Building Societies Act 1986 (Modifications) Order 2024

Considered in Grand Committee

17:07:00

Moved by

That the Grand Committee do consider the Building Societies Act 1986 (Modifications) Order 2024.

I was going to start by welcoming the noble Baroness, Lady Neville-Rolfe, to her place, but I see that she has moved along the Bench. However, I am sure that we will have the opportunity in future. The Government have committed to modernising the Building Societies Act 1986 to ensure that building societies, which are mutually owned financial institutions, primarily offering savings and mortgage products to members, can compete effectively with retail banks. This order forms part of this commitment, by amending the Building Societies Act 1986 to remove some unnecessary burdens on the sector by aligning certain corporate governance requirements with the same flexibilities afforded to companies under the Companies Act 2006. This aligns within the Government’s wider ambition to unlock the full potential of the mutuals sector, recognising the sector’s potential to drive innovation and economic growth across the country through its emphasis on support for members and communities. Specifically, this order modernises the 1986 Act by amending and deleting the relevant provisions in Sections 60 and 61, which currently impose a normal retirement age of 70 for directors, which in turn enables building societies to provide a compulsory retirement age for directors in their rules. By amending these provisions, this order will provide building societies with greater flexibility in appointing directors and end blanket age-based restrictions, modernising the 1986 Act in line with the Companies Act 2006. Moreover, this order will amend Section 80 of the 1986 Act to alter the requirement for the balance sheet of a building society to be signed by two directors and the CEO and instead allow one director to sign the balance sheet on behalf of the board. This removes an unnecessary burden for building societies and aligns the legislation with that for companies, which requires only one director to sign their accounts. Overall, these amendments make small but important updates to the 1986 Act by removing outdated corporate governance requirements and providing building societies with the same modern flexibilities as retail banks operating under the Companies Act 2006. Furthermore, I understand that these changes will be welcomed by the sector. For example, the prospect of an amendment to allow one director to sign a building society balance sheet on behalf of the board was welcomed during a consultation published by the previous Government in December 2021. Although the removal of the retirement age for building society directors was not proposed in the 2021 consultation, it was suggested by the Building Societies Association and another large building society in their responses to the consultation, as published in the consultation response in December 2022. Finally, I shall touch briefly on future considerations. Earlier this year, the Building Societies Act 1986 (Amendment) Act 2024 achieved Royal Assent. This allows for real-time virtual participation at building society general meetings and provides the Government with the powers to introduce subsequent amendments further to modernise the 1986 Act. The Government will introduce these remaining changes in due course. In conclusion, and as I have outlined, this order makes necessary amendments to the Building Societies Act 1986. Crucially, it will support building societies by aligning certain corporate governance requirements with the same flexibilities afforded to retail banks. This is an important step in progressing the Government’s commitment to unlock the full potential of the mutuals sector. It is my pleasure to bring these amendments to the Committee, and I hope that noble Lords will endorse these important reforms.

My Lords, I will make my comments brief. Like the Minister, I am a strong supporter of the mutual sector, but the values of many of our retail banks have sometimes sent them chasing profits when they should have been serving customers. Mutual societies at least argue that at their base there is a different ethos that makes them far more aware of the needs of both their members and the community. I would very much like to see a significant expansion of the mutual sector, particularly to try to deal with the many unmet needs in the financial services sector. However, I am a little uncertain about these two changes, although I am not going to oppose them. I think it is a good idea for organisations to refresh, and by removing a retirement age, there may be a temptation, particularly because people develop a certain personal loyalty to particular directors who have been there for a long time, or a hesitancy to refresh than we would have seen if there were a retirement age. Will the Minister comment on that because it is generally good practice? I understand that a hard and fast retirement age creates all kinds of ageism issues, but is there is going to be any kind of mechanism to encourage that look at refreshment from a corporate governance perspective? The other issue is having one signature rather than three. Again, I have some hesitancies here. In the modern era, it is so easy to provide a signature electronically that one wonders why it should be so desperately cumbersome. I am certain that most directors of mutual societies are people of great integrity and would never allow a falsified statement to go forward. Within financial services, however, we have all been disappointed from time to time by a sort of creeping abuse in one sector or another. I am just concerned that a very natural check may be removed by going from three signatures down to one.

17:15:00

These are relatively small things but the lessons of the past are that temptation can be quite powerful in any organisation engaged in the financial sector. It is very hard for the regulators to genuinely monitor such a wide range of institutions. I am therefore concerned to understand why that decision is being taken. To me, these are not ordinary companies. They are companies whose integrity is far more fundamental to our well-being and our economy than many other institutions. We will not oppose this but I would say that, in my own head, some red flags are raised here.

My Lords, I note my interest as a director of the Co-operative Bank, which has agreed to be acquired by the Coventry Building Society. I agree with the comments from the noble Baroness, Lady Jones, on the advantages of the mutual sector. I possibly hesitate to agree with the comments of the noble Baroness, Lady Kramer, given that the Co-operative Bank is not the best example of the virtue of the mutual sector as opposed to capitalising banks under the Companies Act in the normal way and funding them in public markets. These things can be looked at in different ways. Building societies have long been the backbone of local communities. They embody the principles of mutuality and prudence, offering a model of finance that places people before profit. Yet, as our economy evolves and the needs of homeowners and savers shift, so too must the regulations that govern these vital institutions. This draft order amends Sections 60 and 61 of the 1986 Act to remove all references to the normal retirement age or the compulsory retirement age for directors. It will update that Act in line with the Companies Act 2006, under which there are no longer corresponding restrictions for company directors following the repeal of Sections 293 and 294 of the Companies Act 1985 by Section 1295 of and Schedule 16 to the 2006 Act. The draft order also amends Section 80(1) of the 1986 Act so that the current requirement for the balance sheet of a building society to be signed by two directors and the CEO is changed to allow one director to sign the balance sheet on behalf of the board. We would support that on these Benches. This amendment will modernise the 1986 Act, aligning the provisions with Section 414 of the 2006 Act and, on these Benches, we welcome it. This order would reduce a small but unnecessary burden on building societies, providing them with the equivalent accounts sign-off procedures for companies. It makes sense to modernise the 1986 Act, or at least to bring it in line with the Companies Act 2006. As Conservatives, we will not oppose a measure that will ease unnecessary burdens on businesses and financial institutions, and thus I welcome this order.

I start by thanking noble Lords for their attention on this important matter. As I stated in my opening speech—I hope this gives some reassurance to the noble Baroness, Lady Kramer—the Government are committed to supporting the mutual sector, which we see as a key component in delivering inclusive growth across the country. I refer noble Members to the Mansion House speech delivered by the Chancellor of the Exchequer just last week, when she announced multiple new measures to unlock the potential of the mutuals sector. I do not need to go through all the specific points that were made then, but that speech amounted to a very strong commitment and recognition of just how important their contribution is and how much more could be achieved. I specifically refer to the comments that the noble Baroness, Lady Kramer, made about the change to one director being allowed to sign off the balance sheet. I repeat that the amendment will not impact on the reliability and accountability of the process. The full board of the building society will still be required to approve the annual report and accounts, and the director’s responsibility is not enhanced by this change. Additionally, all building societies are public interest entities and are regulated by both the Prudential Regulation Authority and the Financial Conduct Authority, meaning that building societies are required to comply with the regulatory obligations of these entities, ensuring that their accounts are appropriately checked and scrutinised. In addition, Section 60(11) and (13) of the 1986 Act will specify, after the amendment of the SI, that all directors must step down after three years, regardless of age, although they may be re-elected. Therefore, wider members will still be able to scrutinise the performance of all directors. There is really no justification for preserving age restrictions for building society directors when these have indeed been removed for companies. I thank the noble Lord, Lord Altrincham, for his comments and support for the proposals that are being considered today. It is our strong belief that these will update certain outdated and unnecessary provisions in the Building Societies Act 1986 and will therefore ensure that building societies can benefit from a legislative regime that is fit for the 21st century. I am sure that noble Lords will join me in supporting these amendments.

Motion agreed.

Committee adjourned at 5.22 pm.