The purpose of this Bill is to amend and update certain provisions of building societies legislation, contained mainly in the Building Societies Act 1989. The Bill is based, to a large extent, on reform proposals from an expert review group which comprised representatives of the relevant Departments, the Financial Regulator and the three building societies. It recommended that any building society wishing to demutualise and develop as a public company should not be unduly restricted as regards the conditions under which it could pursue that option. However, the group also recommended that any society wishing to continue to develop as a mutual society should be adequately protected in retaining its mutual status. In addition, it proposed that certain provisions of the legislation should be updated to widen the powers and flexibility of building societies, subject to an appropriate level of approval by the Central Bank.
Most attention has focussed on the proposed changes to the demutualisation options. I want to correct some inaccurate comments that have been made in this regard. The impression is given by some critics that it could, in some way, weaken the concept of mutuality. The opposite is the case. For better or worse, the option for building societies to demutualise has been available in law since 1989. The Bill merely provides additional options for demutualisation but is not prescriptive as to which, if any, of these options are taken. The Bill is primarily about giving building societies more options. It gives the existing building societies, and any that might come into existence in the future, a greater range of options for their corporate status. While it supports any society wishing to remain mutual, it allows any society that sees its future outside the mutual sector more ways to pursue that strategy. That decision rests entirely with each building society. That decision is ultimately made by the members of the building society, who must decide whether to approve a conversion scheme. This will still be the case with the Bill.
The criterion for opting out of the protective provisions has been formulated to ensure sufficient protection for a society that wishes to remain a mutual society. This is achieved by making it a condition for opting out of the protective provisions that a building society has, for at least five years prior to demutualisation, restricted access to membership by requiring a minimum deposit of €10,000 to open a share account. There will now be a five-year period of protection either before or after demutualisation, depending on whether a society wants to have the option of being sold following conversion to a public company or not. This is entirely logical.
The buffer period prior to conversion is designed to discourage any potential predators and carpetbaggers who could quickly emerge and have a destabilising effect if the post-conversion protection was dispensed with and nothing put in its place. This provision is also favourable to long-term members. Some people are looking forward to proceeds from conversion, offsetting possible shortfalls in endowment mortgages, which the Department played a key role in discouraging in the early 1990s.
Some who have criticised the Bill on the principle of mutuality have perversely implied that it could disadvantage EBS members. One key principle the Attorney General's office applied in clearing the Bill was the need to ensure, as far as possible, it provided for equal treatment of the members of all existing building societies and any that might be established in the future. It is not correct to suggest that a society like EBS that has not, up to now, restricted access to membership would have to wait for five years to convert from mutual status to a public company if it were to decide to embark on a policy of demutualisation. It is immediately open to any society to pursue demutualisation under the existing 1989 Act provisions in the same way as two societies have already successfully converted. The Bill does not alter this option. However, a society would have to restrict access to membership for five years before it could avail of the new option under the Bill to dispense with the five-year post-conversion protective provisions.
The Bill will result in building societies having a total of four possible options with regard to their status: to remain mutual; to demutualise under the existing protective provisions; to opt out of those provisions and be taken over immediately; or to opt out and be sold at any later date. There is no reason to assume a building society should inevitably take the demutualisation route. The legislation is designed to ensure that, in opening up additional options for institutions that do wish to convert, no new dynamic is created that might bring additional pressure for demutualisation to bear on a society that wishes to remain mutual.
I want to correct a report that, if a society wants to remain mutual, membership will be restricted to those who deposit a minimum of €10,000. This condition is merely the criterion for giving an institution the option to demutualise without the protection of the five-year ban on takeover after conversion. There have also been suggestions that the Bill is designed to look after the some vested interests. It does not change the status of any building society. It is an enabling measure to provide additional options for the development of institutions. The Irish Nationwide Building Society indicated a desire to be able to demutualise without the present five-year post-conversion ban on takeover. It will, however, still be open also to any society to demutualise with the cover of the existing protective provisions. The decision on these matters is for the society's members. If the members feel they are not getting a fair deal in a conversion proposal, they can vote it down.
The conversion of a building society involves an extensive and rigorous process of consultation and approval. This point is also relevant to comments made about the lending practices of building societies. Such issues are for either the Financial Regulator or the financial services ombudsman, depending on the context. They are not affected by the Bill. Senators who may have concerns about this must be aware of the robust process involved in the approval and implementation of a building society conversion.
It might be useful to outline a little more fully at this point how the conversion process actually operates. The demutualisation process is governed by a conversion scheme under the Act. While the conversion scheme is drawn up by the directors of the society, it must comply with detailed requirements in the Act and it must first be cleared by the Central Bank. The scheme must be explained to and approved by the members of the society, public notices must be given, and the scheme must be formally confirmed by the Central Bank which must consider any objections or representations and can refuse to confirm it on various grounds, including the public interest. There is also provision for members of the society to petition the High Court for cancellation of a conversion scheme. Where the conversion process is duly completed, the society must be registered under the Companies Acts, whereupon it becomes incorporated as a public company, in effect changing from a building society to a bank.
Two societies have converted into public companies under the provisions of the 1989 Act. The Irish Permanent demutualised in 1994 and now trades as Permanent TSB, while the First National Building Society, now First Active, converted in 1998. Both of these demutualisations took place under the so-called "protective provisions" in section 102 of the 1989 Act, precluding takeover for five years. While an option of a five-year protection before rather than after conversion is now being allowed by this Bill, it is important to be aware that the process for conversion, which worked well in the previous cases, still applies and indeed is being made even more rigorous and transparent in some ways.
I will now outline briefly some of the main provisions of the Bill. While the main focus of attention in this area has been on the change in the demutualisation provisions, it does also provide for a number of other reforms in the legislation governing the operation and regulation of building societies. These arise from matters considered by the review group and some subsequent proposals from the sector, which have been agreed with the relevant Departments and the Financial Regulator. These include the following: amendments to increase the powers and discretion of societies, subject to approval by the Central Bank, as appropriate, in regard to matters such as the range of services they provide; how they source funding; bodies in which they can invest; categories of customers that can be given membership; and the extent to which specific approval of society members and the Central Bank is needed in order to undertake certain functions. I will outline briefly some of the main changes.
Section 7 allows building societies to extend membership to additional categories of customers and to establish loyalty schemes for members. Section 8 broadens the scope of building societies to raise funds from different sources in line with other financial institutions and also extends the power of building societies to provide security for borrowings by various bodies in which they are empowered to invest. Section 9 brings the powers of building societies in regard to mortgages into line with those of other financial institutions, including clarification of powers relating to refinancing and top-up loans and allows mortgages to be provided without the society having a first charge against the property.
Section 10 permits a building society to make unsecured or partly secured loans without first having to adopt the power specifically to do so. The Central Bank will have a general supervisory role with regard to the making of these loans rather than prescribing a specific loan limit as is currently the case. Section 12 extends the existing powers of building societies to invest in or support other bodies, including investment in unincorporated bodies such as partnerships, as well as corporate bodies.
Section 13 extends the range of financial services that can be offered by a building society, including any activities under the EU codified banking directive that are not otherwise permitted by the legislation. Examples of new services that could be provided arising from this include trading for the account of customers in money market instruments and other financial instruments and portfolio management and advice. Section 15 provides that powers that are ancillary or incidental and related to powers that have already been adopted by members of a building society and approved by the Central Bank, will not have to be separately adopted and approved.
Sections 19 to 27 provide for amendments of the legislative provisions relating to demutualisation. The main change in this area involves giving a building society discretion to decide to opt out of the five-year post-conversion protective provisions in existing legislation. These preclude any individual or institution holding 15% or more of the shares of a demutualised society for five years. There are in fact two elements involved in this matter in the Bill. First, section 21 amends section 101 of the Building Societies Act 1989 to allow a building society, in specified circumstances, to propose a conversion scheme that will, effectively, disapply the provisions of section 102. This opt-out provision is designed to operate in a way that will not adversely affect any society wishing to retain mutual status. A society will only be able to disapply the protective provisions if it has, for the preceding five years, required a minimum of €10,000 to open a share account.
Section 19 contains a further provision to protect against pressure for demutualisation being brought to bear through members of a mutual building society. It extends an existing provision, in section 74 of the 1989 Act, precluding members from proposing conversion resolutions at AGMs. The reason for this change is that there were doubts as to whether certain types of resolutions referring to conversion were covered by the existing provision and also the need to cover resolutions relating to access to membership which, under this Bill, can constitute a route towards demutualisation. However, having considered concerns voiced in regard to this section that the current wording could be interpreted as being rather restrictive, I have brought forward an amendment which was made on Committee Stage in the Dáil to ensure that there is no question of restricting the right of members to raise any issue for discussion.
The second element of the provisions relating to conversion and sale of a building society involves the insertion of a new section in the legislation providing for an integrated process of conversion and immediate acquisition. Section 22 of the Bill provides that a society opting to convert without the protection of the five-year post-conversion protective provisions will be empowered to do so through a combined "conversion-acquisition scheme" which will form part of the conversion scheme and, as such, will be approved by the members of the society. This will enable the society to agree a trade sale of the company to be implemented immediately on demutualisation. If, for any reason, that acquisition does not proceed, for example, due to some condition of the agreement not being fulfilled, the conversion would be terminated and the society would continue as a mutual building society.
The intention of the Irish Nationwide Building Society to demutualise following enactment of the changes provided for in this Bill has been well signalled. The question of entitlements of members or borrowers of the society in the event of its demutualisation has been the subject of media speculation. However, these are not prescribed in the legislation itself. The only specific provision in that regard in the legislation is a condition that any entitlements arising from shareholding in a society are restricted to members who have held shares for at least two years. This provision is, in fact, being amended to make it absolutely clear that it does not restrict possible entitlements solely to shareholders.
As in the case of the two demutualisations that have already taken place, the details regarding entitlements are matters to be determined in the conversion scheme, which governs the conversion process, subject to confirmation by the Central Bank. While the details of the conversion scheme are matters for the society and the Central Bank, I would be surprised if the precedents of the two other demutualisations did not generally apply, whereby both qualifying shareholders and mortgage holders received entitlements and where a person qualified on both counts, he or she received dual entitlements.
The mortgage lending sector has developed out of all recognition since the 1989 Act. The lending institutions themselves have developed greatly and have, it must be said, facilitated hundreds of thousands of additional households in becoming home owners, especially during the past ten years or more of tremendous growth in the housing market. More recently, some have made a very welcome entry to the affordable housing scene. The lending market today is not entirely without issues, but they are very different from the types of issues that were current in the 1980s and early 1990s.
Since the middle of last year, I have consistently expressed concern about the likely impact on house prices of increased lending and 100% mortgages in particular. In a recent quarterly bulletin, the Central Bank commented that the gradual acceleration in house price inflation since last autumn had coincided with some easing of credit conditions and that this seemed, at least in part, to reflect an increased effort on the part of mortgage lenders to market some new products, specifically 100% mortgages. The president of the European Central Bank has also commented recently on the need for prudence.
There is nothing wrong, per se, in lenders trying to maximise profit and market share. I take issue, however, with executives of some institutions flaunting so-called “innovative products” and with the aggressive marketing of those products, particularly to first-time buyers. It would be foolish to ignore the potential implications of excessive lending in terms of house prices, both for the individual and at a macro level. House prices are determined not just by the numbers seeking houses but by the volume of funds available.
The real solutions lie in maintaining high levels of supply and increased output of affordable housing, not through pushing up loan to value ratios or stretching loan terms to a point where many mortgages are virtually interest-only repayments. The Government has taken a range of actions to promote housing supply affordability. As these measures increasingly have effect and the market calms somewhat with more restrained lending in line with the Central Bank's comments, we will resume the path towards house price moderation and stability in the market. I was pleased to hear reports earlier this week from the auctioneering bodies that the market may be cooling and hopefully easing back gradually to a more sustainable pattern. Those comments are not yet reflected in the statistics but we hope they are an indication of what will happen in coming months.
As regards the longer-term evolution of building society legislation, this Bill is not and was never intended to be a root and branch overhaul of building society legislation. The much-reduced number of building societies, their smaller share of mortgage lending, the fact that they are now supervised by the Financial Regulator in common with other financial institutions, and the further reduction of distinctions between building societies and banks under this Bill, have largely removed the rationale for a separate code of building society legislation. The Government has, accordingly, decided in principle that the building societies legislative code should be brought within general financial services legislation at a future date. This will give a chance to reflect further on the role of the mutual sector and its continuing contribution to promoting diversity and price competitiveness in the mortgage market.
Although the timescale for processing this Bill is tight, its enactment is desirable in order to avoid any uncertainty for the market and bring closure to the issues surrounding possible future building society demutualisations. It is quite a technical Bill consisting almost entirely of amendments to the 1989 Building Societies Act. It deals with financial services issues which are somewhat outside the mainstream of my Department's functions. Its production has been very much a collaborative process between the various Departments, the Financial Regulator and the Office of the Attorney General. The Bill implements several important reforms and updates building society legislation. It brings clarity to the options available to societies regarding their future corporate status. I commend it to the House.
