The Building Societies (Undated Subordinated Debt) Order 1994

Explanatory Note

(This note is not part of the Order)

This Order is made under section 45(5) of the Building Societies Act 1986 which permits the Building Societies Commission with the consent of the Treasury to specify descriptions of capital resources which may be aggregated with reserves for the purpose of the first criterion of prudent management (maintenance of adequate reserves and other designated capital resources) in section 45(3) of the Act.

It designates, by article 3(1), as capital resources, undated loan capital namely financial resources deriving from qualifying subordinated debt, that is to say debt which is only repayable with the consent of the supervisory authority (which in the case of a building society is the Commission) or in the winding up of the borrower ranking after all liabilities save those in respect of deferred shares, or in the case of a commercial company as successor to the borrower, equity capital.

Such qualifying subordinated debt must also be debt—

• in respect of which interest may be at a fixed or variable rate, but not ascertained by reference to the borrower’s profit (article 3(2)(c));

• in respect of which payment of interest is prohibited if the borrower is insolvent, or the borrower has cancelled the interest or dividend upon any shares of the society other than deferred shares or upon deposits other than other subordinated debt, or the society is, or would, upon payment of the interest, be in breach of the first criterion in section 45(3) of the Act (article 3(2)(d) and Schedule 1);

and must not be issued upon terms which—

• require or permit repayment other than in sterling (article 3(2)(e) and Schedule 2, paragraph 1(a));

• restrict a society from merging with or transferring any of its engagements to another society or transferring the whole of its business pursuant to section 97 (transfer of business to a commercial company) of the Act (article 3(2)(e) and Schedule 2, paragraph 1(b));

• permit the rate interest (or in case of interest related to some other rate, the margin with respect to that rate) to rise by more than specified percentages (article 3(2)(e) and Schedule 2 paragraph 1(c));

Undated loan capital is not to be aggregated with the reserves of the society for capital adequacy purposes if the rules of the society permit any shares of the society, other than deferred shares, to be written down (article 4).

If the supervisory authority gives consent to repayment of qualifying subordinated debt the undated loan capital derived therefrom ceases to be aggregable with reserves for capital adequacy purposes (article 5).

The Order also amends the Building Societies (Designated Capital Resources) (Permanent Interest Bearing Shares) Order 1991 by amending the definition of subordinated debt in article 2(1) thereof. The effect of this amendment is that future issues of permanent interest bearing shares will be required to be upon terms that, upon transfer of the society’s business to a commercial company, the shares will be converted into debt repayable only upon winding up subordinated to all sums due to other creditors or with consent of the Bank of England. As originally enacted, the 1991 Order confined the necessity for Bank of England consent to five years from the transfer (ie the debt in replacement of the shares could be term subordinated debt).

The Order gives effect, in respect of undated subordinated debt issued by building societies, to the provision of the European Communities Council Directive on the own funds of Credit Institutions (89/299/EEC) (OJ No. L142, 5.5.89 p.16) that among other sources of capital, securities of indeterminate duration of a credit institution may be counted as own funds for solvency and prudential purposes.

The extent to which such resources may be aggregated is limited by the Building Societies (Designated Capital Resources) Order 1992 (SI 1992/1611) as amended by the Building Societies (Designated Capital Resources) (Amendment) Order 1994, (together “the Designated Capital Resources Orders”) of even date with this Order. This gives effect to a limitation in the Directive.

This Order enables societies to count as capital, subject to the limitations of the Designated Capital Resources Orders, the proceeds of issue of a new category of subordinated debt, but does not impose any new burden on business and no compliance cost assessment has been prepared.