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The Building Societies Act 1986 (Amendment) Bill would enable societies across the UK to raise more funds from sources other than member savings and bring some administrative rules in line with those which apply to banks.

The Bill largely mirrors proposals the Government consulted on during 2022 and has been welcomed by the industry.

Under the Building Societies Act 1986, building societies must raise at least 50% of funds, with some qualifications, from customer savings.

The Bill would exclude some types of funding held for liquidity purposes or accessed in stress scenarios, from this calculation.

What are building societies?

Building societies are financial institutions with the principal purpose, established in law, of making residential mortgages, funded substantially by individual customer savings.

In accordance with this principal purpose, building societies must ensure at least 50% of their funds come from customer savings (subject to some qualifications), while the remainder can come from sources like bonds, called wholesale funds.

Building societies account for around 23% of residential mortgages by value in the UK and 19% of household savings.

Until the mid-1990s building societies accounted for around 60% of residential mortgages, but this fell to around 20% after a number of building societies, including Halifax and Northern Rock, became banks in 1997.

Building societies are owned by their members, which are individual customers with savings in or borrowings from the society. They are not owned by external shareholders, unlike banks.

The funding limit

When the 1986 Act was passed, the funding limit was set at 20%, meaning at least 80% of society funds had to come from customer savings. This was gradually increased and now sits at 50%.

The Bill does not propose changing the 50% figure but does propose excluding three types of funding from the calculation (clause 1):

  • Funds accessed from the Bank of England in stress scenarios.
  • Types of loss-absorbing debt building societies might hold to ensure that, should the society fail, investors rather than taxpayers bear the loss.
  • Sale and repurchase agreements for types of easily-monetised assets building societies must hold for liquidity reasons. Building societies may choose to sell these under repurchase agreements, but this results in the funding being essentially double-counted for the purposes of the funding limit calculation.

The Bill would also give the Treasury the power to further specify these definitions via statutory instrument.

Other Bill provisions

The Bill also proposes changing the 1986 Act in ways that would allow real-time virtual participation in annual general meetings (clause 2) and pave the way for reducing the administrative burden with executing documents (clause 3).

Similar provisions already apply to banks, which are governed by the Companies Act 2006, but not building societies, which are governed by the Building Societies Act 1986.

Response to the Bill

The Bill is welcomed by the sector which says the proposed changes to the funding limit exclusions will enable societies to access funds in times of difficulty, compete better with banks, and provide more mortgages.


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