Thursday, 30 October 1986
Dáil Eireann Debate
This Bill is a first step towards a radical overhaul of the legislation governing building societies. Its purpose is to deal with a number of matters relating to the operations of societies which have given rise to some dissatisfaction with the societies among the general public, while at the same time enabling societies to expand their services by permitting them for the first time to engage in lending other than by way of mortgage.
Before I go on to outline the measures contained in the Bill, I feel it is incumbent on me to refer to recent developments in relation to building society interest rates. When I met with the Irish Building Societies Association on a number of occasions recently, I made it clear to them that the level of any increase in interest rates should be determined in a responsible way, taking account of the potential impact on borrowers and the housing programme. Following the failure of the association to reach a common agreement on rates, one society has announced an increase of 3 per cent in their mortgage rate. I am convinced that this is an overreaction to developments in the financial marketplace and imposes an unnecessary burden on the society's borrowers. The level of the increase is particularly disappointing when account is taken of the structuring of the most recent interest rate increases by some of the associated banks, which were designed to alleviate the impact on personal borrowers. The attitude behind this decision must give rise to some reconsideration on my part of possible further legislative proposals which could confer wider powers on societies. With power comes responsibility and the latest developments do nothing to enhance my confidence in the sense of responsibility of some, at least, of the societies. I think the House may take it that I shall be  returning to this topic again in the near future.
—It will place a total prohibition on tiered rates for all loans taken out on or after 23 October as from a date some six months after the passing of the Act. This latter clause is to allow the societies time to adjust their offer rates accordingly;
(a) Prohibiting or restricting the charging of redemption fees when a person is paying off a mortgage. This is an unnecessary and unfair charge imposed on building societies' customers when they are actually in the process of paying back the sum outstanding;
(b) The making available by the society to the borrower of the valuer's report on the house being purchased. I consider this to be reasonable when one realises that the borrower pays for the cost of such report;
(d) Precluding or restricting the building society from charging the customer its legal costs in investigating title, thereby removing the present burden on borrowers of having to pay two sets of legal fees at time of purchase; and
The value of the contribution made by building societies to the housing programme, particularly over the past twenty years or so, has been acknowledged time and again. As the major source of mortgage finance for house purchase — last year they provided some 64 per cent of the total — their practices, charges and interest rates have a very direct bearing on the lives of a large segment of the population. House purchase is the biggest financial commitment undertaken by the average person and the costs involved — both initially and for many years afterwards — can represent a very sizeable demand on the individual's financial resources. For this reason, it is reasonable for the public to expect that we, as legislators, will ensure that the framework within which building societies operate will afford the borrower a degree of protection against practices the justification for which, to say the least, is questionable.
The building societies, for their part, have more and more forcefully insisted on the need for legislative changes which would free them from some of the restrictions under which they operate at present. Deputies will be well aware of the major changes that have been taking place in financial services on a worlwide basis, with many institutions exploring areas outside their own traditional field of operation. An aspect of this development has been the recent enactment of a new Building Societies Act in Britain. Given the fundamental similarities between our own societies and their British counterparts, it is not surprising that the Irish societies should seek a similar widening of their powers; the pressure in this direction is all the greater since that new British legislation will permit societies to have subsidiaries in other countries, including Ireland. Such a subsidiary operating here would, of course, have to meet the requirements of our own law regarding  the establishment of societies and the conduct of their business.
At EEC level, discussion has commenced on a draft directive on mortgage credit designed to permit community mortgage credit institutions to establish themselves in member states other than their own and also to provide their services across national boundaries. While it will certainly be some years before this draft directive reaches implementation stage, it is clearly necessary for Irish building societies to gear themselves for a new era which will present them with both opportunities and challenges.
Conscious both of a degree of public dissatisfaction with some aspects of building society operations and of the need to face up to the changes in the financial services area, the Government last year set up an inter-departmental committee to consider the operations of building societies and the legislative and regulatory environment within which they operate. Following consideration of the report of this committee, a discussion document was issued on which various interested parties were invited to make submissions. I am using the document itself, together with these submissions, as a starting point in the development of legislative proposals. There are many complex issues to consider in shaping these proposals, and in order not to delay the implementation of certain measures about which there is a widespread consensus, I invited the Irish Building Societies Association to agree to the adoption of a voluntary code of practice. This would have dealt with certain building society practices which have been a cause of regular complaint from the general public and which were adverted to in the discussion document. The IBSA indicated, however that they would prefer to have detailed and full discussion on an entire range of matters which could be considered and addressed in legislation.
The Association wishes to discuss a range of issues as broad as those covered in the recent British legislation to which I have referred. As this Act is almost 300 pages long and includes some 20 schedules, Deputies will appreciate that it  could have taken a very considerable length of time indeed to complete the discussions which the building societies were seeking and to prepare and draft legislation which might emanate as a result. Meanwhile, house purchasers would continue to suffer from the practices to which I have referred.
Another factor in my decision to proceed at once with the short Bill we now have before us was the step taken by a major building society in announcing the introduction of tiered rates of interest on mortgage loans. Not only did this seem to me to be a retrograde step, at a time when competitive forces have eliminated tiered rates elsewhere but I was particularly taken aback by the downright unfairness of applying these tiered rates to existing borrowers. Many of these would, of course, have chosen the society in question because of their policy of applying the standard mortgage rate to all loans. While they would, of course, understand that the interest rate was variable, in accordance with normal building society policy, they would have had every reason to assume that the variation would simply be in response to the normal economic and financial forces which influenced societies — until yesterday — in setting their general level of rates. They would not have expected the society to change the ground rules for their borrowers after their mortgages had been executed.
Section 2, while it simply amends a definition in the 1976 Act, is of very fundamental and potentially far reaching importance. This is because the definition in question is that of the very term “building society”. Up to now, societies have, by definition, been limited to raising funds in a number of ways for the purpose of making loans to members secured by way of a mortgage. Under the new definition, in addition to the making of mortgage loans, a society is defined as an institution with the further purpose of making loans “with or without security” in accordance with regulations made by the Minister for the Environment under section 3 of the Bill.
Section 3, complements the provisions of section 2 by setting out the power of the Minister for the Environment to prescribe these regulations. These can deal with the purposes of and conditions attaching to loans, other than the rate of interest, and can also specify whether or what security is required. This power is exercisable after consultation with the Registrar of Building Societies, who is responsible for the prudential supervision of societies, and with the consent of the Minister for Finance.
An ancillary power to make regulations is also conferred by section 3; the Building Societies Acts may be amended in such ways “as may reasonably be necessary or proper” as a consequence of the regulations concerning new types of loans. A positive resolution of both Houses will be necessary to give effect to such regulations.
As I have indicated, the powers under section 3 will be used, initially, to permit building societies to offer bridging finance to their borrowers. I hope that this power which introduces a new element of competition into the market for bridging finance will be used in a manner that will confer advantages on borrowers and that will be a first demonstration of the ability of societies to offer new services on attractive terms. I will certainly be observing closely the use that is made of this new power and I will be influenced by what I see when considering what wider powers might be conferred on societies both under this section and in the context of further legislation.
I have referred to the question of tiered interest rates and to my disappointment and surprise at attempts to spread a practice that should instead, I believe, be dying out. Section 4 contains the measures which I have promised to deal with this issue. Deputies will be well aware of what is meant by tiered rates: for the purpose of the Bill, we have defined the term, in section 4 as an interest rate on a  loan which is determined either by the amount of the loan or the amount outstanding at any time, and which is higher than the lowest rate available to members of the society generally. In this context, “loan” means a loan secured by a mortgage relating to a dwelling.
Tiered rates will be prohibited where the mortgage was created before 1 August 1986 and a tiered rate was not being charged on that date; and where the mortgage was created on or after 23 October — the date of publication of the Bill.
However, in this latter case, the restriction on charging a tiered rate will apply after some six months has elapsed from the passing of the Act. This is to allow societies who now operate on the basis of tiered rates to bring their interest rate structure on the investment side into line with the new requirements on the lending side. After the six month period to which I have referred, however, tiered rates cannot be charged on loans taken out on or after the publication date of this Bill. These measures thus herald the end of the practice of charging tiered rates for all future loans.
As a natural consequence of the prohibitions on tiered rates which I have outlined, section 5 confers on any borrower who is charged a tiered rate in contravention of the preceding provisions the right to recover from the society any excess amount he has been charged. It also specifies that a borrower cannot be held to be in breach of his mortgage agreement by refusing to pay any excess amount demanded through the imposition of a tiered rate in contravention of the provisions of section 4.
Section 6 confers on the Minister for the Environment the right, after consultation with the Registrar of Building Societies, to prescribe rules in respect of several important matters. These powers are in addition to powers already conferred by section 10 of the 1976 Act. Rules prescribed under the new powers will become part of the rules of any society to which the regulations apply one month after the making of the regulations.
 Perhaps one of the most important matters on which rules can be prescribed from the borrowers' point of view, is the prohibiting or restricting of the charging of redemption fees. As Deputies will know, the rules of societies generally allow a charge of several months interest to be charged where a borrower wishes to redeem his loan. As I have already indicated, this strikes me as a most unfair and unjustified charge. Indeed, one might well expect to be rewarded, rather than punished, for early repayment of a loan. The justifications sometimes offered — administration costs, losses while seeking a new outlet for the money — are not at all convincing keeping in mind the size of the charges and the fact that societies are in a position to invest any surplus funds they may have in a range of very profitable investments.
Another practice that has been the subject of much annoyance to many building society borrowers is the refusal of societies to give the borrower sight of the valuation report on the property — while nonetheless expecting him or her to pay for it. Again, this is a blatantly unfair practice, and the Restrictive Practices Commission have recommended the making of a restrictive practices order to deal with it. Instead, I am taking the opportunity of dealing with it in the present Bill by providing for the power to prescribe a suitable rule or rules. The Restrictive Practices Commission have also recommended measures to deal with the restrictions imposed by societies on the choice of insurer on the property securing the loan. This clearly restricts competition in the insurance market and prevents a borrower from choosing an insurer of his choice and seeking the best terms available. Again, there is provision in section 6 for the prescribing of a rule removing or restricting the right of a society to limit the borrower's choice in this way.
The expense involved in house purchase is such that one would imagine that the best interests of lending institutions, as well as borrowers, would best be served by ensuring that no unnecessary  additional burden is imposed on borrowers. For this reason, I find it very hard indeed to understand the attitude of societies to the question of the legal investigation of title to properties offered as security for loans. The insistence of societies on having title examined by a solicitor appointed by themselves from very restricted panels means that not only is there duplication of work — since the borrower's solicitor must do the same thing — but duplication of expense for the borrower, since it is he or she who must pay both sets of legal fees. The need for this is mystifying since in Britain and Northern Ireland societies are quite satisfied to accept the borrower's solicitor. Even where societies operate on the basis of a panel, it generally comprises the vast majority of solicitors engaged in conveyancing in the society's area of operation. This not only results in substantial savings to borrowers, but, by eliminating the duplication of work to which I have referred also helps to reduce delays. I am, therefore, providing, in section 6, for a power to prescribe rules precluding or restricting a society from charging its legal costs in investigation of title to the borrower. If societies want a separate solicitor, they will have to pay for the privilege.
Finally, rules can be prescribed regarding the arranging by a society through an insurer nominated by it for the provision of mortgage protection insurance. As Deputies will be aware, this is a form of life assurance designed to ensure that the loan will be repaid if the borrower dies, and is to be distinguished from the insurance on the mortgaged property, to which I have already referred.
All publicly funded house purchase loans made available through local authorities now automatically include a small charge, incorporated into the repayments, in respect of mortgage protection insurance. Provided the borrower is actively at work and is under 55, the cover comes with the loan. I would like to see building societies making similar arrangements  for their borrowers, and the power to make rules in this respect is intended to encourage and facilitate the practice.
In addition, there are existing powers to prescribe rules available to me under section 10 of the Building Societies Act, 1976. I intend to use these to deal with certain other matters identified in the discussion document. I commend the Bill to the House.
Mr. R. Burke: We all agree that there is a need for legislation to update the operation of building societies, the last major review having been carried out in 1976. My regret about this piece of legislation is that it was born not in a spirit of agreement between the Minister and this important financial section of the Irish economy, as it should have been, but rather in an atmosphere of belligerence and confrontation. To debate today's measure which is in theory designed to control building society rates without referring to the decision by one society to increase rates by 3 per cent would be unreal. This is more so with the threat of the remaining societies to increase their rates by 3 per cent and there is even talk of one society increasing by more than 3 per cent. I fervently hope this is not true.
The implications of the increases will be to add more than £60 per month to the standard mortgage of £30,000, a shattering prospect for already hard-pressed families. This savage increase has been brought about by a number of factors, and the Minister and the Government must take the responsibility which is theirs.
In the case of the Government, their total mismanagement of the country's finances has resulted in a collapse of confidence in the money markets which has driven general interest rates to record levels, taken against inflation. Under Fianna Fáil they were 3 per cent below inflation. Now, at minimum, they are 10 per cent above inflation.
The factors that have particularly brought this about are the record current budget deficit, the spiralling national debt, the unacceptable levels of foreign  borrowing, and the litany could go on to include 100,000 of our people emigrating and a quarter of a million unemployed. In the Minister's case, his Rambo-like posturing against the soft target of the building societies which has provided him with the occasional favourable headline in the short term, has resulted in a poisoning of the atmosphere between the societies and himself to the detriment of thousands of hard pressed families.
A further example of this was the tinker-like fight between himself and one of the chief executives of a building society on the airwaves of this nation this morning. This is no way for a Minister to behave in dealing with such a sensitive issue and with one of our major financial institutions. There is a better way, and we in Fianna Fáil when in Government showed that way.
Can I remind the House that on one previous occasion when the societies were suffering temporary inflow problems we arranged that EC funds would be made available to them and guaranteed against exchange rate losses, thus protecting the mortgage holders. Unfortunately, I have to say to the Minister that your huffing and puffing about the societies and that the mismanagement of his Government will have blown the roofs off many families from today.
The Minister is a racing man, as we all know, and to use a racing parlance, he is flattering to deceive. To return to the Bill, with the changes that are to be brought about, resulting from EC decisions, which will result in an influx of British and continental societies into the country, our national interest would best be served by a comprehensive measure which would strengthen the base and clarify the role of how we see our societies in the future within the Irish economy.
One area in which we feel there is a potential for greater competition is the banking area. Comprehensive legislation should cover the possibility of extending the rights of the societies to enter into the banking arena. Unfortunately, the Minister has missed the opportunity because he has no specific objectives other than apparently to seek short term  political gain by being seen to attack the soft target of the societies.
We in Fianna Fáil recognise that there is considerable room for improvement in the operation of the societies. We feel that the Minister has lost the opportunity to protect the vital national interest because surely one area of job creation in the future must be in the financial services area. It is consequently vital that we have a strong home base to tackle the competition from Britain and the EC. It is obvious that the British Government's legislation which gives their societies access to the Irish market is drafted not with the interest of the Irish economy or the Irish people in mind, but with the expansion and increased profits of their own societies in mind.
The societies play a major role here representing as they do over 120,000 mortgage holders and approximately 800,000 to a million depositors. It is incumbent on Governments to deal with the societies and their borrowers and depositors in a responsible way. This sense of responsibility was sadly lacking with the introduction of DIRT, which has driven up to £1,500 million of savings from this country since its introduction last January.
The societies cannot be isolated from the movements in the money market and we in Fianna Fáil are particularly concerned at the threat that mortgage rates in the future will be based on the performance of rates on the Dublin inter-bank market. Inter-bank rates always have been much higher than mortgage rates. There has been recently a difference of up to 4 per cent between the inter-bank rate and the home loan rate. The overall management of the economy by the Government is consequently of vital importance to the societies, to their mortgage holders and their depositors, so when this Government run a current budget deficit of £1,500 million, which is the highest in money and percentage terms in the history of the country, this has a traumatic effect on the funding of the Government in the money markets which in turn has a catastrophic effect on mortgage holders.
 The managing director of one of the major societies was recently quoted as saying that the imposition of DIRT on its own will bring 0.5 per cent increase in mortgage rates. It is ridiculous and unrealistic for the Minister to say, as he recently did — he said so again today — that such increases would not be acceptable to the Government. The reality is that he will not be able to interfere with market forces. If he has any doubts on that score, he might consult with the Minister for Finance whose reported comment on the recent threatened 4 per cent mortgage rise was that there was very little the Government could do about it.
Having expressed my regret at the lost opportunity in this legislation I will refer to some of the Minister's proposals in the Bill. Section 4 relating to tiered rates has been the most publicised and commented on section in this Bill. In principle, we in Fianna Fáil are not opposed to the removal of the two tiered rates structure but we need a guarantee that our fears about this move are groundless. We fear that the removal of the premium rate for large borrowers will result in a reduction in their repayments but at the expense of the standard scale mortgage holder. In a recent editorial The Irish Times said it was illogical of the Minister for the Environment to contend that removing tiered interest rates increases competition among building societies and must therefore be in the borrowers' interest and that what will happen despite the Minister's best intentions——
Mr. R. Burke: I do not have it here. The editorial went on to say that what would happen despite the Minister's best intentions is that the £85,000 borrowed instead of paying the premium for a large loan, will get his loan at the same rate as everyone else and that the underlying level of basic mortgage rate would then be likely to rise. Will the Minister confirm that this will not happen? If the Minister cannot confirm that the standard rate will  not go up so as to benefit those on large mortgages we will firmly oppose this section. I cannot disagree with the fears expressed in The Irish Times. It is essential that the Minister guarantees the House and the people that the proposal will not result in the standard rate mortgage holder having to meet increased repayments. Of course, tiered rates are not the exclusive domain of the building society movement. The principle of multiple rates in banking has been long established. I would like the Minister's comment on that.
The second section of the Bill which has received close comment is section 6. In principle, we welcome the prohibition or restriction of the charging of redemption fees, the making available to the borrower of the valuation report, the alteration in the insurance of the property, changes in legal costs and the arrangement of mortgage protection insurance. However, just as with the proposal to abolish tiered interest rates, we fear that these measures will result in extra repayments for mortgage holders.
In relation to redemption fees, and property and mortgage property insurance, we welcome the proposal the abolish them. However, the societies claim — and I would like the Minister to answer the point — that this will lead to a reduction in their income, which cannot be met by greater efficiency within their operations and will have to be passed on to the already hard-pressed borrower.
In relation to the proposal to allow borrowers to see valuations, the societies claim that those who carried out valuations on their behalf would find it hard to insure themselves against third party actions if their valuations were found to be negligent. This, in turn, would lead to a rise in valuations which would be passed on in the form of increased mortgages.
I want to emphasise that I welcome the Minister's suggestions in this area but they need to be clarified and expanded on. I want to be assured that it will not lead to increased charges for mortgage holders. I suspect the Minister intends to clarify these suggestions and examine them more carefully now that he has the  initial PR hype out of them. The Minister has been very careful in the drafting of the Bill to use the word “may” in section 6 (1) instead of “shall” prohibit redemption fees and so on. The section reads
The Minister may, after consultation with the Registrar, prescribe rules in respect of any one or more of the following matters, either generally or by reference to a specified class or classes of rules or societies, denoted by reference to such matters as the Minister may consider appropriate.
I note that the Minister and the societies have met and have been reported to have discussed the operation of this Bill and the prospects for future legislation. I hope that commonsense will prevail on both sides and that the interests of the mortgage holder and investor will be protected and that they will not be the victimes of a fit of pique on either side.
The position of the building societies needs to be examined in the light of their changing role and in the light of UK and EC legislation. However, this review of the Building Societies Act of 1976 has been done in too much haste and in too much confrontation. Also, not only does the Minister seem intent on this, but he is pushing ahead regardless of the potential increase in mortgages which will result from his proposed legislation.
In recent months, rates have already gone up and will go up again because of the implications of DIRT. The Minister must recognise this reality and also the reality that mortgages constitute the single most important expenditure of 120,000 Irish families. We are concerned that the reality may be that the implications of this will heap more increases on mortgage holders, and the Minister's windowdressing and piecemeal tinkering with this whole area will, in the long run, not hide this fact. The director of one major building society said that the effect of all this is that the basic mortgage  rate will be increased, that the fellow with a £20,000 mortgage will end up paying more, while the fellow with a £50,000 mortgage will pay less.
We will not oppose the Second Stage of this Bill but we will carefully examine each section on Committee Stage and will oppose any section which the Minister will not guarantee will not pass on increased mortgage repayments to families who can no longer bear the burdens being placed on them as a result of this Government's actions. It is essential for the long term future stability and security of mortgage holders that a general election be called so that the present uncertainty, confrontation and unsatisfactory state of this major financial sector of our economy can be clarified. This general uncertainty is bad because it relates to increased interest rates. It is vital that this uncertainty be removed and this can only be done with a general election.
Mr. Yates: I welcome the opportunity to speak on this important Bill. During the last year particularly I have invested a lot of time in researching in depth this whole area which is of interest to a lot of people who are interested in helping themselves and who are not looking to the State to build their homes. It would be wrong if this debate was to be seen in the shadow of current developments in relation to interest rates. They are a separate issue. I acknowledge that there are straightforward financial market factors in relation to capital outflows due to speculation on sterling, external trading relations and to a lesser extent on DIRT which mean that any financial segment of the market has to be attractive to depositor rates. The issues in this Bill are different. The issues in this Bill deal with basic consumer rights and the legislation of a movement that has its origins in the 18th century, the principal legislation for which is governed by the UK Act of 1836. The subsequent changes which took place in the 1976. Act are only a consolidation of minor changes which have taken place. There has been no review of consumer rights and the policy formation of what  we want building societies to do in the overall financial markets.
I have some critical things to say about the building society movement and their managers. In the past I have sent greetings to them across the national airwaves and through the media. I am glad this morning that they are here face to face to hear it. We must analyse the background. Building societies together with friendly societies developed during the second half of the 18th century in response to a prevailing economic and social trend at that time. The early societies were true building societies as they built homes and were mutual. They existed to provide each member with a house paid for from their funds. Developments in Irish building societies have the same legislative background as those in the UK. The growth in the seventies and early eighties has been extremely rapid. In 1974, the building societies accounted for 44.6 per cent of total mortgage finance. In 1980, this figure had risen to 74.2 per cent. Similarly, building societies have increased their share of the savings market from 9 per cent in 1967 to 20 per cent between 1979 and 1981. This performance has been achieved with no significant change in their legal framework. The societies raise most of these funds through share investments but to the investor these are more akin to deposits.
The shareholder in a building society is analagous to being a depositor in a bank rather than being a shareholder in a company. Voting power in a society is not normally weighted according to the value of shares held resulting in one person one vote. Therefore, it is impossible for even a substantial number of members to have sufficient votes to enable them to exercise control over the society. That is the theory. This is evidenced by the fact that the concept of one person one vote when there are 100 members is very simple but when there are 100,000 members it is impossible to pursue in terms of true democracy. Between 1971 and 1981, 243,000 new houses were built, half of which were  financed by borrowing. The Blackwell report of the NESC projected that over the period 1981-91 there would be an additional need for 293,000 houses. I understand that that information is now out of date and was slightly optimistic.
In Ireland, a group of five societies dominate the building society industry. They account for in excess of 90 per cent of total assets. These societies are different in size. In 1984, for example, the total assets of the big five as it was then amounted to £2.428 billion. Of this figure the Irish Permanent had assets of £1.023 billion. Large building societies are comparable to banks. They are largely anonymous with branch networks throughout the country. The present legislation and their operation as a cartel has resulted in them being very profitable. Their profits in relation to post tax return on gross assets are higher than the Bank of Ireland or Allied Irish Banks. I would like to turn to a particular table which proves that. If we look at the post tax return on gross assets the figure for the Bank of Ireland for 1981-2 was 0.77 and in the following year it was 0.54. For AIB, the figure in 1981-2 was 0.8 and in 1982-3 it was 0.71. Over the same period the figure for the Irish Permanent was 0.89; for the ICS, 1.13; for the Irish Nationwide, 1.84; for the EBS 0.64 and for First National, 0.8. Those figures clearly prove that they are extremely profitable and opposite to the perception of building societies which is that of non-profit making organisations.
The legislation relating to the registration and supervision of building societies is primarily regulated under the Building Societies Act, 1976, with subsequent technical amendments made in 1980 and 1983. The 1976 Act consolidated with amendments the preexisting law. Under these Acts the control and supervision of societies is vested in the Registrar of Friendly Societies who has various powers of inspection and the withdrawal of certain rights, for example advertising. An annual report has to be submitted to the registrar annually.
I would now like to turn to some recent developments in relation to the building  society movement in the context of the financial sector. Building societies are now at a crossroads in two respects. First, in relation to their legislative environment further to the EC Directive of 1984 and the publication and subsequent decisions further to the Green Paper in the UK, it is proposed that many of the statutory constraints and powers would be loosened so that societies could act in other areas adjacent to mortgage finance such as estate agency and brokers for insurance. The second area of change is with regard to the savings market. At the top end at present they are under pressure from the effectiveness of growth bonds and at the lower end they are being pressurised by the attractiveness of post office saving certificates many of which are index-linked. These are becoming increasingly attractive and will be more so at times of high inflation. It is in the context of changing circumstances that I decided to do an in-depth study of building society operations in Ireland. As this progressed, I became gravely concerned about (a) their policies, (b) the effectiveness of the registrar and (c) the legislation governing them. The public and shareholders' interests are not being well served in any of these three areas.
With regard to their policies and decisions, it has been very noticeable that there has been a huge growth in three areas of their expenditure: new branch networks, management expenses and fees and their advertising budget. If we look at the figures for advertising expenditure by the big five building societies as it was we will see that in 1979 they spent £2.21 million. Total building society expenditure on advertising was £2.61 million. In 1980, the figure for the big five had increased to £2.75 million and for the total building society sector to £3.2 million. In 1982, these figures had gone up again to £4.49 million for the big five and £5.07 million for total building society sector. In 1983, the big five were not satisfied with that level of expenditure and spent £6.07 million and the total building society sector went to £7.2 million.
I will now turn to management  expenses. I will come later to the AR11 form which has to be submitted to the Registrar of Building Societies. That form is totally inadequate in terms of the details which have to be provided. One can see from that form that total management expenses for the Big Five in 1979 were £8.33 million and for all building societies, £10.07 million. In 1980 that figure went to £11.11 million for the big five and £13.77 million for all building societies. In 1982 there was another staggering jump. The Big Five decided to spend on total management expenses £20.98 million and while the amount for all building societies was £20.39 million. The figure shot up again in 1983 to £27.08 million for the Big Five and £31.47 million for all building societies.
Put simply we are dealing with a situation where management expenses of the Big Five, which includes expenditure on branch network, advertising and other promotions, salaries, perks and other expenses, went from £8.3 million in 1979 to £27.08 million in 1983. This morning the Fianna Fáil spokesman said that the building societies would have to pass on any loss of income due to the abolition of the redemption fee and any loss of income due to the restrictive practice they operate with insurance brokerage. I put it to Fianna Fáil that if they look at those figures they will see that there is plenty of spare change to be picked up at a time when their advertising expenditure is three times that of the banks and in 1984 was three times the expenditure of the building societies in the UK. I do not see how it can be argued for one second that in the interests of a movement that is given special legislative consideration it is in the interests of the people that they serve that they should so wastefully chase their own tail in search of deposits to add to the normal cost overheads of the movement by having such a huge budget on new branch networks and on advertising. I will deal with those areas later.
I should now like to return to their policies and decisions. New branch networks are costly and their current rate of growth has resulted in management and  administrative cost ratios that are out of line with the asset growth they are reporting. I should like to give another set of figures which are very interesting. I should like to look at the global figures for management expenses, as per the AR11 form submitted to the Registrar, as a percentage of mean assets in 1983 and 1984. The figure for the Irish Permanent was 1.42, for the EBS, 1.57, the First National, 1.58, the Irish Nationwide, 1.20 and the ECS, 2.04. In 1984 they increased, relatively speaking. The Irish Permanent went up by 22 per cent, the EBS by 27 per cent, the First National by 41 per cent and the Irish Nationwide by 50 per cent. The question arises, if that expenditure did not take place could it not be the case that the differential between the lending and the deposit rates could have been reduced or could a lot of these restrictive practises that this legislation obliges building societies to get rid of not have been removed? It is my belief that if there was greater accountability in the building society movement the shareholders of the societies would say that that was what they wanted. That was the way to pursue this instead of having to legislate in an area where commonsense should have prevailed.
It is questionable whether these management policies have been in the interests of depositors as surely the future trend will not be in blocks and mortar for offices in terms of new branch networks but rather in electronic financial services. Similarly their colossal advertising budgets are a wasteful burden on the building society movement. Currently they are three times that of the banks, and, in effect, the dog is chasing its own tail. The net effect of growth and expenditure in these areas has resulted in far greater overheads for the societies. This can only mean that any possibility of reducing the margin between the deposit rate which in July 1985 when I was studying it, was 7.25 per cent and 11.85 per cent will be dissipated. All of this is verified by the fact that as a percentage of mean assets the top four building societies have shown  increases between 1983 and 1984 of between 22 per cent and 50 per cent in overall management and administrative expenses. Thus the blunt question arises, is this current expenditure policy at the expense of the interests of shareholders and home buyers?
The second policy area where I would be critical of building societies is that there has been virtually no innovation in the type of mortgages offered to house buyers due to the lack of competition within the building society cartel. With the exception of endowment mortgages, and a slight change in savings services, the building societies have been very slow to either promote new housing initiatives or to submit new proposals to the Government for the potential on export markets. That was until the Honohan inquiry was held. The operation of the cartel has been very tight in the past with an exclusion to new members, previously the Mutual Building Society was expelled and we all know of the ongoing difficulties between the ICS and the other societies. For the Irish Building Society Association to refute the operation of a cartel in my view in the past was unfair and I hope this week marks a new departure in relation to its break up. It is my belief that it is in the interest of individual societies that that should be pursued.
I have referred to the Registrar of Friendly Societies as a toothless lion and I state this because I believe he does not exercise sufficient scrutiny and accountability over the societies and their top management. Any concept of accountability must first of all understand the term mutual which is used to indicate an organisation of which the ownership and ultimate control is vested in the members broadly on a basis of equality rather than in proportion to financial interest. I categorically state that the current election system operated within the building societies does not reflect that term of mutualisation. In practice the election system does not result in outside candidates having a chance of election and it is only by co-option that new members are appointed. The proxy form system seems to ensure retention of the status.quo board directors. Thus the onus on the Registrar is all the greater to ensure accountability to the public and to the shareholders.
It has to be acknowledged that his office has been under funded, under staffed and has lacked a continuity of policy due to a change in personnel in recent years. In this area I should like him to take the following steps to ensure greater accountability: (a) a reform of the details of management expenses that have to be provided in the AR 11 form; currently only global figures are required here and I believe a full breakdown should be given; (b) the registrar should publish guidelines in relation to compensation for retiring directors, especially in the event of a merger; (c) the full rights of shareholders should be clearly published on all deposit books and (d) the conditions relating to declaration of interest by board members should be the same as those operating for company directors. I will return to that later.
In relation to the legal framework governing societies I believe that the 1976 Building Societies Act should be amended along the lines of the Industrial and Provident Society (Amendment) Act, 1978 (section 25) whereby the Registrar of Friendly Societies where deemed necessary can appoint a director to the board of a society if it is deemed necessary. I also believe the Department of the Environment should examine whether it is correct to assume that market forces will dictate competitive interest rates while there is a cartel in operation and that it may in fact be necessary while it is in operation to vest new powers in the Minister to provide statutory controls on the lending margins of building societies.
Consideration should also be given to whether there should be some form of limit on management and administrative cost ratios within societies. I readily accept that this should only be used in emergency circumstances where the Registrar feels that such action is justified. In order to give Irish building societies an equal opportunity to compete with foreign international institutions it is essential that the current legislation  is reviewed in the event of traditional barriers in financial services markets being broken down throughout the world.
I note that Deputy Burke this morning referred to the building societies as a soft target. I have never found the building society movement to be a soft target. They are a well organised and articulate group who can defend their interests extremely well. The changes that are being sought here in terms of consumer rights are the very same as those that exist in terms of practices for mortgagees in the UK. The direct effect of information technology and the EC financial services directive will be that UK building societies will have full and free access to the Irish mortgage market before long. If the Irish building society movement want to respond to this competition and retain their market share — we all want to see a strong indigenous Irish movement — then they must make these changes of their own accord.
Building societies resent my comments and criticisms of their operations but they must address themselves to the issue of public scrutiny beyond their current legal obligation. It is in their own interest in terms of securing a sound future that they should do this. At no stage in my comments have I dealt with the relative tax treatment of building societies vis-à-vis other financial institutions. Whatever about my views on DIRT, in the interests of home building, building societies should have a favourable position within a tax led savings market.
Section 6 deals with the major part of the legislation. When I spoke out on these issues I received a deluge of correspondence. I will not delay the House by relating individual cases but there were cases of people who had to pay three solicitors for the conveyancing of one house. With a 1½ per cent charge on a £30,000 houses the amount involved is £450. There were cases of people selling houses in the UK and coming back to live in Ireland and vice versa. They could not understand the difference in the way they were treated by the UK and Irish building societies. People who are in the insurance  business wrote to me and explained that they could arrange their own house insurance at a reasonable rate but were debarred from doing so and were told they must go to a specific insurer.
I greatly welcome the Minister's plan to facilitate the early issuing of loans after completion date and so obviate the need for bridging finance. I have heard harrowing cases in relation to delays on the issuing of loans finance which led to severe hardship. In the recent past there have been cases of people extending their mortgages and availing of the grants for the renovation and repair of houses. They were again subjected to all the extras — valuation fees, research fees, insurance changes and so on. There is the impression that many mortgagees who are clients of building societies are not happy and I am doing the building societies a service by pointing this out to them. One of the first rules of commerce in any business is that the customer is always right. I do not believe that that modus operandi holds true in the building society movement.
Tiered interest rates have not been my highest priority in relation to the inequities that arise. However it is totally absurd for any society to turn around after a number of years and say they intend to change the terms of your mortgage without your having any say in the matter. That is unfair and would not be tolerated in any other line of business.
I welcome the changes that are being made. They are long overdue. It is deeply regretted that it requires legislative change to deal with these matters. If there was no legislative change the fact is that UK building societies would have obliged Irish building societies to change anyway.
In relation to other legislative changes it is worth underlining that in the case of a credit union the registrar has power under section 25 of the Industrial and Provident Society Act 1978 to appoint someone to the board. No such facility exists in relation to building societies.
I would not like to see excessive statutory control in relation to interest rates  but the behaviour of the building societies is analogous to that of a spoiled child. Quite frankly they are only waiting for a general election and a change of Government so that this legislation can be scuttled. I do not know if that is true but it is my belief. The antics of Fianna Fáil whereby they were very upset by the timing of this legislation give credence to that.
On 16 July last year I called for a public inquiry into the activities of building societies and was very pleased when the Government subsequently announced the commissioning of the Honohan report. That report dealt with some aspects of the issues I raised. The question of extending building society finance beyond the area of mortgages needs to be looked at. During my research last year I saw a letter from the chief executive of one building society which advised a mortgagee that he or she could get additional facilities on his or her mortgage for items other than their house. I do not know if it was for a holiday, the purchase of a yacht or whatever. I saw that letter and can produce it. We should call a spade a spade. I am not suggesting that is done by every building society or that it is always done by any building society.
Mr. Yates: At the time of my comments I challenged the building society on three occasions to a debate and they declined. Perhaps some of the issues which I could have raised, such as that one, might have enlightened them somewhat.
On a more positive note, I am very involved in policy formation for small businesses and one aspect which is of great concern to me is the huge increase in bank charges. I hold no candles whatsoever for the banks relative to the building societies. Bank rates have increased out of all proportion in terms of handling charges. There may be cases where individual building societies would be able to provide, on a personal basis, cheque book facilities for individuals or businesses. In the context of the EC liberalisation this must be looked into and certainly I would not oppose it.
I wish to turn to the area of the election of the board. This is the greatest injustice. At the moment there are rules as laid down by the Registrar of Friendly Societies in relation to the election to a society of directors and board members. If I am a share investor in a society I am entitled to be a candidate. If I and several colleagues in my House decide to put my name forward as a candidate and I write to the secretary of the building society saying that I wish to canvass everybody on the share register, I understand from the register that with regard to some societies the secretary can refuse to give me access to the share register to distribute my canvassing literature, if the secretary deems that it is not in the best interests of the society. I am not saying that applies to all societies, but to certain of them. Obviously if there are people in a very powerful position in a society they might resent outside interference. We have had a recent example of an attempted election by one person on to one society. My experience is that by the procedures of notification of an early pre-emptive strike it is extremely possible for someone to garner the votes necessary to become elected. This can be the case. People will know the society to which I am referring. It can be that people are sent out proxy.  forms to see which member of the family they are going to vote for in relation to the election of directors in one society.
I should like to see a declaration of interests, as for private companies, of every director regarding any business — be it architectural, advertising, a legal practice — to see if in any way there is a relationship between the director's own business links and the society's links. Shareholders are entitled to have this information and it should be made fully available in all cases. I am not happy about the co-option system on to individual boards. I am not looking for anything different from the provisions under the 1963 Companies Acts which might be available under the new companies legislation which is due to come before this House before long.
If that is not done, in the interests of accountability the registrar or the Department should be allowed to have a nominee on the board. Under those rules full accountability is guaranteed. That is the only fair way to proceed. Basically, building societies regard their share investors as depositors in a bank. Perhaps from their point of view it would be unworkable to give every person a vote, but the reality is that most people who put money into a building society do not realise that it is like putting money into a company on a one person one vote basis as opposed to putting money in a bank. They just see it in terms of their rate of return. That is why all the rules and all the shareholders' rights should be clearly displayed on the deposit book.
Could the Minister, in reply, give me some answers in relation to the studies that he has done on the difference between the lending and deposit rates, how they compare with rates in other financial institutions and whether he is satisfied that there is no scrutiny whatsoever by the Department of the Environment, the Registrar of Friendly Societies, or previously by the National Prices Commission, or by anybody else. Nobody analyses the profit margin of building societies to see whether there is scope in terms of alleviating the rate to  mortgage holders or having more attractive rates for depositors, whether the margin, be it 4 per cent or 5 per cent, is fair. Would the Minister specifically clarify whether under this Bill he has enabling powers to make changes in that area? I do not believe that it would be at all satisfactory or correct, in terms of interference in a financial market, to prohibit the increase of rates — I am not talking about relative rates such as tiered, but overall rates — to go beyond a certain level. That level of interference could be construed as nationalisation of a sort. It is more important to assure the public that the margin between the deposit rate and the lending rate is fair and competitive and that there is no unnecessary luggage.
Is the Minister satisfied in relation to the disclosure that each building society makes on the AR 11 form to the registrar, whether there should not be guidelines for compensation to retiring board members. Here is a very interesting topic. Last summer there was a proposed merger between the EBS and the Irish Permanent Building Society. I am very glad from the point of view of the EBS that they did not go along with this, but that is only a personal observation. It could theoretically happen that if a big society were subsuming a smaller society that might not be in the interests of the smaller society but it might be in the individual interests of directors who might have the necessary power in terms of their authoritative position within the society. I am not saying that this has happened and it may never happen, but hypothetically it is possible that the compensation given to certain directors in the circumstances of a merger would be so great as to be attractive. Guidelines should be issued in such cases.
I should also like to know if it is true, as many letters which I have received suggest, that individual directors of individual societies have certain perks. Would the Minister clarify the situation in relation to loan facilities available to individual directors, give some breakdown of entertainment expenses, or  some detail — perhaps not issued to the public if it is of a personal nature, but at least issued in detail to the registrar or the Department — in order to be satisfied that the best interests of the share investors are being met. I believe that in relation to one society expenditure between eight directors in one year amounted to £731,000. Are there any personal commissions with regard to the total lending in relation to individual building societies?
In reply, perhaps the Minister could clarify the legal situation about new entrants to the building society sector, or if this is in the new legislation. Entry should be absolutely wide open to anybody who wants to set up a building society tomorrow morning. I should like the Minister's assurance that individual mortgagees would have sole right of choice of insurance for their house and that there would not be an insistence on a third solicitor in terms of conveyancing; that the issuing of loans would be very prompt to obviate the need for bridging finance and, in relation to building society management, I call on the managers of the societies to review their level of expenditure of advertising and justify why this is so high. Similarly, I would call on them to try to keep moving away from the cartel, as they have started to do this week. I would ask them to justify their expenditure on branch offices as opposed to agencies which would be a lot cheaper, and to explain why they have not spent as much on new electronic financial services as they have on blocks and mortar in new branch offices. I would like some clarification regarding an opening of the door in relation to election procedures. I would like to see uniformity for all societies so that outside candidates could have a fair crack of the whip.
I have no vendetta or difficulty with individuals in the building societies. I do not know any of them personally and I have never had a problem with any of them but the deluge of correspondence I received last summer verifies that many people feel that there has been a cloak of secrecy around the building society  movement. It is in their interest in terms of accountability and satisfying their clients that that cloak is lifted. I hope that at the end of the day they will be part of a vibrant and growing financial sector that will be able not only to repel imports in the advent of EC changes but will be able to attract extra deposits from Northern Ireland and the UK and return profits to Irish building societies.
I wish this legislation well and I hope this debate will not be shrouded in the current difficulty in relation to interest rates. We are trying to achieve something different from the current topic of rates of interest.
Mr. O'Kennedy: I, too, share the wish of Deputy Yates that this debate might not be shrouded by the current debate on interest rates. I think that hope cannot be fulfilled because the Minister in introducing the legislation this morning prefaced his remarks with reference to recent developments in regard to interest rates. He even went so far as to say that these developments would require him to give consideration to possible further legislative proposals which would confer powers on societies. He said that with power comes responsibility. The implication of his remarks was that the building societies, particularly in regard to very recent developments, have not been acting responsibly having regard to the powers they have. I would like to put all of this in context.
When we talk about building societies we cannot discuss the position in which they operate in isolation from the whole position of financial institutions and current interest rates. We should ensure that we do not react to immediate developments by trying to plug holes without trying to ensure that Government actions will in no way bring about the consequences they complain about in introducing legislation of this kind. The Minister for the Environment complains about the level of interest rates for building society borrowers while overlooking entirely in the course of his address the whole climate in which this decision has been taken. The House should not  address any issue as important as this with that blindfold imposed on itself.
The current real interest rate is about 10 per cent, the highest for many years. It is at a level which makes it impossible to have any degree of balance, equilibrium or confidence in the markets. It has brought about a position where even the Government stockbroker is offering Government gifts at the unprecedented rate of 13.5 to 13.75 per cent. They are still not able to find sufficient takers for Government stocks at that unprecedented rate. The Minister spoke about the responsibility of building societies to borrowers. I take that point but surely there is also a responsibility to the taxpayers who will inevitably and eventually have to fund the cost of the interest rates now being offered by the Government on Government gilts. The question arises as to why that has happened. Why do the taxpayers of the future have to face the burden of meeting the cost of these enormous interest rates being offered by the Government? That question should be answered before we start hurling charges at building societies or other financial institutions who have to operate in conditions brought about by Government. This Government deliberately, and despite our constant warning from day one in this House, introduced a tax which has had a most disastrous effect on all financial institutions. The deposit interest retention tax was introduced purely for the sake of adding further to the tax take which now exceeds well over £6,000 million. The effects of that on the money markets have been even more disastrous that I, as spokesman for Fianna Fáil, indicated at the time. On the day that tax was introduced I warned the Government of the consequences it would have. I was proved to be inaccurate to one extent only; the fears I had at the time were understated rather than exaggerated. If there is an outflow, even in the space of one year, of at least £500 million from our financial institutions do we expect interest rates to stay stable and normal? We are being asked to ignore the fact that the Government have to  increase the interest offered on Government gilts which is a direct consequence of their own actions. The Minister then comes in here as he did this morning to pillory individual building societies. I understand that other building societies may feel the need to follow suit over the next few days. How can any Government reasonably fix their target on building societies or banks when those institutions are reacting to the conditions deliberately brought about by the Government? It is time the Government answered for those consequences.
The reason I am taking part in this debate is to invite the Minister for Finance to explain how this issue will affect building societies or how he sees it as being in any way effective or affected by the general lack of investment confidence in the banking system, building societies, Government gilts, never mind manufacturing or other industry at this time. That is one of the most shortsighted, damaging actions ever undertaken by a Government.
I am not at this stage going to discuss the equity of it because that is of no consequence to this issue. Before we can reasonably deal with the whole question of the amendment of legislation affecting building societies we must realise that this can be done only in the context of legislation affecting the financial institutions generally. I want to place on record that as long ago as 1980 when I was Minister for Finance I initiated within the Department — the record must still be there — an examination of the whole role and authority of the Central Bank, the legislation affecting the Central Bank and its control over financial institutions generally, with a view to seeing how best we could introduce a rational system throughout our financial institutions. I would have expected that I would have been in a position the following year at least to bring proposals before this House, or at the most in two years. Here we are five, six years later and we are reacting only in one event, the building societies because they are big news today.
Mr. O'Kennedy: They are big news today and were yesterday and last week, and we have a Government reacting to the understandable concern about the level of interest rates in building societies without doing anything at all to address the fundamental problem which is the pressure on interest rates that they have brought about.
As Deputy Yeats asked in relation to the banks, what about the interest rates of banks? I have mentioned the current interest charges and the difference, which is now historically high, between the deposit interest and the overdraft interest. At this moment I cannot put a precise figure on it but it is away outside what would be normally acceptable in any commercial activity. Why? Why are bank charges at the level they now are? Why is the whole business climate being burdened by the level of these charges of interest rates? Why do the building societies find themselves for one reason or another as they see it — I am not going to take on the role of Spokesman for the Environment for our party — obliged to increase interest rates by at least 3 per cent to maintain the level of deposits? Why are all these distortions in the market taking place? It is that we have not only failed to attract deposits into our financial institutions from abroad but we have driven out such deposits as at least would maintain a certain level of equilibrium from domestic depositors.
We will never know just how damaging has been the effect of DIRT but we can quantify to a certain extent what is gone. We can never quantify what was not invested. We warned from day one that that barrier which was being erected deliberately by the Government would be seen by external depositors in our financial services system as being a clear warning to them that this was no place to invest. Oh, yes, a statement of exemption  for non-resident account holders which would be made available to the Revenue Commissioners was meant to ensure that they would not be subject to this DIRT, but anyone who lives in the real world knows that any external depositor will above all else refuse to make any such declaration purely because of the apprehension he has that this would be made known or available to the revenue authorities in his own country. Even if there is no foundation for the apprehension, even if our Revenue Commissioners, whose bona fides I accept — would under no circumstances disclose any details in relation to individual accounts, and it is of no consequence if depositors who may be seeking a haven outside for moneys that are not being fully disclosed to their own revenue authorities are apprehensive. That is the end of it, and I could not begin to estimate the drain on the whole deposit funding in our financial institutions as a consequence of what we have lost in that direction.
If ever we needed investment and deposits in our financial institutions, now is the time. The Exchequer, the public purse, cannot cope any more. We are all agreed on that. We can cope no more with extra commitments in public expenditure. If that is to be the case the only basis on which we can fund our private housing sector programme or public housing sector programme as it is at the moment or any other development programmes is through private investment and when we have tried to encourage that we have done the very opposite; then the Government complain about the level of interest rates for which they themselves are directly responsible. For that reason I ask this Government again to please pull down the cul-de-sac signs that they have erected over the last few years particularly in relation to DIRT. There were others also from the beginning which affect the private house market. The infamous residential property tax has lost the Revenue Commissioners more than it ever even claimed could accrue to the revenue. The decline in private house building at that level of the market has had disastrous effects on the construction  industry and, let it be said, on the revenue yield. The stamp duty yield which has declined so much there has been a matter of considerable concern even for the revenue authorities and the Minister for Finance.
Do the Government feel free to take any effective action at this stage? I do not believe so but I ask them to pull down the cul-de-sac signs at least to ensure that when another Government come in they will be able to start with a reasonable prospect of engaging in normal investment.
Mr. O'Kennedy: I want to turn to matters that arise and have been dealt with by the Minister and by Deputy Yates. The financial services in this country have some very special characteristics and have a major potential which should not be ignored by any Government, particularly at this time. In the first instance, does it need to be said that they are labour-intensive at a time of crushing unemployment? Because they are labour-intensive at every level we should be promoting particularly a climate for the development of the financial services. We should promote the development of the financial services by way of a comprehensive Government policy. We have some very considerable advantages. We have the knowledge, the capacity and the commercial expertise in our financial services sector, but instead of applying it to our own advantage we are exporting it. The major finance houses in this city will confirm that the response elsewhere to the young, junior management staff who have gone out to live and work in New Zealand, Australia, Canada and America has been to ask us to send as many more as we have because they are making a major contribution to their programmes.
Mr. O'Kennedy: The second point I want to make is that the building societies have very considerable advantages because of the proximity to the London market; we are in the same time zone as London and that confers very considerable advantages on the financial services sector here, and we have the same language. All of this can be promoted but instead the Government plug a few little holes here and there in the Building Societies (Amendment) Bill, promising, even in introducing it, that there will be another to follow soon.
Third, I would ask if he must always react to what the others do? If we really were developing a policy for strengthening the financial services sector, we would not simply be reacting to the others, we would invade their territory. If some of our people in the commercial sector can succeed abroad, having departed from the very unhealthy investment climate here, there is no reason the people in the financial services sector cannot do so as well. There are some areas where the building societies' role can be enhanced and extended. It is clear that because of the major level of public expenditure on local authority housing here, which is higher than that in any other country in the European Community, one must ask how much more in the public purse can bear. We have an obligation to provide for what was called in the 1890s the housing of the working class when the whole local authority housing programme was introduced. We can be proud of everything we have done in relation to local authority housing, but the help of the building societies could be enlisted in providing housing on a home ownership basis for that segment of the market — and this is happening to a much greater extent in the UK and elsewhere. It would achieve two things at the same time. We could  reduce the burden on the taxpayer and encourage home ownership which is a very welcome feature of the whole building society programme with all that goes with that in terms of house maintenance and protection of the asset. The discussions between the Minister and the building societies should prepare for the day when they will expand their role beyond what it is at the moment as is the pattern particularly in the UK. We would find the idea of old age pensioners here being able to finance housing for themselves through building societies very strange to contemplate. But this is happening in the UK and in the North. I would like to see that kind of development encouraged. I would like to think that this Government, and certainly our Government coming into office, would engage immediately in discussions with the building societies in that area. We do not want to see them having to react to the others coming in and offering services they do not yet provide. This is an area we should build on.
I will not take on the role of spokesman for the environment but I want to place this debate in context and I want to record that it is not good enough for any Minister of a Government with collective responsibility to come in here to this House complaining the morning after an announcement from one building society about the level of interest rates, when the Government of which he is a member is responsible for the total distortion in the money market, for the unprecedented interest rates. If we can get this Government to make some sense at this point, the complaints that are at present being directed against building societies may not arise and the breathing space that they and others require will be forthcoming. I hope it will not be necessary to come back with another amendment to an amendment Bill. That is not the goal of this House. If we react like that every few weeks we are acknowledging that we do not have the control here and that we do not wish to, but that we wish to complain about those who are forced to react to our mistaken actions.
Mr. Farrelly: I know the building societies fairly well because I have a business that has an agency from two different societies and I am a mortgage holder. I know about the general perception of building societies and the value of the services they have provided to many householders over the years.
I am flabbergasted at the contribution made by the Opposition spokesman on Finance this morning on this Bill which will alleviate some of the costs to mortgage applicants. He did not refer to any section of the Bill but defended a recent increase in their mortgage rates recently by one of the building societies. That is all he did. The major part of his contribution sounded more like an answer in a budget debate and that is not what this Bill is about. The conduct of the Opposition spokesman leaves a lot to be desired. He did not refer to the reduced costs for mortgage holders which are a part of this legislation but only said that the DIRT tax was the main cause of the drain of finance from this country. DIRT tax is not the main cause of money leaving. In the six months since DIRT wax was introduced we have collected £5 million more from it than was originally anticipated. Are the Opposition telling us that the higher rates of income tax which were reduced by 3 per cent because of the introduction of DIRT, should not have happened? The building societies have had DIRT tax at the rate of 28 per cent for as long as I can remember and the 7 per cent increase to 35 per cent has been blamed by the building societies chiefs for the 3 per cent increase in mortgage rates. They say that an increase of £7 in the £100 interest earned would mean an increase of £25 to £35 a month on the average £20,000 mortgage. Who are they trying to cod? Anyone involved in business would not countenance such a suggestion. It does not make any sense and neither the building society movement nor any Member of this House can convince me of it. I would like to hear comments in answer to that point.
The introduction of a system in which the mortgage applicant will only have to pay a standard charge to the building  society solicitor is long overdue. It is unacceptable that a mortgage applicant should have to pay a tiered rate to the building society solicitor and have to pay somewhere in the region of £400 to £450 to the solicitor.
I hope this is the first step in improving the position of the mortgage applicant. I have already asked the Minister for the Environment to ensure when this legislation is passed that a single rate and a single contribution should apply to local authority applicants. I welcome that provision in the Bill and I am astonished that neither of the two Opposition spokesmen mentioned the savings that this would mean to people but only said that the building societies were an easy option.
Mr. Farrelly: In relation to redemption fees it is unacceptable that a person who wishes to repay his loan or move house should be penalised. This is another important point which this Bill addresses and I fully support it. Thousands of people have had to pay a redemption charge in order to sell their houses and at the same time have had to pay the full cost of applying for a new mortgage. That is totally unacceptable and I am delighted that the Minister has done something positive in this area.
I do not accept that a financial institution should enter into an agreement with a person, and ten years later change the terms of that agreement by the introduction of a tiered rate. As the Minister said this morning that is particularly unacceptable to people who joined a building society because it had a single rate when  they joined. I am glad the Minister stopped one of the main societies from introducing a tiered rate. The rules should not be changed in mid stream.
In relation to building societies deciding where people should insure their houses we have learned from the various reports that substantial fees are paid to the various insurance companies by the building societies and that house insurance is a big income earner. An individual who takes out a mortgage should not be compelled to insure the house through the building society when such insurance can be looked after locally by hundreds of thousands of agents throughout the length and breadth of the country. There should not be a monopoly and I would be delighted if something could be done in that regard.
I would also welcome an extension of the building society funds to ordinary people. I never accepted that the banks should be the only people allowed to run a financial system and that the building societies should not be allowed to compete. This year we learned of the handling charges which the banks introduced and of the income as a result of those charges on small businesses and individuals who use the banking system. We heard that the return of income in this area will be more than the total interest collected on loans for the year. That is an unacceptable precedent and the Minister, with the Minister for Finance, should look into the question of widening and broadening the scope of financial areas through the building societies. The broadening of the building society services will make competition more keen.
If the cost of advertising for the building societies is three times as high as those of the financial institutions, reducing such costs could mean a reduction in mortgage interest rates. The main building societies are well known to everyone and intensive advertising is uncalled for. A reduction of one-third in their costs could give a 0.5 per cent reduction to the ordinary mortgage holder. This debate will give an insight into the workings of building societies to the general public. After all,  64 per cent of mortgages are with the building societies and people are entitled to know where their repayments are going and how profits are spent.
The building societies have done an excellent job over the years where farmers have got into financial difficulties with the banks. On numerous occasions they have provided help for such families by granting them mortgages. That has been very important to a large number of family farms as interest rates were at their lowest since the early seventies. It should be remembered that the building societies have helped hundreds, maybe thousands, of people.
I wish to comment on Deputy O'Kennedy's contribution as to the reasons for a 3 per cent increase in mortgage rates by one building society — I presume the others will follow suit. Certainly the supply and demand of finance is very important and if money is scarce you must pay more for it. I agree with the Deputy that a 3 per cent increase is too high, a rate of 2 per cent or 2.25 per cent would have been sufficient for the reasons I gave earlier. The imposition of DIRT cost building societies a mere 7 per cent increase. I wish to remind Deputy O'Kennedy and other members of the Opposition that in October 1982 the interest on mortgages was at the rate of 16.75 per cent. Deputy O'Kennedy had many plans in regard to finance but he did not stay with us, he went to Europe. It is very unfair to say that today's rates are appalling compared to then because the average rate over a long period has been in the region of 12 per cent or 12½ per cent. Even the 3 per cent proposed by one society merely brings the rate up to the average of 12 per cent or thereabouts. I believe that this is a short term increase and that criticism reduces confidence in the building societies. This is what has happened and I disagree totally with the scurrilous comments made by Deputy Séamus Brennan on the radio. He tried to deflate and undermine the whole financial system of the State. However, it did not work and the proposed increase will be shortlived. I will not accept the argument from anybody  that householders and new mortgage applicants are not entitled to a single repayment each of between £200 and £300 from insurance companies. It is open to thousands of people throughout the country to avail of such repayments.
Deputy O'Kennedy spoke about local authority housing. I can tell him that the long waiting lists of thousands of people waiting for such houses have been shortened considerably because of the new reconstruction grants. Members of the House doubted the effects of these grants on employment in the building and construction industry. Now, one in every five people who own houses has applied for and got these grants and the State is committed to an expenditure of £100 million to cover them. House owners themselves have invested between £250 million and £350 million in reconstruction work and consequently the construction industry and employment in it have benefited to that extent. People who say that these grants have not created employment in building do not know what they are talking about.
The Bill will mean that those who wish to sell their houses to people who take out mortgages can do so. We were never so well off in regard to house ownership, and the building societies have played a major part in that, and I hope they will continue to do so. However, I would welcome a reduction in the cost of mortgages. It is a pity we did not have some positive reaction instead of criticism of this legislation. As I said, mortgage holders and new applicants will benefit much more than they did five years ago and I hope the Bill will go a long way towards ensuring that local authority housing loans will be reduced from the point of view of solicitor's costs.
Mr. N. Treacy: I rise to support the excellent contributions of Deputies Burke and O'Kennedy. Listening to the Government speakers, from the Minister up, one would think that the building societies had not made any contribution to the Irish economy. This legislation has been hastily prepared and is totally hypocritical because it is an effort at political  posturing by the Minister and the Government to the people. The people will show their reaction to that when the question is put to them.
I have been associated with a building society as a district agent and I have always been impressed at the way the societies operate. I cannot accept that they are not prepared to face up fairly and squarely to any legislative proposals put to them. It is important that we ensure that any legislation introduced will maintain equality of opportunity in the financial markets so that all involved in financial institutions will be on an equal footing.
I would point out that building societies, due to legal restraints vis-à-vis other institutions are inhibited in the matter of developing and expanding the financial service they give to our people. This Bill is only a piecemeal effort despite the fact that the Minister for the Environment, inside and outside the House, has promised comprehensive legislation. All we see is this Bill put forward by the Government as a propaganda effort to try to represent to the people that the Government are doing something for mortgagees.
There cannot be mortgages unless there is investment and there will not be investment if we do not offer inducements to the people to invest in financial services — the money will not be there. I regret more than most people that mortgage rates have to be increased by 3 per cent but we must appreciate that this is due to market forces. We must also remember that the associated and commercial banks increased their rates by 3 per cent on two occasions, and unless the other finance houses move accordingly their financial base will be eroded seriously. It is worth repeating that we have a small open economy which is affected by major international movements and it is wrong to suggest that one group of financial institutions should be allowed to react to such international and domestic movements and others should be restrained from doing so. People who suggest otherwise are not speaking of movements in the financial world.
 Deputy Farrelly castigated my colleague, Deputy O'Kennedy, for speaking as if he was replying to a budget debate. I would remind Deputy Farrelly that Deputy O'Kennedy is a former Minister for Finance. He is the present Opposition spokesman on Finance. He has a duty to speak on financial matters affecting this country at any time he rises to speak in this House. We warned the Government during the budget debate last January that the imposition of DIRT would have devastating affects on the financial base of our nation.
I remember speaking after midnight on the night of the budget warning the Minister for Finance, Deputy Dukes, of the consequences of his decision. He only laughed at our suggestion. Deputy Farrelly referred to the fact that our Exchequer will receive £5 million more from DIRT than was estimated in the budget. I submit to Deputy Farrelly that if DIRT remains that £5 million will soon be reduced to a deficit £5 million. There is positive proof that £1.5 billion has left our shores this year as a result of DIRT. That is a tragedy because if there are not the liquid resources to go around and there is no cash flow within the economy the financial institutions will be short of money. Consequently, interest rates will rise and the economy will stagnate. That is what has been happening under this Government in the past four years. Unemployment has risen to almost 250,000 and added to that about 80,000 have left our shores. Many companies have gone out of business yet the Government continue to impose severe financial constraints on our institutions and on our people. So long as they continue to do that the economy will contract and will go into a deeper recession.
I have listened to the comments of the various Government speakers. It seems that the word “profit” is a dirty word, so far as they are concerned. One would think it was a crime to make money. to create wealth and to redistribute that wealth to create opportunities and ensure that our economy expands. Deputy Yates criticised the building societies with  regard to the sum of money they have spent on advertising and on promoting their services. The building society industry has served this country for about 125 years but only gave a real service and came into the market place in the past 20 years. Until the Building Societies Act, 1976 there was no type of fair legislation which would enable them to give a real service. Since 1962 the building society movement has expanded throughout the cities and provincial areas. Specialising as they do in providing a particular service, finance for housing construction and mortgages, they have to compete with other institutions for the basic commodity which is the peoples' money. Surely, they must advertise their services. They must expand and develop. The associated and commercial banks have been based across the country over the years. The building society movement had to get in there, acquire properties, provide a service, employ staff and create jobs in the construction industry by way of the building of office accommodation. They have given a major service and created major opportunities for many people.
Mr. N. Treacy: I have declared my interests. Deputy Mitchell has never declared his. We all know of his involvement with international music artists and the fact that he is on a special retention figure. I have declared my interest at all times. Deputy Mitchell will get his opportunity.
Mr. N. Treacy: I am representing the people of this country and as long as I am in this House I will speak as I see fit to ensure that legislation that is fair and equal is introduced in this House and not draconian measures to try to erode our economic development.
Mr. N. Treacy: We can compare the services of the building societies to those of the banks in areas where they have been in existence for many years. The banks employ many young single women. If they marry the banks will re-employ them on a temporary basis thereby saving vast sums of money. The building societies have to compete on that basis.
One would think from listening to speakers this morning that there was no competition between the building societies. The building societies have been very progressive in the services they provide to the public. There is ferocious competition at all times between the building societies. This has led to a tremendous service being offered to both borrowers and investors.
I want to put the other side of the picture lest people would think that this Bill is designed to clear up a situation which does not exist. There is no point in creating a myth that this Bill is going to do something for those who have to borrow money to provide their own houses because the real impact of this Bill will be that the cost of money to the institutions and, ultimately, to the borrower will be higher in real terms than it is today. The building societies have trustee status similar to the banks. Money invested in those societies is secured for the investors. At any one time the building societies hold sums in the region of £500 million in Government gilts and stocks. Surely, that is a major contribution to the domestic borrowing requirements of the Government. We can contrast the security of investment and the service being given with other financial companies who have gone into liquidation and for whom the Government may have to carry the tab. That situation can never develop with regard to the status and structure of the building society movement. We can contrast it to the PMPA where innocent people invested money in an Irish company. That company went to the wall because their liquid reserves were not sufficient  to meet demands. Consequently, those poor innocent investors were the victims and the Government of the day had to carry the can to preserve the jobs, the service and risks which had been carried by the company. Due to weaknesses in our legislation many companies which were set up in recent years and who took a lot of investors' money want into liquidation while re-investing money in overseas companies. That is the positive approach we must look to in comparing the financial scenario in this country.
Deputy Farrelly referred to the fact that interest rates in 1982 were 16.75 per cent but he did not refer to the fact that Fianna Fáil who were in Government at that time had a direct interest subsidy of 2.75 per cent on that interest rate. The Coalition came into office in November 1982 and abolished that interest subsidy in the 1983 budget. Where then was the compassion, respect and assistance that borrowers and mortgage holders needed from this caring Government? How easy it is to forget what happened in the past and the disastrous decisions made that affected mortgage holders.
I should like to give statistics that will show the level of service given by the building society movement to our people. To date they have about 1,500,000 investors and hold money in trust for those people. In effect, the investment is gilt-edged. Building societies have about 150,000 mortgage holders and they have helped people who would not qualify for loans elsewhere to purchase houses. Those people may not have been in a position to qualify for a local authority loan because of their income or, due to financial circumstances, may have been refused a loan by the associated banks. The building societies have given a tremendous service over the years and have brought the lending area to a fine art.
The Bill proposes to allow building societies, for the first time, to advance loans other than on the security of a mortgage. I welcome that development as I am sure building societies do. However, bearing in mind what the Minister has said it appears that he is expecting the  societies to provide bridging finance. There is no reason why those societies will not do that. The Minister has hinted that he will expect the building society movement to refund premiums charged on bridging finance when the mortgage has been arranged. Anybody providing a service, irrespective of the time involved, must be paid for that service. A person lending a car to a friend would not expect to have the cost of the petrol used by that friend to be charged to his account and in the same way building societies cannot be expected to hand out money without getting a return on it for their investors. Investors expect a return on their money. I hope the decision to permit building societies to provide bridging finance benefits consumers and I expect the societies to produce a positive structure that will protect borrowers while on bridging finance. I have no doubt that the societies will charge the minimum interest possible for the duration of the bridging period.
The Minister proposes to prohibit tiered interest rates. In my view the proposals in the Bill are designed to hurt the building society movement. Deputy Yates gave profit figures for the movement but he neglected to quote the comparative figures for the associated banks, concerns that have greater protection under legislation and carry on their business privately. If the tiered interest rates are abolished the building societies will be expected to operate at a disadvantage vis-à-vis the banks and the other financial institutions. It is obvious that in order to compete with other financial institutions they must have a tiered investment rate; they must provide incentives for people to invest money, whether it is £1, £1,000 or £100,000, in their societies. If they are not permitted to pay a tiered investment rate they will not attract the money needed to meet the demand for house mortgages.
It has been the philosophy of building societies down the years to attract as many investors as possible and the majority of them invest small sums of money. We must recognise that building societies borrow short term and lend long  term. In order to sustain the funds needed to carry mortgages they must offer an attractive tiered interest rate for the investor and the mortgage holder. The majority of mortgages are £20,000 or less and those who can afford to buy bigger houses should pay an extra amount on the money loaned to them.
Mr. N. Treacy: On the other hand we must recognise that the bigger the income of a person the greater the mortgage he or she will qualify for. Such people will get a very high tax relief. If we abolish the tiered system we may find that the tax relief on mortgages will be reduced or abolished. The Government's action is discriminatory. Tiered interest rates ensure that equality prevails for the small investor and the small borrower. It would be anti-social to remove the tiered interest rate.
The Bill proposes to abolish redemption fee charges. That area is very important for preserving the financial security of mortgages and societies. Those societies must retain the legal right to charge those fees in order to protect their business against loss of mortgages to banks and other financial institutions who may, as they do in Britain, offer building sociiety borrowers a free transfer of loan with no legal costs. That may be in order here for one building society that enjoys the privilege of having a parent bank but other building societies are not in the same position. It is obvious that that move is discriminatory. After acquiring a mortgage a bank or other financial institution will be free, if this Bill is passed, to increase the mortgage rate thus eliminating the original advantage the borrower had. By transferring those people into a different environment at the particular time there is nothing to prevent the second institution increasing the rate to the detriment of the borrower. The redemption charge exists to protect the investment and the mortgage and to ensure that mortgages cannot be transferred easily or quickly to the detriment of the investors or the society.
 In Britain societies have re-imposed redemption fees because of the need to protect the mortgage business from attack by other institutions. It is sad to say that this Bill is being prompted on the basis of British laws that relate to building societies. We must recognise that there is no prohibition on building societies in Britain charging redemption fees if they see fit. Redemption fees are imposed in order to protect the investor, the borrower and the society and to ensure that there will be balance in our financial structure. If there were no redemption fees building society administration costs would escalate.
I welcome any proposal in any Bill that makes information available to consumers and which creates a climate of opportunity and fair play but we must be sure that the proposals in this Bill will not ultimately be to the detriment of the investor or borrower. It is proposed in the Bill to make available to the borrower the valuer's report. This is an important aspect. In order to protect himself from professional negligence claims the valuer will carry out a more detailed survey with a corresponding increase in cost to the mortgage applicant. At present architects and surveyors report to the society on the property, its value and condition. Based on that report a mortgage is offered to the applicant. The charges are based on the amount of the mortgage irrespective of the price of the house. If the house costs £100,000 and the mortgage is £30,000 then the cost of the valuer's report is based on the £30,000. If the position is changed the cost of the valuer's report might be based on the total cost of the house because not only will the valuer have to report to the society but he will have to give a report to the mortgage applicant. There will be increased charges for the borrower. That is the other side of the coin. I represent a rural constituency where people live many miles from an architect's or surveyor's office. They will be saddled with a mileage charge for the architect or surveyor to inspect the property. That is discriminatory  and imposes extra costs on the borrower.
It is proposed to give the customer freedom of choice in deciding where to place his house insurance. There are two types of insurance which are mandatory for building society clients. One is the mortgage protection policy which the building society movement pioneered in order to ensure people would be protected in the event of death of either of the partners. None of the other institutions have followed suit. Recently local authorities have started to examine the position of mortgage protection insurance. The building society movement, recognising the importance of the family and the need for protection of the family, have always insisted on mortgage protection insurance. There is also the normal house insurance.
Over the years building societies have given their clients a range of insurance companies from which applicants can choose. Some societies offer three companies and others up to six or seven companies. It is important that there is a choice. Building societies include the annual insurance premium in the monthly mortgage repayments of their borrowers. If this Bill allows mortgage holders to arrange their own cover with their own insurance company, there will be extra administrative costs involved; the companies will have to carry out checks and the mortgage holder will have to pay the premium annually. At present building societies include the insurance premium in the monthly mortgage repayments. Is that not a fair system? In the event of an insurance claim by a mortgage holder they would have the support and assistance of the building society behind them and would probably have their claim dealt with expeditiously as a result.
In the United Kingdom people can choose their own company and place their house insurance with them. On average only 1 per cent of all mortgage holders choose to pick their own company. Surely that is positive proof that the present system is the ideal one and is in the interest of the mortgage holder. I  see no reason why the names of insurance companies should not be included in the application forms of mortgages. The applicant could decide which company to use. Applicants would be saved much time and worry in getting house insurance. We must ensure that we take a positive look at both sides of every proposal.
Another proposal is to restrict the building society from charging the customer legal fees in the investigation of title thereby removing the present burden on borrowers of having to pay two sets of legal fees at the time of purchase. I would welcome a change in this area but it has been proved over the years that on many occasions the building society solicitors find some problem with the title. Many titles have been perfected as a result of the involvement of building society solicitors. There is no reason why the position cannot be changed and only one solicitor be involved. Each building society has a panel of solicitors.
There is no reason why, with the co-operation of the Incorporated Law Society, a panel of solicitors' names should not be available to mortgage applicants so that they could choose a solicitor, consequently having only one legal charge. Once that solicitor's name was on the building society panel, the expediting of mortgage applications and the thoroughness of investigation of title in the interests of the mortgage applicant and of the society would lead to a more positive conclusion and a more rapid decision in the signing of a mortgage. The Incorporated Law Society would have a major role to play in this matter in ensuring co-operation with investors in building societies, with would-be borrowers and the building society industry, so that when this choice would be available that society would provide the necessary legal services, to the advantage of the customer and the borrower.
If those legal fees were to be charged to the society, they would cost something in the region of £4 million per annum and one could add a further £1 million or  £2 million in VAT for the State. If the societies have to carry that burden somebody has to pay for it and it will be the investor and, ultimately, the borrower. There will be an added burden unless this situation can be resolved. Making a carte balanche decision and having an open-ended proposal to change the situation will lead to further pressure on financial resources and institutions, on investors in those institutions and, ultimately, on those who buy or borrow money — the mortgage holders for whom we are all interested in getting a better deal.
As I said, the tragedy is that the long promised legislation concerning the building society industry as a whole has not materialised. This Government have produced this hastily prepared piecemeal legislation. One must question the reasons for so doing at this time. They must accept collective responsibility for the financial state of the country. There is urgent need for major legislation to upgrade and change the financial area of services. All institutions must be able to compete on an even basis, having equality of opportunity in attracting investment, in reinvesting that money and in providing security for their investors. That is not the situation today. Some financial institutions enjoy a better climate of support from and through legislation than others. Until these anomalies are removed, we cannot hope to lift the economy and ensure equality of opportunity for our citizens and our financial houses.
The income of our building societies will be reduced under this Bill in certain cases. The DIRT tax had serious implications for the building society movement and for the whole area of finance. The composite rate of tax has been abolished, confidentiality of investment has gone. All other institutions compete on this basis with the building societies, which was not the position until the budget of 1986.
There are some loopholes in the Finance Act of 1986 which we pointed out to the present Minister for Finance, Deputy Bruton, when the Bill was going through. The building society movement  have to compete with the associated banks and life assurance companies in attracting funds and investors and providing resources for mortgage holders and for borrowers. At the moment, the life assurance companies can provide more incentives and inducements to attract investment because of these loopholes in the Finance Act, by making available investment opportunities guaranteeing 13 per cent free of DIRT, because this money is invested in gilts which are free of that tax. Consequently they are in a much more advantageous position than are the other financial institutions. This has been pointed out on several occasions inside and outside this House and has been brought to the attention of the Minister for Finance and his Department. However, nothing has been done about it. These are areas in which changes can be made. That would be positive legislation which would protect our financial institutions, ensuring that investors would have a fair range of opportunity for investment in this island.
As far back as last spring, after the budget, the Government issued a first issue of bonds guaranteeing 10 per cent tax free in return, soaking up £520 million in a few short days. That has led to market forces dictating the present interest rates. Yet the Government had available to them on foreign markets money at 1.5 per cent, perhaps carrying an exchange risk but at least the money at home would be available to the financial institutions and to the people to improve the country's economic position.
I have spoken about the disastrous effect which the proposals in the Bill will have on finance and on the building society movement, but I have welcomed the positive aspects of the legislation. I speak as somebody who understands the building society industry and wants to ensure fair play to all institutions. That has not been available to the building societies from this Government over the last number of years. About 18 months ago the Bank of Ireland proposed to acquire the Irish Civil Service Building Society and the then Minister for the Environment, Deputy Kavanagh, gave  this House a commitment that he would bring forward legislation to prohibit that take-over. That legislation never came forward because the Bank of Ireland, representing as it does the ultra right wing conservative groups in the country with which the Fine Gael dominated Government associated were able to persuade the Taoiseach and the Minister for the Environment that that bank were owed some favour for their involvement as State bankers in the past. Without any legislation and behind doors a private deal was done and the Irish Civil Service Building Society were put under the control of the Bank of Ireland.
Mr. N. Treacy: Deputy Mitchell is talking about something totally different. Let him not get confused regarding our financial institutions. We are talking here about the building society industry. This Government did a private deal with one of the biggest financial groups in the country and put under that group another financial institution. That was totally unfair and discriminatory. It has placed the Irish Civil Service Building Society in a very advantageous position vis-à-vis the other building societies. How can we say that the present legislation will be fair across the board when the range of services being offered by the banks cannot be offered by the building societies, with the exception of the Irish Civil Service Building Society? It is obvious that Fine Gael friends in Government and out of Government and involved with the ICS building society — and we know them well — were able to get together with the Taoiseach and other members of that Fine Gael Cabinet to do a private deal. That is the way this Government have been run for the last few years and particularly have been run for the last few  weeks in this House, with Deputies making private deals with the Taoiseach or the Minister for Social Welfare in order to get their support to stay in office for power's sake.
Mr. N. Treacy: I am outlining the financial situation and the duty of Government to ensure that the financial stability of our nation will not be eroded or destroyed. We have Government by blackmail and at a cost to the ordinary citizen. Until such time as the Minister brings forward positive progressive legislation to ensure that equality of opportunity prevails there is no point in proceeding with this type of Bill or in coming in here trying to hoodwink the people of this country.
The ICS advertise their money moving facilities and Bank of Ireland managers have green application forms offering incentives to existing investors to transfer their money to ICS. That is unfair. It is up to this Minister and the Government who have collective responsibility for that private decision which led to the development of that situation to ensure that it no longer prevails. It is a tragedy that a commitment given by the Minister for the Environment in this House to bring about that legislation was not fulfilled. The commitment was given by the Minister for the Environment, Deputy Boland, whose arrogance and ill tempered attitude has been much of the cause of mortgage holders and borrowers having to pay more for their money. The Government should take responsibility for that. The decision to allow the Bank of Ireland to acquire the ICS was a disgraceful, obnoxious decision by the Government. It was totally discriminatory to the other financial institutions and particularly to the building societies. In the interests of the people the Minister should withdraw this Bill and introduce a much more wideranging and positive Bill. He should amend financial legislation in this House so as to  create a climate of opportunity for our people and equality of competition among all financial institutions so that the building societies, could prove once again that their positive level of service and respect for investors and mortgage holders can be expanded thereby improving the economic climate and also the whole financial position of each individual citizen who enjoys the privileges of investing with a building society.
Mr. G. Mitchell: I will refer to the last point made by Deputy Treacy in regard to the friends of Fine Gael in the Bank of Ireland and the ICS. I accept that no one financial institution should have an unfavourable opportunity over another. Perhaps that arrangement does need to be looked at but to extend that argument to say that because of the friends Fine Gael have in the Bank of Ireland they get favourable treatment is taking logic beyond any reasonable conclusion. If the Deputy mentioned the AIB I might have given him some kudos for it but it is rather precarious to say that a certain bank got favourable treatment because of an arrangement with Fine Gael. I would like to see any unfavourable treatment that the financial institutions might be receiving because of the arrangement between the ICS and the Bank of Ireland put on an even keel.
Mr. G. Mitchell: I was very surprised to hear Deputy Treacy arguing for tiered interest rates. That is an extraordinary argument from an Opposition Deputy about a Bill which is going through this House in the public interest. The Deputy said that the average mortgage is £20,000. That may be the average mortgage in the west of Ireland but it seems very low. In Dublin city one will not purchase a house with a mortgage of £20,000. The average mortgage in Dublin city is around £35,000. With tiered interest rates people are paying mortgage interest far in excess of that allowed against income tax. There can be no justification for the continuation  of tiered interest rates. It is extraordinary to hear Opposition Deputies arguing in favour of tiered interest rates and for the removal from the Bill of sections dealing with tiered interest rates.
I welcome in particular the proposals on the charging of redemption fees. As the Minister said in his speech, one might well expect to be rewarded rather than punished for early repayment of a loan whereas, if one tries to redeem a mortgage there are up to three and four months repayments in penalties for so doing. I find that extraordinary. I welcome the fact that the Minister will be looking again at building society legislation. This has been put to him in recent times and he has to take on the challenge which he is being presented with. I look forward to seeing more detailed legislation before the House and I hope it will be introduced in this session.
Deputy O'Kennedy said that building societies have to do what they are doing because of the market they are in. Building societies are operating the way they are because of the adversarial system in this House. Because of that system when we are on the other side of the House we argue against all legislation that is brought before us and the Opposition do so when we are in office. The building societies know that a substantial number of Deputies in this House will embarrass the Government but will not attempt to embarrass the building societies. The Opposition know that when all the mud is flying they can do what they want. I ask Deputy O'Kennedy or any Deputy opposite to say when was the last time mortgage interest rates were reduced by 3 per cent at any one time? It has nothing to do with the market place but with the weakness this House to represent the people we are supposed to represent. There are people running building societies who know that we have not got the juice to deal with them. If we were in their position we would probably say that it is a free enterprise society and do the same thing. Our primary duty in this House should be to do what we consider best for the public just as the people  running building societies want to do their best for those who invest with them. Our duty is in the public interest and we are not serving that interest. When I see a 3 per cent reduction in building society mortgage interest rates at any one time I will be quite happy to listen to reasoned arguments for a 3 per cent increase at one go.
Deputy O'Kennedy said we must abolish DIRT. He said that this is the single biggest problem facing the country. I would like to see deposit interest retention tax abolished particularly for many people on very small incomes. I would love to do it, but what are Fianna Fáil offering? Are they saying that we should replace it with farm tax? No, Fianna Fáil do not want farm tax. They are against land tax, capital gains tax, wealth tax, income tax, corporation tax, VAT, rates and charges. Are they in favour of cuts? No. When Deputy O'Kennedy comes into the House and tells us what he is in favour of when it comes to paying for the cost of running the State, then his arguments can be taken seriously. Is he then suggesting that we should borrow more? Surely not. On all of the money that has been borrowed, mainly when Fianna Fáil were in Government, we are paying an interest rate which is contributing to the upward swing in interest rates today. It is part of the formula, and if we are to follow on to the logical conclusion of what Deputy O'Kennedy says we will borrow more and therefore cause interest rates to go up again. The tens of billions of pounds borrowed by Fianna Fáil when they were in office is contributing to the sorrowful situation that we find ourselves in. We are not the masters of our own destiny, but that has nothing to do with market forces. That was man-made. That was deliberately politically manufactured, and this is the road they want us to continue to travel.
I want to say a word about the term “building societies”. It is a total misnomer and I hope that future legislation will abolish that term. First of all, building societies are not building anything. They are financial institutions. They are  no longer societies. Where is the mutualisation of building societies? There is no mutualisation in building societies. They run their businesses in the very same way as any private or public limited company. There is no difference whatsoever. The legislation may say that it is a society and even a building society, but it is involved in neither building nor anything that could be termed a society in terms of mutualisation. The building societies have behaved in the same arrogant manner as the financial sector generally and in that I include in particular banks like the AIB who come running to this House when they get into any sort of trouble. The people who are supposed to know about finance go and buy into the ICS and then they come back here and ask this House to build it up, but when they want something they behave with absolute arrogance and increase their rents by 3 per cent at one go. Building societies are financial institutions along the same lines as banks and they are putting interest up now 3 per cent at one go. It is outrageous to hear the Opposition suggesting that the Government should back off, withdraw this Bill and not think of any further action.
The line has been drawn by the building societies. They are on one side and we are on the other side. Our duty is to serve the public interest and it is time that we took the building societies on. Until we take them on they will continue to act as they do. It is time to look at the way the building societies are being run, at the family control of building societies. Are building societies investing in public houses? Deputy Yates referred to a letter from the chief executive of a building society — I do not know which society — saying that finance was available for other than house building. Are the building societies involved in the purchase of high turnover public houses in this city and country? That needs to be looked into. What is being done with these investors' funds which are supposed to go into house building?
Building societies have branches at every crossroads. If one building society  opens a branch in an area they all open there. One building society advertises itself as having more branches than Sherwood Forest. They think that the public cannot see the wood for the trees. They are at every crossroads, in every village. In the village of Inchicore where I grew up about six building societies have offices now. How are the resources of these building societies, which are supposed to be available for lending, used?
I was the first person in recent years to push in this House the question of a lottery in Dublin Corporation. There was a great deal of derision about it and many people here said that it could not be done. It can be done. I have argued for years on the same lines, that local authorities should be allowed to go into private business and financial operation. In particular they should be allowed to set up as building societies. They are already acting as building societies, as lenders of money to people who buy their own homes but at the lower end of the market, the more insecure end where there are likely to be problems about repayments. Why should local authorities not be allowed and encouraged to compete with building societies in the way that the Irish Life Assurance Company are encouraged to compete as a State body with private insurance companies? That can and should be done. We have the outlets for local authorities, particularly in areas such as Dublin where we could use those outlets as building society offices to compete with the private sector.
Competition from abroad would be beneficial to the general public. We should not exclude building societies from abroad. Many people abroad would see investing in this country as beneficial. Building societies from abroad could come in here and encourage investors here to avail of their facilities and put some of the building societies in this country on their toes. They need competition. What good do building societies offer outside their supposed mutualisation and their supposed friendly society type lending arrangements? Do they give much employment? Who is employed in a local building society  office? I will tell you. More than likely it is a retired bank manager. The whole worth, the whole involvement of building societies in the community needs to be examined. That is why I feel that a detailed and thorough public examination of the role of building societies is overdue.
The control of building societies, the perks available to those who control building societies, the preferential loans available to those who control building societies, the cars available to those who control building societies, the entertainment expenses and the fees paid to those in control of building societies, should be subject to certain parameters and to public inquiry in view of the outrageous 3 per cent announced by one building society in recent days, and in view of the confrontation with which this Government are presented now, we should set up a full public inquiry to look into these secret matters which the shieks of the financial world in this city have enjoyed for a very long time. We should examine it to see if they are enjoying this at the expense of the poor man and woman on a mortgage who are in very tight circumstances who are now going to be faced all of a sudden with a 3 per cent increase in their mortgage rate. A public inquiry is needed, not an inquiry which will report next year or the year after. There is no reason why an inquiry should not be able to report by the end of January. An inquiry should be set up into the whole workings of the building societies, examining the matters I have mentioned and the worth of these societies — if that is the correct term to use — to the community in view of the arrogant manner in which not just building societies but financial institutions in general have been behaving.
I welcome the Bill. It contains many innovations which are long overdue. I welcome the commitment in the Minister's speech on moving Second Stage that he will be returning to this area in the not too distant future. I hope that he will take in some of the suggestions which have been made here today when he so returns.
Proinsias De Rossa: I am always surprised, if not amused, at the contortions which many spokespersons for free enterprise and capitalism in this House get themselves into in arguing on the one hand for total free competition and, on the other, when it does not work out for their friends in whatever sector, they argue for aids and support, and cry “foul” and “unfair” when particular institutions pull a fast one on some other institution. It was demonstrated very clearly here this morning by Deputy Treacy of Fianna Fáil when he spoke about the Irish Civil Service Building Society being taken over by the Bank of Ireland and how unfair this is to the rest of the building societies. On the other hand, he is arguing for free competition and arguing that the building societies should not be restricted or controlled in the way that this Bill is proposing to do. Whatever about the people in this House, at least the people outside this House should be aware of the contradictory arguments and positions which various Deputies take in this House.
I was interested in Deputy Gay Mitchell's very spirited denunciation of the 3 per cent increase in the mortgage rate of the Irish Nationwide Building Society. I agree with him that it is a disgrace. But Deputy Mitchell is a member of Fine Gael which is a major element in the present Government who brought in overnight a Bill to save the Allied Irish Banks in their unfortunate investment in ICI and handed out what, in the long run, will be taxpayers' money for the rescue of ICI. There is no emergency Bill here today to restrict the building societies in raising their mortgage rates by 3 per cent in one go. If Deputy Mitchell is seriously concerned about the effect of this increase on the mortgage holders, then he should be demanding special legislation to control not only the very minor areas which are being dealt with in the Bill before us today, but the building societies and their activities and the way that they virtually rob the mortgage holders of this State when they choose to.
They should also control the other  major institutions who apparently have a free hand in what they do in relation to our economy. I refer briefly to a glaring example of what they appear to be able to do. We were told in recent weeks that £1,500 million left this State and it must have been taken out with the connivance of the financial institutions. That is equivalent to 30,000 jobs and it was taken out of this State by the people we are told to look up to, the people who it is supposed would create jobs if they were given a chance. Yet they strip this country of its financial resources and send them out to Britain, America, Japan, Hong Kong, wherever the profit rate is better than it is here. When it is all boiled down what we are talking about is profit and profit rate.
The quickest way to make a profit in a capitalist society is to feed off and exploit a need which every citizen of this State has, a need to have a house. The families of this State cannot live a decent life without adequate shelter. The financial institutions which we are told are the backbone of this country, the building societies, the banks and the insurance companies, are exploiting that need. That is what we are talking about here today. All we are talking about, despite the great worries being expressed by Fianna Fáil, is a few minor adjustments to the law relating to building societies. We are not talking about preventing them from milking the mortgage holders in any significant way. We are talking about restricting them here and there. We are not talking about taking any action in relation to the 3 per cent hike by the Irish Nationwide Building Society. The private enterprise nature of the business of loaning money to people to house themselves have many of the worst features of loan sharking which we have, on numerous occasions, criticised in this House. Every citizen and every family has the right to a decent place to live. Until such time as a Government exists in this State which is prepared to ensure that that is provided at a reasonable cost and does not require a family or a person to put into hock 20 to 30 years of their life to supply themselves with, we are only codding ourselves talking  about restricting this or that or tying up the building societies in relation to charging for a second solicitor or not allowing mortgage holders to see surveys and so on. They are important and useful reforms but they will not, in any circumstances affect the major outgoings which a mortgage holder will have to meet at the end of this month or at the end of next month because of the operations of the financial institutions of this State.
The Irish Nationwide Building Society have announced an increase in the mortgage rate of 3 per cent. That in itself is a lie. It is an attempt to confuse people. What it is in fact is an increase of one third of the rate which is being charged. It is being increased from 9.5 per cent to 12.5 per cent, a third of the rate that this company is charging to its mortgage holders. Successive Governments have refused to take any legislative measures which would enable them to control the interest rates charged by societies. In fact in section 3 of this Bill, where the Minister is taking additional powers to control the activities of the society, he specifically excludes control of interest rates. So who is codding who in this House today?
Successive Governments have abdicated their responsibility to manage the financial affairs of this State. The financial institutions and the speculators can do what they like. They can rip off this country whenever and as often as they wish. They can create black holes at will. They can export the money which this State needs to create jobs and export it to wherever they choose to create jobs elsewhere, because they may get an extra rate of profit. In fact the primacy of this House, the democratically elected representatives of this State have refused to take control of the economy of this State and have failed miserably to ensure that the wealth created by the working people of this country is kept there to ensure that jobs are created here.
I am reminded of a poem called The Rebel by Padraig Pearse where he warns that in the society that he dreamed about the men with their keen long faces in their counting houses would not easily  give up the power they have to control our lives. That is the reality today despite our political independence. This House is powerless to do anything about it. The board of the Central Bank which in our legislation of 1942 is supposed to ensure that our institutions act in the interests of the community appeared in recent weeks to be enthusiastically involved in the speculative activities which have virtually wrecked interest rates and investment in this State. Is it any wonder? The present board of the Central Bank comprises representatives of the other private banks and similar commercial interests. I argue that the board members with private and commercial financial interests should be sacked from the board of the Central Bank and replaced by people who would protect the interests of the community and back the law, weak as it is, in the interests of the common good, in the interests of the ordinary man who must slave each day for a paltry wage. I am not talking about protecting the institutional investors who can shift their money around at will to increase their incomes. The important question in this matter is, who runs the country; the banks, the building societies, the insurance companies and their directors, or this House, the people who are elected to run the country? It is obvious from events over the years and in recent weeks that this House certainly does not run the country.
This Bill is welcome in so far as it goes but it is relatively minor legislation. I agree to some extent with what either Deputy Treacy or Deputy O'Kennedy said in that it is window dressing to try to give the impression that the Government are concerned about the building societies. The reforms are welcome but they are minor. The Bill does not attempt to deal with management expenses, directors fees, expense accounts with the vast advertising in which building societies are engaged or with the duplication of offices all over the country. There are four or five such offices at virtually every major intersection in any town or city.
The proposal to abolish redemption fees and tiered interest rates and the  reforms in relation to solicitors and insurance fees and so on are very welcome but it is regrettable that Deputy Boland does not intend to break the cartel of building societies. It has been suggested that because the Irish Nationwide Building Society independently increased their rate by 3 per cent in the last day or two a break up of the cartel is indicated. I do not believe it has broken up. The Irish Nationwide Building Society are flying a flag to see how far they can go and the other building societies will watch the reaction to see what they can get away with. If they get away with this 3 per cent they will all increase their rates by 3 per cent. There is no question of the cartel being broken up because the personal and financial interests of those at the top of the building societies rests in maintaining the cartel. Officially or unofficially they will operate their cartel, just as do other financial institutions.
In 1985 the building societies loaned out £428 million to over 18,000 borrowers. The Housing Finance Agency loaned out £116 million to over 5,000 borrowers. The local authority loaned £75 million to 5,000 borrowers and the banks and the insurance companies lent relatively minor amounts for house purchase. The building societies control 90 per cent of the borrowing that exists for house purchase. If one wants a loan one must go to the building society or else to the Housing Finance Agency to get a loan. One will not get a Housing Finance Agency loan unless one's income is below a certain level. In March 1986 the total assets of the building societies amounted to just under £3,000 million. The ten Irish building societies have come a very long way from their roots when they were first established as co-operative and friendly societies. They are now run by the self-perpetuating clique whose main objective is not the provision of low cost finance for housing for the maximum number of people, as has been suggested on the Fianna Fáil side, but for the self-advancement and financial gain of this small clique at the top who run the societies. It is clear from the comments today  that neither Fianna Fáil, Fine Gael nor, one must assume, the Progressive Democrats, given their political philosophy, will do anything to undermine the domination by the building societies of housing finance.
I understand that the Taoiseach ordered an inquiry into the building societies and that a report, the Horohan report, arising from that inquiry was never published. Deputy Yates seemed to indicate this morning that he got a look at it, but I wonder how many other Deputies in this House got their hands on it. I have not seen it and I do not know if any mortgage holder outside this House has managed to see it either. Why has it been kept secret? However, the Department of the Environment published a discussion document on legislative and regulatory arrangements in regard to building societies in April 1986. It contains reasonably interesting and informative information but it is far from a radical document which would ensure the proper control of building societies.
Theoretically seven out of the ten building societies are mutual societies owned by their members but, in practice, they are controlled by a self-perpetuating group. In living memory a director nominated by ordinary shareholders has never been elected to the board of any of the ten building societies. This was clearly illustrated in the case of the First National when Henry Murdock sought nomination to the board on a platform of reasonable reforms. He was unsuccessful and withdrew eventually when the building societies co-opted a professor of business on to the board. One practical way of dealing with that problem could be through fiscal, legal and administrative pressure to force the building societies to behave more as co-operatives or self-helf societies, which was intended in the first place. This could be done by legislation in regard to the election of directors, through postal voting facilities, a role for the Central Bank in their regulation and taking away tax benefits which would make them less attractive to their current bosses.
I referred to management expenses:  those of the Irish building societies are consistently higher than in the United Kingdom. They totalled £40 million in this country in 1984 and there has been a rapid rise in expenses from 1.6 per cent of mean mortgage assets in 1975 to 2.19 per cent in 1984. One of the greatest costs is in the massive duplication of fancy offices by the building societies. There is hardly a crossroads which does not have five or six such offices. In Phibsboro, virtually every vacant shop has been taken over by a building society and another one is opening shortly.
Building societies are among the biggest advertisers, and the Irish Permanent have had an advertisement on RTE every night since the station was founded. Why should building societies feel they must compete with each other? They are supposed to be mutual self-help societies offering aid to those with small investments and to potential house buyers who need loans. Advertising is a total waste of money, obviously there is a need for a certain amount to ensure that the public are aware of the services available but constant, repetitious advertising between all the building societies is unnecessary.
The directors of building societies are extremely well rewarded financially. The Irish Permanent paid their eight directors an average of £11,100 per annum for merely attending a few meetings each year in the case of their non-executive directors. In addition, directors were paid £282,000 under other headings which means they were paid £35,000 each on average or a total of £46,000 each per annum. That is the average figure based on the number of directors but, in practice, the likelihood is that most of the money went to the head of the company who was not appointed on the basis of skills in open competition but who inherited his position as head of the Irish Permanent Building Society from his father.
The EBS pay their directors £6,000 per annum plus a sum of £124,000 in other remuneration. The First National paid an average of £7,300 plus £137,000 spread over all the directors. Why are we never  told by the building societies how this money is spent? To whom it is paid? These are global figures which appear in their annual reports but we are never told to whom the money is paid and why. There should be total disclosure in regard to remuneration to directors. There should also be a declaration of interest paid to directors of these societies. Section 41 of the 1976 Act dealing with building societies calls on directors to disclose interest in contracts with the society. Section 43 calls for the disclosure of details of loans to directors or members of their families. Clearly, from the information available, these laws are not implemented in a way which requires disclosure of information to shareholders.
The tie-up of building societies with insurance companies is another area which gives cause for concern and is not properly revealed in the annual reports of buildings societies. Each building society is linked to an insurance company and the directors of the building societies are often rewarded with directorships of the insurance companies. This practice should be ended and borrowers should be allowed to shop around to purchase property insurance where they choose. This point is included in the Bill but there is no restriction on insurance companies and building societies breaking the cartel arrangement between each other.
The building societies also force borrowers to go to one of their nominated solicitors and often the principals of the firms of such solicitors are on the boards of the building societies. In addition, building societies force borrowers to pay the legal fees of the societies. In every purchase three solicitors are involved, the purchaser's own solicitor, the building society's solicitor and the vendor's solicitor. Clearly one solicitor would be sufficient for the building society and the purchaser. I could go on and on detailing abuses in regard to the borrower by building societies, the manner in which building societies are run and the weak law which exists to restrict them.
Building societies are slow in agreeing to pay out loans. This Bill will now allow them to offer bridging finance and I  should like the Minister to indicate what incentive there will be for building societies to keep the bridging loan rates of interest at least on a par with the rates charged for a mortgage. Does the Minister consider that there will be an incentive for them to delay sanction for loans in order to keep applicants on high interest bridging finance?
Much needs to be done in reforming the whole area of financial institutions. This House should control the actions of financial institutions in relation to the economy and the Bill is a very minor step in that direction. Other major areas remain to be tackled to ensure that the ordinary person is no longer a victim of the greedy financial speculators who seem to run the country at present.
Mr. Skelly: I wish to make a brief contribution on the Bill, which I welcome. We have two types of Minister, the talker and the doer, and Deputy Boland is in the latter category. We have been talking about attacking this problem for years and Ministers have been given an awful runaround by the societies in the most arrogant fashion imaginable. It has taken until now for some Minister to tackle the building societies by way of legislation under which some protection could be afforded to house purchasers and shareholders in building societies.
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