The Government sought yesterday to kick-start mergers in the beleaguered building society movement by proposing restrictions on hostile takeovers. Presenting the draft Bill on building societies, Angela Knight, the Treasury Minister, suggested ring-fencing societies which have decided to merge against outside bids for up to a year.
"We want to make sure that building societies feel they can continue to do their traditional mergers. At the moment they feel this not to be practical, because as soon as they announce a merger, they get into the firing line for a predatory takeover," she said.
The Government will be looking for responses from the market to its suggestions and the draft legislation, over the coming three months. Introducing the Bill, Mrs Knight, who described herself as a "fan of building societies", said it aimed to provide a permissive legal framework instead of the prescriptive legislation that currently governs the movement. "I think what the Bill does is ensure building societies have a level playing field, and can do more while remaining mutual," she said.
The need for reform has been pointed up by a recent rush to convert, which has seen three of the four biggest building societies announce their intention to float on the Stock Exchange next year. When the Halifax/Leeds, Alliance & Leicester and the Woolwich finally convert, just 30 per cent of mortgage assets will remain with building societies, a dramatic transformation from their predominant position just five years ago.
The Government has been concerned that unless it loosened the legislative reins, remaining societies would find it too difficult in the hugely competitive retail financial services sector.
The draft legislation contains two so-called "nature limits", designed to keep building societies concentrated on their traditionally core business. They must raise 50 per cent of funds from retail deposits and they have to 75 per cent of their lending in the form of home loans. But beyond this, societies will be pretty much free to do as they wish, with the backing of their members.
Entitled "mutuality for the next millennium" the legislation will "remove barriers to what societies can do and strengthen bonds with members," said Mrs Knight.
The suggestion to ring-fence merging societies from outside predators responds to strong calls from within the movement to prevent a "duck-shoot". But the government's suggestion yesterday of a moratorium provoked criticism that members would be prevented from knowing potentially better offers from outsiders.
Mrs Knight was vague about whether the proposal would prevent a bank, for example, even telling members of the merging building societies what deal it would offer after the moratorium expired. "It would be a one-year ring fence from when the merger is announced, to give a quiet period for the societies' consultation of their members to take place," she said. "This is merely a suggestion to get some order into the merger process."
Mrs Knight also suggested that, if a society becomes the target of a rush of account opening on speculation that it will convert, it might be able to suspend the shareholding status of new accounts for a short period.
Mrs Knight said she would "push hard" to get the draft Bill into the Queen's Speech at the start of the next session of Parliament in the autumn.
The Labour Party yesterday said the Government must act urgently to put the reforms into law before the general election.
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