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Select Committee on Finance and General Affairs díospóireacht -
Thursday, 6 Feb 1997

SECTION 64.

Amendments Nos. 33 and 34 are related and both may be taken together. Is that agreed? Agreed?

I move amendment No. 33:

In page 33, lines 40 and 41, to delete "amended by the insertion after section 101 of the following section:" and substitute the following:

"amended—

(a) in section 101 by the insertion after subsection (6) of the following subsections—

‘(7) The terms of a conversion scheme may, if it has been approved by the board of directors of the society, specify that if the Central Bank considers it in the commercial interest of the successor company the successor company may allot or agree to allot any shares in or debentures of the company so as to enable more than 15 per cent. and up to 100 per cent. of the shares in or debentures of the company to be subscribed for or acquired and held by, or by nominees for, any one person.

(8) The Central bank may, in contemplation of the intended exercise of its powers under section 102(4) undertake by notice to a building society that conditional upon and immediately following approval, confirmation and registration of a conversion scheme in accordance with Part XI, it will consider it in the commercial interest of the successor company to direct, and that it will direct by notice in writing to such successor company that subsection (1), (2) and (3) of section 102 shall cease to apply to such successor company, forthwith upon registration of the society as a company, pursuant to section 106, so as to enable more than 15 per cent. and up to 100 per cent. of the shares in or debentures of the company to be subscribed for or acquired and held by, or by nominees for, any one person in accordance with the provisions of the conversion scheme.',

(b) by the insertion after section 101 of the following section:".

This amendment has been lobbied by the Irish Nationwide Building Society. In this era of openness, transparency and accountability, I and my life partner, and mother of my children, have an ordinary residential mortgage on our home with this building society at the normal commercial rates.

The building society has lobbied for some years regarding such a change. The chief executive met me before Christmas hoping to convince the Department of Finance to bring forward a similar amendment. I understand he also visited Deputy Michael McDowell, officials in the Department of Finance and the Minister for the Environment. I am sure the Department is aware of the reasons put forward by the building society for the amendment. This is the only suitable legislation to appear before the House for some time in which such an amendment can be inserted.

There have been major changes in competition between financial institutions in the past ten years. Competition among them for new business, both deposit and lending, is intense. The recent results of another building society revealed a big increase in business but a reduction in profits because of its understandable attempt to increase its market share.

All building societies operating in this State are on a strong financial footing by any known criteria, national or international. They are also well regulated. The amendment seeks to enable building societies to compete on the same equal footing as other financial institutions, especially State institutions. Both the ICC and the ACC have been allowed compete on this basis.

It has been suggested that the Irish Nationwide Building Society seeks this change to enable it go public. While this would be one of the reasons, it would also allow the society to retain its present status while taking on a partner or becoming part of a larger financial institution.

It is obvious that building societies will be subject to competition from abroad in the near future. Financial institutions here are competing in a limited market and are all making their pitch at the consumer. More international institutions will establish in Ireland and compete for the available business. It is obvious that building societies must increase their volume of mortgage business and that will be difficult. It is also obvious that they must develop their activities in other areas of finance if they hope to generate additional business and revenue. There is huge potential for increased competition on the lending side and this will come even more sharply into focus when Ireland joins European Monetary Union. Building societies should not be limited by legislation in any way.

Although it may appear strange, several options are effectively open at present to a building society if it wants to change. For example, it can remain as a mutual operation or it can merge with another building society. In that case it would probably be similar to the Irish Permanent which must operate within certain rules for five years. The main rule is that nobody can build up a shareholding in the Irish Permanent beyond 15 per cent. However, after five years, that no longer applies. If one examines the share price of the Irish Permanent many people are taking the view that, at the end of five years, a predator may be willing to take it over. That is at least one of the reasons people are anxious to deduct the share price of that building society.

The case made by the Irish Nationwide Building Society should be accepted by the Minister because we are entering an era of international competition for financial business. I tabled the amendment, which was drawn up by the Irish Nationwide Building Society in consultation with its legal advisers. Deputy McDowell tabled the same amendment and although we have not discussed it, I am aware that he considers the building society put forward a strong case through its lobbying. I ask the Minster to accept the amendments.

The chief executive of the Irish Nationwide Building Society also spoke to me about this matter.

The purpose of the amendments is to effectively remove the protection provisions of section 1 or 2 of the Building Societies Act, 1989. These provisions prevent any one person or institution holding more than 15 per cent of the shares in a building society for five years after conversion to PLC status. The five year waiting period was introduced in the 1989 Act to ensure that a building society, having converted to PLC status, was not exposed to a takeover within that period. It was also intended to protect mutual building societies from speculative pressures to bring about a conversion with a view to a takeover.

The likely result of the proposed amendments is that all building societies, including those committed to mutual status, would be forced to convert to PLC status. Even if the board of a building society was averse to that course of action, a large institution wishing to take over the society could persuade the members to their viewpoint with an attractive package and, through this route, ultimately pressurise the board into conversion and sale. In order to resist a predatory takeover, it is likely that a society would have to seek demutualisation on a pre-emptive basis, seeking a white knight with which to form a partnership.

In the circumstances of the Irish market, the loss of mutual building societies would have adverse consequences, including a loss of competition and diversity in the mortgage market and higher mortgage interest rates than would be the case otherwise. This is an important point. If building societies converting to PLC status were taken over by UK institutions, there is risk that higher loan to income ratios would in time contribute to significantly higher repossession rates in Ireland as they have in the UK.

The amendments would enable the directors of a building society to include in a conversion scheme a provision which would effectively require the Central Bank to sanction the takeover of the society on conversion to PLC status solely in the commercial interest of the company and regardless of any adverse effects on the mortgage holders or mortgage market generally. This would mean that if it were profitable for the successor company, the Central Bank would have to give permission. Inevitably, it would be profitable if the successor company could charge higher mortgage interest rates in a situation of reduced competition.

The amendments show total disregard for the interests of mortgage holders and of the overall necessity to have a diverse and competitive mortgage market. While I understand the reasons behind the amendments, as indicated by Deputy McCreevy, regarding the specific company that has interest — I understand the company's interest — their acceptance would not be in the overall interest of the mortgage market or mortgage holders in this country.

I am disappointed the Department of Finance has taken that view and I do not understand why it has done so. Are we are trying to be like King Canute, putting our hands up and trying to stem the flow because it does not make sense? The Minister of State made the case that competition from abroad will push up interest rates. In two years anybody can come along and take over the Irish Permanent Building Society because the five year period will have elapsed and the provision in the Act regarding the 15 per cent level of shares will no longer apply. Many people take the view that will happen. The Minister of State's submission does not make sense.

There will be increased competition in Ireland and the building societies must compete. State institutions, such as the ICC, the ACC and the TSB, are allowed to compete on this basis but building societies will not be allowed. However, effectively the Irish Permanent Building Society has been allowed to do it and it happened some years ago when the Irish Civil Service Building Society became a subsidiary of the Bank of Ireland. Four building societies remain — the First National Building Society, the Educational Building Society, the Irish Nationwide Building Society and the Norwich Building Society. The Norwich Building Society is making some changes internationally but the other three will be hamstringed.

If a company tried to take over a building society, agreement by the mortgage holders, the depositors and the board of directors must be sought. After that, the Central Bank must gives its approval. These three levels of control must be complied with before a conversion scheme is put in place. The ridiculous position at present is that the only way a building society can get around this is if it is in financial difficulties. It may appear strange but section 102 would allow a building society to get involved with a larger institution if it was more or less going under. It is ridiculous that this is the only way it can be done.

This is flying in the face of commercial reality. I do not understand why the Department of Finance has taken this view. I am aware from private contacts that the Central Bank is completely neutral in this regard and has not advised any line to the Department. Over the years certain people in the Department of Finance may not have been too pleased with certain individuals in some building societies. However, that should not be a justification for denying competition in this regard.

It is not.

If that is case, the arguments advanced by the Department to stop this going ahead are ridiculous. Are we to hamstring these building societies? Some of them may wish to link up with the other institutions and if this amendment is accepted a building society will be able to take on a strategic partner. The other alternative is to go public, like the Irish Permanent, and after five years a predator from abroad could take it over. These amendments would allow a building society to so regulate its affairs that it could control who it goes into partnership with or takes on as a subsidiary. It would not have to go public. When a building society becomes a public company it can be taken over by anybody after five years.

There is no logic to the Department's position on this matter. The Department has advocated freedom of competition between other institutions yet it now wants to hamstring a particular building society. It does not make sense. Further thought should be given to the matter. If these amendments were accepted a building society would form a relationship with a well capitalised institution on a minority or majority basis. The Minister of State should reconsider her approach which is short-sighted in the extreme. It does not stand up to any logical argument and I cannot understand why the Department is advancing it. I am aware there may be differences of opinion on the matter in the Department. The Minister should have a more open mind on the amendments.

I would not say that the Deputy is not making broad sense from certain aspects of the industry's perspective. Conversion and take-over are a package in this context. If these amendments were to be accepted we would have no mutual sector left. That is not in the interests of householders and mortgage holders.

They could all go public under section 1 or 2, like the Irish Permanent, and there would no mutuals.

That is not in their interest. It is not in the interests of householders.

Surely it is in the interests of householders to have competition as far as possible?

There would be less competition and they would be run from across the water given the commercial reality of the small market.

The biggest player is the Irish Permanent and in a short period of time it is possible that a big building society from the UK will take over the Irish Permanent. The Irish Permanent controls the largest segment of the market.

There would be no competition if they were all directed from across the water.

This amendment would allow a mutual building society, with the prior authority of its deposit holders and mortgage holders and subject to the final approval of the Central Bank, to decide what strategy it wishes to pursue itself, rather than be taken over by a large UK organisation. Otherwise the societies will take the pubic company option and we will have no control at all. The employees and the mortgage holders will be disadvantaged. We are setting our face against that.

This discussion indicates that public debate is needed before any major policy change, such as is suggested by these amendments, could be considered. From a housing policy and public interest perspective the loss of mutual building societies as a separate entity in the mortgage market, which acceptance of these amendments would inevitably mean, would have serious adverse consequences.

This issue is primarily a matter for the Minister for the Environment.

What is his view?

There are discussions between the Departments and there are probably differences of opinion.

There are major differences.

The debate needs to be continued more widely than is possible on Committee Stage of this Bill. An amendment to the Central Bank Bill is not the correct means to make a major policy change to such an important sector. Interdepartmental agreement will be needed before it is decided.

The Central Bank provisions of the investment intermediaries legislation contradict the logic here. I am not using just one section of this Bill to change the building societies legislation.

The Minister of State made the point that this would lead to a reduction in the number of mutual building societies. My amendment would allow building societies which are converting to public companies——

The elimination of them I would suggest.

——the extra option of forming a relationship with another institution to control the long term ownership of the society to the betterment of all involved.

There would be an increase in mortgage rates. That is the bottom line.

There is no logic to that argument.

Historically, mutual rates have always been lower.

If these amendments to allow building societies to form relationships without going public are not accepted the alternative is for the building societies to go public. If they do so we will have no control after a period of time over who controls the societies. Rather than allowing the building societies to form their own strategies through relationships with other institutions — an arrangement over which the Central Bank would have some control — they will go public and anyone could take over the societies and control them as they see fit. That is not logical. I am sure the Department of the Environment would not follow that argument.

The Minister of State's point about interest rates is not sustainable. Interest rates are not determined by the actions——

My point is historically accurate.

The financial institutions have changed dramatically in the last five years and the Minister of State's point no longer applies. Building societies, banks and credit unions are all competing and that is what is keeping interest rates down as much as anything else.

They work primarily for their shareholders, not their mortgage holders.

That argument applied 15 years ago but it no longer applies.

It is a fact. The difference between them and the mutual societies is that they are driven by profit rather than the interests of the mortgage holder.

Then Minister is thus arguing that they should all become public companies like the Irish Permanent.

I am not. The mix and the competition there is in the best interest of the householders. Effectively, what the Deputy is saying is that this is too big a policy change to debate as an amendment to the Central Bank Bill and we are not doing justice to this.

Was the change to the Investment Intermediaries Act not significant enough to warrant inclusion in this?

A vacuum was created by the lack of regulation and we could not leave the situation unregulated. It was created by a specific case over which we need not go and which was slightly different.

I do not agree with it.

From a housing policy and public interest point of view, we need a more adequate and considered debate. Moving the amendments is not in the best interest of mortgage holders and housing policy. It would mean the complete removal of the mutual building societies from the marketplace.

What the Minister for the Environment and the Department think about this has been bandied around. I have no reason to believe the Department of the Environment wants to make the change. The briefing material with which the Department of the Environment provided me strongly defends the present position. I have not asked the Minister specifically if he agrees with this. The Department of the Environment's policy strongly defends the present position.

The case was put ably by my colleague. The Minister of State spoke about a serious public debate on this. It seems we will have the debate after the horse has left the stable. The Irish Permanent has changed the situation fundamentally. The fundamental change occurred once the decision was taken to allow the building societies become public limited companies. The Irish Permanent could be taken over by a major British or French banking institution and there will be a substantial international player in the Irish market which will seriously disadvantage and undermine the competitive position of the mutual building societies.

An extraordinarily restrictive practice in law is contained in this, although the amendment is trying to remove it. How does this stand up under European law and other aspects of Irish law? How can the Minister of State defend such position? It is clear from Deputy McCreevy's argument and what the institutions have said that we are undermining their ability to grow and compete in the marketplace where it is certain there will be a major player because of the position of the Irish Permanent.

The Minister of State suggests it would be nice if the mutual building society as it exists could remain in place. We may all applaud that wonderful aspiration. However, that is not a sustainable position in hard financial and business terms. Instead of encouraging them to strengthen their position, as Deputy McCreevy outlined, we are restricting them. It is without question that in two years time when the five year period is up for the Irish Permanent, it will not be possible to protect the buildings societies the Minister of State is trying to protect. The horse will have left the stable and the marketplace will have changed. It is bizarre to try to defend this. Although it may be laudable, it is unrealistic.

What are the perceived benefits to the mortgage holders of a society being mutual? Having had a mortgage for many years from mutual societies, I never felt any benefit. In recent years since the change in the Irish Permanent, I get more accountability, dividends and votes which I never had before. These mutual societies are run by boards for their own benefit without the checks and balances of the Companies Acts and they are self-perpetuating. I see much merit in these proposals. Perhaps these amendments in their present form may not be perfect, but it is an issue which the Minister of State might consider further before Report Stage.

Mutual building societies put their profits back into lower interest rates to the benefit of the members.

They award high salaries.

We should look at yesterday's results from the EBS and their rates at present. Profits are down but their mortgage holders are benefiting.

There are international factors. One cannot sustain an argument that Irish interest rates are controlled exclusively by them.

I am not saying they are controlled exclusively by them, but interests rate are and have been lower than the bank interest rates. They are not driven by the profit motive or do not have to look after shareholders in the same way as the others. The Irish Permanent case has been mentioned and I would to refer to its conversion statement. Its board considered that the provisions regarding the 15 per cent shareholdings contained the articles which apply for a period of five years from conversion should enable it to consider the society's business as a public company without the threat of a takeover bid during this period.

It gives it a considerable advantage in the marketplace having regard to the position of the other mutual societies which may have to wait another five years if they are to convert to public limited companies.

The same rules apply to them all.

I accept that.

This may not be the correct forum to do justice to such a major policy change which these amendment promote. The result of these amendments would be that all building societies — I defend the competition in the marketplace at present — including those committed to mutual status would be forced to convert to public limited company status. The Irish Permanent Building Society converted voluntarily and was pleased to have the five years but all building societies, including those which want to remain mutual, would be forced to convert, even if the board of a building society was averse to that course of action.

Any large institution from across the water or elsewhere wishing to take over the society could persuade members to its viewpoint with an attractive financial package and through this route put pressure on the board to convert and to ultimately sell. To resist a predatory take-over, it is likely that a society would have to seek demutualisation as a pre-emptive basis seeking what they refer in the industry as a "white knight" with which to form a partnership to protect themselves.

The board of a society, the mortgage holders and the deposit holders would have to agree to the option and the consent of the Central Bank would have to be obtained. The Minister of State made the point that they could all be bought off. Is she suggesting the Central Bank could be bought off? At present the Central Bank has no control over the Irish Permanent. These amendments give mutual building societies another option rather than take the public limited companies route over which there is no control. The Department of Finance's position on this is not logical. We have not heard from the Minister for the Environment yet.

Neither have I, but I got directions and advice from the Department. I am being advised by a Department official.

With respect, advisers advise and Ministers decide. Let us hear what the Minister for the Environment has to say.

Deputy McCreevy should come into the real world.

I was a Minister and I made decisions.

Unlike the Deputy, I do not set myself up as a specialist. I claim to be a general practitioner and I am not beyond getting specialist advice from any Department.

I will resubmit these amendments on Report Stage.

Amendment, by leave, withdrawn.
Amendment No. 34 not moved.
Section agreed to.
Sections 65 to 70, inclusive, agreed to.
NEW SECTION.

I move amendment No. 35:

In page 38, before the Schedule, to insert the following new section:

"71.—Section 4(3) of the Decimal Currency Act, 1969, is hereby amended by the insertion of the following paragraph:

(c) paragraph (b) of this subsection shall not apply in the case of coins made for commemorative purposes and where the coins to which the order relates are composed in whole or in part of silver or gold.'.".

The purpose of this amendment is to insert a new paragraph (c) after section 4(3)(b) of the Decimal Currency Act, 1969 to allow for the issue of silver £1 coin as part of an international coin issue programme to mark the 50th anniversary of the United Nations. The provisions of section 4(3)(b) of the Decimal Currency Act, 1969 would effectively require the Minister for Finance to cease providing the normal circulation cupro-nickel £1 coin if a silver coin were issued. Section 4(3)(b) prohibits the issue of the same coin in two different metal compositions at the same time and this prohibition will remain intact but the amendment proposed will allow for gold and silver coins made for commemorative purposes to be issued at the same time as a normal circulation coin of the same denomination.

Amendment agreed to.
Schedule agreed to.
Title agreed to.
Report of Select Committee.

I propose the following draft report:

The Select Committee on Finance and General Affairs has considered the Central Bank Bill, 1996 and has made amendments thereto. The Bill, as amended, is reported to the Dáil.

Is that agreed? Agreed.

Report agreed to.

Ordered to Report to the Dáil accordingly.

I thank you, Chairman, your staff, Deputy McCreevy and Deputy Cullen for their staying power, contribution to and interest in the Bill and the staff of the Department of Finance and the Department of the Environment for their advice during Committee Stage.

I thank the Minister for her attendance and courtesy.

The Select Committee went into private session at 12.55 p.m.

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