Explanatory note

These Rules provide for the aggregation of assets and liabilities of subsidiaries and other associated bodies of a building society with those of the society for the purposes of the limits in sections 7, 8 and 20 of the Building Societies Act 1986.

Under section 7 of the Act no more than 40 per cent of the total share and deposit liabilities of a society may be non-retail, that is to say generally liabilities to persons other than individuals. A society’s liabilities in respect of its non-retail funds and deposits are defined in section 7(4) of the Act. Section 8 requires that no more than 50 per cent of the total share and deposit liabilities of a society may be represented by deposits. Section 119 of the Act provides that deposits includes loans for the purposes of the Act and so of these Rules.

The commercial assets of a building society are classified as class 1, 2 or 3. Class 1 assets are advances secured on residential land, class 2 assets are generally advances secured on other land and class 3 assets are generally unsecured loans to individuals, residential land and interests in bodies corporate. Under section 20 the aggregate of the class 2 and class 3 assets of a society may not exceed 17½ per cent of the total commercial assets of the society, and its class 3 assets may not exceed 7½ per cent of its total commercial assets. The Building Societies (Limits on Commercial Assets) Order 1988 (S.I. 1988/1142) provides for these limits to be increased to 20 per cent and 10 per cent respectively on 1st January 1991, and further on 1st January 1993.

In order to determine the assets and liabilities of a building society for the purposes of these statutory limits, these Rules provide for the attribution to the society of assets and liabilities of associated bodies corresponding to assets and liabilities of the society. To avoid double counting, in certain circumstances assets of a society which represent liabilities of an associated body are disregarded, as are liabilities of a society which represent assets of an associated body.

Under section 18 a society which adopts appropriate powers may invest in or support associated bodies including those designated for the purpose by order. One such associated body may be an “appropriate mortgage company” which is a company limited by shares and whose objects include acquiring, holding and disposing of existing mortgage debts and lending money on mortgage. These Rules provide for the attribution to a society of the mortgage debts of its associated body as class 1 or class 2 assets of the society. Such an attribution may be made, if the society so desires and if it can obtain certificates establishing that those mortgage debts correspond to class 1 or class 2 advances by the society. Other mortgage debts held by an associated body are to be attributed to the society as class 3 assets. Rule 9(1) provides for the proportional attribution of mortgage debts when the associated body is not a subsidiary of the society. Rule 9(2) prevents mortgage debts held by an associated body which are represented by liabilities of the parent society being attributed to the society, and rule 10 provides for assets of the society to be disregarded where they are represented by liabilities of an associated body.

Rule 8 limits the extent to which mortgage debts held by an associated body may be attributed to the society as class 1 assets under these Rules to a maximum of 15 per cent of the total commercial assets of the group. Any excess would be attributed to the society as class 2 assets.

Rules 11 and 12 specify some associated bodies whose assets and liabilities do not need to be aggregated. These include bodies established in other European Community member states to lend on the security of land, pension companies, life and general insurance companies and certain named bodies providing services to societies such as clearing houses and credit card companies.