Explanatory note

The Order consolidates the Orders revoked by article 5 and makes provision as to the bodies corporate which a building society may invest in or support under section 18 of the Building Societies Act 1986.

Article 3 designates for the purposes of that section those corporate bodies or types of corporate body specified in columns 1 and 2 of Part I of the Schedule.

The types of body which are designated are those which the Order terms appropriate financial service vehicles, appropriate life insurance vehicles, appropriate general insurance companies, appropriate estate agency vehicles, appropriate mortgage companies, and appropriate territorial corporations.

An appropriate financial service vehicle is a body corporate carrying on investment business which is an exempted or authorised person under the Financial Services Act 1986 or a candidate for authorisation under that Act and does not engage in specified activities such as market making, lending money and general deposit-taking (article 3(1)(a) and Schedule, Part I, item 15, and Part II, paragraph 7(2)).

An appropriate life insurance vehicle is a body corporate the objects of which include, and which is authorised or a candidate for authorisation to conduct, long term insurance business under the Insurance Companies Act 1982 (article 3(1)(a) and Schedule, Part I, item 16, and Part II, paragraph 7(3)).

An appropriate general insurance company is a company limited by shares the objects of which include, and which is authorised to conduct, general insurance business under the Insurance Companies Act 1982. A building society may not hold 15 per cent or more of the equity share capital of an appropriate general insurance company (article 3(1)(a) and Schedule, Part I, item 17, and Part II, paragraphs 5 and 7(4)).

An appropriate estate agency vehicle is a body corporate the objects of which include the carrying on of estate agency work and which does not engage in market making, lending money or general deposit-taking. It is a requirement that at least 40 per cent of its gross income is, and continues to be, derived from estate agency work in a country in which the society is carrying on the business of making advances secured on land (article 3(1)(a) and Schedule, Part I, item 18, and Part II, paragraphs 6 and 7(5)).

An appropriate mortgage company is a company limited by shares, which is a one tier organisation, (that is it does not have the capacity to have subordinate organisations) and which is formed for, or whose objects include, carrying on one or both of the activities of:

and which does not engage in activities such as market making and general deposit-taking (article 3 and Schedule Part I, item 19 and Part II, paragraph 7).

In relation to secured loans which it makes, there is a requirement that the company maintains systems similar to those required of building societies for the safe custody of documents and for assessing the adequacy of security. Secured loans by the company are required to be transferable without the consent of the borrower, and must be loans which the society itself would have had power to make had the borrower been a member of the society (article 3 and Schedule Part I, item 19 and Part II, paragraph 6A(2)(c)).

An appropriate territorial corporation is a body corporate formed in a specified territory, that is to say respectively the Isle of Man, Jersey, and Guernsey and Alderney (article 3(1) and Schedule, Part I, item 20, and Part II, paragraph 10). The corporation must be formed for, or its objects must include, carrying on one or more of the activities of:

It may not engage in activities such as market making and estate agency work (article 3 and Schedule, Part II, paragraph 7), and it does not have the capacity to have subordinate organisations.

In relation to secured loans which it makes, there is a requirement that the corporation maintains systems similar to those required of building societies for the safe custody of documents and for assessing the adequacy of security. Secured loans by the corporation must be loans which the society itself would have had power to make had the society itself carried on business in the specified territory, pursuant to the power conferred by section 14 of the Act (power to make advances secured on land overseas) as applied to the specified territory by the relevant order referred to in the definition of “specified territory” in paragraph 10 of Part II of the Schedule.

Particular companies designated in the Order are Electronic Funds Transfer Limited, Funds Transfer Sharing Limited, LINK Interchange Network Limited, APACS (Administration) Limited, BACS Limited, CHAPS and Town Clearing Company Limited, SWIFT UK Limited, Switch Card Services Limited, Eurocard International SA, MasterCard International Incorporated, Society for Worldwide Interbank Financial Telecommunication SC, County Court Users Association, Cheque and Credit Clearing Company Limited, EftPos UK Limited, the Joint Credit Card Company Limited, Visa International Service Association and Girobank plc.

The designation of Girobank plc is subject to the conditions set out in column 5 of item 10A of Part I of the Schedule to the Order and further described in Part II of the Schedule.

Girobank plc is not suitable for investment or support by a building society if Girobank has a subordinate organisation outside a prescribed range. The prescribed range comprises The Office of the Banking Ombudsman, bodies corporate individually designated in the Order, and bodies corporate designated by description in the Order which do not have the capacity to have subordinate organisations. A subordinate organisation is one in which a designated body has an interest of at least 5 per cent.

The power for a society to invest in or support Girobank plc is not available if Girobank plc engages in market making or, apart from the exceptions specified in paragraph 8 of Part II of the Schedule, if its business includes activities which the society itself has no power to undertake either because the society has not adopted the necessary adoptable power or because the activities would contravene a restriction on the extent of a power which the society has adopted. The exceptions include the continuation, for a limited transitional period, of overdrafts in excess of £10,000 per individual arranged before the date Girobank plc becomes associated with the society, provided that there is no increase in the limits allowed on such overdrafts, and of corporate loans (other than secured loans and overdrafts), debts relating to acceptances of bills of exchange and letters of credit, and forward rate agreements arranged before that date.

The power for a society to invest in or support Girobank plc is further subject to the condition that, in relation to loans secured on land which it makes, Girobank plc must maintain systems similar to those required of building societies for the safe custody of documents and for assessing the adequacy of security. Such secured loans are required to be transferable without the consent of the borrower, and must be loans which the society itself would have had power to make had the borrower been a member of the society.

The Order also repeats the designation as qualifying bodies of United Kingdom companies doing in other member states business corresponding to building society mortgage business, housing associations, housing trusts and pension vehicles.

Qualifying bodies are categorised by column 3 of Part I of the Schedule as suitable for investment and support or support alone, or as suitable for investment and support but not support in the absence of investment. Investment is defined by section 18 of the 1986 Act as acquiring and holding shares or corresponding membership rights and forming, or taking part in forming, bodies corporate. Support is defined by that section to comprise the provision of loans, grants, guarantees, services or property to bodies corporate in which a society is investing or which it has resolved to support.

Column 4 of Part I of the Schedule specifies the purposes for which (in addition to the purposes permitted by section 18(4)) a society may invest in or support a qualifying body. Column 5 prescribes further limits and conditions on the power to invest in and support certain of the qualifying bodies. In relation to the bodies numbered 6B, 6C, 6D, 9, 10, 10A, 11 to 13 and 15, 16, 17 and 20 in Part I the power is only available to building societies with a qualifying asset holding (referred to as the “standard asset provision”). A building society has a qualifying asset holding where the aggregate value of its total commercial assets is not less than £100 million (1986 Act, section 118).

The provisions of paragraph 4 of Part II of the Schedule constitute a condition which applies to corporate bodies (other than general insurance companies) designated by description which have subordinate organisations (that is to say organisations in which the designated body has at least a 5 per cent interest). The condition imposes two duties on a society investing in such a designated body.

First, if the society discovers that any subordinate organisation of the designated body is conducting business in the “prohibited range” (as defined in paragraph 4(2)), the society must dispose of its interest in the designated body as soon as conveniently practicable without undue loss. Business in this prohibited range is market making, lending money (except by a stockbroker in the ordinary course of buying or selling investments as agents), taking deposits in a manner requiring authorisation under the Banking Act 1987, and activities which the society itself cannot undertake because it has not adopted the necessary power or because the activities would contravene a restriction on the extent of a power, which it has adopted.

Secondly, except where the designated body is a company in which the society has an interest of less than 15 per cent, the society must seek to obtain a certificate for each financial year of the designated body to the effect that at least 60 per cent of the consolidated gross income of the designated body and its subordinate organisations was derived from carrying on activities for which the society has power to provide investment or support. If no such certificate is obtained for two successive financial years, the society must cease having an interest in the designated body (or reduce its interest to less than 15 per cent if the designated body is a company).