In addition to the traditional lending secured by mortgage of land, societies will be able to offer loans on second mortgage, bridging loans, loans for payment of a deposit for the purchase of property and loans backed by other securities or guarantees as may be approved by the Central Bank. Societies will also be able to offer, subject to whatever limits the Central Bank imposes, unsecured loans to individuals for house improvement, unsecured loans and overdrafts for general purposes.
The new power to own and develop land will enable societies to invest directly in the provision of housing for sale or rent and I would hope to see them use this new power to make a contribution to the urban renewal programme by becoming involved in mixed developments. While societies cannot be expected to operate at a loss as social or community improvement agencies their mutual tradition when combined with their wide new powers to invest directly in land, to set up subsidiaries, etc., opens up the prospect of profitable and socially useful joint ventures with local authorities and other organisations.
The Bill, therefore, opens up wide new horizons for societies in their traditional area of housing. It will enable them to consolidate and further expand their already very influential position in the housing sector.
Section 28 will allow societies to form companies, either alone or in conjunction with others, as subsidiaries of the society or as joint ventures. The section will also enable societies to support voluntary and co-operative bodies which provide residential accommodation on a non-profit making basis.
Under section 29, societies will be able to offer a wide range of financial services to members and other persons. Financial services have been defined broadly and flexibly. However, the provision of any of the services listed in section 29 will be subject to the terms of the Central Bank approval and any other legislation that govern the activity in question.
Provision is also made in Part III for certain non-financial services, such as conveyancing and auctioneering and other services in relation to land. Given that societies have been extensively involved in housing purchase transactions for so many years, it is only natural to allow them to expand their range of services so as to include the full range associated with these transactions.
Section 31 amends the Solicitors Act, 1954, so as to allow societies to provide conveyancing services subject to regulations to be made by the Minister for Justice. Section 32 will allow societies to provide auctioneering services as well as other services such as valuation, property management services, etc.
All in all, a society will be able to offer a comprehensive house purchase service to its customers. This in turn, it is hoped, will lead to a reduction in the overall costs to the consumer. I recognise that there is some potential for conflicts of interests in respect of these activities and I have taken steps to counteract that. The Bill contains a number of provisions aimed at avoiding these problems. In the case of conveyancing services, the provision of such services to both the vendor and purchaser of the same property is prohibited, thus removing the greatest potential source of conflict of interest.
The regulations which have to be made before societies can offer conveyancing services will be able to make further provision in relation to conflicts of interest, compensation for negligence, qualifications of persons providing the services and so forth. Similar regulations can be made in relation to other property related services if this is shown to be necessary. In addition I have included provisions to ensure that societies do not engage in anti-competitive pricing in the provision of conveyancing and auctioneering services. A society is also prohibited from requiring anyone getting a housing loan from it to use other services provided by the society or its subsidiaries.
Section 18 contains a very wide power for societies to raise funds in Irish or foreign currencies. I expect that societies will in the future look to the wholesale market for a higher proportion of their funding than they have done to date. Use of wholesale funding will also, of course, serve to even out the peaks and valleys in society funding and, together with the increased number of mortgage providers, should ensure that we do not have mortgage queues like we had in the past. For reasons relating to their mutual status and to the supply and cost of mortgages, societies will be required to maintain at least half of their total funding liabilities in the form of shares issued to members.
In relation to the power to operate abroad it should be noted that even with this power a building society incorporated and authorised in Ireland could not at present operate in, for example, the UK on the same basis as a UK society nor could they set up a subsidiary to take deposits in the UK without authorisation from the Bank of England. However, under the proposed EC Second Banking and Mortgage Credit Directives an Irish building society would be able to operate throughout the Community under the supervision of their home supervisor, the Central Bank.
As diversification by societies into any or all of the new activities I have referred to will involve new and different kinds of risks for societies the Bill contains a number of detailed provisions in section 36 requiring that a society must formally adopt by special resolution any of the new powers they wish to exercise and they must obtain the approval of the Central Bank to exercise the power.
The Central Bank will have wide powers to control the involvement of societies in the provision of new services and to impose whatever conditions and requirements they consider appropriate. Also, provision is made to allow the Central Bank to restrict the exercise of certain powers to specified categories of societies.
Before leaving Part III, I would like to say a few words about tiered rates. In this respect the position has changed radically since the 1986 Act was introduced. In the first place I should make it clear that tiered rates cannot now or in the future be reintroduced in respect of existing loans. Under the Bill tiered rates may only be charged by a building society on loans made after the commencement of this Bill if a tiered rate is charged from the day the loan is drawn down, the mortgage provides for the charging of a tiered rate and the borrower acknowledges in writing that he is aware that he is being charged a tiered rate. That is the factual position. Also bear in mind that there is no restriction of any kind on the charging of tiered rates by other financial institutions engaged in mortgage lending. It would not make sense to have a ban on tiered rates that applies to only one type of institution providing housing loans and not to others. The best and most realistic protection against high rates whether in tiered form or otherwise is the existence of a really competitive mortgage market.
Part IV contains the general provisions relating to the control and prudential supervision of building societies by the Central Bank. The powers which the bank will have are similar to those they already have or will have under the Central Bank Bill in relation to banks.
In summary, the Central Bank will be able to: (a) require societies to maintain specified prudential ratios; (b) impose requirements relating to the structure and composition of liabilities and assets — for example, liquidity requirements; (c) revoke a society's authorisation in certain serious circumstances; and (d) give a direction to a society to suspend for a specified period raising funds or making payments.
The powers which the Central Bank will have in relation to a society's authorisation, that is, the power to impose conditions, to give a direction to a society to cease raising funds and to revoke an authorisation are central to the enforcement of the Bank's supervisory functions. Section 40 lays down in considerable detail the circumstances in which the Central Bank may either revoke an authorisation or suspend operations. The Central Bank will also have wide powers to carry out inspection of a society's books and records, to obtain information relating to the activities of the society, to control the form and content of advertising by societies and to call a special meeting to mount a formal investigation of a society's affairs. On the other hand, the Bill contains important safeguards by way of procedural requirements and ultimately appeal to the courts in regard to the exercise by the bank of their powers.
It will be obvious, therefore, that the powers available to the Central Bank will be more extensive and flexible than those currently available to the registrar. This strengthening of supervisory powers is a necessary aspect of modernisation of the legislation, a necessary concomitant of the broadening of the scope of societies' powers and will bring about a substantial degree of uniformity in supervisory systems. All in all, I am confident that the Bill will provide the basis for an effective system of supervision that will be sympathetic to the development needs of the societies.
Section 38 is a new provision which recognises the special importance of ensuring an adequate supply of mortgage finance for house purchase and improvement. It would be my intention under this section to regularly monitor the supply and demand of mortgage finance in consultation with the Minister for Finance and to communicate the position to the Central Bank so that any impending shortage of funds would be anticipated and appropriate preventative action considered. It should be noted that we are talking here about the supply of mortgage finance from all sources, not just building societies.
Turning to the question of the running of societies generally, I have tried to strike the right balance between the role and responsibilities of the directors and those of the members. The board of directors carry the final responsibility for the overall direction of a society and as such are properly interested in ensuring that the composition of the board is such as to enable the board to effectively and efficiently discharge its responsibilities. It is the members who elect the directors, however, and to whom the directors must account for their stewardship. Members therefore must be kept fully informed of major developments affecting the society and members who have a commitment to the society must have a fair chance of putting forward a candidate for election as a director. Basically it is vital that societies should be seen to be run in the interests of their members.
Part V deals mainly with the election of directors and a number of situations where a director might be tempted to put his personal interest before that of the society. It requires every society to have a board of directors elected by the members, a chief executive and secretary. It contains a number of changes in existing legislative provisions and substantial new provisions relating to the election and conduct of directors. The provisions as drafted will, together with those in Part VI, enhance the confidence of members in the manner in which directors are elected and subsequently conduct themselves as directors.
Sections 50 and 51 contain extensive provisions in relation to the appointment of directors. Until regulations were made under the 1986 Bill, building society law contained no particular provisions regarding the election of directors, the eligibility and nomination of candidates, the circulation of an election address and the retirement of directors. The provisions in the 1987 regulations regarding these matters have been retained in the present Bill but with certain changes. The effect of these changes is that a society may, (a) increase the maximum shareholding that may be required to nominate or join in nominating a candidate for election as a director from £10 to £250; and (b) increase the maximum number of qualified members that may be required to nominate a candidate for election as a director from ten to 20.
The new limits will allow societies to require candidates to demonstrate a reasonable level of support and those nominating them to have a reasonable commitment to the society.
On the other hand, there are important new provisions designed to enhance public confidence in the electoral process. First, a poll, as distinct from a show of hands, must be held on a contested election. Secondly, societies will in future have to appoint an independent person to supervise the conduct of elections and to report to the Central Bank on the conduct of the election stating whether in his opinion the election was conducted in accordance with statutory requirements and otherwise with fairness and integrity. Thirdly, canvassing by employees at their place of employment or at a meeting of the society will be prohbited. The Central Bank will also be able, if it considers it to be necessary on the basis of the report from the person who supervised an election, to apply to the High Court for an order setting aside an election.
Sections 52 to 59 contain provisions on dealings between a society and its directors. They are designed to ensure that an unscrupulous director does not divert a society's assets for his own personal gain. The approach adopted is, (a) to prohibit certain dealings between the society and a director or a person connected with him; (b) to require disclosure of all significant dealings between the society and a director or a person connected with him; and (c) to provide for civil liability and penalties in respect of dealings that contravene the requirements of the Bill.
In addition, section 60 requires societies to maintain and make available for inspection a record of the amount of business being given by the society to any company or firm which has a director of the society as a director or partner.
Part VI contains a series of detailed provisions on meetings, resolutions and voting. Section 69 increases from £10 to £100 the maximum shareholding that can be required of a member to vote on a resolution or in an election of directors. The £10 requirement which was first prescribed in the 1976 Act as a reflection of actual practice at that time has become quite meaningless in terms of today's money values. The figure of £100 proposed represents a minimal level of commitment to a society which merits enfranchisement. The section also makes it clear that on a special resolution or a resolution for the conversion of a society into a company each qualified member has one vote. This is in line with the interpretation of existing legislation by the courts. A special resolution may only be proposed in relation to certain major decisions such as changes in the memorandum or rules, the adoption of new powers and mergers.
It is important that the law protects the rights of the ordinary members of mutual bodies such as building societies and gives them a democratic say in the running of affairs. At the same time societies, as major financial institutions depending for their survival on public confidence, must not be made prey to irresponsible elements who have no real stake in the society. This legislation strikes a good balance between these two interests.
Part VII contains provisions relating to the accounts and audit of societies and substantially updates existing provisions in these areas. It is very important that societies observe the best modern practice in keeping accounting records and publishing annual accounts. The provisions on these matters and relating to auditors in building society legislation have traditionally been based on similar provisions in companies legislation and accordingly the provisions on accounting records, the appointment and removal of auditors, the rights of auditors and the auditors' report are based on similar provisions in the Companies (No. 2) Bill, 1987. There are, however, additional provisions in this Bill: (a) it requires societies to have a proper system of control of its business and to have an internal reporting system to the board of directors; (b) it requires the preparation of a layman's summary financial statement for issue to members; (c) it gives the Central Bank power to veto the appointment of an auditor as is also proposed in the Central Bank Bill for banks; (d) it imposes special duties on auditors to report certain serious matters or to supply specified information to the Central Bank over the head of the society, as has been enacted for auditors of insurance companies in the Insurance Act, 1989 and as is proposed for banks in the Central Bank Bill, 1988; and (e) it requires that auditors be re-appointed at every annual general meeting and does not provide for automatic re-appointment.
I make no apology for insisting that societies have proper systems of internal control and that auditors alert or assist the supervisor if something goes wrong. After all, no reasonable measure designed to protect the security of the public's savings should be omitted.
Part VIII contains a re-enactment of the existing provisions in relation to the settlement of disputes between the society and a member under the rules. It also provides that the Minister for the Environment may make regulations requiring societies to set up, either individually or jointly, a scheme for the investigation and determination of complaints by customers in relation to the services provided by societies. This type of "ombudsman" arrangement would apply to consumer complaints in relation to services provided by societies and not to disputes between a society and its members under the rules. However, any such disputes that are covered by the terms of the complaints scheme could, with the agreement of the parties concerned, be dealt with by that scheme. I have already suggested to societies that they should come together to set up a voluntary arrangement for dealing with complaints. If the societies succeed in setting up their own scheme and if I am satisfied that it constitutes a satisfactory arrangement I will be quite happy to forego the regulation-making power in favour of the voluntary arrangements.
Part IX provides for the extension to savings held in building societies — whether as shares or deposits — of the scheme proposed in the Central Bank Bill for the protection of deposits with banks. The trend internationally is towards the establishment of some form of protection for smaller deposits taken by financial institutions — and the EC has already issued a non-binding recommendation in this regard. While societies have a very good track record in so far as the safety of funds entrusted to them is concerned, I think the arrangement now proposed is an opportunity to further enhance the confidence of small savers in our financial institutions and to put societies and banks on the same footing in this important area. The contribution of societies to the protection account in the Central Bank is set at 0.2 per cent of Irish pound shares and deposits, which will mean that societies collectively will have to maintain a deposit of something in the region of £7 million with the Central Bank as their contribution to the fund. This compares with £4.5 million currently maintained by societies under the 1976 Act. It should be noted that this is a once-off deposit which will earn interest for the societies. Societies will only have to make further contributions in line with the growth in their shares and deposits or in the event of a payout from the fund.
Part X is essentially a re-enactment of similar provisions in the 1976 Act relating to the amalgamation of societies and the transfer of engagements between societies. The opportunity has been taken to clarify and streamline the process by which societies can amalgamate or transfer engagements. It is important that societies have a clear and well-defined mechanism for effecting amalgamations and transfers particularly at a time when future developments in the financial area may well give rise to some rationalisation of our existing building society configuration.
Part XI contains a series of detailed provisions which will enable a society to convert itself into a public limited company. I would like to emphasise that the Government's main concern in this is to ensure that any society proposing to convert carefully considers all the issues involved and that the conversion process is not rushed into on the basis of ill-considered and half thought-out proposals. That is why the conversion process contains safeguards such as the requirements to consult with the Central Bank, to draw up a formal conversion scheme, to have the scheme approved by a conversion resolution passed by a majority of the investing and borrowing members entitled to vote and to have the scheme approved by the Central Bank. In addition, aggrieved members will, under section 105, have recourse to the High Court if they consider that the conversion scheme does not respect their rights.
Section 102 contains a number of what we have termed protective provisions. These are intended to ensure that societies do not come under external influence to convert with a view to their take over and that following conversion a society will have five years of assured independent life in its new status. I believe that new forward-looking legislation such as this should not freeze societies into a specific legal form and exclude them from the option of conversion and I am satisfied that the procedure laid down with its inbuilt safeguards will ensure that any conversion will be properly considered and carried through.
Part XII is concerned with the winding up and cancellation of registration of a society and is mainly a re-enactment with modifications of existing provisions. There is a new safeguard for mortgage holders in that a liquidator cannot sell off mortgage assets except on terms that the High Court consider just and equitable.
Part XIII contains a number of miscellaneous provisions, including a requirement on the Central Bank to keep a public file relating to each society containing specified documents provided by the society. Members of the public will be entitled to inspect these files. Provision is also made for necessary amendments to the Banker's Books Evidence Acts and Bills of Exchange Act so that societies will be able to provide banking type services. Section 127 is designed to give building societies the same status as banks as depositories of money, for example, to hold client funds and to accept payment of wages.
The underlying objective of the Bill can, I think, be summarised in the phrase "preparing for the future". That is essentially what it is about — allowing societies to use the considerable human and financial resources at their disposal to develop not alone for the benefit of their members but also for the benefit of the economy generally. The Bill will result over time in the transformation of societies as we know them today without diminishing their commitment to housing. That societies are preparing for this transformation is clear, in some cases at least, from the injection of new and additional skills and changes in internal organisation. The transformation, however, will not be without difficulty and will require careful planning and preparation.
This Bill I believe will provide a good framework with which societies can plan their future development. It sets out very few boundaries to their future role and activities and, as I have said elsewhere, the main constraint on societies will be their own capacity to broaden and intensify their business without prejudicing the funds of their investors.
I hope the House has found my explanation of the thinking behind the Bill and of its major provisions useful and helpful. Due to its length I regret that I was unable to dwell in detail on individual provisions but I will try to respond to any points or queries raised by Senators in my reply to the debate.
These Bills as you are aware, a Leas-Chathaoirligh, have been around since December last year. Every country in Europe has modernised its legislation on financial institutions in the recent past. We set up a working party over two years ago. Everybody was aware of what was in the Bill and everybody has a good idea how carefully it was dealt with in the other House. These Bills are very urgent and necessary. We need to reform our legislation on financial institutions to prepare the path for 1992 negotiations. These matters cannot be set aside. The Dáil having considered these matters at great length and having passed them, I assume the Seanad will find it useful now to consider them further. Molaim an Bille don Seanad.
