Seanad Éireann - Volume 103 - 14 March, 1984
Adjournment Matter. - Proposed Take-over of Building Society.
Mr. O'Leary Mr. O'Leary
Mr. O'Leary: I should like to thank you, a Chathaoirligh, for giving me the opportunity of raising this matter on the Adjournment, and I should also like to thank the Minister for his attendance here. My purpose in raising this matter is to add to the debate which is going on in public concerning the problems which have arisen concerning the proposed take-over of the Irish Civil Service Building Society by the Bank of Ireland group. In doing so, I am conscious of the fact that the Minister and other Ministers involved, have a very complicated series of decisions to take and I do not expect him to announce those decisions here this evening.
It is appropriate that Seanad Éireann should consider the problems associated with this and whether allowing it to go ahead would be in the public interest. It is true that the five major building societies are dominant in the market, and my information is that the proposed take-over of the Irish Civil Service Building Society is a take-over of the smallest of these societies although of course there  are smaller societies. I understand it is the only society with shares quoted on the Stock Exchange and that the special section of the Building Societies Act, 1976, was inserted so as to facilitate the continuation of this unusual circumstance.
I should like to consider two matters in logical progression. Is it in the public interest that the Bank of Ireland should acquire a building society, specifically the Irish Civil Service Building Society and if it is permitted by the Government and accepted by the shareholders of that society, will the proposed take-over be successful? If it goes ahead, successfully, should there be special provisions so that the Minister in his wisdom could make whatever regulations are necessary, or indeed amend anything which might be necessary in order to make the take-over work? Consider whether it is in the public interest. This is a matter about which people have instinctive feelings. I am highly conscious of the growth of the building society movement, the growing dominance of the five building societies and indeed the growing dominance of the biggest building society in Ireland. I would like to bring about a situation where the five building societies, in a dominant market, were more equal among themselves. I think — and this has some relevance to what I have to say later on — that the biggest building society is proportionately very big when you consider the market as a whole. There are advantages to having a multitude of retail outlets, and that is what a building society is. It is a retail outlet for the gathering of money and for the supplying of money to the house mortgage market. It is an independent source of finance for housing.
There are, of course, other sources of finance for housing, such as local authorities, but they are now marginally only a theoretical source of finance in respect of most houses, that is local authority loans as distinct from local authority grants. It is not a very important part of the overall national field. The associated banks have certain tax advantages. They provide some mortgage finance themselves, and to that extent are already in competition with the building societies. There are  many reasons for the attractiveness of building societies and I am sure that attractiveness will increase over the years if the building societies develop to a stage where they provide alternative services to the consumer, such as the provision of a cheque book and other things which appears to be a developing trend in other countries. This might, under a benign Government, develop here.
My instinctive reaction — for a number of reasons — is that to have a bank involved with a building society is not in the public interest. I will deal later with the dominant position of the two major banking groups in the Irish financial scene. The separation of a man's dwelling and the financing of that dwelling from his other business transactions is a good principle. The State has gone to considerable lengths to ensure that in the event of the house being pledged in respect of business commitments owners' spouses will be protected.
It is my personal experience that both of the major banking groups, in advancing money to somebody in respect of his house, include in the mortgage a clause which puts the house as security, not only with regard to the money being borrowed in respect of the purchase of the house, but any other money which might be borrowed from time to time during the course of business. That is where the danger lies. Separation has already broken down within the banking community in respect of those homes which are financed in that way and the absorption of a building society into a banking group will encourage that trend further. Very soon any persons who deal with the enlarged Bank of Ireland Group will find themselves in that position. That is socially unacceptable and not a trend which we should encourage or foster.
There has been a dramatic reduction in the number of choices available to people, particularly those outside the metropolitan area, with regard to availability of finance in general. There are three or four banks in the Allied Irish Group and three or four in the other, certainly the six or seven banks have — in my lifetime — been reduced to two. There are other banks such as the  Northern Bank or the Ulster Bank, but these do not operate over a large portion of the country. As far as banking facilities are concerned, in many country towns there are only two choices. The building society movement has given an additional source for people to put their money in and an additional source for them to raise finance in respect of their house mortgage, without complicating their affairs to such an extent that their house mortgage is tied in with their business activities. It might be that they voluntarily tie it in from time to time, but it is my experience that anybody who has borrowed money from the Bank of Ireland Group or the Allied Irish Banks Group at present has pledged, directly or indirectly, his house against debts other than those incurred in respect of the purchase of his house. I would not like to encourage that. The restriction of the element of choice is something I consider to be very important.
The reduction of choice is not good. When that is coupled with the fact that the reduction is into a banking group that adds a second element of unpleasantness and a second reason why it should not be encouraged to go ahead. Banks are too dominant in the financial area of the country at the moment. They control too high a proportion of the money which is available to people for spending. The growth of other financial institutions should be encouraged. For that reason the building society movement must be protected and fostered, not just the dominant societies within that movement, but the building society movement in general.
There are other reasons why it would be quite unsuitable for the Government to permit this to go ahead without making changes in the legislation. The views I have expressed refer to my personal possition with regard to whether it should go ahead at all. I will explain why it would be most unsuitable that a bank should take over any building society under present legislation.
The Building Society Act, 1976, is really the consolidation Act of the building society legislation at present. Section  77 of that Act appears to confer on the Minister for Finance the power to direct the type of loans which a building society might give. Section 77 (1) says:
Whenever the Minister considers it expedient in the interests of the orderly and proper regulation of building society business and having regard to the demand for loans for house purchase, he may, subject to the consent of the Minister for Finance and after consultation with the Registrar, make regulations in relation to the purposes and amounts of loans by societies.
I have not investigated this but if there are no statutory regulations in force in that regard there must be unofficial guidelines whereby money is not extended by the building society beyond a certain amount. The sum of £50,000 comes into my mind but I am not sure of that figure.
That section of the Act and the following section appear to give the Minister the power to do that. Therefore, the Minister might feel that he was in a position to protect the investor and the society in general in the event of these two institutions getting together. In fact the Minister would be powerless, under present legislation, to stop the Bank of Ireland Group, as expanded, from utilising a substantial portion of the money collected by the building society for its own purposes, purposes which have nothing whatsoever to do with the advancement of money for mortgage finance. Section 38 (1) would provide a substantial loophole to the building society. It states:
the Minister for Finance, after consultation with the Minister and the Central Bank, may prescribe the investments in which a society may invest such portion of its funds as are not immediately required....
Subsection (2) is independent and superior to that. It says:
To the extent that a society's surplus funds are not invested in accordance with subsection (1), the society may keep them in cash in the custody of officers of the society or on current  account, or on deposit with the Central Bank, a bank, the Post Office Savings Bank....
That stands on its own. While the Minister can refuse or grant a request under section 1, if that request is not make at all or is only made in respect of a small portion of funds, the remainder of the funds in respect of which no request has been made can be put on deposit by a building society in a bank. So in the event of the Irish Civil Service Building Society being taken over by the Bank of Ireland, the money collected by the building society can be put on deposit with a bank on the basis that it is investment or surplus funds for the moment without the approval of the Minister for Finance. That is clear because it was never envisaged that a building society would take over a bank. That is why it is framed like that. Nobody ever thought that one of these listed options would become the parent body. Therefore, that is something which must be considered very carefully by the Minister in deciding what to do.
I refer to section 52 (1) of the same Act which deals with the entitlement of people to vote. We must look at this in the context of the rules of the Irish Civil Service Building Society and, in so far as they are not in conflict, I do not think they will be incorrect. Section 52 (1) of the Building Society Act, 1976, deals with the question of who is entitled to vote at meetings. Those who are entitled to vote at meetings in respect of a building society irrespective of what it says in the rules of that society — in fact, I understand the rules of the Irish Civil Service Building Society contain the same provision — shall be the numbers who at the end of the last financial year before the date of the meeting held shares to which voting rights attached and were issued by the society under section 22 (1) and at the date of the meeting continued to hold such shares. In other words, the people who were entitled to vote at a meeting of the Irish Civil Service Building Society at present are those shareholders who held shares on 31 December 1983 and who continue to hold them.
 If the Bank of Ireland have acquired 17 per cent of that company that 17 per cent are not entitled to vote at all until at least 31 December 1984.
I wonder do the Bank of Ireland know that. Effectively they have disenfranchised themselves to the extent of 17 per cent of the share capital of the building society. Even if they acquire more shares during 1984 they will not under any circumstances be entitled to vote prior to 31 December 1984. That is a very serious situation, because the control of the society might go into a smaller and smaller group until eventually 5 per cent of the people before the end of this year might have all the controlling voting rights of this society.
In addition to that, section 53 (1) of the 1976 Act says that the persons entitled to vote in the event of all being properly registered and having the votes at the right time at the meeting of the society shall be all members who at the end of the last financial year before the last meeting held shares to which voting rights attached which were issued by the society under section 22 (1) to a value of not less than £10 and at the date of the meeting continued to hold such shares. I understand that together with the provisions concerning polls and proxies as meaning that anybody who holds shares, has held them on the previous 31 December and continues to hold them is entitled to one vote in respect of shares which he had even though they might be in excess of £10. Even if you wait until after 31 December 1984 the Bank of Ireland will be entitled to one vote in respect of their 17 per cent.
Leaving aside for the moment the disenfranchisement of the Bank of Ireland by reason of the operation of the rule concerning the previous year's voting rights, they could acquire 99 per cent of the shares of the company and still be controlled by the remaining 1 per cent. The only way they could do it is to use nominees at any time. It would be most extraordinary for a bank having acquired the shares in the building society to disperse them on a nominee basis to a considerable number of their employees. I believe that use of nominees was criticised  by the Registrar and the court in a case involving the building society promoted by another building society against an insurance company.
What will happen now? The Bank of Ireland should be persuaded not to proceed with their bid. Suitable people, such as existing shareholders, should be encouraged to buy the shares at a fair price. They should either buy those shares and hold them in trust or, alternatively, hold them in trust until such time as the Irish Civil Service Building Society can out of their own funds in due course re-purchase their own shares and convert themselves into a mutual society. They are entitled to do this under their rules. Alternatively, a possibility could be considered that instead of acquiring the shares, loans could be given proportional to the reserves of each society to enable the Irish Civil Service Building Society to purchase its old shares now. If some adjustment in respect of the reserves or the percentages are necessary to do that, it should be done. If that is not possible then an outright purchase by a consortium of building societies would be preferable to the purchase by the bank, even though I am not in favour of that. I prefer to have the five of them there. But if it has to be acquired by somebody I would prefer it to be a building society. If that is not possible, the possibility of a union of the societies should be considered. We should be realistic enough to realise that probably only one or at the most two societies would be substantial enough to envisage something like that. They are the possibilities that I suggest to the Minister and no doubt others are being considered. This is an area which is fraught with danger and I hope the Bank of Ireland realise the can of worms which they have opened because they now have a very heavy responsibility to ensure that the Irish Civil Service Building Society continues to prosper, which I sincerely hope it will.
Minister for Finance (Mr. Dukes) Alan Dukes
Minister for Finance (Mr. Dukes): Senator O'Leary at the beginning of his remarks said that we are dealing here with a situation that requires or could  require a number of complicated decisions. Listening to Senator O'Leary's analysis of the situation and his own views on the desirable course to follow, we can confirm that it requires a number of complicated decisions. We are dealing with a situation which while in a sense provided for or made possible by the terms of the 1976 Act was not precisely foreseen when the Act was passed by the Houses of the Oireachtas.
Senator O'Leary felt that in view of the fact that a number of complex decisions needed to be made he did not expect to hear this evening what those decisions would be. The Government have not made a decision as to the precise approach that we would adopt to this case, partly for the reason that the particular difficulties and considerations outlined by Senator O'Leary are ones to which the Government are alive and because a number of other considerations which Senator O'Leary has not raised this evening need to be examined. As I have said on two occasions in the last week, whatever decision the Government make about this particular matter in the event and to the extent that it turns out to be a matter for Government decision, it would be based on a concern to at least maintain the supply of housing finance and to protect and promote the interests, both of those who have borrowed money from building societies and the interests of depositors in building societies as well. Having said that, some aspects of what Senator O'Leary said need a great deal more discussion and I should like to make a few points.
Senator O'Leary has spoken of the desirability of creating more balance between the building societies. It is part of his concern to develop greater balance between the different kinds of financial institutions. These are two of the questions very much at the centre of the present debate. There is no particular reason, other than the Senator's own preference, why in any area of activity, whether it is financial, commercial or any other area, we should secure a given balance between the different operators in the market unless there are so few of them that one threatens to dominate excessively  or a very small number threatens to dominate and perhaps to collude in that kind of domination.
It is a moot point, in relation to building societies in a country of 3,250,000 people, given the demand that we properly make on building societies as to the solidity of their operations, whether we are at the stage when we really need to be concerned with that kind of balance as a primary factor between the existing five major building societies. Objectively speaking, there is no particular reason why there should be a given balance between different kinds of financial institutions. Before I examine that a little more I would like to make the point that whatever the result of the present situation and whatever the outcome of the discussions that are going on now or in future, the building society that continues in being after those discussions had been completed would continue to be subject to the same rules, the same supervisory conditions, the same regulations, the same Act to which the building societies now in existence and operating are subject. Senator O'Leary did not take enough cognisance of that fact and that the provisions of the 1976 Act which have shown themselves adequate to deal with  the operations of building societies would continue to apply to this building society whatever the eventual outcome of these discussions.
I indicated, a Chathaoirligh, with your permission, that I would not have as much time to deal with this section as I would like. I think that the evidence of my ears indicates that I have come to the end of my time, but I would like to thank Senator O'Leary for raising the matter in the way that he has and for bringing out a number of the considerations which the Government and other people need to bear in mind in making up their minds about this proposal. I agree with one point which Senator O'Leary made — we may have introduced a new element into the financial institutions that currently serve our country. It might be a good thing to have that new element; on the other hand it might not. It is different, and this debate will at least help to focus our thinking. Recent events have shown that we need to rethink some of the ways in which our community is served by our financial institutions.
The Seanad adjourned at 8.35 p.m. until 2.30 p.m. on Wednesday, 21 March 1984.
Seanad Éireann 103 Adjournment Matter. Proposed Take-over of Building Society.