Keeping building society legislation relevant for the 21st Century
It's time to update the legal framework surrounding building societies so that they reflect the needs of modern society.
It feels like the uncertainty and change of the past few years has followed us into 2022, especially with the situation in Ukraine. But one constant in UK financial services is the building society sector. It has over 25 million members across the UK and has 23% of the mortgage market and 18% of the cash savings market. While building societies are continuing to help their members to save and to buy or build a home, which they’ve been doing since 1775, the governing legislative framework needs updating.
It’s 25 years since the Building Societies Act was enacted, and the world has changed a lot since 1997. Digital and technological changes, along with the Covid-19 pandemic, which increased video communications and hybrid working, means the legislation no longer fully reflects the world we are living in.
The current framework
Building societies are subject to two nature limits: at least 50% of their funding must come from members (subject to some exemptions), and at least 75% of their lending must be on home mortgages.
The member funding limit means there is a focus on longer-term customer savings and this remains an important feature of the building society model. But modifications are needed to make the funding limit work effectively in the 21st century.
These are our proposed changes:
1. Allow deposits from savings platforms to be included within the 50% member funding limit
The way in which people save is changing, with people increasingly using savings platforms – online hubs that provide access to a range of savings accounts from different building societies and banks through one website. The structure of these platforms means that savings deposits are held in an aggregate account as non-member deposits rather than share accounts, even though the underlying cash is from individual savers. This means that under current legislation these balances are excluded from the 50% member funding limit.
As consumers become more dependent on digital tools for convenience, we expect this type of saving to grow, and building societies must be able to engage in this market without being disadvantaged. The funds received from savings platforms therefore need to be included in the 50% member funding limit.
2. Increase the flexibility within the definition of member funding to ensure future-proofing
The funding limit will create challenges for building societies that other financial institutions, like banks, do not have. The Treasury is already proposing sensible changes on how the undesired constraints could be eased. We need these to be introduced and alongside the Act more generally be reviewed regularly to ensure they remain appropriate.
3. Update the Building Societies Act (1986) to align with the modernisations made to corporate frameworks and other legislation for companies
Building societies operate under a separate legal framework from companies, and it is not usually modernised at the same time. Consequently, building societies remain under more burdensome and unnecessary legislative requirements compared with, in particular, the Companies Act (2006). The Treasury has proposed a few important but limited modernising and equalising measures, such as electronic voting at AGMs and virtual/hybrid AGM meetings, but other equalising changes are excluded, such as:
- Removing the reference to the retirement age for a director
- Extending the definition of a director's fiduciary duty
- Converting criminal offences into civil offences
- Widening scope of enabling power to update the 1986 Act in line with future changes to company law.
Whilst the Building Societies Act is broadly fit for purpose, making these changes will allow building societies to better serve customers and ensure the sector stays fit for purpose through further financial and technological change.
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