of the Irish Building Societies' Association. The association represents the five largest societies, which control 98 per cent of the assets of all societies. Over the past two years
I have been in correspondence with the association on the question of management expenses. We all know that the past few years have seen an enormous expansion in the activities of the societies, circumstances in which one might have expected to find a substantial rise in management expenses. In fact, the accounts of the largest societies for the year 1974 show that, despite the high level of growth and the effects of inflation, the level of management expenses was very reasonable.
Criticism has been directed also at the amount of competitive advertising by the societies. It must be remembered, however, that advertising is essential in securing a continued inflow of funds in a very competitive market. On examination I found that in 1974 the expenditure of the five principal societies on advertising showed no increase over the figure for 1973 which would not, in my view, support any suggestion of extravagance. While I am satisfied that the major societies are keeping a reasonable balance in these matters, I still feel that there is need to have the reserve power which this section provides.
If regulations are made I would envisage the drawing up with the societies of a code of practice to contain provisions relating, for example, to standards for incidental fees, charges for the redemption of loans, payments to accredited agents of societies and so on.
The other area in which direct control is proposed is in section 77. This confers powers on the Minister for Local Government, after he has consulted the Minister for Finance, to make regulations whenever he considers it expedient in the interests of the proper regulation of building society business and having regard to the demand for house-purchase loans. The regulations may prescribe the maximum amount of a loan that a society may make and the purpose for which a loan may be made. They may also control the amount that a society may lend to a corporate body.
Members of the House will wonder why I have not sought to control the rate of interest charged by societies on loans. Considerable thought has been given to this matter and it has been decided not to write a provision of this kind into the Bill. As Members will appreciate, the mortgage rate which a society charges is directly related to the rate it must pay to investors to attract new funds and retain the funds already invested. Societies are not profit-making institutions. Their principal source of income is the repayments on mortgages and their first liability is to pay interest to the investors. After operating expenses and taxation are met, whatever surplus remains goes to the societies' reserves. The margins on which the societies operate are very narrow and the effect of any change in the investment rate has an immediate impact on the rate which must be charged on mortgages.
Senators will appreciate that for the purpose of attracting investments, the interest rate which the societies offer on shares and deposits is crucial and is largely determined by factors outside their control; for example, the rates offered by the banks and other financial institutions. It is the expertise that they develop from day to day operations that enables them to gauge the interest rate they must offer to retain funds already invested and attract new funds. It would be unwise and unrealistic for me to dictate to the societies and tell them that they must offer a certain rate to attract investments. It must be borne in mind that it takes more than five investors to provide the funds for every borrower, and the security and attractiveness of the investment is crucial to the success of the movement. Furthermore, it is desirable that the societies should be free to take initiatives to develop schemes which, in their view, would be attractive in the light of changing patterns in savings, particularly schemes which would attract the longer term investment so necessary to them. The imposition of statutory control over the interest rates structure, no matter how flexibly framed, could frustrate these initiatives.
There has been some rather uninformed comment about the possibility of reducing the mortgage rate by cutting down management expenses and by reducing what these commentators refer to as "profits". I have already referred to management expenses; even if they could be reduced to some extraordinary low level, the effect on the mortgage rate would be insignificant. As for what has incorrectly been referred to as profit and which is, in fact, a contribution to the societies' reserves, these contributions are crucial factors in the structure of the building society movement which has been expanding rapidly, with the consequent need to expand its reserves. So far from being excessive, the reserves of even the largest Irish societies are relatively low indeed, and I am satisfied that any lowering of their level would be neither practical or prudent.
Since March, 1973, an arrangement exists whereby the concessionary income tax rate payable by societies applies only to those societies which maintain a mortgage rate which is not in excess of that specified by the Minister for Local Government. I, and my officials and officials of the Department of Finance, have frequent contact with the Irish Building Societies' Association and in this way the level of the mortgage interest rate they are charging is kept under constant review. This arrangement has worked remarkably well. In all these circumstances I consider that it would be unreasonable for a Minister to arrogate to himself the power statutorily to control the mortgage rate. I am satisfied that the present arrangement which provides for consultation and consensus is preferable to compulsion.
Two important provisions, adapted from the Companies Act, 1963, are contained in sections 41 and 43. These relate to the disclosure of interest by a director of a society in any contract with the society and the disclosure in the annual returns and the annual accounts of the society of loans made to directors and others. These are new requirements in the building society code. They are not as restrictive as the provisions in the Companies Act relating to loans to company directors because the making of loans is the ordinary business of a building society and the rules adequately govern them. I am confident that the Seanad will find that the provisions as drafted strike the right kind of balance.
Section 75 is intended to deal with a point of criticism of the societies, namely, the giving and receiving of commission in connection with loans. One form of commission arose out of a practice whereby some societies were paid commission by builders in consideration of an undertaking that loans would be available from the society for the purchase of houses from the builder; this was known in the business as commission for a block loan arrangement. It was an undesirable development in many ways, although I can see that it had legitimate attractions for both the building societies and builders. The system favoured the big builder and tended to leave the small builder or the individual seeking a loan at a disadvantage. It goes without saying that the cost of the commission was passed on to the purchaser, thus increasing the cost of the house. When the interest subsidy to the societies was introduced in 1973 the societies agreed to end any such arrangement by which commission was paid. This form of commission will be prohibited under subsection (2) of section 75.
The section prohibits a society from giving, or any person from receiving, commission in connection with the introduction of mortgage business or in connection with an undertaking to introduce such business.
I have received complaints from persons that they have been offered loans on payment of quite a substantial fee. I have no evidence that societies are in any way involved in these offers, but I feel strongly that the public should be protected from the activities of persons obtaining easy money by the offer of a service which the would-be house purchaser could provide himself without cost.
The section also prohibits an officer of a society, a solicitor, or surveyor, from receiving any commission, other than that authorised by the rules, for introducing mortgage business, or undertaking to introduce such business. Also an officer, solicitor or surveyor of a society, who is also an auctioneer, will be prohibited from accepting commission as an auctioneer in connection with a transaction involving a property for which a loan is made or given. There is also a prohibition on the acceptance of commission on the effecting of certain types of insurance.
I have mentioned some of the important new provisions of the Bill and I will now deal briefly with the other sections of the Bill in sequence.
Part I contains the usual provisions regarding interpretation, commencement and such matters as the making of regulations.
Orders will be made under section 3 bringing into operation provisions in the Act as appropriate. I envisage that most of the sections will be brought into operation as soon as possible. Section 5 contains the powers to make regulations.
Part II contains provisions relating to the establishment of societies, their rules and the powers conferred on them. I have already referred to certain of these provisions, namely the number of persons who may establish a society, the requirements in connection with the commencement of business, the control of advertising and the lodgment of a deposit with the Central Bank.
Ever since the first societies were formed, the rules have been of special importance in the constitution of building societies. Subsection (1) of section 10 details the matters which the rules must contain. This is mainly a re-enactment of the 1874 and 1894 Act provisions, but stated in more general terms. Subsection (3) empowers the Minister to prescribe in regulations the rules for societies or for different classes of societies. Complaints have been made from time to time about the existence of restrictive practices permitted by the rules of some societies by which, for example, too much power might be given to the directors. In such a case the Minister would be able to ensure that prescribed rules would be substituted for the existing rules. The section provides an opportunity for a society to bring its rules into line with prescribed rules and for an appeal to the High Court against this requirement if it considers that its rules are already substantially in accordance with the prescribed rules.
Section 11 sets out the procedure to be adopted by a new society in submitting its rules to the registrar for registration and incorporation. This section is a re-enactment of sections 17 and 22 of the 1874 Act, but with far greater discretion given to the registrar. For instance, he will be free to refuse to register the rules of a new society if he is satisfied that registration would not be in the interest of the orderly and proper regulation of building society business, or if the proposed name of the society is undesirable or so resembles the name of another society or financial institution as to be calculated to deceive. A society may appeal to the High Court where the registrar fails or refuses to register rules.
Sections 12 and 13 deal with the procedure in the case of a proposed change in the rules of a society or a change in its name. Heretofore the rules of a society were required to provide for these matters. The procedure now proposed, calling for a special resolution of the members, is more straightforward and will be uniform for all societies. Again there is provision for an appeal to the High Court should the registrar refuse to register an alteration in the rules. Although the concept of the special resolution, adopted from the Companies Act, 1963, is new, the section is largely based on section 22 of the 1874 Act. Power is contained in the section for the registrar to require a society, already incorporated, to change its name where he is of opinion that the name is undesirable. This section also provides for an appeal to the court against a refusal of the registrar to register a proposed new name or against his requirement to change an existing name.
I draw attention to section 16 which sets out the powers of societies to acquire and dispose of land and buildings. These powers are based upon those in section 13 and 37 of the 1874 Act. They are related to the purposes for which the society is established, which are the raising of funds for making loans to members on security by way of mortgage of freehold or leasehold estate and, of course, enable a society to acquire premises for the conduct of its business. Under the section a society will be required to dispose as soon as practicable of land coming into its possession through its mortgage business.
Section 17, which deals with membership, contains a provision enabling a person to whom a loan is made to become a member, without holding a share in a society. This power is included in order to comply with the requirement in the definition of a society regarding the making of loans to members. Such a member will not have the same voting rights as an investing member.
Section 21, which is adapted from section 29 of the Central Bank Act, is necessary in order to provide for the disposition of the deposit with the Central Bank in the event of a judgment of decree being obtained against a society.
Section 22 will authorise societies to raise funds and borrow money. This is largely a re-enactment of provisions in the 1874 and 1894 Acts.
The section also restrains unauthorised persons or bodies from raising funds or borrowing money in accordance with this Bill. My attention has been drawn to the fact that some organisations have included in their articles of association provisions which would enable them to carry on business as a building society. The purpose of the proposal in the Bill is to prevent any such arrangement from becoming effective.
A significant provision in section 22 is the limitation on the issue of shares which do not carry voting rights. It will be noted that an exemption is provided in the case of existing societies which, at the date of publication of the Bill, had issued shares to which voting rights did not attach. This exemption is provided to meet the case of one of the most senior and respected of our societies. Ever since its establishment, more than a century ago, only one class of shares in that society has had voting rights. There would be almost insuperable difficultes for the society in bringing its share structure into line with the requirements of this section and of sections 52 and 53. On balance, I have considered it preferable not to interfere with the existing arrangements in relation to this society and the section has been drafted accordingly.
Section 24 allows a society to lend money to another society with the consent of the Minister for Finance if the registrar so authorises. The circumstances in which the power would be used would arise where a society was in serious financial difficulty and its engagements were being transferred to another society. This section would enable the latter society to provide temporary support to the society it was taking over. As the Bill lays down the manner in which a society may hold and invest its funds it is necessary to make specific provision for this type of contingency. The section validates payments already made by two societies involved in such transfers of engagements over the past two years.
The last group of sections in Part II deal with the procedure to be adopted in the case of unions or amalgamations of societies and transfers of engagements. The procedure in the 1874 Act was considerably simplified by section 2 of the Building Societies Act, 1974. A further simplification is contained in the present Bill which, in the case of a large society taking over the engagements of a smaller society, with the approval of the registrar, will have the effect of dispensing with the requirements that a meeting of the members of the larger society be held.
Part III deals with the exercise of control over the societies by the registrar. Heretofore the registrar had very limited powers of investigation or initiative. Sections 29 and 30 confer wide powers on him to appoint inspectors and to call a meeting of a society. The sections are largely adapted from sections 165 to 173 of the Companies Act. They provide powers, as does the 1963 Act, to investigate any other body corporate or society associated with the society whose affairs are being investigated. There is adequate provision for follow-up procedures should the necessity arise. It would be my hope that the powers in these sections will never need to be implemented, but I think it desirable that they should be available.
Section 31 and 32 empower the registrar to prohibit a society from raising funds or from advertising, in a case where, for instance, he is of the opinion that the society is likely to be unable to meet its obligations to its creditors, that it is in the interests of the members, or where the affairs of the society are being investigated under the preceding sections. The powers are similar to those contained in sections 21 and 22 of the Central Bank Act.
Section 35 empowers the registrar to control the matter and form of advertising and, when necessary, to require a society to take all practical steps to withdraw an advertisement.
Part IV is the area where the Minister for Finance is empowered to exercise control. I have already referred to his power, in section 37, to require societies to maintain specified ratios between assets and liabilities. Section 38 empowers the Minister for Finance to prescribe the investments in which a society may invest surplus funds not immediately required by it for the purpose of the society. At present societies may invest such funds in trustee securities only.
An important new provision is that the societies may hold Central Bank reserve bonds which, up to now, might be held only by licensed banks. The section also states how the societies may keep their uninvested surplus funds.
Part V of the Bill deals with the management and administration of the societies. It details the requirements for officers and directors, and procedures as to the holding of meetings, the keeping of records, publication of the accounts, the appointment of auditors and the general conduct of the affairs of the society. I have already referred to some of these sections, and I do not propose to go into the detail of the others as they are generally of a non-controversial nature. The broad aim has been to provide the same kind of procedures as are required for companies under the Companies Act. In sections 47 to 50, which deal with disputes, the provisions of the Arbitration Act, 1954, are being applied to disputes where the rules provide for their settlement either by reference to arbitration or the registrar.
Section 51 provides that a society may give notice of a meeting by publication in at least one daily newspaper or by sending notification to every person entitled to attend. At present the bigger societies incur considerable expenditure in circulating notices to all those entitled to attend a meeting; the alternative of publishing a notice in a newspaper is in the interest of economy. Section 52 provides that all who were investing members holding shares to which voting rights attached at the end of the previous financial year will be entitled to attend meetings, while section 53 sets out their voting rights. An investor who held shares to a value of not less than £25 at the end of the previous financial year will be entitled to vote. The appointment of auditors, which up to now was provided for in each society's rules, is dealt with in sections 66 to 69. The auditor has a key role in the affairs of a society and it is desirable that there should be a statutory procedure dealing with his appointment and removal, similar to that in company law.
Section 73 requires that a register of members' names and addresses be kept and is a new requirement for building societies. Provision is made so that a member may communicate with other members on a subject related to the affairs of the society. The register will contain only names and addresses and will not contain particulars of the members' business dealings. Members need have no worries as to the confidentiality of their position in this respect.
Part VI of the Bill deals with loans. I have already referred to the powers conferred by section 77 on the Minister for Local Government to make regulations regarding the amounts and purposes of loans. The existing legislation did not provide in detail for obtaining security for a loan or for the assessment of the value of that security. Although this was a serious deficiency in the Acts, fortunately over the years its absence has not led to any great problems. Nevertheless, it is considered that such provision should be made and this is being done in sections 78 and 79.
Section 78 provides that additional security, other than freehold or leasehold estate, may be taken into account. Where additional security is offered, the amount of the loan may not be increased by more than 25 per cent of what would otherwise be given and may in no case exceed the purchase price. Section 79 details the requirement in connection with the valuation of the security offered for a loan. It provides inter alia, that a report by a person having a financial interest in the disposal of an estate shall not be accepted by a society in arriving at a decision on the valuation to be placed on the estate. Section 80 continues the prohibition on second mortgages, except where the prior mortgage is in favour of the same society. Section 82 deals with the sale of mortgaged property and provides for the protection of the interest of the mortgagor.
Part VII contains a number of miscellaneous provisions. Section 85 provides that the Registrar of Friendly Societies shall be the Registrar of Building Societies for the purposes of this Act. Section 86 requires the registrar to submit an annual report on the exercise of his functions to the Ministers of Finance, Local Government and Industry and Commerce and requires that a copy shall be laid before both Houses of the Oireachtas.
Other important provisions in this Part include powers in section 87 enabling the Minister for Finance to guarantee moneys borrowed by a society. This is, in fact, an extension of the power conferred by section 3 of the 1974 Act which was limited to a specific borrowing facility of £6 million. Section 87 provides for guaranteed borrowing of sums up to £20 million. No further borrowing by the societies is envisaged at present, but the section is being provided as a means of effecting a guarantee should the necessity arise at any time in the future. The form of the guarantee is similar to that which applies to other State guarantees of borrowing.
This is a lengthy and rather complex Bill, but one which, I hope, will have the effect of providing an adequate, modern, legal framework for building societies. Much consideration has gone into deciding what the Bill should contain. Due regard was had in this context to the memoranda submitted by the Irish Building Societies' Association. Submissions by other bodies were also considered and particular regard was had to the report in February, 1974, commissioned by the National Prices Commission, on building societies in Ireland.
Since the Bill was published its terms have been discussed at considerable length with representatives of the Irish Building Societies' Association. Arising out of these discussions I have been asked to consider a number of amendments and will be making recommendations in this regard on the Committee Stage of the Bill.
I am aware that there is a considerable body of expertise in this House on the subject. I will welcome a constructive debate on the Bill's contents and I can assure the House that I will consider carefully any suggestions which Senators may put forward with the aim of improving the Bill.
The Minister can be assured that as far as we are concerned this will be a constructive debate. I appreciate the manner in which he has led into the matter. It is quite obvious that if we bend our minds and energies to it certain improvements can be made to the Bill. It will be primarily at Committee Stage that specific improvements and amendments will emerge. We can refer to them in general at this Stage within the context of the overall principle of the Bill.
There are two main themes in the Bill, one to which we have no objection whatever and the other we would like to query further and get some elucidation on in the course of the debate. The first is the general theme of providing for a better policing regulation in regard to the formulation of building societies, to the directors of building societies, to the whole question of deposits required at Central Bank, the restrictions in regard to the commencement of business, the powers of the registrar to investigate the disclosure of interest in regard to directors, and the sums that should be lodged by founder members of societies. In all of this investigative area, the policing area, the regulatory area, this is overdue and to be welcomed. The Registrar of Friendly Societies appears to be the appropriate person to deal with the situation, staffed to a much stronger degree than at present and given a greater degree of confidence by reason of specialised staffing than is possessed at present. Subject to amendments which I am sure will be coming from all sides of the House in that whole area, I am in total agreement with the Minister. On Second Stage I do not propose to get into that area because it is obviously something that is welcome.
Our main criticisms of the Bill relate to sections 37, 38, 76 and 77. The Minister is well aware of the points of view that are involved in discussing these fundamental sections. These sections bring the Minister for Finance into over-control of building societies. This represents a grave danger because it may lead to a substantial drop in the flow of funds into building societies. The flow of finance into building societies is the important factor in regard to building societies as they stand at present and will continue in the future. Their assets now stand at the substantial figure of about £300 million. This is a remarkable achievement and we want to see that trend accelerated even more than was evident in the healthy growth over the past ten years.
Will we have the growth rate that we desire in order to ensure that we have the proper financing for private house building if the Minister for Finance is given the degree of control proposed in the Bill under sections 37, 38, 76 and 77? This is the nub of the issue, because we have very drastic controls written into this Bill. I quote section 37, which says:
The Minister for Finance may, after consultation with the Minister and the Central Bank, require a society to maintain—
(a) a specified ratio,
(b) a ratio not exceeding a specified ratio, or
(c) a ratio which is not less than a specified ratio, between its assets and its liabilities, and the specified ratio may be expressed as a percentage of the assets or liabilities concerned.
We are asking the Administration or the bureaucracy to move into a basic banking or building society area, a very subtle and sensitive area in which the Minister may require a society to have specified ratios between assets and liabilities expressed as a percentage of assets or liabilities. This is a dangerous provision because, with all due respects to the Administration and to bureaucrats, who have their place in the regulatory area, they have no expertise or technical competence in banking or lending or ratios between liquidity and assets or liabilities and so on. They do not understand the sensitive mechanism of devising a liquidity-reserve ratio or devising a ratio between assets and liabilities. Surely the Central Bank could be written in instead of the Minister for Finance to perform this supervisory function in regard to reserves, liquidity, assets and liabilities. It could be better performed by the Central Bank than by the Minister because they have the expertise, and because they carry out similar functions in regard to banking and they could also do so in regard to building societies. I offer this as a constructive suggestion because the whole question of maintaining appropriate ratios is a day-to-day matter—sometimes an hour-to-hour matter for them—which is of the highest importance and which demands the highest standards of expertise.
A similar criticism applies also to subsection (2) of section 37 and in particular to subsection (3) of that section where it states that a requisition under the section shall have effect in accordance with its terms and may be varied or revoked by the Minister for Finance after consultation with the Minister and the Central Bank. Again, the Minister for Finance is put in the central position in this important matter rather than the Central Bank.
The same criticism applies to section 38 in regard to the investment of surplus funds. Here we are dealing with a situation where temporary investments are required to be made from day to day, from week to week, from month to month, by building societies regarding funds pending their investment in the proper area. This is a day-to-day matter of finance administration and credit organisation. It concerns cash flows and money available in excess of what is immediately required for housing purposes, and how to deal in the interim period with investment arrangements. The Minister for Finance is involved again in subsection (1) of section 38 where it says that the Minister for Finance after consultation with the Minister for Local Government and the Central Bank may prescribe the investments in which a society may place money not immediately required by it for the purpose of the society.
Subsection (3) of section 38 says that the Minister for Finance, after consultation with the Central Bank may prescribe limits in respect of investments by the society in securities of a specified class and in respect of funds kept in cash or in current or deposit accounts and different limits may be prescribed for different classes of society. This is a dangerous intrusion by the Minister for Finance into the day-to-day cash dealings of a business. He is intervening in the society's delicate balancing between its depositors and its borrowers, seeking to do well by its investors and at the same time ensuring that there is sufficient capital flow of funds for borrowers. The Minister for Finance is being involved in the question of the funds of a society kept in cash or in current or deposit account. This is a dangerous, bureaucratic exercise by people who will know very little about what they are doing. I ask the Minister to consider this seriously.
Much the same criticism applies to sections 76 and 77. The principle is the same and we have the same phraseology in section 76, except that it is the Minister himself after consultation with the Minister for Finance, who is in the driving seat with all respect to the excellent officials in the Department, I do not think the expertise is available in either the Department of Local Government or in the Department of Finance. The section says that the Minister for Local Government may make such regulations in relation to the management of societies which he considers necessary or expedient. It also states that regulations made by the Minister after consultation with the Minister for Finance may provide for limits on the expenditure that may be incurred by a society for the purpose of or arising from its operation and management. I do not object to what it goes on to say about a code of practice relating to societies in paragraph (b) of subsection (2). That is fair enough but, in the area of prescribing limits that may be incurred on expenditure by a society for purposes of or arising from its operation and management I object to civil servants in the Custom House deciding on the limits in regard to expenditure, again without any knowledge or expertise.
Section 77 brings in the Minister for Local Government and the Minister for Finance on making regulations regarding the basic working of building societies. Whenever the Minister considers it expedient in the interest of the orderly and proper regulation of a building society, and having regard to the demand for loans for house purchase and the financial needs of the national housing programme, he may, with the consent of the Minister for Finance, make regulations in relation to the purposes and amounts of loans by societies and conditions subject to which such loans are made. Here we have the Ministers for Finance and Local Government, in charge of Departments without any expertise in this particular area, actually making regulations as to the amounts and the purposes to which these amounts will be devoted. This is a very dangerous area.
Furthermore, in subsection (2) of section 77, we have the detail, that the Minister may with the consent of the Minister for Finance, go into the matter of providing for the maximum amount of loan which a society can make, the purpose for which loans may or may not be made and the maximum amount a society may lend to a body corporate and the total amount of such loans.
This may be all right in theory but we must have regard to the reality. We are dealing with building societies which we wish to see expand in terms of drawing in funds. We are all agreed on that. We wish to see the exceptional growth of recent years continuing. We wish to see the £600 million in building society funds doubling. We want more funds available for private house-building so as to expand that sector. Regulations of the kind in which the Minister for Finance and the Minister for Local Government will be seen to have their hand in the administration and management of building societies will tend to deter such investment.
This is a serious matter which needs to be watched. The best supervisory agency in this respect would be the Central Bank. It commands respect and it has the expertise which the Departments of Local Government and Finance do not have in this area. If you had a two-tier system in the supervision of building societies, between the Registrar of Friendly societies looking after the police functions in relation to building societies and the Central Bank supervising the overall financial and investment policies, one could ensure that the societies were properly managed in the public interest—the Minister has rightly chosen the Registrar of Friendly Societies for that purpose—and on the other hand that the societies would be managed in accordance with the best financial and credit criteria and the whole question of liquidity ratio, reserves, assets and liabilities and interlocked ratios, finance and credit management would be best achieved under the general supervision of the Central Bank acting in the same manner as it does vis-à-vis the present banking system.
I put that suggestion to the Minister because the presence of five agencies in this Bill—the Minister for Local Government, the Minister for Finance, the Minister for Industry and Commerce, the Central Bank and the Registrar of Friendly Societies—will land everyone into an administrative morass. Money is not raised from people with money by adopting bureaucratic procedures. Today, with the growing sophistication of building societies, they are almost banks themselves; they have grown away from the original purpose behind the formation of building societies. They are an important element in the whole credit and lending and investment structure of our community. In that situation they should be treated as such. They should not be submitted to the type of bureaucratic controls and strictures which are envisaged in having five separate Departments of Administration involved in their supervision. They should be treated as an adult, sophisticated group of organisations which have a contribution to make, their main contribution being to attract sufficient funds to provide money for private house building. Bringing it down to that basic essential, the important factor is their capacity to attract funds. Any intrusion on the part of the civil service of the Administration or bureaucracy into the day-to-day regulation of the highly-sensitive variations in regard to deposits, credits and so on can only cause damage and serve to deter investment. That is the main principle which I wish to adumbrate. I shall have much more to say in Committee Stage discussions.
A Bill of this kind is needed but I disagree with the Minister on a fundamental principle in regard to the particular four sections I mentioned. Otherwise, I welcome the Bill.
Business suspended at 5.15 p.m. and resumed at 6.30 p.m.
I should like to welcome this Bill and to commend the Minister on his very comprehensive and wide-ranging statement introducing the Bill. Fundamentally, the Bill is necessary to introduce controls and supervise the insurance business as a whole. Apart from some possible amendments which the Minister showed us his readiness to accept, it can be said that the Bill will enable the building societies to continue their important work of providing funds for the purchase of houses and also providing a very safe custody at reasonable terms for depositors.
It would be a mistake to suggest that the introduction of this Bill is in any way a criticism of the building societies per se. In that regard I think it is clear that the societies themselves have seen the need for this Bill. It is important to remember that it is now over 100 years since the principal Bill in 1874 was introduced, followed by the 1894 Bill 20 years later. These were the principal Bills on which our building societies legislation is based today. A lot of changes have taken place in the building society industry over that long period of years. I think everybody will agree, notwithstanding the criticisms that have been levelled at lending institutions generally from time to time, that the building societies in toto have done a magnificent job over many years in providing opportunities for people, especially for young married people, to become home owners, and by so doing to take on the responsibility of having a house of their own and the extra trouble and obligations it entails, and also ensuring that they will not become an encumbrance on the already overburdened ratepayers and taxpayers.
Indeed, the Minister's figures have shown what a massive contribution, in a comparatively short space of time, the building societies have made in carrying out a very desirable social objective. This should be recognised and the societies should be applauded for their effort. In general, I have very few comments to make on the Bill. It is largely a Bill for discussion on Committee Stage, but I should like to make comments which I hope will be regarded as relevant and which I hope will encourage the Minister to have a look at a few sections in the Bill. I think it is true to say that probably anybody who speaks on the Bill tonight will find not more than half a dozen sections out of a very lengthy Bill on which they could possibly find sound grounds for criticism.
I would go along a good deal of the road with Senator Lenihan in asking the Minister to ensure that nothing is included in this Bill that will in any way prohibit the building societies from doing the job they are best organised to do. They should be permitted to manage and direct their own affairs with independent judgment. After all, 100 years is a long time to be in any business. There must be an enormous accumulation of wisdom, judgment and experience behind all the building societies, even the newer and smaller societies. They should be allowed to be the best judges of how to run their business within the necessary ministerial controls and subject to the supervision of the Registrar of Friendly Societies as watchdog for the depositors and borrowers.
Having said that in general terms, any other controls or interference by people not versed in the ways of building societies, and whose ideas might run contrary to the ideas and expertise of a building society, should, as far as possible, be kept out of the affairs of the building societies. In general, that should be accepted as a principle and, indeed, a principle I would like to see enshrined in this Bill. I think that in the long run the better job the building societies make of their own business the better it is for the depositors and borrowers.
A suggestion has been made that the appointment of an advisory body for the industry might be helpful. This is an idea the Minister might give consideration to. I would visualise a representative body, a body representing all the industry, not necessarily confined to the Building Societies' Association, which comprises only five of the building societies in the country, albeit the five societies which have far and away the biggest share of the building society business; but there are other smaller building societies and I think they should not be left out of consideration in drafting legislation for their protection and the protection of their depositors and borrowers. I should like to see the depositors and borrowers represented on such an advisory body.
Section 18 covers investments by directors. While not stating specifically the amount, the Minister has indicated that an amount of £10,000 would be an acceptable figure. It seems a very large amount to me. I do not know whether it is intended to apply to existing societies or whether it is intended to apply to groups intending to form new societies. If so, I would venture to suggest that very few new building societies will come into operation.
Section 20 deals with deposits in the Central Bank, 5 per cent of the value of the society's shares and deposits. The value of the society's shares might be a difficult thing to come by. The market place is obviously the indicator to the value of the society's shares, but there could be substantial societies not necessarily quoted on the stock exchange and it might be difficult to assess their value on a realistic basis. The deposit is subject to a minimum of £20,000 and a maximum of £50,000, which incorporates the principle in the recent Central Bank Act, although if I am correct, the Central Bank Act did insist on a deposit of £500,000, now raised to £1 million and no small minimum such as is suggested in this Bill. I do not know if £20,000 is a realistic minimum, having regard to the fact that the members would be expected to subscribe £10,000 each. The relationship between the member subscription and the minimum deposit seems to be somewhat out of line, but no doubt the Minister has been advised on this figure.
What does concern me in this section, which I think might require further examination, is to ensure that the provision does not in any way inhibit the ability of the building societies to lend funds. In other words, I take it that the prime objective of a building society is the lending of money to potential house owners and that should be the prior consideration in this legislation, indeed of any legislation dealing with building societies, and next to that to look after their depositors' funds. I have not done any calculations on this, but there could arise a situation whereby, in order to comply with this requirement, an altogether disproportionate amount of the building societies' liquid funds might be tied up in the required deposit in the Central Bank. I think that would want to be looked at very carefully. Although it would obviously make the building societies stronger in financial terms, it might possibly inhibit their primary function to have funds liquid and available for lending to borrowers, potential house owners.
Section 37 is intended to fix the ratio's relation to assets and liabilities. Assets are not defined and could include, as I understand it—perhaps I am wrong and the Minister will correct me in his reply—both fixed and current assets, and I am glad to see from the Minister's own speech when introducing the Bill that deposits with the Central Bank are, in fact, included as assets. Neither the Minister nor the Bill indicate what the ratio is. Obviously this is going to be a vitally important figure and one which again I should like to repeat and to impress on the Minister, one which must be governed by the function of the building societies to lend money and to safeguard the depositors' funds.
Section 38 empowers the Minister to prescribe the investments in which a society may invest surplus funds and lists such institutions as the Trustee Savings Bank, the Industrial Credit Corporation, the Agricultural Credit Corporation, Post Office Savings Bank and so on. This section may require further examination. I do not suggest for a moment that a building society should become a form of investment society or investment trust. Indeed, I think that any tendency to regard its funds primarily for the purpose of investment rather than for lending would, to a large extent, negative the whole purpose of the building society movement. The fact that a loan might not be available because funds were tied up seeking attractive rates of interest would negative the purpose of the building societies as a whole. But building societies have to get an adequate return on their investments. Their borrowing rate is probably an effective 11 per cent. If they were to invest funds in some of the institutions which I have just mentioned, obviously there would be a substantial loss on the transaction. Building societies, as I hope it is generally known, operate on a very narrow margin, something like 1½ per cent, which compares—I think we would agree—more than favourably with the situation in the banking institutions. If that narrow 1½ per cent is cut any further by the fact that they cannot invest at adequate rates of interest, or for any other reason, obviously the person who is going to suffer in the long run is the borrower.
The Minister would want to be very careful to ensure that the directors of savings banks are given a reasonably free hand to ensure that their funds are reinvested at an adequate rate of interest, otherwise it will upset the whole delicate balance of borrowing short and lending long which, in fact, is the skilled business of the building societies.
I was very interested to hear the Minister's references to permanent societies and terminating societies when he was talking about the historical background of the establishment of societies. I assume that one of the requirements for having the word "permanent" in the titles of building societies is to distinguish between a permanent continuing society and a terminating society of which there are now, I understand from the Minister's speech, none in the country. I should like to ask the Minister if it is now necessary to have the word "permanent" in the title of building societies in view of the fact that there is no distinction to be sought between "permanent" and "impermanent" or terminating societies.
A further question I should like to put to the Minister—and perhaps I am not completely right in interpreting what he said—is this. Is it intended that there will be two classes of building societies, societies with a trustee status and societies with a non-trustee status? If there are to be two types of societies, how do the societies that might not now be regarded as of trustee status get to the trustee status? What do they do? Is it to be confined solely to the big five, the members of the Building Societies' Association, with their tremendous financial strength? Or is there any way whereby smaller societies, either on their own and through their own initiative and hard work and enterprise, or by combining with other smaller societies, could achieve trustee status? Can that be done in the terms of this Bill?
I should like to see—and I think this Bill generally does ensure it—the widest possible spread of depositors and borrowers. In other words, for social reasons, from the point of view of the strength of building societies, and from the point of view of a sort of mutuality or co-operative element in the building society business.
I would prefer to see a big number of small depositors rather than any society being—I hate to use the expression but I hope it is relevant—at the mercy of a small number of large depositors. I appreciate that the small depositors' interest is safeguarded in this Bill to the extent that the biggest depositor can still only claim five votes in a voting situation, which is a very desirable inclusion in the Bill.
One point that is not mentioned in the Bill is that when a building society conforms to the requirements laid down in the Bill, and some of them are extremely rigid, albeit desirable requirements, there should be some method by which a depositor's funds can be guaranteed against loss, and the institution to do that is the Central Bank. A depositor should feel that if anything goes wrong, in the last resort the Central Bank will underwrite his deposit. That might be asking a lot, but recently we saw where there were difficulties in a financial institution of a different type and where it was very doubtful if the depositors would recover their funds. If these requirements in the Bill are complied with, a depositor should feel that, in the last resort, some institution—I think it should be the Central Bank—should underwrite his funds.
I hope also that, notwithstanding some of the honest requirements of this Bill, the Minister will ensure that competition will exist in this industry. It would be undesirable, to say the least, if the building society industry was to pass into the hands of a confined number of societies or organisations. It would be undesirable from the point of view of the depositor and certainly from the point of view of the lender. I should like to see written into the Bill opportunities for good, conservatively-run and well-managed small societies to increase by their own enterprise, or else to associate or merge in some shape or form with similar societies to make them equally strong and able to take on a wide spread of business.
That is the only remark I would like to make at this stage except to congratulate the Minister for bringing it forward. It is a very useful and necessary piece of legislation, and, subject to some changes, which the Minister has shown his willingness to consider, it is a very fine piece of legislation.
I agree with the last speaker. It is a fine piece of legislation. The fact that there are 96 sections in it shows that a great deal of work and effort have gone into the drafting of it. My knowledge of building societies is limited, although I was a member of the Educational Building Society. These building societies have played a very important part in the economic life of the country. They have been doing an excellent job. I feel I am justified in saying that the people have tremendous confidence in them and this confidence over so long a period is sufficient testimony to their integrity and to the efficiency with which they have managed their affairs.
Building societies have succeeded in enticing people to invest money in their societies. Before a person does that he must have confidence and be reasonably sure that his money is safe. That is an important factor, and for that reason I think that somebody should be in a position to ensure that if anything goes wrong a move would be made at the right time to secure the depositors' money.
As a rule, building societies collect money and distribute it to people as loans to build houses. That is one of the most important exercises they could be engaged in. We all know that a man's home is his castle, and it is very important to people that they would be able to own their own homes. There are many people who get houses built through local authorities, and the law has been amended —and rightly so—to ensure that these people will eventually become the proud owners of their residences. In the same way building societies have given encouragement to young couples who are thinking of getting married and, incidentally, with the rise in population and emigration easing off there will be more need for this. Building societies have a very important part to play in easing the burden on local authorities. It is a very laudable thing that people who are reasonably well off should make an effort, by using the building societies, to provide their own homes rather than asking local authorities or somebody else to provide homes for them. If people become home owners, they will take pride in seeing that their homes are well kept, and it will give them something they will value all their lives.
Building societies have also played an important role in encouraging people to save. One of the things that must be stressed at present is that, irrespective of what the economic situation may be, people should at all times be encouraged to save, because there is always a rainy day. Young people, in particular, should learn the saving habit and try to be able to stand on their own feet. The only way of doing that is to become owners early in life. They can do that by availing of the facilities provided by the building societies.
From my experience with a building society, I must say they provide a very useful service. Not alone do they lend money, but they also provide expert advice on assessing the value of premises a person might intend to purchase or they might advise in other ways, and they provide these services for a very reasonable sum. Many people are indebted to the building societies because they now own their own homes. The building societies should get recognition for what they have done down the years.
Some speakers suggested that the Central Bank should have complete control over the building societies. Competition between building societies is healthy and I like to see them advertise against one another. It would be a mistake if they were all lumped together in the one society. At the same time, there is need for overall control. Perhaps it might be better if such control was given to a body such as the Central Bank, rather than a particular Minister of State, or three or four Ministers of State. I am not saying that just to differ with the Minister in what he has said but because the Central Bank have already been set up to perform a similar function in relation to the banks.
There are various other sections in this Bill that I shall not go into now. We shall have an opportunity of doing that on Committee Stage. The Bill is a very laudable one. There may be some amendments to be put down to it, but on the whole it is a useful Bill. We are very conscious of what the building societies have done down the years and of the confidence that the people have had in them. The very fact that they have grown from a mere £1½ million up to the figure which the Minister quoted today is sufficient testimony of the trust and confidence the people of Ireland have placed in their integrity and in their boards of management down the years. I hope they will grow still further in the years ahead and continue the excellent work they have been doing of encouraging people to become the proud owners of their own homes.
First of all, I want to commend the Minister on the Bill and on his excellent speech. It has been rightly commended by other Senators and I want to add my own commendation. It is a very lucid speech and explains the Bill very simply. The Bill deals with many of the points which have caused concern in the evolution of the building society movement, particulary over the last decade. It is quite clear we are dealing with a financial institution which has over the last decade been literally transformed by changes of social pattern, not least in the field of savings. The figures which the Minister himself has given for the growth of the societies in terms of their assets and loans are themselves the very reasons for this legislation. They have grown phenomenally and it was absurd that they should have been governed by legislation which was designed in the last century for totally different circumstances. The circumstances in which they were designed was that period in the British Parliament when they began to pay attention to the growth of friendly societies, industrial and provident societies, and there was a great spurt of legislation over a 20-year period between the 1870s and the 1890s.
One thing I think should be emphasised is that building societies are not co-operatives. Co-operatives have a particular structure and philosophy. The terminating building society would have greater claim to being a co-operative than the existing building societies. They are financial institutions. The Minister has referred to the divorce between the depositor and the borrower, whereas a co-operative would have no such divorce. Because they are not co-operatives, because they compete in the money market and are a particular type of financial institution, this legislation is needed. I believe the safeguards which the Minister is putting into this legislation are in the public interest. I particularly commend him for the conditions which he has laid down in respect of the formation of societies, and I support in the letter what he has written into that section. I commend him, too, for insisting on a certain relationship between assets and loans. These two are necessary in the public interest. I particularly commend him for section 77.
Section 77, 41 and 43 cover a great deal of the public criticism which was voiced over recent years about the societies. In those three sections and particularly with the prohibition on the block loan, he will have removed from the public mind much of the disquiet which may have been there. Perhaps some of it may have been ill-founded, but it was wise of the Minister to take into account the fact that it existed. I would hope that fairly stringent regulations will be laid down in connection with section 77 on the description of maximum loan, the type of purpose for which a loan may be made, and also the conditions under which loans are made to corporate bodies. I believe that these three points were the main cause of concern in the public mind.
The last point I want to make is regarding the rate of interest. The Minister has taken the decision not to confer upon himself statutory control in this area, believing that consultation is better than coercion. As Senator Russell has said, the building societies are in the market for money the same as everybody else. That is the reason they have got to advertise. I am not one who would criticise them for advertising. I would be concerned about the type of advertising and the amount of advertising expenses, but I can see the necessity for them to advertise and to be competitive. One can see the immediate relationship between their rate of interest and that of other competing institutions.
The Minister has said that the consultation procedures which he has established are working satisfactorily. I can quite understand the philosophy behind his statement that consensus and consultation are preferable to compulsion. However, I would ask the Minister to give his further views in this matter in replying to the debate and to consider that it might be prudent to write in a reserve power which might never be resorted to but which might in certain circumstances be necessary. Situations could arise where the public would be disquieted about obvious discrepancies between the rates of interest which the societies were charging or offering and those in other financial institutions.
In times of relative financial stability interest rates are themselves stable. We have not lived through periods in which interest rates have been stable, and I can see the reasoning behind the recent statement by the association that they wanted, in response to the banks' downward trend, to see how the world money market was going before they took a decision themselves. In times of uncertainty they have difficulties, given the type of business they are in of short-term deposits and long-term loans. However it might be prudent to write into the Bill reserve powers which would be only used in extreme circumstances.
Like Senator Dolan, I think this is a Bill which will require a good deal of scrutiny at Committee Stage, but in terms of the major points it covers, and in terms, too, of the Minister's speech in introducing the Bill, this is a model piece of legislation. I have no hesitation in supporting it.
I should like to draw attention to an aspect which has not been covered, at least while I have been present, with as much depth and in as much breadth as I think it deserves. The situation as I judge it—and I am speaking within a Second Stage ambience on the subject—is that within the contour of the Bill a certain assumption has been made. If I interpret that assumption correctly it would go as follows. There has been a Registrar of Building Societies in Ireland. In some respects his activities—there is more than one person involved—have been adequate. In other respects they have not. There has been an enormous upsurge of business into the building societies, so that their operation has in the last ten years, in particular, grown at a spectacular rate.
The office of the Registrar of Building Societies is no longer adequate to deal with the increased volume of work and the increased demands. Therefore we have to create a situation where, in certain of the vital functions of that office of Registrar of Building Societies, instead of expanding his activity within this area, we will have, as in section 4, a measure by which the Minister for Local Government may make regulations in certain instances and the Minister for Finance in other instances. Under section 10 the Minister may prescribe rules for a new society; under section 37 the Minister for Finance, after consultation with the Minister for Local Government and the Central Bank, may require societies to maintain prescribed ratios between assets and liabilities; under section 38 the Minister for Finance may prescribe the investments in which a society may invest its surplus funds; under section 70, subsection (8), every society shall submit the information the Minister may require from time to time; under section 76, the Minister for Local Government may after consultation with the Minister for Finance, make such regulations as to the management of societies as he thinks appropriate; under section 77, whenever the Minister considers it expedient he may make regulations in relation to the purposes and amounts of loans and the conditions on which such loans may be granted. Therefore the Bill involves a spectacular incursion of the Minister, be it the Minister for Finance or the Minister for Local Government, into the activities of building societies.
Senator Lenihan has raised the psychological implications of this and one or two points he made are worth reiterating. First, a building society is an organisation—Senator Halligan has raised the question of whether is a co-operative or not and I do not propose to go into the semantics of that —which involves people who have been deeply involved in the provision of houses, in the acquisition of finance, in the investment of money, in the balance between the needs of the community, of young people needing houses, on the one hand, and the interests of their shareholders on the other. It involves a day-to-day equilibrium of judgment without which building societies could not survive. It is implicit in the Minister's Bill that they have been doing a good job.
These incursions would seem to me to be such as to interfere seriously with the normal rhythm of a building society and to impair their judgment, to interfere with their timing. It is almost as if somebody in the midst of a tennis game were to come in from time to time and tell the tennis player how to play. In other words, the people who would be involved in these incursions into the area of building societies would be not people who had any sense of the game; they would not be people who had been trained in assessing one man's demand for a house or an application for a house, balancing it against the assets of the society, balancing overall policy against the policy of Government, whether it be in Finance or Local Government, viewing the whole operation in a day-to-day way against things like the fluctuation of money values, against inflation, against all these things.
If the building societies are to exist and if they have earned the right to existence, they have earned it in terms of their own competence. That is not to say that they should not be supervised. But why should the supervision be of this kind, which, with all due respect to the Minister, I think sinister. It is happening too much. When I say "respect to the Minister", I mean respect to the office; he may be here now; he may move to another Ministry; we may have another Government in time. What legislators have to do is create adequate laws so that the passing of ministerial power from the hands of one to another can be done without seriously upsetting the structure of our social and business life.
There is a mechanism here which has been passed over and ignored. That is the mechanism that has served the United Kingdom so well for a hundred years. The Registrar of Building Societies in the United Kingdom has total control over the operation of the building society movement there. That is an operation which has assets of £23,000 million. He holds a position of very high esteem within the public arena. He is respected by public and by politicians alike. He is very rarely interfered with. He is in constant liaison and constant dialogue with the corridors of power in Westminster and he has a constant, benign and continuing dialogue with the building societies. His office is 100 years old. The fact that it has survived for 100 years is certainly worth considering in a society as mobile and as subject to ideological change as England is, when there is a Conservative Government one year run by a man called Health and a Socialist Government another year run by a man called Wilson. We have had such an office here and still have, and his existence is not overlooked in the Bill. However, the philosophy behind the Bill is such as to say: "That has been an inadequate office. Our Registrar has not been doing his work. By and large, let the Minister come along and straighten things out from time to time. Let him make the odd sporadic raid into the area of the building societies and straighten things out from time to time"—and straighten them out in the manner I have spelt out. I am not speaking up in the air. I would like to be contradicted on the points I have made if my interpretation of them is wrong.
We would like to see the office of registrar built up to a very high degree of expertise, with very considerable research and resources behind it and under a man of outstanding quality. Then it would become an office which would be largely independent of the changes and fluctuations in Government, in the moods or personalities of Ministers. It would speak to the Government, on the one hand; it would speak to the building societies, on the other. It would have the enormous advantage of having an ongoing body of knowledge and of expertise.
If what the Minister suggests here in sections 4, 10, 37, 38, 70, 76 and 77 is allowed to become the order of the day in this matter—and it would take very little change in the Bill for it not to be the order of the day—what will it mean? It will mean that the Minister for Local Government's civil servants, on the one hand, and the Minister for Finance's civil servants, on the other will be involved in that dialogue with the building societies. It is a fact of life within Government Departments that the man who is dealing with building societies this week may have to go to Brussels next week or perhaps be moved to the Department of Education or the Department of Agriculture and Fisheries. It takes no Evelyn Waugh or Franz Kafka to draw a picture of the resulting waste of time and the inevitable tangled misunderstandings that will take place.
Look at an office like that of the Registrar of Building Societies in Britain. It has been there for about 100 years and it has been doing its job with no Government interference. The building societies know the personnel there. There has been a volume of knowledge accumulated over the years. Every young man coming into that office knows what has gone on before, and as he is promoted through that structure he becomes more and more sophisticated in dealing with this problem. If the problem was a unilinear one there would be no bother, but if it is multi-faceted, multi-dimensional, as it may be, as a building society has to deal with the demands of young couples seeking homes and of older couples looking for homes, the building society must know how to deal with them. They must also be able to deal with unscrupulous people wanting to use their money for investment in profit-making activities. The societies must also know how to deal with a Minister who may want to cut a spectacular dash by rushing the building of several thousand houses because of pressure on his political life. They may have to deal with a Government who says "We need money for this" or a Minister for Housing who would want that. Sometimes a Minister for Finance desperately seeking money may decide to obtain a considerable sum from building societies.
This gives a picture of a series of measures which could allow the Ministers of the day, both of Finance and Local Government, the right in effect, to nationalise the building societies. The model I would adhere to and the one which I would urge strongly on the Minister would be to appoint a Registrar of Building Societies, to aggrandise him, to give him an office, to give him research facilities and to allow him to function in the same way he is allowed in the United Kingdom, where the registrar has spectacularly justified his existence.
Therefore I would ask the Minister for Local Government and the Minister for Finance to withdraw to a decent distance from this operation. Of course, it is essential that they have some supervisory powers and act in a watch dog capacity in the public interest. Ultimately the buck stops with them. I should like to see the situation where, between the Government, on the one hand, and their demands and the building societies and their demands on the other hand, there would be this office of the registrar which would be free from political influence and which could build up a body of expertise which could monitor operations on behalf of the public and allow the building societies, without unseemly, untimely and sporadic interruption, to go about their multidimensional and multifaceted business.
It is a pity that this Bill, which has so many positive qualities in it, falls short in some ways. I am not suggesting that the provisions have been inserted for unworthy motives, but there are more ways of killing a cat than choking him with butter. There are two ways of dealing with building societies. Has the Registrar of Building Societies been given a chance? He has not, and no one is to blame for that. When his office was created there was no enormous movement in the building society world, but in the last ten years it has expanded so rapidly and dramatically that there is a tendency to by-pass it. We are inclined to say: "Let the Minister for Finance and the Minister for Local Government handle that". This is very bad. It will involve the unseemly and untimely intervention of politics into this sensitive and complex area of our national life. It would undermine the operations of building societies which by and large have been doing a good job. I shall have several amendments to put down on the lines I have suggested. I know I have been selective in choosing an area which I think is vulnerable in the Bill, but I do not want to waste time on plamás on the excellent aspects of it. I ask the Minister to reconsider those provisions.
When I come to address myself to a Bill of this kind I usually have some knowledge of the legal background to the matter being dealt with and I draw on that. I sometimes find that there are things written on the subject which I can read and make my own evaluation of them. I sometimes find that I have experience of cases and I know what has happened in the background and I am able to make some kind of generalisation, and sometimes I consult people with more experience and seek their views. Their view is very often a professional one, a sincerely held view, which would be helpful for me to hear anyhow. Sometimes it may be a self-interested view—we are all good at that—but in general I try to reach a right conclusion. Whether I am seated opposite my friend the Minister here or I am seated opposite someone who is not my friend in the sense in which we use these words here, I make the same kind of speech.
I take the point that Senator Martin has been making. This point has been made to me. I do not know who said that the Registrar of Building Societies in the United Kingdom has been such an astounding success. I do not know the basis of the acclamation which has greeted his efforts in the past, or the efforts of previous office holders; not a single bastard among them apparently, which is extraordinary. In a whole series of office holders you usually find one, at least, who is not all that marvellous. The circumstances are totally different to ours. The funds administered are massive and the number of depositors is about five times greater per head of the population than here. I am not rejecting the view Senator Martin put forward. I am merely saying that I remain to be convinced of the necessity for what he is putting forward. In any Department of State there is a rotation of officers. Promotion takes place and so on. I know that people leave this particular field—and indeed, many other fields—at a point when they have considerable expertise which would prove valuable for the Department. This appears to me to be an administrative problem which should concern the Department of the Public Service.
I should like to compliment the Minister on the general terms of the Bill. I have been waiting for it and I welcome it. The amendments we had in 1942 were helpful for the societies in their situation at that time, and the amendment in 1974 was certainly necessary. There have been no real amendments to the law affecting building societies for about 82 years except the two occasions I mention. There has been one other amendment affecting building society law which the Minister in his admirable speech did not refer to, that is, the Companies Act, 1963, which affects building societies and did amend the building society law when it was enacted in 1963. I wonder, when it comes to the fine detail of the Schedule which, alas might have to go on for quite a while, some Senators may want to make some amendments.
Here is a fairly significant amount of Irish savings. Of course, the conduct of these societies must be regulated from a public point of view. I understand, in general, that the position in the building society is rather like what it is in many other fields: that an Act is made to make lawful what is already good practice with good societies; that what is being said in many sections here is simply that all societies must do now what the well-run societies found they had to do.
I like the general run of those sections which state "the rules of a society shall specify" and "loans cannot be made beyond" and so on— specific and definite statements of the law. The sections which I do not particularly like, I am only giving this as an example because section 77 is an excellent one, are the ones with the approach of "whenever the Minister considers it expedient" and so on he may provide for this or that. It should not take that form but should say: "You cannot give a loan of this kind or that kind or an amount in excess of so much to such and such a body". Then the people will know where they are, what the law is and can act accordingly. They are then bound by the law but they are free to do what they like once they know what the law is. We should reduce as many of the conditions as possible which are subject to regulations.
I know this is not contained in the UK code, but we need not be tied too much to it, the parallel of the Families Act where there are a set of rules which a person is incorporated by unless he wants to vary them. The person can only vary them if the variation is itself permissible by the Act. That would be an appalling job to do. Senators have, presumably in their heads at this moment, regulations about this, that or the other thing. Senators have, for example, an idea of which societies will have trustee status. I should like to know what societies will have trustee status and how they will achieve this.
From a technical point of view the Minister is right in asking the Seanad to assist him in this legislation because he tackled an immensely difficult thing. Many Acts are involved including the Central Bank Act, 1971, concepts from the Companies Act, all drawn into this stream as well as the current problems which must be solved in a particular way. One is bound to find when he gets down to the particular sections that there may inevitably be possible improvements in the expression of the matter.
The Seanad have been told that £300 million is the current figure of the sums involved in these building societies. If I understand it correctly, that the assets in 1921 were £500,000, this means a 600 times growth. This is amazing and has all happened without too much law or regulation. Therefore, it is very important that the abuses which we know existed in this particular situation do not exist any longer. The Seanad knows that nothing but good can be said about the building societies' association and their admirable practices and high standards and the public spirit shown by them. However, it is very necessary to get these things cleaned out. There are two types of public interest being served and it is necessary to match the two of them: the public interest of people who want to place their savings in safe hands and who desire to have them properly looked after, and the public interest of people who want to get money to buy houses, on terms which are reasonable and safe. This is important. As the Minister said at the beginning, it is a legal milestone. It is, and there is no doubt about that. The 1894 Act seemed to be a milestone because it took so long to change it. If we put something wrong into this Bill it may take an equally long period of time to change it.
To support in some degree what Senator Martin said, the Central Bank Act was introduced in 1969. They took two years to get it through, and it was not an Act of Parliament until 1971. There was very little appearance of the Minister there, only in certain questions of revocation and so on, which is a very interesting fact. Here we have a banking institution which has the confidence of various banks. It seems to me, on the basis of the cost of money, that when the tax to be paid by the building societies on the deposit interest they pay out is grossed up, the sort of interest they will get from the Central Bank on their deposits may make the deposits imposed by these provisions costly to the building societies. Maybe the view is that the increased reputation that will be enjoyed by the financial institutions to comply with this type of requirement will justify it. Maybe, but regarding the Prices and Incomes Board in Britain Keir Hardy carried out a study on this. On the question of deposits, the Minister has taken the very words of the very section of the Central Bank Act and inserted it into the Building Society Act. He has taken the flat 5 per cent, but Keir Hardy argued that this percentage could be scaled down according to the size of the situation generally.
I will not invite the Minister to explain for me, much as I want to understand it—I wish somebody could explain it to me—how the composite rate of tax is worked out. The National Prices Commission made some attempt to explain it to me but I lost it half way through the chapter. In general the statement seems to be there that it was, in effect, a transfer from the non-taxpayer to the benefit of the standard or higher taxpayer. I presume there is a reason for this and would like to know what it may now be.
Two points I want to make. We come now to the Law Reform Commission. This is a rather good example of the type of law reform which cannot be carried out by a law reform commission because it depends upon administrative experience of problems in a whole business area. It is interesting to know that law reform does not end with the Law Reform Commission.
A concept which is missing altogether from our financial field— and I would not like it thought that in mentioning it I thought it had particular bearing on building societies—is that there is nothing like the Prevention of Frauds Act in Britain which governs very carefully this whole question of soliciting for money, and which I think applies to building societies as well as to companies.
There is no provision for restriction on advertising. I wonder in relation to the whole business of raising money for any purpose, for housing or any-think else, whether there ought not to be some code to be complied with for Irish building societies and companies. We do not have industrial provident societies controlled as to their deposit rating at all. I do not know who will net this catch, but the Department of Industry and Commerce will in due course be picking up the pieces there, I imagine.
There were a few thoughts that various people suggested to me on the kind of business building societies do. We all can imagine a situation where a certain building society which is not a member of the association issues letters to various people assuring them of sums, and the unfortunate people go off and make deals to acquire their houses and the money is not coming and so on. There should be something making it an obligation on the building society not to tell in any committed form that sums are going to be available unless the sums are available when they are making the commitment, or something analogous to that. They ought at least be able to make bona fide judgment about the cash repayments and so on. The dividend is very good. That is important and I am glad that it is so.
What happens with these letters is that the chap goes off to the bank. The bank will lend him money to cover this period, and will be in fact making money out of the building society's letter. Is there any method by which building societies, as part of their activities, could join in consortia with each other to provide bridging loan facilities? Is there not a case for allowing building societies, again on a consortia basis, to get in on the business of making money out of house and fire insurance, in profitable business insurance, assuming of course they complied with the insurance code to be amended. These activities would seem to be for the benefit of the depositors and borrowers in both cases, assuming that they are under the proper type of control.
Finally, as I understand is done in other countries, subsidiary building societies can go into the business of estate development as distinct from buildings. Their expertise in building is employed for the benefit of the borrower and they see that houses are constructed in accordance with this. Everything I said does not apply to sections 31 and 32. An awful lot of what I have been saying will come up in detail on the relevant sections.
Debate adjourned.