I move "That the Bill be now read a Second Time."
The purpose of the Bill is threefold:
First, it will preclude industrial and provident societies, in the main, from accepting deposits and will introduce supplemental controls to be operated by the Registrar of Friendly Societies; second, it will create and formalise a system for the inspection and supervision of credit unions; and third, it will make some fundamental and badly needed amendments to industrial and provident society law generally and will extend the power already vested in me to exempt bodies corporate from the scope of the Moneylenders Acts, 1900 and 1933.
Industrial and provident societies are bodies corporate which may be formed for carrying on any industry, trade or business, including "the business of banking". The governing Act is the Industrial and Provident Socities Act, 1893 and its section 19 lays down the conditions which must be met by societies which carry on "the business of banking".
A quick glance at section 19, however reveals how inadequate these conditions are, in terms of acceptable banking controls in modern circumstances. There are, for example, no regulatory controls involved. Instead, the conditions laid down could be said to amount only to minor administrative inconvenience.
When the Central Bank Act was enacted in 1971, industrial and provident societies as a general class were exempted from its scope. Behind the exemption was the very meritorious consideration that the tradition of limited deposit-taking undertaken, from time to time, by some co-operatives, mostly in the agricultural and fisheries sectors, should not be interfered with. This way of raising funds often served to ease the acute problem of capital shortage experienced by those co-operatives.
Since then, however, the exemption has been shown to have been too generous in its scope. Its generality opened a door through which has emerged a new type of financial institution, namely, the "banking" industrial and provident society. The type of society I refer to is easily identified by its almost exclusive concentration on the business of accepting deposits from the public. Of such societies registered since 1971, 14 are still on the register. At the moment, there are before the Office of the Registrar of Friendly Societies applications for the registration of 19 new societies, the proposed rules of which would also permit a banking activity exclusively.
These statistics put the problem being dealt with in Part II of this Bill in very meaningful perspective. Through use of the exemption for societies which was written into the 1971 Act for an entirely different purpose, a fringe banking sector has evolved, the basis for which was never intended to be facilitated and the existence of which runs counter to the very philosophy which underlined the 1971 Act itself. And though they operate in direct daily competition with the conventional banking sector, the deposit-taking societies concerned enjoy complete freedom from the extensive framework of controls which are applied under the Act by the Central Bank. This means that investors in them are bereft of the safeguards which characterise a licensed banking institution.
It is against this background that I have on a number of occasions issued warnings to members of the investing public about the need for caution in placing their money in the care of deposit-taking societies of this kind. There was, and there still is, no suggestion that, in the main, those persons who manage the affairs of "banking" societies are not both conscientious and prudent. But because a "control vacuum" exists, I saw it as my clear responsibility to advise the public that attractively high interest rates alone should not determine investment decisions. More importantly, I promised urgent legislation to fill the "control vacuum". Part II of this Bill represents my proposals in this regard.
Before discussing these proposals I should like to deal with a general point which I anticipate Deputies may make. That is whether it would not have been simpler in dealing with this problem to amend appropriately the Central Bank Act, 1971—that is to say, to bring deposit-taking societies within its ambit—instead of formulating the elaborate provisions now contained in Part II. I wish that such a simple solution would do but it will not. As the societies concerned have developed outside the Central Bank's control, they could not, if brought immediately within the bank's domain, live up to its technical licensing requirements. One consequence, in that event, would be that the societies concerned would have to be stopped from taking in new deposits immediately. Such a final development could clearly lead to early difficulties, of a very serious nature, in some cases.
It is, therefore, with a view to avoiding the danger of exacerbating, straight away, an already difficult problem, that Part II of the Bill has been prepared in its present form. It will give some breathing space to the larger societies concerned, within which they can formulate a definite plan as to their future, in the light of the firm prohibitions now being placed on the future acceptance and holding by them of deposits.
Section 5 contains my specific proposals in this regard. It prevents the acceptance of deposits by any future societies and by existing ones which have not yet accepted deposits or have accepted some on a limited basis. At the same time it stamps a definite time limit of five years on both the acceptance and holding of deposits by the larger existing ones. Excluded from this embargo, of course, are those classes of society listed in section 4.
Underlying this approach is my belief that all banking activity—which means, in effect, the acceptance of deposits—should be subject to the Central Bank Act, 1971 unless there exists a special social emphasis to, or economic purpose behind, the acceptance of deposits in particular circumstances. Building societies already enjoy a special recognition in this regard. It is my opinion that only those classes of industrial and provident societies which are now proposed for exemption from Part II under section 4—namely, agricultural and fishery co-operatives, credit unions and a very limited number of societies which are analogous to the latter—have special characteristics as societies which justify the continued right to accept deposits as part of their normal activities.
Sections 4 and 5 of the Bill reflect this opening proposition. The supervisory controls vested subsequently in the Registrar of Friendly Societies, hinge around it. They are there to enable the registrar to monitor the structural changes in the businesses of existing deposit-taking societies which must follow upon the proposed cessation of the deposit-taking activity.
Broadly speaking, each society so affected will face the following three options on enactment of the Bill:
(a) First, it can gear itself towards applying for a banking licence from the Central Bank;
(b) Secondly, it can arrange alternative sources of finance, for example bank loans, to enable it to continue with its lending business, or
(c) Thirdly, it can arrange for an orderly running down of its business.
Whatever the course chosen by a society, however, the registrar is being given sufficient powers to enable him to maintain a watchful eye to see that the interests of investors are, as far as possible, taken full cognisance of by a society.
As regards the specific details of the controls, they are equivalent, in several instances, to the controls which the registrar already enjoys in relation to his supervision of the building society sector. There are a few exceptions, however.
Section 6 enables the registrar to regulate, in the main, the raising of funds by societies to which Part II applies. In framing this provision, I have been continuously conscious—in the light of the unforeseen consequence of the exemption of societies generally from the Central Bank Act, 1971—of the need to ensure now that whatever correction is made at this stage, is watertight. Section 6 must be seen in this light. It will assign to the registrar the function of determining whether or not a proposed method of raising funds by a society is contrary to either the interests of members or of the public. Notwithstanding the prohibition now being imposed on deposit taking, it would not be difficult for a society to switch to some other form of fund raising. It could, for example, invite lump investments on promises of attractive interest or dividends. Indeed, it is the very variety of ways in which funds could be raised that makes it so difficult to design legal controls to regulate each possible form. Section 6, therefore, both closes off any possible abuses in this area and, at the same time, constitutes a flexible mechanism of control which, we can be sure, will be operated by the registrar, particularly in so far as bona fide operations are concerned, according to the dictates of common sense and the common good.
Excluded from the scope of section 6 is the acceptance of deposits by existing societies, within the five years period that is, permitted by section 5 (2). This activity has been isolated for separate attention under section 10 which vests especially extensive regulatory powers in this area in the registrar. These powers are intended to ensure that within the time limit of five years, societies will proceed to operate in a fashion most consistent with the best interests of depositors.
I would draw particular attention also to section 15 which enables the registrar to appoint a person to the management committee of a society. There is no parallel with this in either banking or building society law. Behind it, too, is my paramount concern for investors. It could transpire, notwithstanding how detailed are the provisions contained in Part II of the Bill, that a society might decide on a future course of action which may not seem to serve the best interests of investors. Rather than invoking the formal and prolonged procedures of investigation or suspension, the registrar might see more merit in decisively intervening on behalf of the collective body of investors by appointing a person to a society's committee of management. Such a person would, on one hand, be privy to the society's plans in full and, on the other hand, be in a position to steer the society back on a course most consistent with the cause of investors. Should the society prove recalcitrant in this respect, however, the registrar could then employ the more direct powers available to him.
Part III of the Bill contains a scheme for the inspection and supervision of credit unions. I had considered the introduction of such a scheme by way of regulations under section 35 of the Credit Union Act, 1966, but, on balance, I have thought it best to give it direct statutory implementation in this Bill. While the provisions of the scheme are similar to many of the controls contained in Part II, they have the entirely progressive objective of ensuring, as best as possible, that future growth in the movement is matched with stability.
Too few people nowadays seem to realise how important is the contribution which credit unions makes as a source of national savings. In 1969 the total amount due to shareholders and depositors by credit unions was just over £6½million. By the end of 1976, which is the last year for which complete figures are available, the amounts so due had reached almost £40 million. Indications are that this pattern of growth will have been maintained in the last two years. This record of performance bears ample testimony to the application and commitment of the many people who have given generously of both their time and idealism to the practical application of the credit union system. It is a fact, however, that growth brings its own problems. The bigger the volume of money being handled by part-time people, the greater is the element of risk.
It is my desire now to try to minimise these risks. I hope Part III will be seen in this context. It vests the registrar with sufficient powers not only to monitor trends in the businesses of credit unions but to foresee any problem situations developing and to take any early corrective action that may be necessary. I am confident that the movement itself will, by and large, welcome this development.
Part IV is designed to introduce some few, but basic, general amendments to existing industrial and provident society law. For example, present accounting requirements for co-operatives generally are very inadequate. Sections 29 and 30 will update these to coincide with basic company requirements. The greatest beneficiaries from this change will be the members of the co-operatives who can now expect an acceptable level of disclosure and accountability. As the House knows, the agricultural co-operatives in particular are now major powers in the economy and the turnover of the larger societies now is in many instances greater than that of most of our larger manufacturing companies. It is, to say the least, anomalous that the requirements on these societies under the law in the matter of disclosure and accountability are much less demanding than what is required of even the most insignificant of limited companies.
I recognise, of course, that there is a need to up-date the general body of law dealing with industrial and provident societies and it is my intention to introduce such legislation as soon as circumstances permit. Meantime sections 29 and 30 will improve the situation where the need for such improvement is most urgently required, and this amendment, I am confident, will be welcomed by all concerned with the co-operative movement. Another change of substance in this Part is in section 33 which will permit me to prescribe different financial limits for different classes of societies. Because of the inherent differences in the nature of their business the capital requirements of agricultural co-operatives can be much more demanding than for, say, a credit union. Up to now, however, I could never reflect this in legal form because the present law only enables me to prescribe the same financial limits for all classes of societies. On presenting draft regulations some time ago to increase the previous limits, I indicated my intention, therefore, to amend the existing law to enable me to prescribe different limits for different classes of societies. This power is now being achieved by section 33.
Finally, section 36 of this Part will extend the power already vested in my office under the Moneylenders Act, 1900, to exempt bodies corporate from the scope of the Moneylenders Act 1900 and 1933. I have been advised that societies which, as part of their business activity, lend money, could be in breach of those Acts. While a society can apply individually in the form prescribed in the Moneylenders (Exemption of Bodies Corporate) Regulations, 1934, some have not done so, notwithstanding that the legal dangers inherent in their present position were brought to their attention. It is clearly necessary to remedy this undesirable situation. Section 36 will, accordingly, enable me to declare, by order, that a specified class or classes of industrial and provident societies are exempt from the Acts concerned. It will be my intention to give retrospective effect to any such orders in so far as is necessary to cover, in full, the period during which societies affected operated a lending business.
I recommend the Bill to the House. If its prime motive can be summarised, it is to protect, so far as possible, the savings of ordinary people. It does not, perhaps, amend enough of the many outdated provisions of existing industrial and provident society law. Such an extension, however, would be a substantial one which would take some considerable time to complete. I assure the House that it will be done as soon as priorities permit. But, for the present, the pressing need is to legislate to safeguard people's savings which is why I am proceeding with the separate and urgent consideration of this Bill.