I move: "That the Bill be now read a Second Time."
This Bill is a first step towards a radical overhaul of the legislation governing building societies. Its purpose is to deal with a number of matters relating to the operations of societies which have given rise to some dissatisfaction with the societies among the general public, while at the same time enabling societies to expand their services by permitting them for the first time to engage in lending other than by way of mortgage.
Before I go on to outline the measures contained in the Bill, I feel it is incumbent on me to refer to recent developments in relation to building society interest rates. When I met with the Irish Building Societies Association on a number of occasions recently, I made it clear to them that the level of any increase in interest rates should be determined in a responsible way, taking account of the potential impact on borrowers and the housing programme. Following the failure of the association to reach a common agreement on rates, one society has announced an increase of 3 per cent in their mortgage rate. I am convinced that this is an overreaction to developments in the financial marketplace and imposes an unnecessary burden on the society's borrowers. The level of the increase is particularly disappointing when account is taken of the structuring of the most recent interest rate increases by some of the associated banks, which were designed to alleviate the impact on personal borrowers. The attitude behind this decision must give rise to some reconsideration on my part of possible further legislative proposals which could confer wider powers on societies. With power comes responsibility and the latest developments do nothing to enhance my confidence in the sense of responsibility of some, at least, of the societies. I think the House may take it that I shall be returning to this topic again in the near future.
I propose now to spell out briefly the areas covered by the Bill:
—It will allow building societies, for the first time to advance loans other than on the security of a mortgage. My intention is, initially, to permit societies to advance bridging finance;
—It will prohibit the charging of tiered interest rates to existing borrowers by any society where such a regime did not apply on 1 August last;
—It will place a total prohibition on tiered rates for all loans taken out on or after 23 October as from a date some six months after the passing of the Act. This latter clause is to allow the societies time to adjust their offer rates accordingly;
—It will also enable rules to be prescribed for societies in relation to the following matters:
(a) Prohibiting or restricting the charging of redemption fees when a person is paying off a mortgage. This is an unnecessary and unfair charge imposed on building societies' customers when they are actually in the process of paying back the sum outstanding;
(b) The making available by the society to the borrower of the valuer's report on the house being purchased. I consider this to be reasonable when one realises that the borrower pays for the cost of such report;
(c) The right of the customer to freedom of choice in deciding with which company to insure the house;
(d) Precluding or restricting the building society from charging the customer its legal costs in investigating title, thereby removing the present burden on borrowers of having to pay two sets of legal fees at time of purchase; and
(e) The arranging by a building society with an insurance company of mortgage protection insurance for its borrowers.
The value of the contribution made by building societies to the housing programme, particularly over the past twenty years or so, has been acknowledged time and again. As the major source of mortgage finance for house purchase — last year they provided some 64 per cent of the total — their practices, charges and interest rates have a very direct bearing on the lives of a large segment of the population. House purchase is the biggest financial commitment undertaken by the average person and the costs involved — both initially and for many years afterwards — can represent a very sizeable demand on the individual's financial resources. For this reason, it is reasonable for the public to expect that we, as legislators, will ensure that the framework within which building societies operate will afford the borrower a degree of protection against practices the justification for which, to say the least, is questionable.
The building societies, for their part, have more and more forcefully insisted on the need for legislative changes which would free them from some of the restrictions under which they operate at present. Deputies will be well aware of the major changes that have been taking place in financial services on a worlwide basis, with many institutions exploring areas outside their own traditional field of operation. An aspect of this development has been the recent enactment of a new Building Societies Act in Britain. Given the fundamental similarities between our own societies and their British counterparts, it is not surprising that the Irish societies should seek a similar widening of their powers; the pressure in this direction is all the greater since that new British legislation will permit societies to have subsidiaries in other countries, including Ireland. Such a subsidiary operating here would, of course, have to meet the requirements of our own law regarding the establishment of societies and the conduct of their business.
At EEC level, discussion has commenced on a draft directive on mortgage credit designed to permit community mortgage credit institutions to establish themselves in member states other than their own and also to provide their services across national boundaries. While it will certainly be some years before this draft directive reaches implementation stage, it is clearly necessary for Irish building societies to gear themselves for a new era which will present them with both opportunities and challenges.
Conscious both of a degree of public dissatisfaction with some aspects of building society operations and of the need to face up to the changes in the financial services area, the Government last year set up an inter-departmental committee to consider the operations of building societies and the legislative and regulatory environment within which they operate. Following consideration of the report of this committee, a discussion document was issued on which various interested parties were invited to make submissions. I am using the document itself, together with these submissions, as a starting point in the development of legislative proposals. There are many complex issues to consider in shaping these proposals, and in order not to delay the implementation of certain measures about which there is a widespread consensus, I invited the Irish Building Societies Association to agree to the adoption of a voluntary code of practice. This would have dealt with certain building society practices which have been a cause of regular complaint from the general public and which were adverted to in the discussion document. The IBSA indicated, however that they would prefer to have detailed and full discussion on an entire range of matters which could be considered and addressed in legislation.
The Association wishes to discuss a range of issues as broad as those covered in the recent British legislation to which I have referred. As this Act is almost 300 pages long and includes some 20 schedules, Deputies will appreciate that it could have taken a very considerable length of time indeed to complete the discussions which the building societies were seeking and to prepare and draft legislation which might emanate as a result. Meanwhile, house purchasers would continue to suffer from the practices to which I have referred.
Another factor in my decision to proceed at once with the short Bill we now have before us was the step taken by a major building society in announcing the introduction of tiered rates of interest on mortgage loans. Not only did this seem to me to be a retrograde step, at a time when competitive forces have eliminated tiered rates elsewhere but I was particularly taken aback by the downright unfairness of applying these tiered rates to existing borrowers. Many of these would, of course, have chosen the society in question because of their policy of applying the standard mortgage rate to all loans. While they would, of course, understand that the interest rate was variable, in accordance with normal building society policy, they would have had every reason to assume that the variation would simply be in response to the normal economic and financial forces which influenced societies — until yesterday — in setting their general level of rates. They would not have expected the society to change the ground rules for their borrowers after their mortgages had been executed.
I would now like to fill in a little more detail regarding the areas covered by the Bill, which I summarised at the outset.
Section 2, while it simply amends a definition in the 1976 Act, is of very fundamental and potentially far reaching importance. This is because the definition in question is that of the very term "building society". Up to now, societies have, by definition, been limited to raising funds in a number of ways for the purpose of making loans to members secured by way of a mortgage. Under the new definition, in addition to the making of mortgage loans, a society is defined as an institution with the further purpose of making loans "with or without security" in accordance with regulations made by the Minister for the Environment under section 3 of the Bill.
Section 3, complements the provisions of section 2 by setting out the power of the Minister for the Environment to prescribe these regulations. These can deal with the purposes of and conditions attaching to loans, other than the rate of interest, and can also specify whether or what security is required. This power is exercisable after consultation with the Registrar of Building Societies, who is responsible for the prudential supervision of societies, and with the consent of the Minister for Finance.
An ancillary power to make regulations is also conferred by section 3; the Building Societies Acts may be amended in such ways "as may reasonably be necessary or proper" as a consequence of the regulations concerning new types of loans. A positive resolution of both Houses will be necessary to give effect to such regulations.
As I have indicated, the powers under section 3 will be used, initially, to permit building societies to offer bridging finance to their borrowers. I hope that this power which introduces a new element of competition into the market for bridging finance will be used in a manner that will confer advantages on borrowers and that will be a first demonstration of the ability of societies to offer new services on attractive terms. I will certainly be observing closely the use that is made of this new power and I will be influenced by what I see when considering what wider powers might be conferred on societies both under this section and in the context of further legislation.
I have referred to the question of tiered interest rates and to my disappointment and surprise at attempts to spread a practice that should instead, I believe, be dying out. Section 4 contains the measures which I have promised to deal with this issue. Deputies will be well aware of what is meant by tiered rates: for the purpose of the Bill, we have defined the term, in section 4 as an interest rate on a loan which is determined either by the amount of the loan or the amount outstanding at any time, and which is higher than the lowest rate available to members of the society generally. In this context, "loan" means a loan secured by a mortgage relating to a dwelling.
Tiered rates will be prohibited where the mortgage was created before 1 August 1986 and a tiered rate was not being charged on that date; and where the mortgage was created on or after 23 October — the date of publication of the Bill.
However, in this latter case, the restriction on charging a tiered rate will apply after some six months has elapsed from the passing of the Act. This is to allow societies who now operate on the basis of tiered rates to bring their interest rate structure on the investment side into line with the new requirements on the lending side. After the six month period to which I have referred, however, tiered rates cannot be charged on loans taken out on or after the publication date of this Bill. These measures thus herald the end of the practice of charging tiered rates for all future loans.
As a natural consequence of the prohibitions on tiered rates which I have outlined, section 5 confers on any borrower who is charged a tiered rate in contravention of the preceding provisions the right to recover from the society any excess amount he has been charged. It also specifies that a borrower cannot be held to be in breach of his mortgage agreement by refusing to pay any excess amount demanded through the imposition of a tiered rate in contravention of the provisions of section 4.
Section 6 confers on the Minister for the Environment the right, after consultation with the Registrar of Building Societies, to prescribe rules in respect of several important matters. These powers are in addition to powers already conferred by section 10 of the 1976 Act. Rules prescribed under the new powers will become part of the rules of any society to which the regulations apply one month after the making of the regulations.
Perhaps one of the most important matters on which rules can be prescribed from the borrowers' point of view, is the prohibiting or restricting of the charging of redemption fees. As Deputies will know, the rules of societies generally allow a charge of several months interest to be charged where a borrower wishes to redeem his loan. As I have already indicated, this strikes me as a most unfair and unjustified charge. Indeed, one might well expect to be rewarded, rather than punished, for early repayment of a loan. The justifications sometimes offered — administration costs, losses while seeking a new outlet for the money — are not at all convincing keeping in mind the size of the charges and the fact that societies are in a position to invest any surplus funds they may have in a range of very profitable investments.
Another practice that has been the subject of much annoyance to many building society borrowers is the refusal of societies to give the borrower sight of the valuation report on the property — while nonetheless expecting him or her to pay for it. Again, this is a blatantly unfair practice, and the Restrictive Practices Commission have recommended the making of a restrictive practices order to deal with it. Instead, I am taking the opportunity of dealing with it in the present Bill by providing for the power to prescribe a suitable rule or rules. The Restrictive Practices Commission have also recommended measures to deal with the restrictions imposed by societies on the choice of insurer on the property securing the loan. This clearly restricts competition in the insurance market and prevents a borrower from choosing an insurer of his choice and seeking the best terms available. Again, there is provision in section 6 for the prescribing of a rule removing or restricting the right of a society to limit the borrower's choice in this way.
The expense involved in house purchase is such that one would imagine that the best interests of lending institutions, as well as borrowers, would best be served by ensuring that no unnecessary additional burden is imposed on borrowers. For this reason, I find it very hard indeed to understand the attitude of societies to the question of the legal investigation of title to properties offered as security for loans. The insistence of societies on having title examined by a solicitor appointed by themselves from very restricted panels means that not only is there duplication of work — since the borrower's solicitor must do the same thing — but duplication of expense for the borrower, since it is he or she who must pay both sets of legal fees. The need for this is mystifying since in Britain and Northern Ireland societies are quite satisfied to accept the borrower's solicitor. Even where societies operate on the basis of a panel, it generally comprises the vast majority of solicitors engaged in conveyancing in the society's area of operation. This not only results in substantial savings to borrowers, but, by eliminating the duplication of work to which I have referred also helps to reduce delays. I am, therefore, providing, in section 6, for a power to prescribe rules precluding or restricting a society from charging its legal costs in investigation of title to the borrower. If societies want a separate solicitor, they will have to pay for the privilege.
Finally, rules can be prescribed regarding the arranging by a society through an insurer nominated by it for the provision of mortgage protection insurance. As Deputies will be aware, this is a form of life assurance designed to ensure that the loan will be repaid if the borrower dies, and is to be distinguished from the insurance on the mortgaged property, to which I have already referred.
All publicly funded house purchase loans made available through local authorities now automatically include a small charge, incorporated into the repayments, in respect of mortgage protection insurance. Provided the borrower is actively at work and is under 55, the cover comes with the loan. I would like to see building societies making similar arrangements for their borrowers, and the power to make rules in this respect is intended to encourage and facilitate the practice.
In addition, there are existing powers to prescribe rules available to me under section 10 of the Building Societies Act, 1976. I intend to use these to deal with certain other matters identified in the discussion document. I commend the Bill to the House.
