I move: "That the Bill be now read a Second Time."
The purpose of the measure is to modernise and consolidate the law relating to building societies. It has been examined in a critical but constructive manner by Seanad Éireann. In the course of the discussions in that House, a number of amendments of the text of the Bill as introduced were considered and the great majority were accepted. In consequence, the document which has been circulated to Deputies should, I hope, prove to be a generally acceptable set of legislative proposals, designed to govern the operations of one of the principal investment repositories and the most important source of mortgage finance for the private housing sector.
The existing statute law controlling the operations of building societies in this country dates back just over a century. The principal Acts were enacted in 1874 and 1894. It will be obvious, therefore, that there must be scope for a radical updating and reconsideration of the law. This is the purpose of the Bill which I am glad to present to the Dáil. I hope that the House will give it an objective and positive examination, such as it received in the Seanad.
The operations of building societies have expanded enormously since the State was founded, but particularly in recent years. In 1922 we had 23 societies with total assets of little more than £500,000. By 1941 these assets had trebled and amounted to £1.5 million. Since then there has been a constant acceleration in growth. By 1961 the assets of building societies had increased to £18.7 million. In the short space of the four following years, their assets doubled to £36 million in 1965; by the end of June last they were over £350 million—a phenomenal rate of growth.
This scale of operations is a measure of the confidence which the investing public and house purchasers alike have in the building society movement. In the five years ended 31st December, 1975 the societies advanced £215 million in loans for house purchase, which gives a clear indication of their importance in connection with the financing of private housing. The societies have made an invaluable contribution towards improving housing conditions generally throughout the country.
The inflow of funds to the societies and their rate of loan approvals have been at record levels during the past year. The value of loans approved in 1975 was the highest in any year ever.
This expansion of activities and the importance of the position which the societies now hold as custodians of the savings of so many people make it essential that the legislation under which they operate, and which was designed so long ago to suit much smaller institutions, be reviewed and reconsidered.
This Bill is the outcome of such a review and one of its primary objectives is to reinforce the confidence of the investing public in building societies with the backing of suitable statutory provisions. A person investing with a building society should know that his money is no less secure than if it were placed with a licensed bank.
This Bill, while re-enacting and updating all the relevant provisions of the existing building society legislation, contains a number of new provisions. Some of these are similar to provisions in the Companies Act, 1963, the Central Bank Act, 1971, and the Credit Union Act, 1966, adapted, as appropriate, to deal with the conditions peculiar to building societies. In scope, the Bill is intended to deal comprehensively with all the operations of building societies from their initial establishment to their eventual winding up. Special care has been taken to protect the rights of the members, depositors and mortgagors, and the security of investments, through controls and supervision considered appropriate to one of the most important forms of financial institution in the State. In preparing the Bill I have had regard to the dual function of the societies, first as the repository of an appreciable proportion of national savings and, secondly, as the largest single source of mortgage finance for private housing.
I trust that the Bill will help to increase public confidence in the societies. In this context I want to emphasise that none of its provisions will, in any way, disturb the present confidentiality regarding the business dealings of the societies and their members, and which is so important in attracting investment funds to the societies. I want to give a similar assurance in relation to the orders and regulations to be made in due course, and the directions to be given, under the Bill. Indeed, some of the amendments which I moved during the Committee Stage debate on the Bill in the Seanad were designed to reinforce this element of confidentiality and were accepted in this spirit by Senators.
A basic feature of building society finance is that the societies must borrow short and lend long. Money vested with them is generally on call at three to six months' notice while the money which they lend is usually repayable over 15 to 25 years. This is a problem for which the present Bill—or, indeed, any conceivable legislation— could hardly produce a solution. Another area of difficulty with which it cannot concern itself is the fluctuating mortgage interest rate which borrowers have to pay on their loans. It does not contain provisions relating to trustee status. However, the provisions in the Bill ease the way for the Minister for Finance in conferring trustee status on approved societies.
This is a long and rather complex Bill. It is based, I might say, on a century's experience of previous building society legislation. Because of its importance and complexity I had a particularly detailed explanatory memorandum prepared which sets out the background to the measure, states its objectives and explains its provisions in considerable detail. As Deputies have had an opportunity to study both the Bill and the explanatory memorandum, I do not propose, at this juncture, to go at length into the provisions of the Bill. The measure is essentially a Committee Stage one and when the House moves on to that Stage we can consider each section which Deputies may wish to discuss. However, there are some provisions which call for special comment and I ask the Dáil to bear with me while I refer briefly to these aspects.
Under section 8, ten or more persons may establish a society by agreeing on rules and submitting copies to the Registrar of Building Societies. Heretofore a society could be established by any number of persons, provided the draft rules were signed by three persons and the intended secretary. A further provision in section 18 will require each founder member to invest a specified minimum amount in cash in the society and to retain the investment with the society for at least five years. 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 will be prescribed by regulations. The purpose of these provisions will be readily appreciated. Where funds are solicited from the public it is right that investors should have security. One way to achieve this is to require the founders of a society to have a substantial and continuing personal stake in its funds.
In the case of a society incorporated after 5th December, 1975, which was the date of publication of the Bill, or a society incorporated before that date but which had not then commenced business, section 18 stipulates that it may not raise funds unless the requirements relating to the founders' shares, to which I have just referred, have been complied with. In addition there is a further requirement, under section 20, that such a society must have lodged a deposit with the Central Bank. If a society fails to comply with these requirements within specified periods, the registrar can have its registration cancelled or have the society wound up. Quite a number of societies have been formed and registered but have then been allowed to lie dormant, sometimes for years. There is no purpose in having inactive societies on the records and for this reason the registrar will be empowered to have them struck off.
Section 19 will apply to a society incorporated after the date of publication of the Bill, or a society incorporated before that date but which had not then assets of at least £1 million. Any such society must obtain the written permission 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 is that the registrar will not allow a society to advertise for funds 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.
Some small societies will be affected by this section, but I do not envisage that the provisions will prevent them 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 its requirements.
I have mentioned the requirement in section 20 to make a deposit with the Central Bank. All societies will have to lodge 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 comply with the requirement. A similar requirement applies to licensed banks under the Central Bank Act, 1971. It is appropriate that the statutory provision governing financial institutions of the size and importance of building societies should be similar in such regard to those for banks. The deposit will earn interest; it will rank in assessing a society's liquidity, and will provide security for investors.
Section 37 will enable the Minister for Finance to require a society to maintain a ratio between its assets and its liabilities. At present, apart from the limitation on the amount which a society may accept on deposit, there is no statutory requirement in regard to the relationship between the assets and liabilities of a society. It is considered appropriate that that type of control in this vital area which applies to the banks should apply also to the societies. The powers in the section will not be used as a method of monetary control—the ratio will be merely a basic requirement to ensure the stability of the society and the security of the investor.
Different ratios may be prescribed for different classes of societies. Reference is made throughout the Bill to different classes of societies. The intention 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.
There are two other areas in which direct control is proposed over certain aspects of the societies' operations. Section 76 will enable regulations to be made, on the recommendation of the registrar, to secure the proper and efficient management of societies and to promote the orderly and proper regulation of their business. These regulations may lay down limits on the management expenses of a society and may also provide for a code of practice. We have all been aware, from time to time, of the criticism of societies on the grounds that their management and advertising expenses have been unduly high, especially with regard to the expenses of comparable societies in Britain. I want to put on record that my own experience has satisfied me that such criticisms cannot reasonably be sustained against the five societies represented on the Irish Building Societies' Association. These member societies control about 98 per cent of the assets of all societies. The past few years have seen an enormous expansion in the activities of the societies—circumstances in which, combined with the effects of inflation, a substantial rise in management expenses might well have been expected. In fact, the accounts of the largest societies show that management expenses were maintained at very reasonable levels.
Criticism has been directed also at the extent of the competitive advertising by the societies. It is only right to remember, however, that advertising is essential to secure a continued inflow of funds in a very competitive market. Indeed, the level of expenditure in 1974 and 1975 of the five principal societies on advertising had fallen when compared with the figure for 1973, a situation which would not indicate extravagance. While I am satisfied that the major societies keep a reasonable balance in these matters, I still feel that there is need to have the reserve power which this section provides.
In due course I would envisage the drawing up, with the advisory committee proposed by the Bill, of a code of practice which would contain provisions relating to matters such as the standards for incidental fees, charges for the redemption of loans, payments to accredited agents of societies and so on.
Direct control is also proposed in section 77 which empowers the Minister for Local Government, with the consent of the Minister for Finance and after consultation with the registrar, to make regulations prescribing the maximum amount of a loan that a society may make and the purpose for which a loan may be made. The regulations may also control the amount that a society may lend to a corporate body.
Sections 41 and 42 incorporate two important provisions, adapted from the Companies Act, 1963. 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, certain members of their families and some corporate bodies with which officers of a society may be directly associated. 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. However, I suggest to the Dáil that the provisions of these sections strike the right kind of balance.
Another point of criticism of the societies has been the giving and receiving of commission in connection with loans. This arose, for instance, in cases in which 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 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 however, 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. The societies agreed in 1973 to end any such arrangement by which commission was paid. This form of commission will be prohibited under section 75 of the Bill.
I have been disquieted by complaints which I have received from persons who claimed that they have been offered loans on payment of quite a substantial fee. I have looked into these complaints but have found no evidence that societies are involved in these offers. I feel strongly that the public should be protected from the activities of persons obtaining easy money by the offer of a service which a house purchaser could get directly by himself without extra cost.
Section 75 also prohibits a director of a society from receiving any commission, other than that authorised by the rules, for introducing mortgage business, or undertaking to introduce such business. There is also a prohibition on the acceptance of commission on the effecting of certain types of insurance.
As I said at the outset, this is a long and rather involved Bill, but one which, I hope, will provide an adequate, modern, legal framework for building societies. On the general subject of controls contained in the Bill, may I say that any Bill of this kind must seem to contain wide powers of control by the central authority. If only the existing body of building societies legislation were to be simply restated in the Bill, this would still seem to comprise a formidable array of controls. The proposals that have been added to the existing provisions have, in the main, been adopted from controls already exercised over banks, credit unions and public companies. I can appreciate that, reading the Bill in isolation, it could strike Deputies as being unduly restrictive and possibly conveying an impression of distrust of the societies. However, the Bill contains few, if any, more restrictive provisions than those seen by the Oireachtas in recent years to be necessary for the control of banks, credit unions and companies. The building societies are major financial institutions with assets in excess of £350 million and the State would be failing in its duty to its citizens who invest with and borrow from the societies if it did not provide an adequate legislative framework for controlling institutions of this magnitude.
Deputies will observe that the Bill proposes to give four different authorities specific areas of control over activities of the societies—the Ministers for Finance and Local Government, the Central Bank and the Registrar of Building Societies.
When the Bill was being discussed in the Seanad, considerable pressure was brought to bear on me to delete all forms of ministerial controls and to place the responsibility of overseeing the societies on the Central Bank and on the registrar, who would then be an independent, almost judicial functionary. This proposition could not be accepted in the Seanad and it cannot be accepted in Dáil Éireann. Responsibility for questions of policy and for subordinate legislation, in the form of statutory rules and regulations, must be vested in a Minister responsible to the Houses of the Oireachtas and able to explain—and defend, if necessary— his policies and regulations in the Dáil and Seanad. The executive functions of day-to-day supervision of societies properly rests with the registrar who, I may say, will be given no less independence in the discharge of these functions than his counterpart in the United Kingdom—who was held up in the Seanad as an example to be copied here. To the limited extent that the societies are part of the second level banking system and custodians of more than £350 million of our people's savings, it is proper that the Central Bank should have directive and sanctioning powers over certain of their financial arrangements.
My attitude in the matter is supported by the report, "Building Societies in Ireland", prepared in February, 1974, for the National Prices Commission by Mr. E.J. Cleary of Swanson University, an acknowledged expert in the history, development and constitution of building societies. At paragraphs 123 and 124 of his report Mr. Cleary makes the point that, while it is necessary to give the registrar power to regulate societies, it is important that there should be safeguards for societies. He says, and I quote:
This can be done by making the Registrar's powers in these matters subject to the consent of an appropriate Minister. The resulting regulations would appear as Ministerial orders made under the Building Societies Act. This could be drawn so that they were subject to annulment by resolution of the Houses of the Oireachtas. Such an approach would enable building societies and others to challenge the regulations through the political process. Societies would, of course, look for legal redress through the Courts if the regulations made were not in their view in conformity with the Act.
124. Apart from the public interest in the good and legal conduct of building society activities there is also a public interest in the manner in which societies adapt themselves to the overall housing programme. This interest is currently overseen by the Department of Local Government. While it has a certain logic to combine these two functions in a single Ministry, it is better practice to separate them. The Ministry's strong interest in the achievement of its own programme can conflict with the proper supervision of the interest of investors and borrowers in building societies. It could be tempting to reward a society compliant in responding to the needs of the Ministry's programme, by not exercising regulatory supervision with the keenness that the interest of members demands.
There we have a succinct and objective explanation of the reasons why the exercise of various functions under the Bill is divided between different appropriate authorities and, in particular, why certain powers in connection with the societies are being given to the Ministers for Finance and Local Government. I would like to make it clear that I am not prepared to agree to any departure from the general framework of the Bill in so far as the distribution of these functions is concerned.
While I must stand firm on these basic principles, I would like to assure Deputies that in any other respects I will be glad to consider carefully any suggestions which they may put forward with the aim of improving the measure. Over a century has elapsed since the present basic statutory structure governing building societies was enacted. I would like to think that the present Bill will stand the test of time as well as did the Acts of 1874 and 1894.
I commend the Bill to the Dáil and I look forward to a constructive debate on its contents.