Noel Ahern (Dublin North West, Fianna Fail)

I move: "That the Bill be now read a Second Time."

The purpose of the Bill is to amend and update certain provisions of building societies legislation contained mainly in the Building Societies Act 1989. The Bill is based, to a large extent, on recommendations of a review group which contained representatives of relevant Departments, the Financial Regulator and three building societies. The group proposed a package of reform measures. It concluded that any building society wishing to demutualise and develop as a public company should not be unduly restricted as regards the conditions under which they could pursue that option. However, it also recommended that any society wishing to continue to develop as a mutual should be adequately protected in retaining its mutual status. In addition, it considered that various provisions of the legislation should be updated to widen the powers and flexibility of building societies, subject to an appropriate level of approval by the Central Bank.

The main legislative framework for the building society sector is the Building Societies Act 1989 which broadened the range of business a building society could undertake, including activities such as holding and developing land for residential and commercial purposes, investment and support of corporate bodies, a wide range of financial services, conveyancing and auctioneering services. These extended powers enabled building societies, subject to Central Bank approval, to compete more equally with banks which were becoming increasingly active in the mortgage market that had been largely the preserve of the building societies.

An important change introduced in the 1989 Act enabled a building society to decide voluntarily to demutualise, in other words, to drop its mutual society status and become a public company. The Bill is, in a sense, an extension of the process begun in the 1989 Act in extending both the powers of building societies and their options for demutualisation.

During the 1980s nearly two thirds of mortgages were provided by building societies, with their proportion of total mortgage lending reaching a peak of over 70% in the early 1990s. However, since the enactment of the 1989 legislation, there has been much change in this area. The number of building societies in Ireland now stands at three: EBS, Irish Nationwide and the ICS. They account for approximately 20% of the mortgage market. This has resulted mainly from mergers and demutualisations. Two societies have converted into public companies under the provisions of the 1989 Act. Irish Permanent demutualised in 1994 and now trades as Permanent TSB, while the First National Building Society, now First Active, converted in 1998. Both demutualisations took place under the so-called "protective provisions" in section 102 of the 1989 Act precluding a takeover for five years which are being amended in the Bill.

Although the timescale for processing the Bill is tight, it is very desirable to avoid any uncertainty for the market and bring closure to the issues surrounding possible future building society demutualisations. This is a technical Bill consisting almost entirely of amendments to the 1989 Building Societies Act and dealing, as it does, with financial services issues, the subject matter is somewhat outside the mainstream of my Department's functions. Its production has been very much a collaborative process between my Department, the Departments of Finance and Enterprise, Trade and Employment, the Financial Regulator, the building societies and the Attorney General's office.

I shall outline briefly some of the main provisions of the Bill. A number of sections contain either standard provisions in a Bill or purely technical amendments to the principal Act. While the main focus of attention in this area has been on the change in the demutualisation provisions, the Bill also provides for a number of other reforms in the legislation governing the operation and regulation of building societies. These arise from matters considered by the review group and subsequent proposals from the sector which have been agreed with the relevant Departments and the Financial Regulator. These include amendments to increase the powers and discretion of societies, subject to approval by the Central Bank, as appropriate, in matters such as the range of services they provide, how they source funding, the bodies in which they can invest, categories of customers who can be given membership and the extent to which specific approval of society members and the Central Bank is needed in order to undertake certain functions. I will outline briefly some of the main changes.

Section 7 allows building societies to extend membership to additional categories of customers and establish loyalty schemes for members. Section 8 broadens the scope of building societies to raise funds from different sources in line with other financial institutions and also extends their power to provide security for borrowings by various bodies in which they are empowered to invest.

Section 9 brings the powers of building societies in regard to mortgages into line with those of other financial institutions, including clarification of powers relating to refinancing and top-up loans and allows mortgages to be provided without the society having a first charge against the property. Section 10 permits a building society to make unsecured or partly secured loans without first having to adopt the power specifically to do so. The Central Bank will have a general supervisory role with regard to the making of these loans rather than prescribing a specific loan limit as currently.

Section 12 extends the existing powers of building societies to invest in or support other bodies, including investment in unincorporated bodies such as partnerships, as well as corporate bodies. Section 13 extends the range of financial services that can be offered by a building society, including any activities under the EU codified banking directive not otherwise permitted by the legislation. Examples of new services that could be provided arising from this include trading for the accounts of customers in money market instruments and other financial instruments and portfolio management and advice. Section 15 provides that powers ancillary or incidental and related to powers already adopted by members of a building society and approved by the Central Bank will not have to be separately adopted and approved.

Sections 19 to 27 provide for amendments of the legislative provisions relating to demutualisation. The main change in this area involves giving a building society discretion to decide to opt out of the five-year post-conversion protective provisions in existing legislation which preclude any individual or institution holding 15% or more of the shares of a demutualised society for five years. There are, in fact, two elements involved in this matter in the Bill. First, section 21 amends section 101 of the Building Societies Act 1989 to allow a building society, in specified circumstances, to propose a conversion scheme that will, effectively, disapply the provisions of section 102. This opt-out provision is designed to operate in a way that will not adversely affect any society wishing to retain mutual status. A society will only be able to disapply the protective provisions if it has, for the preceding five years, required a minimum of €10,000 to open a share account.

Section 19 contains a further provision to protect against pressure for demutualisation being brought to bear through members of a mutual building society. It extends an existing provision, in section 74 of the 1989 Act, precluding members from proposing conversion resolutions at annual general meetings. The reason for this change is that there were doubts as to whether certain types of resolutions referring to conversion were covered by the existing provision and also the need to cover resolutions relating to access to membership which, under the Bill, can constitute a route towards demutualisation. However, I have considered amendments tabled by Deputies to this section and accept that the current wording could be interpreted as being rather restrictive. In response to these concerns, I am prepared to bring forward an amendment on Committee Stage to ensure there will no be question of restricting the right of members to raise any issue for discussion.

The second element of the provisions relating to conversion and sale of a building society involves the insertion of a new section in the legislation providing for an integrated process of conversion and immediate acquisition. Section 22 provides that a society opting to convert without the protection of the five-year post-conversion protective provisions will be empowered to do so through a combined "conversion-acquisition scheme" which will form part of the conversion scheme and as such, will be approved by the members of the society. This will enable the society to agree a trade sale of the company to be implemented immediately on demutualisation. If, for any reason, that acquisition does not proceed, for example, owing to some condition of the agreement not being fulfilled, the conversion will be terminated and the society will continue as a mutual building society.

These provisions merely provide additional options for demutualisation but they are not are not in any way prescriptive as to which, if any, of these options are taken. The Bill is primarily about giving building societies more options. It gives the existing building societies and any that might come into existence a greater range of options on their corporate status. As is well known, the Irish Nationwide Building Society has indicated a desire to be able to demutualise without the present five-year post-conversion restriction on conversion. It will, however, still be open also to any society to demutualise with the cover of the existing protective provisions. The Bill supports any society wishing to remain mutual, but allows any society which sees its future outside the mutual sector more ways to pursue that strategy. The decision rests entirely with each building society. That decision is ultimately made by its members who must decide whether to approve a conversion scheme. That will still be the case with the Bill.

It might be useful to outline a little more fully how the conversion process will actually operate. The demutualisation process is governed by a conversion scheme under the Act. While the scheme is drawn up by the directors of the society, it must be approved by its members and confirmed by the Central Bank which must consider any objections or representations made. There is also provision for members of the society to petition the High Court for cancellation of a conversion scheme. Where the conversion process is duly completed, the society must be registered under the Companies Acts, whereupon it will become incorporated as a public company; in effect, changing from a building society to a bank.

The intention of the Irish Nationwide Building Society to demutualise, following enactment of the changes provided for in this Bill, has been well signalled. The question of entitlements of members or borrowers of the society in the event of demutualisation has been the subject of media speculation. However, these entitlements are not prescribed in the legislation. The only specific provision in that regard in the legislation is a condition that any entitlements arising from a shareholding in a society are restricted to members who have held shares for at least two years. This provision is being amended to make it absolutely clear that it does not restrict possible entitlements solely to shareholders.

As in the case of the two demutualisations that have already taken place, the details regarding entitlements are matters to be determined in the conversion scheme which governs the conversion process, subject to confirmation by the Central Bank. While the details of the conversion scheme are matters for the society and the Central Bank, I would be surprised if the precedents of the other two demutualisations did not generally apply, whereby qualifying shareholders and mortgage holders received entitlements, and where people qualified on both counts, they received dual entitlements.

I would like to clarify some of the proposed amendments. The criterion for opting out of the protective provisions has been formulated in a way that ensures sufficient protection for a society that wishes to remain a mutual society. This is achieved by making it a condition for opting out of the protective provisions that a building society has for at least five years prior to demutualisation restricted access to membership by requiring a minimum deposit of €10,000 to open a share account. In other words there will now be a five-year period of protection either before or after demutualisation, depending on whether a society wants to have the option of being sold following conversion to a public company. This is logical. The five-year buffer period prior to conversion is designed to discourage any potential predators and carpetbaggers, as opportunists trying to make a fast buck are termed, who could quickly emerge and have a destabilising effect if the post-conversion protection was dispensed with and nothing put in its place. This type of pre-conversion protection has, in practice, already been applied by the Irish Nationwide Building Society.

It is important to be clear that the Bill does not oblige any member of a society to have a total of €10,000 on deposit for a period of five years to qualify for entitlements on conversion, as some reports have wrongly suggested. The specific conditions to be satisfied by individuals to qualify for entitlements will be set out in the conversion scheme, which must be approved by the members and the Central Bank. The €10,000 provision is a technical provision that acts as the condition for allowing a society to opt out of the existing five-year post conversion restriction on takeover, while also providing protection against possible predators and carpetbaggers. This provision is also favourable to longer-term members. I know some people are looking forward to proceeds from conversion offsetting possible shortfalls in endowment mortgages.

I would also like to correct a report that if a society wants to remain mutual, membership will be restricted to those who deposit a minimum of €10,000. As I have indicated, this condition is merely the criterion for giving an institution the option to demutualise without the protection of the five-year ban on takeover after conversion.

Contrary to what was implied in a recent newspaper article, a society that has not, up to now, restricted access to membership would not have to wait for five years to convert from mutual status to a public company if it were to decide to embark on a policy of demutualisation. It is immediately open to any society to pursue demutualisation, if it so wishes, under the existing 1989 Act provisions, in the same way as the two societies that have already successfully converted. The Bill does not alter this option. However, a society would have to restrict access to membership for five years before it could avail of the new option under the Bill to dispense with the five-year post-conversion protective provisions.

The Bill will result in building societies in future having four possible options with regard to their status, namely, to remain mutual, to demutualise under the existing protective provisions, to opt out of those provisions and be taken over immediately or to opt out and be sold at a later date.

There is no reason to assume that a building society should inevitably take the demutualisation route. The legislation is designed to ensure that, in opening up additional options for institutions that wish to convert, no new dynamic is created that might bring additional pressure for demutualisation to bear on a society that wishes to remain mutual.

The provisions in the Bill have been developed in response to proposals from the sector and deal largely with technical aspects of financial services. The Government has a broadly neutral position on these matters. The objective is to ensure that the legislative framework facilitates efficiency and flexibility while maintaining a proper regulatory regime. These reforms reflect the fact that significant changes have taken place in the financial services sector in recent years.

The position in that regard has changed considerably since the 1989 Act was enacted. At that time, prospective house buyers, particularly first-time buyers, were very much at the mercy of building societies. Waiting lists were the order of the day, not only for mortgages, but often even for the right to apply for a mortgage. Matters have improved beyond recognition in that regard. The 1989 Act, which we are now amending, played a role in that transformation. The lending institutions have also developed greatly and have facilitated hundreds of thousands of additional households into home ownership, especially during the past ten years or so of tremendous growth in the housing market.

I acknowledge the role that some of the lending institutions now play with regard to affordable housing. Originally, local authorities, through the Housing Finance Agency, were the sole providers of mortgage finance to affordable house purchasers. In recent times, Bank of Ireland Mortgage Bank, followed by the Educational Building Society and IIB Homeloans entered the market with loans tailored to meet the needs of purchasers of affordable housing.

Today's mortgage lending sector is not entirely without issues, but these are very different from the issues that were current in the 1980s and early 1990s. Since around the middle of last year, I have consistently expressed concern about the likely impact on house prices of increased lending and, in particular, 100% mortgages. In a recent quarterly bulletin the Central Bank commented that the gradual acceleration in house price inflation since last autumn had coincided with some easing of credit conditions and that this seemed, at least in part, to reflect an increased effort on the part of mortgage lenders to market some new products, specifically 100% mortgages.

As regards the longer-term evolution of building society legislation, this Bill is not, nor was it ever intended to be, a root and branch overhaul of building society legislation. Any more comprehensive updating of the legislation could best be looked at in the light of developments in legislation relating to the wider financial services sector and corporate governance generally. In this regard we are mindful that reviews of company law and financial services legislation are in progress. The far-reaching changes that have taken place in the mortgage lending market, including the much reduced number of building societies remaining, their smaller share of mortgage lending and the fact that they are now supervised by the Financial Regulator, in common with other financial institutions, have largely removed the rationale for a separate code of building society legislation. This point is reinforced by the fact that some of the changes being made by this Bill will further reduce the distinctions between building societies and banks.

The Government has, accordingly, decided in principle that the building societies legislative code should be brought within general financial services legislation at a future date. This will give a chance to reflect further on the role of the mutual sector and its continuing contribution to promoting diversity and price competitiveness in the mortgage market. Meanwhile, this Bill implements a number of important reforms and updating of building society legislation and brings clarity to the options available to societies regarding their future corporate status. Accordingly, I commend the Bill to the House.

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