Building societies have been the subject of increasing public attention in recent times. The present Bill is a particularly timely one, I believe, and it deals with several issues which have given rise to some criticism of societies from their members and the public generally. However, it is not a regulatory measure only; it includes a very important provision which will have the effect of giving societies an opportunity to expand the range of services they may offer and it makes a new provision for a consultative group on matters affecting building societies.
Before going on to discuss them in more detail, I will list briefly the matters dealt with in the Bill:
Societies will be empowered to provide loans not secured by a mortgage, subject to regulations. Bridging finance will be the first form of such lending to be permitted but other appropriate types of loan may also be considered;
Tiered rates will be prohibited on loans taken out before 1 August 1986 where a society did not apply such rates on that date;
Tiered rates will also be prohibited in the case of all loans taken out on or after 23 October. However, this will not take effect until some six months after the Act has been passed to allow societies to adjust their investment rate structures as necessary.
The Minister will be empowered to prescribe rules for societies regarding the following:
(a) prohibiting or restricting the charging of redemption fees, a practice which I believe to be fundamentally unfair;
(b) the making available of valuation reports to the borrower, who is required to bear the cost;
(c) the right of the borrower to insure the property with an insurer and through a broker of his or her choice;
(d) precluding or restricting a society from passing on its legal costs in the investigation of title, so that the borrower will have to pay only one set of legal fees;
(e) the arranging by a society of mortgage protection insurance through an insurer or intermediary nominated by it.
Provision is made for a faster procedure for the coming into effect of rules prescribed under the Building Societies Act, 1976, in relation to the appointment, remuneration and removal of the boards of directors of societies.
A Building Societies Consultative Council is provided for — this replaces a somewhat similar provision of the 1976 Act. Finally, two technical amendments to the 1976 Act have been included, the purpose of which I will refer to later.
Senators will be aware of the winds of change that are now blowing through the financial marketplaces of the world. All areas of the financial services industry are going through a period of rapid change as new technology, deregulation and ever more intense competition make their impact felt.
This scenario of change and development can be seen on many levels. In a worldwide context, the question of trade in services is one of the major areas to be dealt with in the new round of talks on the General Agreement on Tariffs and Trade. At EC level, the member states have committed themselves to working towards the completion of the internal market by 1992, and in that context discussion has commenced at working party level on a draft directive on mortgage credit. In Britain, there has been not only the much publicised "Big Bang" in the City of London, but, of more direct relevance in the present context, the enactment of a lengthy and comprehensive new Building Societies Act.
The new British legislation not only greatly widens the range of activities in which societies can engage, but will also empower them to operate subsidiaries abroad. This, together with the EC draft directive to which I have referred, means that Irish building societies can expect, in the years ahead, to face the challenge of increased competition in their home market and to have the opportunity for potential new markets abroad for their own services.
In this context of rapid change, and having regard also to public concern about some building society practices, an interdepartmental committee was established last year to look at a wide range of issues affecting societies. It made recommendations both in relation to the types of practice giving rise to criticism of the societies and, in a wider context, on the types of change in the legislation governing societies that would enable them to continue their development in the years ahead to the advantage of their borrowing and investing members and of the general public.
Following consideration of the committee's recommendations, I published a discussion document which was circulated to interested parties, from whom I requested, and received, written submissions. The document itself, together with these submissions, is the starting point for consideration of the future legislative framework within which societies should operate. I emphasise, as I have done in speaking to the societies themselves, that it is a starting point, and not the last word. If a strong case can be established, for example, for powers wider than those recommended, I will be prepared to listen and to give due consideration to the weight of the arguments on each issue.
It will be clear to Senators from my remarks that I see the present Bill as a first step only; further legislation will be required and will be brought forward. However, before embarking on the major task of developing wide-ranging new measures — a task which with the best will in the world cannot be accomplished overnight — I was anxious to deal with some of the areas in which the societies have, justifiably, come in for a degree of public criticism. I was disappointed to find that, despite my open attitude on the question of wider powers, which I have just outlined, the main societies were not prepared to co-operate with me by introducing a voluntary code of practice in relation to the practices in question. For this reason, I have found it necessary to bring forward the present short Bill.
Senators will also be conscious of a further reason for the introduction of the Bill. I refer to the move by a major society during the summer to introduce tiered mortgage rates. It was bad enough that this society — which for so long had operated most successfully without recourse to tiered rates — should have taken this step at all, particularly at a time when one might have expected the trend to be away from tiering, but what made it particularly unacceptable to me, as to the members of the society affected, was the application of the change to existing loans.
Borrowers, who had chosen the society in many cases for the very reason that it did not operate the tiered system, found that the rules were being changed in the middle of the game. I considered this to be unfair; I said so, and I am dealing with the matter in the present Bill. I was strengthened in my resolve to proceed with this measure when I was informed by the society in question, in the course of a meeting with the Irish Building Societies Association, that a board decision to introduce tiered rates had been taken six or seven years ago. I find it extraordinary that no notice of this decision was given to members generally or those members who borrowed from the society subsequent to that unpublicised board decision.
I now propose to fill in a little more detail regarding the various measures contained in the Bill. Section 2 makes a quite radical change in building society legislation by redefining the term "society" as used in the Acts. In addition to the purposes of raising funds from members for the making of mortgage loans, societies may have the further purpose of making loans with or without security in accordance with regulations made by the Minister under section 3.
Section 3, then, obviously follows on from this new definition of a society and provides the power for the Minister to make regulations, with the consent of the Minister for Finance and after consultation with the registrar, setting out the purposes of and the conditions — other than the rate of interest — for loans not secured in the traditional way by a mortgage. The Minister is also being empowered to make any consequential changes to the Act that may be required as a result of regulations governing new types of loans. Such regulations will require a positive resolution of both Houses.
Subsections (4) and (5) of the section, which were not included in the Bill as originally published, would enable the Registrar of Building Societies to give a direction to a society or societies prohibiting the making of the type of loans covered by this section. The registrar in deciding to use this power, is to have regard to the criterion of "The Orderly and Proper Regulation of Building Society Business", an expression which occurs frequently in the Building Societies Act, 1976.
I intend to use the new powers under this section to enable societies to provide bridging finance. In a submission to me on the discussion document, the Irish Building Societies Association indicated that, and I quote:
There is no reason why this finance should not be offered within the building society system, and at a substantial cost saving to the house buyer.
Other areas of lending will also be considered — home improvement loans would be an obvious possibility.
I must say I am somewhat mystified by the approach of the Irish Building Societies Association to this question of new lending powers. In the submission from which I have just quoted, dated May 1986, they express a willingness to offer house improvement loans at a substantial reduction on the banks' interest rate. In a more recent submission, however, they proposed that the Bill should be amended to confine loans under this section to bridging finance. Societies outside the association have, however, expressed an interest in forms of lending other than mortgages and bridging finance. Any regulations made under the section will, of course, be permissive, that is to say, societies will be under no obligation to avail of the new lending powers.
Section 4 deals with tiered interest rates, a tiered rate being defined as a rate greater than the lowest one available to members of a society generally and which is determined by reference to the size of the loan, the amount outstanding or the income of the borrower. This latter element has been included in the definition in case societies would otherwise be tempted to use the criterion of income to replace their existing system of tiered rates.
Tiered rates will be prohibited in the following cases:
Where the mortgage was created before 1 August last and a tiered rate was not being charged in respect of the loan on that date; and
Where the mortgage was created on or after 23 October — the date of publication of the Bill.
In the latter case, however, for a period of some six months from the passing of the Act societies will be permitted to continue charging tiered rates on the loans. This is to give them a chance to review their interest rate structures to take account of the prohibiting of tiered rates on the lending side. Once the six months are up, however, a tiered rate cannot be applied to any loan taken out after the Bill was published. This spells the end of tiered rates on new loans.
Section 5 provides that a borrower who is charged a tiered tate in contravention of the preceding section has the right to recover whatever excess amount he may have paid. Furthermore, a borrower cannot be held to be in contravention of his mortgage contract if he refuses to pay any excess amount demanded by a society charging a tiered rate contrary to the provisions of the Act.
Section 6 is a key section in the Bill providing, as it does, for the making of regulations by the Minister in relation to several building society practices. Rules prescribed under this section will come into effect one month after the commencement of the regulations.
The prohibiting or restricting of the charging of redemption fees is the first matter regarding which rules can be prescribed under subsection (1) of section 6. This practice of charging a penalty which may be up to several months interest to a borrower who wishes to repay a loan early strikes me as very unfair. I have not been convinced by any of the arguments I have heard in favour of the practice, and I know that borrowers will warmly welcome the regulations which I will make in this regard.
A valuation report on the property being mortgaged is required under section 79 of the Building Societies Act, 1976. As many Senators will be aware from their own experience, societies have operated the frustrating practice of charging the cost of this report to the borrower while refusing to give him or her sight of the report. The Restrictive Practices Commission recommended that an order should be made in relation to this practice but, instead, I propose to deal with it under the present Bill.
Another matter on which the Restrictive Practices Commission recommended action is the practice by societies of requiring borrowers to insure the mortgaged property with an insurer nominated by the society and through the agency of the society. Regulations can be made under this section removing or restricting the right of a society to insist on a particular insurer or intermediary.
One of the areas in which societies come in for particular criticism is that of the legal costs of house purchase. Contrary to the practice elsewhere, Irish building societies insist on having title to the property being mortgaged examined by solicitors nominated by the societies from quite restricted panels. The fees for this examination of title are charged to the individual borrower, who has also, of course, his own legal fees to pay. Under this section, I will be in a position to prescribe rules precluding or restricting societies from passing on their legal costs to the borrower.
Rules can also be prescribed under section 6 in relation to the arranging by a society through an insurer or an intermediary nominated by it for the provision of mortgage protection insurance. Such arrangements have been made in relation to publicly funded house purchase loans and I believe they can be very worthwhile from the borrowers' point of view.
I must point out that extensive powers to prescribe rules are already conferred on the Minister under section 10 of the 1976 Act; the powers in section 6 of this Bill are in addition to those already in existence. However, under the procedures in the 1976 Act, it would take a lengthy period before the prescribed rules could come into operation. For this reason, I have added a section, section 7, to the Bill to expedite the coming into operation of any rules to be prescribed under the 1976 Act in relation to a particularly important area, that of the appointment, remuneration and removal of the boards of directors of societies. This is an area of the operation of societies that has been the subject of much comment and I believe it is one in which there is considerable scope for improvement.
Under the new procedure, the registrar will notify a society within one month of the commencement of the regulations if its rules are not consistent with those prescribed. The rules will come into effect three months after the commencement of the regulations. A society will have a right of appeal to the High Court before the expiration of that three months period and, where the appeal fails, the rules will take effect from one month after the date of the court's decision.
Sections 8, 9 and 10 have also been added to the Bill since it was first published.
Section 8 provides for the establishment of a Building Societies Consultative Council which will have a duty to advise the Minister on matters referred to it by him and a general right to advise on matters affecting building society business. This section replaces section 96 of the 1976 Act, which is being repealed. The essential differences between the two sections are that there is no specific limit on the number of members and no specific bodies or organisations are referred to in the new provision. Under the 1976 provision, there was a limit of nine and specific reference was made to having representatives from the Departments of the Environment and Finance, the registrar, the Central Bank and the Irish Building Societies Association.
I believe that, in view of the rapidly changing situation in the financial services area, to which I have referred, it is better to have a more flexible provision to enable the Minister of the day to decide on the size and composition of the council which is most appropriate to the prevailing circumstances. The committee provided for under the 1976 Act was never, in fact, appointed. It seems to me that the appointment of a body truly representative of societies and other interested and competent parties would be particularly appropriate now and that is why I have decided to up-date this provision.
Sections 9 and 10 were originally included in the Housing (Miscellaneous Provisions) Bill, 1985. Since they are clearly more appropriate to the present Bill, I have decided to insert them here and to have them deleted from the Housing Bill on Committee Stage.
Section 9 amends section 12 of the 1976 Act. The purpose of the amendment is to allow the registrar the same discretion in relation to the registration of alterations to the rules of societies as he has in registering the rules of societies in the first place. Under the 1976 Act, the registrar had to register alterations to rules once he was satisfied that they were in accordance with the Acts. This amendment would enable him to reject an amendment which he considered would be prejudicial to the orderly and proper regulation of building society business.
Section 10 amends section 22 of the 1976 Act by providing specifically that societies may borrow abroad. Societies have, in the past, borrowed money abroad under the existing provision, but this wording puts it beyond doubt that societies have this right. It also provides for appropriate control of such borrowing by requiring the authorisation of the registrar with the consent of the Minister for Finance.
Building societies have become very important institutions in our national life to which they have made a major contribution by enabling so many people to achieve the goal of home ownership. They can be justly proud of their achievements and it is right that we should acknowledge them. As legislators, we have a duty to ensure that they operate within a framework that will enable them to continue and to enhance their contribution to the general wellbeing and we also have a duty to ensure that their practices, which affect the lives of so many people in so fundamental a matter as housing, are just and reasonable. The Bill is, as I have said, a first step on the road to a comprehensive review of building society legislation. It is an important Bill, and I commend it to Senators.