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Lord Haskel: My Lords, I thank the noble Baroness for giving way. The existence of such reserves is what enables mutuals to give free use of their capital to new members.

Baroness Gardner of Parkes: My Lords, I thank the noble Lord for that comment. It is true. That is why I make the point about sufficient reserves--but excessive reserves are a different matter. Some building societies have built up huge reserves, and the hand-outs have been huge when they have been disposed of.

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I always remember Lord Houghton of Sowerby telling us in this Chamber how the building society movement started. I do not know whether he was referring to his father or his grandfather, but he said that a group of men got together and each put in a small amount of money until one man was able to buy a house. After that, they continued to put in small amounts, and the next man bought a house, and so on. It was a marvellous scheme, which grew into a huge success. The building society movement has provided housing for thousands, if not millions, in this country.

Mutuality should be the best approach. It is good that dividends do not have to be paid to shareholders and that shareholders' interests do not have be watched over. The point was made that mutuality constantly has to be defended. That is cause for concern. The fight to keep an organisation mutual is a huge expense in itself, and it is not good enough. I have in front of me a cutting from today's Evening Standard about a company wanting to "hand back" the water supply because it is no longer profitable. There is something wrong if people want to provide the benefits of mutuality only because it is unprofitable and unattractive. That is not good. In its hand-out, Standard Life said that it had been a company for 100 years before it became a mutual. That is an interesting history in itself.

I am typical of the many people who do not know where they stand on this issue. No one would refuse a nice little hand-out. Yet one does not want to lose the benefits and see these institutions destroyed. I am a supporter of mutuality and I should like to place that on record.

8.13 p.m.

Lord Lea of Crondall: My Lords, this is a timely debate and we are indebted to my noble friend Lord Faulkner of Worcester for introducing it. I share the thrust of his analysis and indeed that of the noble Lords, Lord Shutt and Lord Haskel. I shall also turn shortly to a point made by the noble Baroness, Lady Gardner.

My central concern is that the financial services revolution is going too far and is destroying some of the best traditions of our institutions, which, as history shows, have made a unique contribution to the social dimension of our lives and to society as a whole.

This is not an occasion for specific legislative proposals. Already in the past year there has been some secondary legislation which has made modest improvements. The House of Commons produced an interesting report in July last year, as my noble friend Lord Faulkner mentioned--to which the Treasury made what might be described as a minimalist response in November.

Perhaps I may quote one sentence from the Treasury response which I should like to query. Paragraph 8 of the Treasury special report states:


    "It would not be right to remove the right to demutualise enshrined in the 1986 Act or simply to increase the rights of those who want their society to remain mutual at the direct expense of the rights of those who wish to demutualise".

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My response to that is: well, yes, but I am not quite sure that we do not want a public policy bias in favour of protecting mutual and co-operative organisations. Even a level playing field is not always sufficient for some people--as Kevin Keegan's squad found the other night. In this context, we must decide what a level playing field is. The Government are asked to tell us about,


    "the role of strong mutual companies in promoting a health and competitive market in financial services".

I spent my working career as a trade union official. As John Monks recently pointed out, Britain's trade unions and mutual organisations, including, for example, building societies, share a long history. They began as friendly society functions. They were established by the underdog to protect and advance the interests of the underdog. That function is still necessary. There are underdogs in need of mutual self-help and protection. We need a public policy bias in that direction. Otherwise, in the next 20 years we shall go round reinventing the wheel. John Monks states that,


    "Mutuals have always played a vital role in this country. They provide financial services to wide groups who are not well served by banks. They were set up to serve the community, and they still do. Their first loyalty is to their members, not their shareholders. And as they have no need to generate profits, over the long term they are guaranteed to beat any bank".

One of the tests as to whether the Government are really committed to helping the underdog in this area is whether, in practice, they are making sufficient connection between social and financial exclusion and the problem of many of our inner cities, and indeed rural areas.

There is a further point which has not been made in this debate. Never was there a time when trust in people's motives in financial services was at more of a premium. In a pub the other day, I heard someone say, "Independent financial adviser? You must be joking". That is the kind of comment that is widely heard at the present time. There is a need for trust in the financial institutions. There is a need for decentralisation. I cite just two examples: when the Town and Country Building Society closed its head office, that had a major effect on Clacton; when the Gateway closed, the impact was felt in Worthing.

That kind of philosophy must be contrasted with the role of the carpet-bagger in investing a small amount of money in a mutual and then forcing it to distribute the assets. I echo what has been said about Standard Life. In the past few days I have heard it said on two occasions on the BBC that "today is the last chance for people to vote to get £6,000". We really must be careful about the media projection of some of these issues.

I could say much more but time does not permit. I hope that my noble friend the Minister will give us a rather philosophical overview of where we are going in this field.

8.19 p.m.

Lord Joffe: My Lords, I, too, am grateful that the noble Lord, Lord Faulkner, has raised this important

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issue, and I support the powerful case that he has made for the Government to take action. At the outset, I declare an interest as a policyholder of Standard Life.

The issue has two dimensions: first, a moral dimension; and, secondly, one of competition. It is unusual to concern oneself with morality in financial matters. However, as the noble Lord, Lord Haskel, outlined, mutual organisations were set up for the benefit of their members and not for profit. Therefore, in my submission morality plays a very important part.

The effect of demutualisation is simply that current members will appropriate for their own benefit the reserves created by previous generations of members. It could not possibly have been contemplated by those previous generations that that would happen to the reserves that they had a part in building. In so doing, the current members are depriving future generations of the benefits of mutualisation. They are also imposing additional expenses on future generations. Therefore, although it is perfectly legal, it is certainly not particularly moral. On the question of morality, it is also relevant to applaud the integrity of the managements of Standard Life and of the Nationwide, who, against their personal interests, support the continuation of mutualisation and the purpose for which the organisations were set up.

I turn to the matter of competition. By and large, the products of good mutuals must be better than the products of good profit-making organisations. That is for the simple enough reason that there is no profit loading. The result of demutualisation is that consumers must pay more for the same products. In my view, it is the interests of consumers that are paramount in relation to the competition aspects. If consumers have to pay more because there is no competition from the most efficient organisations in the field, it is self-evident that government should intervene to protect them from unnecessarily high charges. Government should at least take action to ensure that the most competitive organisations do not disappear.

It is relevant to consider the action taken by government thus far in relation to mergers and monopolies. If, for example, Prudential and Standard Life decided to merge, there is every possibility that the Government would say that that was contrary to the interests of consumers because it created a monopoly situation and distorted the market and, as a result, consumers would be overcharged in the future. Yet, if Standard Life demutualises, competition will disappear and, again, consumers will be prejudiced. I shall be interested to know whether the Minister can provide the rationale for the protection given to consumers as a result of mergers and monopolies legislation and the lack of protection which exists currently in relation to consumers who suffer from the effects of demutualisation.

We know how easy it is for the current members of mutual organisations to be bribed to give up the benefits of mutualisation without regard to the future. We know how easily they overlook the fact that it may not be in their best interests from the long-term point

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of view. Because of that, if the Government consider that there is a role for strong mutual companies in promoting a healthy and competitive market, they had best take action soon because after the next three or four years there will be no strong mutuals to protect.

8.25 p.m.

Lord Graham of Edmonton: My Lords, I congratulate my noble friend Lord Faulkner, not only on initiating the debate but on doing a first-class job in exposing the issues both for and against. In effect, this debate is a defence of the mutual principle. I applaud the principle of mutuality. The concept of "all for one and each for all" appeals to my political background and is the bedrock of a great deal of good.

In practical terms, the benefits of mutuality have been sketched ably by my noble friend Lord Faulkner. I welcome the opportunity to restate the value of mutualisation and to plead with the Government. The noble Lord, Lord Shutt, tellingly told us that the stable door has almost been bolted. However, the stable door was opened by a government not of my political persuasion and for very good reasons. Their political philosophy saw the great opportunity that existed in the locked-in assets of building and insurance societies.

My background is the Co-operative movement. In 1844, when the Rochdale pioneers began their sterling work, they produced, with the trade unions, the friendly societies and a great many others, the concept of helping each other. The great stakeholder was the member. I am delighted at the emphasis that has been placed by the noble Lord, Lord Shutt, on the value of member and consumer participation.

It is only a few years since a predator decided that the Co-operative movement, through the CWS, which was the central federal organisation, was ripe for a takeover. It is due only to a vigorous defence of the CWS, the Co-op and the mutual idea, led by my noble friend Lord Fyfe, the chairman of the CWS, and by its chief executive, Graham Melmoth, that the Co-operative movement is as healthy today as it was then. These attacks come and they will go. We must acknowledge that the jungle in which we walk and try to survive has had predators for a very long time. The principle of "dog eat dog" is well established.

In my view, it is terrible that the appeal to greed and avarice which has been launched in the past few years has found a resonance among so many people. I believe that it is immoral that the assets and prizes, which could have been distributed but which have been kept in the business to make it stronger, are now seen by the present generation as its entitlement. The Co-operative movement is no different. The asset base of the movement substantially comprised the untapped dividends of the members. The members left their dividends in place. Quite frankly, I believe that we should recognise that what we are seeing now could lead to something worse.

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However, it is not the end of the world. Reference has been made to Standard Life, and I wish its directors well. Hitherto, the motivating force for demutualisation has been the directors of the companies who stood to gain the greatest benefit. They knew that once the companies demutualised, there were rich pickings. The first fat cats in our society were the directors of demutualised businesses.

The noble Baroness, Lady Gardner, makes a valid point that the retention of assets can be taken too far, but I would much rather have them prudently managed in that way, particularly if members are being looked after by better terms.

The Minister can do the House a service. The stable door has not been bolted completely. There is still a battle to be fought and won. The Co-operative movement has 8 million members and 30 or 40 big regional co-operatives. They will resist any such move this time, next time and whenever it comes. The Co-op will fight, fight and fight again to retain the principles on which it was established.

The last time that I spoke in a debate on this subject was the day that the Link building societies put forward a scheme to attach excessive charges to hole-in-the-wall machines. I got my debate on an important day, just as my noble friend, Lord Faulkner, was lucky to get this debate tonight. The battle is worth fighting, so I congratulate my noble friend on giving us the opportunity to put in our two pennyworth.

8.31 p.m.

Lord Northbrook: My Lords, I congratulate the noble Lord, Lord Faulkner, on securing this debate. Like other noble Lords, I should declare my interests, first as an investment manager investing in quoted UK life, banking and building society companies, among other UK plcs, and, secondly, as a holder of mutual and non-mutual insurance policies.

I take as my starting point a helpful comment by the Minister. As the noble Lord, Lord Faulkner of Worcester, said, on 18th April, in response to a question from my noble friend, Lady Knight of Collingtree, the Minister advised the House that,


    "The Government's view is that a variety of different kinds of governance in the insurance industry"--

which I assume that we can read as the financial services industry more generally--


    "is a good thing. Therefore there is a place for both mutual companies and for shareholder-owned companies".--[Official Report, 19/4/00; col. 703.]

That makes sense and is important. As Charles Leadbeater, writing in the Guardian a year or so ago, put it:


    "Putting all our organisational eggs into a single basket threatens disaster. We need a healthy ecology of competing organisations and that requires a variety of forms--traditional companies, partnerships, mutuals, co-operatives, social enterprises--to choose from".

At least in part, that is the appropriate answer to the question posed by the noble Lord, Lord Faulkner, about the role of strong mutual companies in

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producing a healthy and competitive market in financial services. We support that. It underlies the point that while, according to the Financial Times,


    "The 'mutual vs plc' argument is sexy--and easy to write about",

it is far too simplistic to perceive the issue merely in those terms. The merits of both sides of the argument are well rehearsed. The noble Lord, Lord Faulkner, and others have enunciated them again tonight most eloquently and I do not need to labour them. However, it is too easy for the debate to become polarised. It is right for the adherents of each side to fight their respective corners, but we have to bear in mind that if competition is to be enhanced and diversity maintained, it is in the interests of the industry and the consumer that mutuals and plcs--and other organisational forms--should co-exist.

What are the strengths and weaknesses of mutual companies? A well run mutual life company, for example, has certain key advantages over its quoted public rivals. It does not have to pay a dividend, and therefore will have more of its surplus to pay out to policy holders. It does not have a share price to be concerned about, and therefore can be less concerned about short-term fluctuations in profit. The mutuals can also make use of a strong local identity to promote themselves.

However, mutuals can have disadvantages. First, due to their size, many may not be able to compete in the long term with their larger quoted brethren. That can be a particular problem in the mortgage market where the size of the market leaders, such as the Abbey National, the Halifax, the Cheltenham and Gloucester and the Woolwich, can lead to greater competition in the setting of rates which the smaller companies may not be able to match over a long period.

Secondly, because of their structure, mutuals can be less able to react to problems within the company, such as additional competition or poor investment performance. Whereas the stimulus of outside shareholders can force change for quoted companies, there is no such mechanism for the mutuals under their existing status.

Some commentators argue that the greatest threat to the survival of mutuals is the management deciding to change to plc status rather than the investors in the company's products.

In summary, neither type of organisation is intrinsically better or worse than the other. What really matters is that the best run of each brings its own benefits to the needs of financial services product consumers.

8.36 p.m.

Lord McIntosh of Haringey : My Lords, I, too, congratulate my noble friend, Lord Faulkner, on introducing this timely debate. I have scored the debate at six in favour and two don't knows. I have counted the noble Lord, Lord Northbrook, and the noble Baroness, Lady Gardner, as don't knows.

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I have been asked by my noble friend, Lord Lea, to give a philosophical overview. I do not think that I shall be able to do that in the 10 minutes at my disposal, particularly as I have to start by declaring an interest, as others have, as a policy holder of Sun Life of Canada and Scottish Widows, both of which have recently demutualised against my vote. That is my starting point.

Let me start with building societies, as the noble Baroness, Lady Gardner, did, remembering a dear friend, Douglas Houghton. Most of the building societies started with as few as 10 friends putting money aside and using the funds to buy one house, then buying more for other members in turn. They dissolved when they had achieved their objectives. A century ago, there were 2,000 of them. Now mergers--a much more significant phenomenon in a sense than demutualisation--mean that there are only 68, of which only nine have converted to plc status. I agree that those nine are among the biggest.

The first legislation for building societies was enacted in 1874. The Building Societies Act 1986 was the first substantial revision of it.

Building societies work on a one-member, one-vote basis. The board is elected by the members to act in their interests. Only the board can propose conversion to or takeover by a plc bank. A vote requires 75 per cent. of saving members on a 50 per cent. turnout and a simple majority of borrowing members. Borrowing members have a veto, regardless of the strength of support among saving members. Those are rightly high thresholds for change.

Despite those high thresholds, when boards have proposed conversion, the votes in favour have frequently been in excess of 95 per cent. on a 75 per cent. turnout. In 1997, the Halifax, the Alliance and Leicester, the Woolwich and Northern Rock got 98 per cent. votes in favour. That is quite a facer for those who want higher thresholds still.

I shall not go into the history of insurance societies, except to say that mutuals and non-mutuals both have long traditions. Demutualisation has happened not only in the United Kingdom but also in Canada and Australia, and it is not one-way traffic. This year, the Royal London took over United Assurance, which is a plc, and as we have been reminded, Standard Life was a shareholder company for 100 years until it mutualised in 1925.

There are over 100 mutual insurance companies. Many are small; for example, provident and mutual health insurance specialists. Most mutuals are general insurance businesses and demutualisation is focused largely on large life mutuals. But even there, some significant players such as the National Farmers Union and Wesleyan Assurance are still mutual companies.

As for the procedures for the demutualisation of insurance companies, there is no legislation governing voting because many are mutuals registered under private Acts. So the business and commitments have to be transferred to a company limited by shares created for the purpose.

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The Insurance Companies Act 1982 sets the framework for that and the regulator, the Treasury--in practice, the Financial Services Authority--has a say in the way in which that is done. Those who believe that they may be adversely affected may make representations to the court.

A number of noble Lords, notably my noble friend Lord Faulkner and the noble Lord, Lord Joffe, have said that other things being equal, mutuals should have an advantage. Indeed, that should be the case. But it is very difficult to prove that. One can almost always find figures to prove either case. Past performance may not be a guide to the future, as it always says in the small print in the advertisements. Payout performance data on policies that run their full term are unhelpful if many are terminated or surrendered early. One can make comparisons between different forms of policy, on the length of policy, on surrender values and on termination values. Those are too complicated from which to draw simple conclusions about which is better. Some companies may be building reserves which may restrict pay-outs. Are they performing less well? It is extremely difficult to say.

On the one side is the theory that, as a company owned by shareholders, management will be driven to perform better. On the other side there is the undoubted fact that mutuals do not pay dividends to external shareholders. However, there is not enough empirical evidence yet, if there ever will be, to test either theory.

Reference has been made to the Treasury Committee report last year which proposed a number of primary legislation changes: aligning the voting thresholds for borrowing members with saving members; applying the same thresholds on members' resolutions proposing conversion; preventing members of less than two years' standing from receiving a share distribution on conversion.

The Government's view is that although, of course, we believe that variety in the market-place is healthy, there are difficulties with the Treasury Committee's view. We must remind the House that borrowers have a veto although they have only one-seventh of the membership. So against the principle of one-member, one-vote, they already have more than their natural share of voting power. When we are looking at the interests of consumers, borrowers, the policyholders, are the consumers for those societies. Experience shows that borrowers vote in the same way as saving members. That may not be a pleasant thought but that is the truth of the matter.

I remind the House that members' resolutions do not have any statutory force. It is the board which must act and the members cannot require the board to do so. Those votes are effectively opinion polls. Imposing voting thresholds does not make any difference to the strength of members' views.

I heard what the noble Lord, Lord Shutt of Greetland, said about charities. All large societies have charitable assignment schemes in place. I heard what has been said about the two-year rule. But that would

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mean that only longstanding members, rather than charities, would receive windfalls and that would not affect the voting. When Lloyds took over the Cheltenham & Gloucester, the two-year rule applied and 95 per cent voted for demutualisation on an 84 per cent turn-out.

Of course, we recognise the intergenerational equity issue. We believe that the boards should take account of future customers; that is, potential policyholders. In the case of insurance companies, the regulator must have regard to the ability of the business to fulfil reasonably expectations of policyholders and potential policyholders.

We have taken action ourselves. We increased the turn-out threshold on conversion votes in 1977 and we have encouraged the Building Societies Commission to increase the number of backers required to nominate board candidates, propose members' resolutions and requisition general meetings.

The Question on the Order Paper asks the Government what they consider to be the role of strong mutual companies in promoting a healthy and competitive market in financial services. Obviously we consider that role to be important. We agree with the thrust of the Question. The subtext is whether we are going to do anything else to prevent demutualisation. I have explained what we have done to make demutualisation more difficult. The problem we have is that the pressure for conversion comes from the members. If we were to support proposals for legislative change, we should risk destroying the very essence of mutuality in an attempt to protect it.

High hurdles are in place before institutions can convert. But in the end, the only way for societies to ensure their own future is to convince their members of the benefits which mutuality can bring. Many societies are doing so through the rates and returns they offer and the quality of service they provide. In the end, the future of those societies is in their own hands, and that is the way it should be.


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