The Building Societies Act 1986 gave building societies what, at the time, was a completely new legal framework for the first time since the initial comprehensive building society legislation in 1874. That Act has subsequently been amended on numerous occasions, and was substantively revised by the Building Societies Act 1997, by the Financial Services and Markets Act 2000 and by the Financial Services Act 2012 (which also amended the 2000 Act). This paper summarises the provisions of the 1986 Act as amended as at 7 July 2009. It also very briefly summarises those provisions of the 2000 Act of particular relevance to building societies.
The following abbreviations are used in this paper -
|"the 1986 Act"
|the Building Societies Act 1986
|"the 1997 Act"
|the Building Societies Act 1997
|"the 2000 Act"
|the Financial Services and Markets Act 2000
|"the 2012 Act"
|the Financial Services Act 2012
|"the Butterfill Act"
|the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007
|the Financial Conduct Authority
|the Prudential Regulation Authority
The 1986 Act as now amended sets out detailed provisions in relation to -
The 2000 Act, as amended eg by the 2012 Act, in so far as it is relevant to building societies, includes provisions in relation to -
BSA members can access detailed guidance prepared by the BSA on the 1986 Act here
BSA members can access the full text of the BSA Act as amended (updated) by the BSA here
The 1986 Act
The 1986 Act as originally enacted was prescriptive in respect of building societies' powers and the way in which they were exercised. However, one of the notable features of the Act was the numerous powers given to the Building Societies Commission (the supervisory authority for building societies established by the 1986 Act) and/or the Treasury to make statutory instruments (orders, regulations etc) which, subject to Parliamentary approval, could amend, extend and supplement the provisions of the 1986 Act. Since the 1986 Act came into force (mainly on 1 January 1987) it has been amended and extended considerably, especially in respect of building societies' powers. Some of the main such changes were made as soon as 1988.
However, the effective limits on change permitted by the 1986 Act were being approached in some key areas by the early 1990s. Accordingly, the Government began a two-stage review of the Act in January 1994. As a result of the first stage of that review, a number of further changes in relation to building societies' powers were made in 1995, some by way of the then recently introduced Deregulation and Contracting Out Act 1994. In February 1995 the Government announced the results of the second stage of its review. After a lengthy consultation process, with the publication of successive drafts of the Bill in March 1996 and December 1996, a Building Societies Bill was introduced into Parliament on 28 February 1997. The Bill passed through all its Parliamentary stages in March and received Royal Assent on 21 March 1997 as the Building Societies Act 1997.
The 1997 Act made a large number of substantive amendments to the 1986 Act.
Its main purposes were -
The provisions of the 1997 Act came into force on various dates from 21 March 1997. There were three Commencement Orders, bringing various provisions into force on 21 May, 9 June and 1 December 1997. The main provisions concerning building societies' powers and constitution, related powers of the Building Societies Commission and a number of accountability provisions, came into force in relation to each society separately on the date on which alterations to each society's memorandum and rules became effective under Schedule 8 to the 1997 Act. For most societies that date was during Autumn 1998.
The transitional period for societies to adopt new memoranda and rules ended on 30 April 1999.
In May 1997 the Government announced its intention to introduce substantial reforms to the regulation of the UK financial services sector generally, including a consolidation of responsibility for regulation and supervision of banks, building societies, insurance companies, friendly societies and investment firms within a single body - the Financial Services Authority. After a lengthy process of consultation and Parliamentary debate, the Financial Services and Markets Act 2000 received Royal Assent on 14 June 2000. Further detailed consultation was undertaken by the FSA and the Treasury respectively on the rules and guidance, and secondary legislation, to be made under the 2000 Act. The main provisions of the 2000 Act came into force on 1 December 2001.
The main provisions of the 2000 Act (and related secondary legislation) relevant to building societies include -
Many provisions of the 1986 Act are repealed by or under the 2000 Act. However, the provisions of the 1986 Act relating to the constitution, governance and principal purpose of building societies remain in place.
Where appropriate, the provisions of the 1986 Act are equivalent to those of company legislation in the Companies Act 1985. In due course, some of the provisions of the Companies Act 2006 are likely to migrate to the building societies' legislation.
The Building Societies Act 1986 (Electronic Communications) Order 2003 (S1 2003 No 404), which came into effect on 20 March 2003, enables building societies, if they wish, to communicate electronically with their members on a range of constitutional matters relating to -
The BSA has issued a commentary on the 2003 Order.
The Butterfill Act, which was introduced as a Private Members' Bill by Sir John Butterfill MP, received Royal Assent on 23 October 2007. The Butterfill Act makes it easier for a mutual society (ie a building society, friendly society or industrial and provident society) to transfer its business to the subsidiary of another mutual society (sections 3 and 4). The Mutual Societies (Transfers) Order 2009 (SI 2009 No 509) brought sections 3 and 4 into force, from 4 March 2009.
The Butterfill Act also allows the Treasury to amend building society law to enable building societies to borrow a greater proportion (up to 75%) of their funding from the wholesale markets (section 1) and to amend building society law so that, in the event of a building society insolvency, members' shares would rank equally with liabilities to creditors (section 2). The Governement has no current plans to implement section 1, but will review the matter in two years time. It plans to implement section 2, but no date had been fixed at the time of writing.
The Banking Act 2009 received Royal Assent on 12 February 2009. The Act built on the tripartite framework to enhance the ability of the Authorities (the Bank of England, the FSA and the Treasury) to deal with crises in the banking system, to protect depositors and to maintain financial stability. The most important innovation is the special resolution regime (SRR), providing the Authorities with a range of tools to deal with banks and building societies that are failing. The 2009 Act also makes certain changes to the 1986 Act.
In June 2010, the Chancellor of the Exchequer announced that the Coalition Government would make significant changes to the regulatory framework for financial services, to address the major problems that had emerged from late 2007. The 2012 Act made substantial amendements to the to the 2000 Act. The key change was the introduction, from 1 April 2013, of the twin-peaks regulatory framework, comprising the FCA and the PRA, to replace the Financial Services Authority.
The 2012 Act and the Financial Services Act 2012 (Mutual Societies) Order 2013 (SI No. 496) also made a number of amendements to the 1986 Act.
The 1986 Act has nine remaining Parts. In addition, there are a number of Schedules that provide supplementary detail for various sections.
The Act is structured as follows -
|Functions of the FCA and PRA
|Constitution of building societies
|Protection of investors
|Powers of control of the Authorities
|Management of building societies
|Accounts and audit
|Complaints and disputes
|Dissolution, winding up, mergers, transfer of business
|Miscellaneous and supplementary and conveyancing services
The FCA and the PRA (sometimes generically referred to in the Act as “the appropriate authorities” are the regulators for financial services industry. The PRA is responsible for prudential supervision of firms and the FCA is responsible primarily for business conduct regulation (but has certain other functions). All UK building societies are ‘dual-regulated’ ie regulated by both the FCA (on conduct matters) and the PRA (on prudential matters).
Section 1 of the 1986 Act sets out the functions of the FCA and the PRA under the Act. The FCA’s functions are -
• to administer the system of regulation of building societies provided for by or
under this Act; and
• to advise and make recommendations to the Treasury and other Government
departments on any matter relating to building societies.
The functions of the PRA are -
• to secure that the principal purpose of building societies remains that of making loans which are secured on residential property and are funded substantially by their members;
• to administer the system of regulation of building societies provided by or under the 1986 Act, but only in so far as sections 5, 6, 7, 9A and 9B confer functions on the PRA; and
• to advise and make recommendations to the Treasury and other Government
departments on any matter relating to building societies.
Section 5(1) of the 1986 Act provides that a building society may be established under the 1986 Act if (and only if) -
"Its purpose or principal purpose is that of making loans which are secured on residential property and are funded substantially by its members"
"Residential property" is defined as being land at least 40% of which is normally used as, or in connection with, one or more dwellings, or which has been, is being or is to be developed or adapted for such use.
The 1997 Act gave building societies the freedom to pursue any activities set out in their memorandum, subject only to compliance with the revised principal purpose introduced by that Act, the lending and funding limits, the restrictions on powers and appropriate prudential requirements, referred to below. In essence, it is the principal purpose, the "nature" limits and restrictions, together with the fact that most of a building society's customers are its members, which retain a building society's fundamental character, and differentiate it from other financial institutions. A memorandum provision that would prevent a building society from receiving relevant financial assistance from the Bank of England is not binding (this stems from emergency measures, introduced during 2008, to address market conditions).
The main differences between the current principal purpose, and that in place before the 1997 Act, are that loans secured on residential property which is let are included, and there is no requirement for the borrowers to be individuals, or members (although mortgage borrowers who are individuals would be members - see below).
A new building society can be established by ten or more people, and the capital which they have to put into the society is a minimum of £1 million (to be held in permanent interest bearing shares (PIBS)).
Schedule 2 to the 1986 Act makes provision for societies to have a memorandum setting out the purpose and powers of the society, and rules covering its internal regulation and arrangements concerning membership, meetings, resolutions, directors etc. The memorandum/rules concept is similar to the memorandum/articles one for a limited company, the main difference being that most of a building society's customers are also its members.
Most of the constitutional provisions are in Schedule 2. It covers, for example -
Section 6 of the 1986 Act provides that at least 75% of the "business assets" of a building society (or of the society's group) must be loans fully secured on residential property. "Business assets" (not a term actually used in section 6) are total assets (or total group assets) plus provisions for bad and doubtful debts, less fixed assets, liquid assets and any long-term insurance funds, and currently comprise mostly mortgage assets. The Treasury may reduce the limit by order to not less than 60%. This single lending limit, introduced by the 1997 Act, replaced the previous commercial asset structure requirements for building societies. That structure classified commercial assets into class 1 (loans secured by first mortgage to owner-occupiers of residential property), class 2 (other loans secured on land) and class 3 (investments in subsidiaries and associates, ownership of land and property for residential development, and other assets such as unsecured loans to individuals and companies). The lending limit would not apply in relation to a building society receiving relevant financial assistance from the Bank of England.
Under the current provisions, to count towards the 75% limit, the residential property which is security for a loan may be either owner-occupied or let. Subject to the restrictions on powers referred to below, there is no other statutory restriction on what categories of asset might be included in the remaining 25% of "business assets".
Section 6A of the 1986 Act defines "loans secured on land". The definition is primarily relevant to classification of assets (and not to powers) and to eligibility for borrowing membership. The land concerned has to be located in the United Kingdom or any other country or territory within the European Economic Area, the Channel Islands, the Isle of Man or Gibraltar. The Treasury may by order extend the definition of a loan secured on land, and the application of any of the other provisions of the 1986 Act, to loans secured on land outside those countries or territories.
Section 6B of the 1986 Act defines "loans fully secured on land". A loan which is secured on residential property or other land is fully secured on the land if the principal of, and interest accrued on, the loan does not exceed the value of the security and there is no more than one prior mortgage of the land. The test of whether a loan is "fully secured" is to be satisfied "on the occasion on which" a loan is made or acquired. Provision is made for the reclassification of loans on the occurrence of certain events. Transitional provisions in Schedule 8 to the 1997 Act provided that any existing advance which was a class 1 advance, or a class 2 advance to an individual secured by a first charge on residential property, immediately before the coming into force of section 6B, is treated as a loan which is fully secured on residential property.
Section 12(2) of the 1997 Act provides that the common law duty of a mortgagee to take reasonable care to obtain a proper price or true market value when selling a mortgaged property in possession applies to building societies, replacing the previous statutory duty.
Section 7 of the 1986 Act provides that at least 50% of the funds of a building society (or of the society's group) must be raised in the form of shares held by individual members of the society. This single funding limit, introduced by the 1997 Act, replaced the two previous limits on funding - the 50% limit in respect of non-retail funds and deposits and the 50% limit on the amount due on deposits and loans. The Butterfill Act allows the Treasury to increase, from 50% to 75% the proportion of their funding from non-retail sources, ie the wholesale markets, but it has no current plans to do so.
Section 8 of the 1986 Act imposes restrictions on the categories of deposit accounts which an individual may hold with a building society, and prohibits a building society from accepting corporate bodies as shareholders (other than in respect of deferred shares (eg PIBS)). Funds raised from individuals must be in the form of shares with the exception only of current accounts; client or trustee accounts; qualifying time deposits; deposits at overseas branches; transferable instruments; and where the society has announced publicly that it intends to transfer its business to a company. The rights of individual depositors in respect of deposits made before the coming into force of the 1997 Act were preserved by transitional provisions in Schedule 8 to the 1997 Act.
A building society may not raise funds from a body corporate in the form of shares, except in the form of deferred shares (eg PIBS), but may accept deposits and loans from such bodies. The rights of corporate shareholders in respect of shares held before the coming into force of the 1997 Act were also preserved by the transitional provisions in Schedule 8 to the 1997 Act.
Section 9A of the 1986 Act imposes restrictions, subject to certain exceptions, on the powers of a building society or a subsidiary undertaking in relation to acting as a market maker in securities, commodities or currencies; trading in commodities or currencies; and entering into transactions involving derivatives. The main exceptions relate to hedging transactions entered into by the society or undertaking and certain transactions effected for customers of the society or undertaking or where the amount involved does not exceed £100,000. The risks that a building society may use derivatives to hedge against are those arising from changes in interest rates, in exchange rates, in any index of retail prices, residential property prices or securities prices, or in the creditworthiness of any borrower. A society is required to do all that is reasonably practicable to secure that each of its subsidiary undertakings complies with the restrictions.
Section 9B of the 1986 Act prohibits a building society from creating a floating charge over its assets. Section 55 of the 2012 Act amended section 9B to allow the creation of a floating charge in connection with participation in a payment or securities settlement system.
Part II of Schedule 2 to the 1986 Act includes "safe harbour" provisions, in parallel with those in the Companies Act 1985 as amended, whereby a building society's capacity is not limited by its memorandum and, in favour of persons dealing with a society in good faith, the powers of the directors to bind the society are free from any such limitation.
Section 92A of the 1986 Act requires a building society to seek the approval of members to the acquisition or establishment by the society or a subsidiary undertaking of a significant "non-core" business. This requirement applies only in the case of a business where, in the opinion of the directors, a greater part of the business relates to activities having no connection with loans secured on residential property, and where the acquisition or establishment would cost 15% or more of the society's own funds (capital).
Sections 36, 36A and 37 of the 1986 Act give the FCA and/or the PRA certain powers where a building society fails to comply with the principal purpose requirement, the lending limit or the funding limit. The powers include a direction by the appropriate authority for the society to submit for approval a restructuring plan to bring it within the relevant statutory requirements, a direction to the society to call a general meeting to consider converting to company status, a prohibition order where a society has failed to carry out a restructuring plan, and, ultimately, to present a petition for the winding up of the society.
Sections 42B and 42C of the 1986 Act provide that if the appropriate authority considers it expedient to do so in order to protect the investments of shareholders or depositors of a building society, it may either direct the society to transfer all its engagements to one or more other building societies, or to transfer its business to an existing company, or to a mutual society under the Butterfill Act (this latter point being inserted by the 2012 Act). The appropriate authority may also direct that a transfer may proceed by board resolution only rather than by seeking the approval of the members of the society. In such circumstances, the provisions of Schedule 8A to the 1986 Act modify the normal merger or transfer requirements in Schedule 16 or Schedule 17 to the 1986 Act (see below).
Section 46A of the 1986 Act sets out the procedural requirements where the appropriate authority proposes to give a direction under the business restructuring power (section 36 of the 1986 Act) or that a building society seek a transfer to another society or to an existing company (section 42B(1) of the 1986 Act). A society has a right to refer such a direction to the Financial Services and Markets Tribunal established under the 2000 Act.
Sections 52, 52B and 54 of the 1986 Act give the FCA or the PRA, as appropriate, powers to obtain information or documents, and to enter premises with a warrant, and section 53A deals with the confidentiality of information obtained by the FCA or PRA, in respect of its functions under the 1986 Act.
Sections 55 to 57 of the 1986 Act give the FCA or the PRA, as appropriate, power (for the purposes of its functions under the 1986 Act) to appoint inspectors to investigate any aspect of the business of a particular building society, or its affairs generally, or to summon a meeting of members.
Part VII of the 1986 Act (sections 58 to 70) deals with the constitutional aspects of the management of building societies. Section 58 requires that there shall be at least two directors, and section 59 requires that every society shall have a chief executive and a secretary (who may be the same person), with appropriate knowledge and experience.
Sections 60 and 61 of the 1986 Act set out detailed provisions for elections of directors. For all elections to the board of a building society, there must be a vote and each candidate must receive a positive endorsement from the members. Except where voting in an election is conducted by postal ballot, a society is required to send proxy forms to all members entitled to receive notice of the meeting at which the election is to be held, and the directors must be elected on a poll. A director must retire at the age of 70 (or lower if required by the society in its rules) unless he or she is specifically re-elected each year. Other directors are elected for a three year term. A society's rules may require a director to have a minimum shareholding, but that minimum may not exceed £1,000.
A nomination for a candidate for election as director may be made at any time, but if it is made after the last day of the financial year immediately preceding the election, the nomination is to be carried forward to the next election of directors after that, unless the candidate otherwise requires. The maximum number of members that a society's rules may require to join in nominating a person for election as a director of a building society varies from 50 to 250, depending on the society's total commercial assets (total assets less fixed assets and liquid assets). A person nominating a candidate may either be a shareholding member or borrowing member (and must have the relevant minimum shareholding or mortgage debt for the appropriate period). The maximum length of an election address which a candidate can require a society to distribute to its members is 500 words. A person in relation to whom there is in force a prohibition order made by the FCA or PRA (as the case may be) under section 56(2) of the 2000 Act is not eligible to be elected as a director of a building society.
Sections 62 to 70 of the 1986 Act are concerned with dealings between a building society and its directors (and persons connected with them). Directors must declare any interest in contracts and other transactions with their society. There are limitations on substantial property transactions involving directors, on loans to directors on favourable terms, and a general prohibition on accepting commission in connection with loans. A contract may be rendered voidable at the instance of a building society where the board had gone beyond its powers in a transaction with a director. Societies are required to keep a register containing details of transactions made with directors, and they have to record, and return annually to the FCA and PRA, details of income received from the society by related outside businesses of directors, including conveyancing, surveying and valuations, accountancy and insurance.
Section 71 of the 1986 Act specifies the accounting records which a building society and its subsidiary undertakings must maintain.
Sections 72 to 76 of the 1986 Act set out the requirements on the directors of a building society to prepare annual accounts, an annual business statement, a directors' report and a summary financial statement. The summary financial statement is sent to members. The full annual accounts must be available on request. The form and detailed content of the annual accounts etc are prescribed in regulations made by the Treasury (see below under Statutory Instruments). Sections 80 and 81 of the 1986 Act deal with the requirements concerning signing, issuing and submission of copies of a society's annual accounts etc to members and the FCA and PRA.
Section 77 (and Schedule 11) of the 1986 Act set out detailed provisions concerning appointment, qualification, resignation and removal of auditors. The auditors of a building society are required to report to the members under sections 78 and 79 on the truth and fairness of the annual accounts and other documents and whether the documents comply with the provisions of the Act. The auditors of a building society are also required to provide certain information to the FSA by and under Part XXII of the 2000 Act (see below).
Section 85 (and Schedule 14) of the 1986 Act provide for the settlement of disputes between a building society and a member or members, in their capacity as such (rather than as customers), to be dealt with by the Court or by arbitration.
See below concerning the Financial Ombudsman Service under Part XVI of the 2000 Act.
Sections 93 to 96 (and Schedule 16) of the 1986 Act deal with mergers of building societies. A merger may either be by way of an amalgamation (where two building societies establish a new society as their successor) or by the transfer of the engagements of one building society to another (the usual method). For a merger to be approved, more than 50% of qualifying borrowing members who vote must vote in favour, as well as 75% of the qualifying shareholding members who vote. Any compensation payments to directors and other officers have to be approved by separate special resolution of the society. Distributions of funds to members, above limits set in regulations made by the Treasury, have to be approved by the members of the societies concerned. Detailed information about a proposed merger is required to be provided to members. A society is required to notify members of the receipt of any non-confidential proposals for a merger.
The Butterfill Act enables the Treasury to make certain changes to the 1986 Act to enable the transfer of the business of a mutual society (ie a building society, friendly society or industrial and provident society) to another type of mutual society. A relevant order was made in 2009.
Sections 97 to 102D (and Schedule 17) of the 1986 Act deal with the transfer of a building society's business to a company. Where a society transfers to a company specially formed for the purpose (a "conversion"), more than 50% of qualifying borrowing members who vote must vote in favour, and 75% of qualifying shareholding members who vote must vote in favour; in addition, a minimum of 50% of all qualifying shareholding members must vote. Where a society transfers to an existing company (a "takeover"), an additional requirement is that 50% of all qualifying shareholding members (or the holders of 90% of the shares) must vote in favour.
The terms of a transfer may include provision for a distribution of cash and/or shares to be made to members and others, and must provide for a distribution of funds to shareholding members not eligible to vote on the relevant resolution. The relevant provisions of the 1986 Act have been the subject of three Court cases in order to determine the type of distributions that are allowed. The terms of a transfer must also require shares in the society to be converted into deposits with the successor company (which must have appropriate permission under the 2000 Act to accept deposits and to carry on any other business of the society).
Any compensation payments to directors and other officers have to be approved by separate special resolution of the society. Any provision to increase the remuneration of directors or other officers, in consequence of a transfer, has to be put to a vote of the members in the form of an ordinary resolution of the society.
Detailed information about a proposed transfer of business is required to be provided to members. This may be done by way of a summary, but in that case the full document must also be available on request. A society is required to notify members of the receipt of any non-confidential proposals for the transfer of its business to a company.
Where a building society transfers to a specially formed company then no more than 15% of the share capital in the company may be held by any one investor for a period of five years from the date of transfer. That protection from takeover is removed if, during that period, the successor company or a subsidiary undertaking takes over, or acquires the business of, another firm authorised under the 2000 Act, or if its shareholders, holding 75% of the shares, vote to waive the protection, or if the FSA gives a direction to that effect.
The provisions on transfer of a building society's business to a company have twice been amended by Acts which were introduced into Parliament as Private Members' measures -
There are a large number of statutory instruments under, or affecting, the 1986 Act. For further information on the various SIs, BSA members should visit here.
The 2000 Act (as amended) is also relevant to building societies. In addition, the FCA and the PRA each have regulatory Handbooks developed in pursuance of their powers under the 2000 Act to set regulatory requirements, guidance and other materials, for firms. The regulatory Handbooks cover –
• high-level standards
• prudential standards
• business standards
• regulatory processes
• specialist sourcebooks
• various other guides ands information.
The regulatory Handbooks can be found at can be found at FCA and PRA Handbooks