There is much talk in the press of the cost of living and interest rates, particularly the rising mortgage rates and the rate at which the Bank of England’s belated rate rises are to feed through into the real economy and impact many people’s standard of living.
Our Financial Services Solicitors investigate how a current Private Member’s bill, which is going through Parliament (but which has cross-party support), may offer poor-benighted taxpayers with mortgages a glimmer of hope for increased competition in the lending market soon.
The Building Societies Act (Amendment) Bill 2023-24 (the Amendment Bill) amends the current legislation (the Building Societies Act 1986 (the Act)), under which building societies must ensure that at least 50% of their funds come from customer savings, with the remainder coming from wholesale investments such as bonds.
These funding limits are not imposed on building societies’ high-street banking competitors, meaning that they are less able to compete with the rest of the banking sector.
Building societies are financial institutions that are owned by their members, who are individual customers with savings in or borrowings from society.
This differs from banks, which are owned by external shareholders. The principal purpose of building societies is to make residential mortgages, which must be substantially funded by individual customer savings.
Historically, the funding limit set for building societies required at least 80% of funds to come from customer savings.
This has gradually reduced to 50%, and although an improvement to the limits set when the Act was originally implemented in 1986, the reduction needs to go further to allow building societies to compete effectively with banks.
This becomes clear when looking at building societies’ market share of residential mortgages.
Building societies currently only account for around 23% of residential mortgages by value in the UK and 19% of household savings but historically their market share of residential mortgages has been much higher, accounting for about 60%.
The changes proposed in the Amendment Bill will not reduce the 50% finding limit referred to above, but the amendments will remove certain impediments, such as allowing for some types of funding held for liquidity purposes or, in stress situations, to be removed from the calculation, which determines the funding limit.
The proposed changes will also bring some of the administrative rules that apply to building societies into line with the Companies Act 2006, which applies to banks. These are proposed to allow real-time virtual participation in annual general meetings and reduce the administrative burden when executing documents.
The Amendment Bill is currently undergoing its second reading in Parliament and will likely be passed.
It is anticipated that the abovementioned proposed changes which it will bring will free up some more funds to allow building societies to lend more and ensure more mortgage loans are available to UK homebuyers at more competitive rates, which will hopefully make them more affordable to homebuyers and homeowners looking to renew and open up the market to more first time buyers.
The proposed changes to the administrative rules are also anticipated to allow building societies to compete more with the offerings from banks, which will provide homeowners and first-time buyers with more options when searching for mortgages and other similar offerings.
We can help our clients in the financial services sector navigate changes to legislation and keep them informed of the upcoming items that should matter to them. For further information on this or legal advice relating to financial services or community banking, don’t hesitate to contact us at
