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Secondly, that raises the spectre that one of the major building societies might be in difficulty. Because the terms of the order are such that only those building societies which, if they got into real difficulties, might have an effect on the financial system as a whole, are covered, the number of building societies that are in fact potential beneficiaries of this provision is small. The inevitable conclusion, on reading the terms of the order, is that the Government, the Bank, or both, are worried about one or more of the societies. So, as the
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The other point that I wish to raise was also mentioned by the noble Baroness and concerns the banking reform Bill. My understanding three months ago, when we were discussing Northern Rock, was that the Bill was going to be brought forward significantly sooner than is now the case. I thought that the Government had said that it would be brought forward in this Session. Can the Minister explain why there has been such a delay that it is possible that the Bill will not be brought forward until at least 12 months from now? Certainly all the language used by Ministers implied that we could expect it before the summer.
Lord Davies of Oldham: As usual, I am grateful to the two noble Lords who have spoken, and I shall do my best to answer their questions. However, there is a hare being set to run that ought not to be released. No building society is in trouble. We are not bringing forward this order because of any anxiety or emergency. Indeed, I do not see that I can be chided by the noble Baroness on the one hand for being a little tardy in bringing forward the order, while on the other hand she is suggesting that it has been prompted by anxieties that a building society will need to avail itself of these provisions, and that is why the order is before us at all.
Neither of those positions is sustainable. The Government said during the passage of the Banking (Special Provisions) Act that it provided for us also to address protection for building societies in circumstances about which we all know. The noble Baroness has been kind enough to keep her remarks about Northern Rock to the absolute minimum, so I shall produce my riposte in minimalist terms. The Government acted effectively under that Act against a background where, we all recognise, the credit crunch is producing an enormous crisis for the financial sector. The Government have put in place the necessary protections against outstanding difficulties for institutions, of which Northern Rock was clearly one that required immediate action.
That is not so with other banks, nor with building societies. The Government made a facility available to the banks to increase liquidity—a position that did not draw much criticism from elsewhere. When we passed the Act, we said that we would extend its provisions on access to credit from the Bank of England to the building society sector. Did we consult? We did not go through a widespread public consultation, because it was a specific objective derivative from the Act, but we did talk to the Building Societies Association. That is why, in my opening speech, I was able to indicate its support for the order.
We have brought the measure forward at the proper point. I might be a little more concerned about the timing if I did not think that the noble Baroness
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Neither on timing, nor on the nature of the consultation, are the Government open to criticism. It is clear—as we recognised in the passing of the Act—that the building societies have a different legal framework. We had to have due regard to that, and we are producing an order that responds to it. I take criticism in good part, because I know that it is always constructive criticism from the noble Lord and, even more so, from the noble Baroness, but I am not going to let the canard flourish—I started off with a hare running, so I am getting my animal and bird metaphors mixed—that this is an emergency provision just before some institution declares that it is in great difficulty. Not so; this is an orderly process that we had foreseen and a protective process.
It is necessary, as I was forced to declare to the House earlier today in answer to a Question, because there is an international crisis in the financial sector unprecedented since the Great Depression. We are all facing challenges of whether our legal and institutional provision can cope with the difficulties. I reassure the Committee that this is a modest building block in that necessary rampart of support addressed to the building societies, and there is nothing more sinister in it.
5 pm
As for where we are with regard to the banking Bill, the noble Lord, Lord Newby, always shows enormous enthusiasm for any proposal from the Government and wants to see it in the light of day as rapidly as possible; and I would like on many occasions to meet his enthusiasm. He will recognise, like the noble Baroness, that it is a significant Bill, which involves enormous amounts of preparation and consultation. We never said as a definitive statement when the legislation would see the light of day.
We indicated that it was necessary for us to go beyond the emergency position in the Act passed in February to a more substantial position for the whole financial sector. It is a significant undertaking against a challenging background, and noble Lords will have to contain their impatience a little. The Government intend that the Bill will be produced this year. I cannot be any more precise about the timing. If I am chided about the absence of consultation on an order that is derived from an Act that everyone recognised, having been passed through both Houses of Parliament in two days, probably deserved the status of an emergency measure, I am certainly not going to be chided about the length of consultation time before we produce the banking Bill.
Baroness Noakes: I thank the Minister for giving way. He is being very interesting on the subject of the next banking reform Bill. May I take him through the
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Lord Davies of Oldham: That is a good try, but I am not going to be drawn into detail about a Bill that is still being prepared. The noble Baroness, with her usual accuracy, has identified when the provisions of the Act will conclude. The Government, having proposed that timescale, are mindful of it, and that is why the Bill has been promised for this year and will be produced this year for consideration.
I would be the last member of the Government to be presumptuous about how rapidly we could get through a financial measure of such significance; unless the noble Baroness is offering on behalf of her party a level of co-operation unparalleled in the past so that we can see the Bill rapidly translated into legislation. The timing is an unknown factor as far as I am concerned and, in all honesty, it is probably an unknown factor as far as she is concerned. She cannot tie me down to dates regarding Royal Assent to a Bill that is still at the stage of consultation and preparation.
On the Butterfill changes and the Bill that her honourable friend in the other place introduced, the proposed changes to the funding limits for building societies form an integral part of the Butterfill Bill, and during debates in that House we promised to offer MPs and Peers the opportunity to comment further. We will do so at a later date, when we seek to finalise the rest of the provisions before we implement the provisions of the Butterfill Bill. There is unfinished business here, but we indicated that we would offer further opportunities for consultation, and we intend to do so as far as that measure is concerned. In the mean time, I think it might be regarded by the rather more neutral observers of our exchanges that we have strayed quite a long way from the order before us.
On Question, Motion agreed to.
Building Societies Act 1986 (Accounts, Audit and EEA State Amendments) Order 2008
5.05 pm
Lord Davies of Oldham rose to move, That the Grand Committee do report to the House that it has considered the Building Societies Act 1986 (Accounts, Audit and EEA State Amendments) Order 2008.
The noble Lord said: I bring forward this order with a certain degree of trembling apprehension. If we could extend the last order to quite a significant
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The overall objectives of these directives are to help to improve the credibility of financial statements provided by businesses in the EU, establish some basic sets of principles for the conduct of statutory audits and to engender good corporate governance practice. Before I move on to the substantive issues included in the order, it may be useful for me to explain the background to the directives. They have their genesis in the European Commission’s broader programme of company law reform aimed at enhancing the credibility of financial statements and annual accounts published by European businesses and, more significantly, in the need for accurate, reliable information in the aftermath of certain corporate financial scandals in the EU such as Parmalat. The directives focus on the linked objectives of increasing confidence in corporate governance frameworks, improving investor confidence through increased transparency and requiring better information from businesses. The measures contained in them are consistent with Government policy and contribute to several of the aims that this Government believe are important to UK industry such as stability, market confidence, better information and improved access to capital.
I must stress the obvious in that UK legislation is already in place for a significant proportion of the areas covered by the directives. However there are some areas where specific provision needs to be made in the legislative framework for UK entities. The Department for Business Enterprise and Regulatory Reform has made specific statutory instruments to give full effect to the requirements of these directives in so far as they relate to companies. The Treasury has been working closely with BERR to implement the directives’ provisions for mutual societies for which it has policy responsibility; namely, for building societies and friendly societies. This order relates only to building societies.
I must explain that in relation to these directives a total of four orders have been laid by the Treasury, two for friendly societies and two for building societies. Three of the orders are by the negative resolution procedure. However, this order related to building societies is required to be dealt with under the affirmative resolution procedure, which is why we are considering it today. The power allows the Treasury to modify the Building Societies Act 1986 to reflect changes in company law.
The order makes appropriate amendments to the 1986 Act concerning disclosures relating to off-balance sheet arrangements, disclosure of auditor remuneration, certain safeguards for auditor independence and security, and procedures for the removal and resignation of
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I shall explain briefly which changes the order will make and what they are intended to achieve. the order includes a requirement for building societies to give certain information on off-balance sheet arrangements in the notes to their annual accounts. At present, they are not required by law to give this information. The Committee will agree that this is a helpful addition to building society legislation. It will increase transparency and the information provided to members, as well as to other interested parties, will help them to take more informed decisions.
The order updates the current requirements on the disclosure of auditor remuneration. Under these changes, building societies will have to specify separately in the notes to the accounts the fees paid to the statutory auditor for several categories of services, such as tax and internal audit services, in addition to the fees for the statutory audit. This will show at a glance what other services the auditor has performed for the client and will alert interested stakeholders to any possible conflicts of interest.
It is clear that auditor independence, and indeed the security of the audit, is paramount to the provision of reliable information. The order includes safeguards for auditor independence and security. Accordingly, it requires the auditor’s report to be signed by the senior statutory auditor in his own name, but provides exemptions to the requirement on security grounds. It amends the rules on the removal and resignation of auditors, requiring the building society and the auditor to notify the audit authority of any removal or resignation and to give reasons. It also gives building society members and the Financial Services Authority a right to apply to court for an order under which an auditor was dismissed on improper grounds. These changes implement various requirements of the audit directive, and whenever possible bring building society law into line with company law.
Finally, the order will amend the definition of a European economic area state in the Building Societies Act 1986. The current definition excludes Bulgaria and Romania, which became Community member states on 1 January 2007. The new definition includes all Community members.
I am sure the Committee will agree that the proposed changes are necessary and proportionate. They will help further to enhance confidence in the financial statements and annual reports published by building societies and to engender good corporate governance standards. They will help to protect the rights and the independence of auditors and ensure that they are not unduly coerced into giving favourable, or indeed misleading, accounts. I commend the proposals to the Committee, and I beg to move.
Moved, That the Grand Committee do report to the House that it has considered the Building Societies Act 1986 (Accounts, Audit and EEA State
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Baroness Noakes: The Minister will be relieved to hear that I shall not detain the Committee for long on this order, which is pretty unremarkable. He explained that the order largely follows the Companies Act in its audit and accounting requirements. He did not have the joy of the passage of the Companies Act 2006, as some of us did, but I make it clear that I shall not re-run any of the arguments that I lost during the passage of that Act.
Building society accounting legislation does not always exactly mirror company legislation; we found that when we debated an order last year. Will the Minister therefore confirm that the order does nothing to building society accounts and audit arrangements that is not also found in the arrangements for companies? I had a quick look, and so far as I can see they are pretty much the same, but can the Minister answer for the detail? In addition, will he say whether there will be any further building-society catching-up, if I can put it that way, with Companies Act legislation? It would be helpful to know whether we should expect any more.
Lord Newby: The Minister said that there were four bits of secondary legislation relating to building societies in this area, three of which were going through under the negative resolution arrangements while this one is under the affirmative procedure. It is not immediately obvious why this needed an affirmative resolution because it does not appear to have any major issues of principle within it and has no significant cost involvement. I was amused to see in the impact assessment that the cost of these provisions was estimated in the range of £14,080 to £44,600. Spread over the whole raft of building societies that will have to implement the legislation, that is as near to zero as makes no difference. Here we have a modest set of provisions that bring building societies, as the Minister says, into line with banks and other companies at a modest cost, so I am happy to support them.
Lord Davies of Oldham: I am grateful to both noble Lords. The reason that this is modest is that what the directive seeks to deal with across Europe, British law already largely covers. We therefore have to make more modest adjustments.
The noble Baroness asked whether there is any difference between the requirements so far as building societies and companies are concerned. There is a technicality in that respect, which I will spell out as accurately as I can. The audit directive requires member states to ensure that auditors shall not be dismissed on improper grounds. For companies, that requirement is implemented by an amendment to provisions of company law on petitions brought by company members. There is no equivalent of these provisions for building societies, so the order creates a new right for members or the Financial Services
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I do not think I have anything else to add on the question of catching up on legislation in this matter. As I say, we are reflecting directives that have definite implications for member states. I end on the fact that I am grateful for the succinctness of the comments on this matter. I say to the noble Baroness that, as much as she missed me on the Companies Act, that was nothing to my loss when we did the Banking (Special Provisions) Act and she was unfortunately detained when we most needed her.
On Question, Motion agreed to.
Cash Ratio Deposits (Value Bands and Ratios) Order 2008
5.17 pm
Lord Davies of Oldham rose to move, That the Grand Committee do report to the House that it has considered the Cash Ratio Deposits (Value Bands and Ratios) Order 2008.
The noble Lord said: The purpose of the order is to reduce from 0.15 per cent to 0.11 per cent the ratio that is applied within the cash ratio deposit scheme, which is itself defined in the Bank of England Act 1998. In so doing, it will revoke the Cash Ratio Deposits (Value Bands and Ratios) Order 2004. The ratio applies to eligible liabilities above the £500 million minimum threshold, and this change will benefit all institutions that make such deposits with the Bank. It is estimated that the change will result in a one-off reduction in the amount of cash ratio deposits held of around £700 million.
It may help the Committee if I briefly outline what the cash ratio deposit scheme is. Before 1998, banks maintained cash ratio deposits at the Bank of England on a voluntary basis. As part of the 1998 reforms of the Bank of England, the Government confirmed that they believed it was right that those who benefited from the relevant operations of the Bank should make a financial contribution to its costs. They therefore placed the cash ratio deposit scheme on a statutory footing.
Under Schedule 2 to the Bank of England Act 1998, eligible institutions—broadly, banks and building societies—may be required to place non-interest bearing deposits, known as cash ratio deposits, with the Bank of England. The Bank then invests these deposits and the income earned on them is used to fund its monetary policy and financial stability policy functions. Under Schedule 2(4) the amount that an eligible institution must deposit with the Bank is calculated by multiplying so much of its average liability base as falls into each of the different value bands of the scheme by the ratio applicable to that band, and then taking the sum of those amounts.
The scheme was last reviewed in 2003, and at that time the minimum threshold of the scheme was increased from the figure of £400 million that was set
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The review was conducted last year in consultation with the Bank of England. As part of the review, the Treasury conducted an informal consultation with all institutions currently eligible for the scheme and a formal 12-week consultation. To the former it received 66 responses and to the latter four responses, two of which were from the British Bankers’ Association and the Building Societies Association.
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