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.
Building Societies (Funding) and Mutual Societies (Transfers) Bill
Currently a Private Members Bill, the Building Societies (Funding) and Mutual Societies (Transfers) Bill, is being considered by Parliament. If enacted the Bill will be enabling - that is secondary legislation would need to be passed by Parliament, preceded by consultation. The three main parts of the Bill could eventually lead to
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an increase in the building society non-member funding limit to 75%
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the ranking of shareholders' and depositors' funds equally in the very unlikely event of a building society being wound up or dissolving
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an easing of the rules governing mergers between different types of financial mutuals
Full details on the parliamentary progress of the Bill, and the Bill itself, can be found here.
