Building Societies Act 1997

Valid from 01/12/1997

13 Power to direct restructuring of business etc.U.K.

(1)For section 36 of the 1986 Act there shall be substituted the following section—

“ Powers in relation to principal purpose and nature limitsU.K.

36 Power to direct restructuring of business etc.

(1)The provisions of this section have effect where, by reason of a building society’s failure to comply with—

(a)the requirement imposed by section 5(1)(a) or (b) (purpose or principal purpose and principal office);

(b)the requirement imposed by section 6(1) (the lending limit); or

(c)the requirement imposed by section 7(1) (the funding limit),

the powers conferred by this section become exercisable by the Commission in relation to the society (the requirements referred to in paragraphs (a), (b) and (c) above being referred to in this section as “the relevant statutory requirements”).

(2)The Commission may give the society a direction under subsection (3), (5) or (6) below.

(3)A direction by the Commission under this subsection is a direction requiring the society, within a specified period, to submit for its approval a plan (in this section referred to as a “restructuring plan”) designed to secure the following purposes, that is to say—

(a)that the society will, by the end of a specified period, comply with the relevant statutory requirements as applied at the last day of that period, and

(b)that it will not thereafter fail to comply with those requirements.

(4)For the purpose of applying the relevant statutory requirements as directed by subsection (3)(a) above—

(a)in the case of a requirement which operates by reference to a quarter day, the day as at which the requirements are to be applied shall be treated as such a day; and

(b)the assets and liabilities of the society shall be determined by reference to a balance sheet prepared by the directors by reference to that day and sent to the Commission within the period of three months beginning with that day;

and subsection (4) of section 81 shall apply in the event of a default in complying with this provision as it applies in the event of a default in complying with subsection (2) of that section.

(5)A direction by the Commission under this subsection is a direction requiring the society—

(a)within a specified period, to submit to its members for their approval at a meeting the requisite transfer resolutions for a transfer of the business of the society to a company under section 97; and

(b)to notify the Commission of the result of the meeting.

(6)A direction by the Commission under this subsection is a direction requiring the society, at its option, either—

(a)within a specified period, to submit for approval a restructuring plan; or

(b)within a specified period, to submit to its members for their approval at a meeting the requisite transfer resolutions for a transfer of the business of the society to a company under section 97;

and, within a specified period, to notify the Commission of the option it has decided to pursue.

(7)Where the Commission gives a direction under subsection (3), (5) or (6) above, it may also give a direction under this subsection—

(a)imposing limitations on the issue of shares, the acceptance of deposits or the making of loans;

(b)requiring the society within a specified period to take certain steps, or to refrain from adopting or pursuing a particular course of action, or to restrict the scope of its business in a particular way;

(c)requiring the society within a specified period to take steps with regard to the conduct of the business of any connected undertaking of the society;

(d)requiring within a specified period the removal of any director or other officer.

(8)Where a restructuring plan is submitted by a society to the Commission under subsection (3) or (6) above then—

(a)if it appears to the Commission that the plan is reasonably likely to secure its purposes, the Commission shall approve it and direct the society to carry it out;

(b)if it appears to it that the plan is, with modifications, likely to secure its purposes and the Commission and the society agree on appropriate modifications within the period of 21 days from the date on which the Commission notifies the society of the modifications it proposes for the society’s agreement, the Commission shall approve the plan as modified and direct the society to carry it out;

but otherwise it shall reject the plan.

(9)Where a meeting is held, in pursuance of a direction under subsection (5) or (6) above, for the purpose of voting on the requisite transfer resolutions, then—

(a)if the resolutions are agreed to and the confirmation of the transfer by the Commission is obtained, the society shall proceed under section 97 to transfer its business to a successor company;

(b)if either resolution is disagreed to, the society shall notify the Commission of that fact as soon as it is practicable to do so.

(10)In the event of the Commission receiving a notice from a society under subsection (9)(b) above, it may, if it thinks fit, serve on the society a direction requiring it, within a specified period, to submit to the Commission for its approval a restructuring plan; and if the Commission does so, subsection (8) above shall apply as if the plan had been submitted under subsection (3) above.

(11)The Commission may, if it thinks fit, extend or further extend any period during which a building society is to take any steps required of it under any of the foregoing provisions of this section and may do so whether or not application is made to it before the expiry of the period in question.

(12)If a building society which has been directed under subsection (8) above to carry out a restructuring plan fails, within the period allowed to it under the foregoing provisions of this section, to secure the purpose of the plan specified in subsection (3)(a) above, the powers conferred on the Commission by section 36A shall become exercisable in relation to the society.

(13)If a building society fails, within the period allowed to it under the foregoing provisions of this section—

(a)where it has been given a direction under subsection (3) or (10) above, to submit a restructuring plan;

(b)where it has been given a direction under subsection (5) above, to submit to members the requisite transfer resolutions;

(c)where it has been given a direction under subsection (6) above, to either submit a restructuring plan or submit to members the requisite transfer resolutions;

(d)where it has been given a direction under subsection (7) above, to comply with any requirement imposed by the direction;

(e)where it has been directed under subsection (8) above to carry out a restructuring plan, to secure the purpose of the plan specified in subsection (3)(a) above;

(f)to agree to the requisite transfer resolutions submitted to the members in pursuance of subsection (5) or (6) above; or

(g)where it has agreed to the requisite transfer resolutions, to proceed under section 97 to transfer its business to the successor company,

or if the Commission rejects a restructuring plan under subsection (8) above, the powers conferred on the Commission by section 37 shall become exercisable in relation to the society.

(14)The provisions of Schedule 7A to this Act regulating the giving of directions apply in relation to directions under subsection (3), (5), (6), (7) or (10) above.

(15)In this section—

• “confirmation”, “the requisite transfer resolutions” and “transfer” have the same meaning as in section 97;

• “quarter day” has the same meaning as in sections 6 and 7.

(16)Nothing in this section implies that it is improper for the Commission to give to a building society or building societies generally an indication of the action it might or might not take in relation to any proposed activity of theirs.”

(2)After Schedule 7 to the 1986 Act there shall be inserted, as Schedule 7A, the provisions set out in Schedule 3 to this Act (supplementary provisions as to directions).

Valid from 01/12/1997

14 Power to make prohibition orders.U.K.

After section 36 of the 1986 Act there shall be inserted the following section—

“36A Power to make prohibition orders.

(1)Where by virtue of section 36(12) the powers conferred by this section become exercisable in relation to a building society, the Commission may serve on the society a notice of the Commission’s intention to issue a prohibition order directed to the society.

(2)A prohibition order under this section is an order—

(a)prohibiting, subject to the saving or transitional provisions of the order, the continuance or, as the case may be, the carrying on of the activity specified in the order after a date so specified, either absolutely or unless conditions so specified are complied with; and

(b)requiring, subject to the saving or transitional provisions of the order, the disposal within a period specified in the order of all assets acquired or otherwise in its possession by virtue of the activity.

(3)A disposal of assets in pursuance of a prohibition order shall vest the assets in the transferee but without prejudice to any claim against the society by a person who had an interest in the assets.

(4)The saving or transitional provisions which may be included in a prohibition order shall be such as appear to the Commission to be just having regard to—

(a)the interests of shareholders of and depositors with the society; and

(b)the interests of other persons who will be affected by the order.

(5)A notice under subsection (1) above of the Commission’s intention to issue a prohibition order shall—

(a)specify the date on which the order is to be issued, being a date not earlier than the end of the period of 21 days beginning with the date of the notice;

(b)specify the terms of the order, including any saving or transitional provisions proposed to be included in it; and

(c)inform the society of its right to make representations to the Commission, not less than 7 days before the date specified in the order, as to the provisions to be included in the order.

(6)After considering any representations made by the society, the Commission may make the prohibition order with such saving and transitional provisions (if any) as it thinks just; and where it does so, the Commission—

(a)shall issue the order by causing it to be served on the society; and

(b)shall direct the central office to keep a copy of it in the public file of the society.

(7)A prohibition order so made and issued shall, subject to subsection (11) below, take effect on the date specified in the order.

(8)A copy of any order issued under subsection (6) above shall also be served on each director and on the chief executive of the society.

(9)The requirement of subsection (8) above, so far as it relates to directors, is satisfied by serving a copy on each director whose appointment has been officially notified and the non-receipt of a copy by a director or the chief executive does not affect the validity of the order.

(10)Subject to subsection (11) below, a prohibition order shall remain in force until revoked by the Commission.

(11)The Commission may suspend or revoke a prohibition order so far as it relates to an asset the disposal of which appears to it, on the application of the society, to be impracticable.

(12)If a society contravenes a prohibition order issued against it under this section—

(a)the power conferred on the Commission by section 37(1) shall become exercisable in relation to the society; and

(b)the Commission may exercise that power or certify the contravention in writing to the High Court, or do both of those things;

but the contravention shall not invalidate any transaction or other act.

(13)On receiving such a certification, the High Court—

(a)may inquire into the case; and

(b)after hearing any witnesses who may be produced against or on behalf of the society and after hearing any statement which may be offered in defence, may punish the society in like manner as if it had been guilty of contempt of the court.

(14)Where a contravention of a prohibition order which is so certified is proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of, any officer of the society he, as well as the society, may be punished in like manner as if he had been guilty of contempt of the court.

(15)In the application of this section to a building society whose principal office is in Scotland, references to the High Court shall be read as references to the Court of Session.”

Valid from 01/12/1997

15 Powers to petition for winding up etc.U.K.

For section 37 of the 1986 Act there shall be substituted the following section—

“37 Powers to petition for winding up etc.

(1)Where—

(a)by virtue of section 36(13) the powers conferred by this section become exercisable in relation to a building society;

(b)by virtue of section 36A(12) the power conferred by this subsection becomes so exercisable; or

(c)the Commission has reason to believe that a building society has ceased to comply with the requirement imposed by section 5(1)(a) (purpose or principal purpose),

the Commission may present a petition to the High Court for the winding up of the society under the applicable winding up legislation; and the power conferred by this subsection is available to the Commission whether or not it has previously presented a petition.

(2)Where by virtue of section 36(13) the powers conferred by this section become exercisable in relation to a building society, the Commission may make an application to the High Court for an order giving directions to the society under subsection (3) below; and the power conferred by this subsection is available to the Commission whether or not it has previously made an application for such an order.

(3)An order under this subsection is an order directing the society to comply with a direction under subsection (3), (5), (6), (7) or (10) of section 36 as directed in the order, or to carry out a restructuring plan as so directed.

(4)Where the High Court makes an order under subsection (3) above, the Commission shall give a copy of it to the central office and the central office shall keep the copy in the public file of the society.

(5)The High Court shall not make an order winding up the society on an application under subsection (1)(c) above unless it is satisfied that the society has ceased to comply with the requirement imposed by section 5(1)(a).

(6)In the application of this section to a building society whose principal office is in Scotland, references to the High Court shall be read as references to the Court of Session.”

Valid from 01/12/1997

21 The criteria of prudent management.U.K.

For section 45 of the 1986 Act there shall be substituted the following section—

“45 The criteria of prudent management.

(1)If it appears to the Commission that there has been or is, on the part of a building society or its directors, a failure to satisfy any one or more of the following criteria of prudent management, it shall be entitled to assume for the purposes of its relevant prudential powers that the failure is such as to prejudice the security of the investments of shareholders or depositors.

(2)The prudential powers relevant for the purposes of this section are the Commission’s powers—

(a)under section 42, to impose conditions on a society’s authorisation,

(b)under section 42B, to direct a society to transfer all its engagements or its business, and

(c)under section 43, to revoke a society’s authorisation,

by reference to the expedience of the imposition, direction or revocation for the protection of the investments of shareholders or depositors.

(3)For the purposes of this Act, the criteria of prudent management are—

1.Compliance with the requirements imposed by sections 5(1), 6(1) and 7(1), and the restrictions on powers imposed by section 9A(1).

2.Maintenance of—

(a)adequate reserves and other capital resources; and

(b)own funds which amount to not less than the sum which, for the purposes of section 9, is the prescribed minimum in relation to qualifying capital.

3.Maintenance of adequate assets in liquid form.

4.Maintenance of a system for managing and containing risks to the net worth of the business, and risks to its net income, whether arising from fluctuations in interest or exchange rates or from other factors.

5.Maintenance of the requisite arrangements—

(a)for assessing the adequacy of securities for loans which are to be made or acquired by the society or subsidiary undertakings of the society, and are to be substantially secured on land; and

(b)for assessing the willingness and ability of borrowers to repay such loans.

6.Maintenance of the requisite accounting records and systems of control of business and of inspection and report.

7.Direction and management—

(a)by a sufficient number of persons who are fit and proper to be directors or, as the case may be, officers, in their respective positions,

(b)conducted by them with prudence and integrity.

8.Conduct of the business with adequate professional skills.

(4)Nothing in this section implies that it is improper for a determination for any purpose of the Commission’s relevant prudential powers to take account of other factors than the criteria in subsection (3) above.

(5)A failure to satisfy any of the first six criteria in subsection (3) above shall be treated, for the purposes of this section, as a failure on the part of a society’s directors prudently to conduct the affairs of the society.

(6)A failure on the part of the society to comply with the conditions to which its authorisation is subject shall be treated, for the purposes of this section, as a failure on the part of the society’s directors prudently to conduct the affairs of the society.

(7)The following provisions apply for the interpretation of the list of criteria in subsection (3) above in their application to a building society, that is to say—

• “adequate”, except with reference to liquidity, means adequate having regard to the range and scale of the society’s business;

• “adequate”, with reference to liquidity, means of such proportion and composition as will at all times enable the society to meet its liabilities as they arise and “liquid form”, in relation to assets, shall be construed accordingly;

• “business” includes business the society proposes to carry on and references to the business of the society include, where it has connected undertakings, references to the business of those undertakings;

• “requisite”, with reference to the arrangements for assessing the adequacy of securities, means such as may reasonably be expected to ensure—

  (i)

  that any person who assesses the adequacy of any security for a loan to be secured on land will have furnished to him a written report on the value of the land; and

  (ii)

  that any person who assesses the adequacy of any security, or reports on the value of any land, will be competent to perform that task, and will not be subject to any conflict of interest or potential conflict of interest;

• “requisite”, with reference to the arrangements for assessing the ability of borrowers to repay loans, means such as may reasonably be expected to ensure that any person who assesses the ability of any borrower to repay a loan—

  (i)

  will be competent to perform that task; and

  (ii)

  will not be subject to any conflict of interest or potential conflict of interest;

• “requisite”, with reference to accounting records and systems of control, means such as are required by section 71;

• “sufficient”, with reference to the number of directors and officers, means sufficient having regard to the range and scale of the society’s business.

(8)In determining for the purposes of the seventh criterion in subsection (3) above whether a person is a fit and proper person to hold any particular position, regard shall be had, in particular—

(a)to his probity;

(b)to his competence and soundness of judgement for fulfilling the responsibilities of that position;

(c)to the diligence with which he is fulfilling or likely to fulfil those responsibilities; and

(d)to whether the interests of shareholders or depositors of the society are, or are likely to be, in any way threatened by his holding that position.

(9)The Treasury may by order vary subsections (3) to (8) above by adding to or deleting from them any provision or by varying any provision contained in them; and an order under this subsection may make—

(a)different provisions for different descriptions of building societies; and

(b)such incidental, supplementary and transitional provision as appears to the Treasury to be necessary or expedient.

(10)The power to make an order under subsection (9) above is exercisable by statutory instrument; but no order shall be made under that subsection unless a draft of the order has been laid before and approved by a resolution of each House of Parliament.

(11)Nothing in this section shall give rise to any claim against a building society or its directors, or afford a defence to any claim made by a building society.”

Valid from 01/12/1997

22 Statements of principles etc. by Commission.U.K.

After section 45 of the 1986 Act there shall be inserted the following section—

“ General functions of CommissionU.K.

45AA Statements of principles etc. by Commission.

(1)The Commission shall, as soon as practicable after the coming into force of this section, publish in such manner and in such detail as it thinks appropriate a statement of the principles in accordance with which it is acting or proposing to act—

(a)in exercising its powers of control; and

(b)in interpreting the criteria of prudent management.

(2)If in the course of a financial year the Commission makes a material change in the principles in accordance with which it is acting or proposing to act as mentioned in subsection (1) above, the Commission shall include in the report made by it for that year under section 4 a statement of the change in such detail as it thinks appropriate.

(3)The Commission may, at any time, publish in such manner and in such detail as it thinks appropriate, either or both of the following, namely—

(a)a statement of the principles in accordance with which it is acting or proposing to act as mentioned in subsection (1) above; and

(b)a statement containing additional guidance as to the exercise of its powers of control and its interpretation of the criteria of prudent management.

(4)In this section “powers of control”, in relation to the Commission, means—

(a)the powers conferred on it by sections 36, 36A and 37; and

(b)its powers to grant or revoke an authorisation, to impose conditions on an authorisation or to direct the making of an application under section 41.”