Policy
Nature of a Building Society
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The Building Societies Act 1986 defines what a building society is and what it can do.
The Legal Definition of a Building Society
The legal definition of a building society has four key elements:
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Principal Purpose
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Powers
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Characteristics of the Balance Sheet
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Nature of Membership
The Principal Purpose
According to the Building Societies Act 1986 as amended by the 1997 legislation, the “purpose or principal purpose” of a building society “is that of making loans which are secured on residential property and are funded substantially by its members”.
Powers
The 1986 Act restricts building societies in relation to
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Acting as a market maker in securities, commodities or currencies
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Trading in commodities or currencies
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Entering into transactions involving derivatives
Also, the risks that a building society may use derivatives to hedge against are listed. The Act also prohibits a society from creating a floating charge over its assets.
The legislation is quite different from that which has existed in the past. Until 1986 societies were effectively restricted to offering mortgage and deposit services. The 1986 Act listed those services which building societies could offer. The 1997 Act reversed this approach and the 1986 Act now lists those things building societies cannot do; everything else is legal.
Characteristics of the Balance Sheet
(i) Member Funding Limit
The Building Societies Act requires building societies to raise at least 50% of their funds from members.
(ii) Assets
Under the Act a building society needs to hold at least 75% of its assets (excluding liquid assets and fixed assets) in loans fully secured on residential property.
The Member Relationship
The members of a building society are shareholding investors and mortgage borrowers.
The Building Societies (Funding) and Mutual Societies (Transfers) Act 2007
The Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 received Royal Assent on 23 October 2007. It had started life in December 2006 as a Private Members' Bill sponsored by Sir John Butterfill (Conservative MP for Bournemouth West). For each of the main provisions of the 2007 Act (see below) to take effect, HM Treasury will have to consult fully on the proposed secondary legislation, and seek approval from both Houses of Parliament for the various amendments to the 1986 Act that are proposed following consultation.
Summary of the main provisions of the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 ("the 2007 Act")
Section 1 - funding limit for building societies
This proposes amendments that would give power to HM Treasury to:
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increase (but not subsequently to reduce) the current 50% non-member funding limit to a maximum of 75%.
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require any society wishing to take advantage of the increased limit to seek approval from its members.
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make appropriate consequential amendments to a building society’s principal purpose.
Section 2 - power to alter priorities on dissolution and winding up
This would give HM Treasury wide power to ensure that, on a dissolution or winding up of a building society, ordinary shareholders would rank equally (“pari passu”) with ordinary creditors (such as depositors). There would be appropriate transitional provisions to preserve the rights of existing depositors. The overall approach was confirmed by the January 2008 paper Financial stability and depositor protection: strengthening the framework, issued by the Bank of England, HM Treasury and the Financial Services Authority.
Section 3 - transfers to subsidiaries of other mutuals
This section would give HM Treasury wide power to enable the transfer of the business of a building society, friendly society, industrial and provident society, mutual insurance company or an equivalent European mutual, to a subsidiary of another such society.
Section 4 - transfer to subsidiaries: distribution of funds
This relates to the approval and distribution of funds to members by the transferor or the mutual society of which the transferee is a subsidiary (the holding mutual).
The 2007 Act may be found here
With explanatory notes here
