Treasury against society takeovers: Banks will be discouraged as home loan rivals' borrowing and lending freedoms are increased

THE GOVERNMENT yesterday made clear its determination to discourage takeovers of building societies by banks.

Announcing new borrowing and lending freedoms for societies, Anthony Nelson, Economic Secretary to the Treasury, said stringent controls on takeovers by existing commercial companies would remain in order to discourage destabilising flows of funds on the prospect of takeover.

He added: 'It is not that we want to be spoilsports, but I don't want a duck shoot at the building societies.'

Mr Nelson said the review, commissioned in January, did not relate directly to the pounds 1.8bn attempt by Lloyds Bank to buy Cheltenham & Gloucester Building Society. This was blocked by the High Court last month because it included payments to members of less than two years' standing, though Lloyds and C&G are trying to find a way to revive it.

Mr Nelson said the Treasury was determined to keep the two-year rule. He was not at all sure that short-term windfalls to members were in the long-term interests of savers and borrowers.

He added: 'We might open the way to a decimation of the building society sector.' It was also destabilising for financial markets.

The new powers for societies include the ability to devote up to 15 per cent of their lending to small companies, which will bring a new competitive force to a market dominated by the unpopular clearing banks.

They will be able to borrow up to 50 per cent of their funds in the money markets rather than the present limit of 40 per cent, allowing them to compete more aggressively on fixed-rate mortgages with the banks.

And they will be allowed to own companies offering buildings and contents insurance and mortgage payment protection policies.

At present societies can act only as agents for other insurers and they are now expected to become tough competitors in the insurance industry.

Mr Nelson's new measures allow societies to behave more like their banking rivals, but the changes are to be accompanied by improved accountability to members. In a second-stage review the Treasury is examining whether some board seats should be reserved for members' nominees.

Mr Nelson said the second stage of the review was looking at whether there could be larger payouts to members when societies merged - a clear encouragement to societies to merge with each other rather than with banks.

Mr Nelson also backed a suggestion that societies should offer dividends to their members. He suggested this should be taken further, with discounts on services for customers, who would benefit directly from the profits and reserves of the organisations. Such moves would also reinforce accountability and mutuality.

He underlined the Treasury's long-term commitment to building societies and held out the prospect of a complete streamlining of existing legislation. The second-stage review will look at whether this should be replaced by a 'more permissive structure'.

If societies became banks in all but name it would be difficult to justify their protection from takeovers and separate regulatory system. But he was convinced there was a case for mutual ownership and believed that as a form of organisation it could be brought up to date with improved accountability.

Societies had a valuable part to play in offering high service standards and low costs to the benefit of consumers. They should continue and develop their role.

The changes represent most of the list societies sent to the Treasury and were welcomed by the Building Societies Association.

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