SPECIAL ADVANCES
| Published date | 01 July 1985 |
| Author | M. J. Russell |
| Date | 01 July 1985 |
| DOI | http://doi.org/10.1111/j.1468-2230.1985.tb00848.x |
SPECIAL ADVANCES
BUILDING societies are big business. The figures are huge: the
societies’ assets at the end of 1983 were almost f86,000,000,000,
which represented a
30
per cent. increase in real terms over
a
period
of
just three years. They have
six
million borrowers and
six
times as
many investors, thereby embracing most of the population (even
allowing for quite a bit of duplication). In 1983 the societies lent
nearly f20,000m,
of
which 99 per cent. was advanced on the security
of owner-occupied dwellings. But this powerful modern industry is
governed by antique legislation, substantially derived from the
Building Societies Act 1874. It is not surprising, therefore, that the
government proposes to bring in a new statute soon, and their
preliminary proposals are set out in a recent Green Paper, from
which these statistics have been taken.’
For 25 years the main-stream lending of each society has by law
taken up at least 90 per cent. of all its advances, with greater latitude
given for the remaining 10 per cent. (namely special advances).
Similar proportions will apply if the government’s proposals are
accepted without alteration. 90 per cent. of all outstanding advances,
etc., should be “advances secured on first mortgage of residential
property to individuals who are owner occupiers of that property”
(Class
1
assets), with apparently no limit on the amount of each
advance. The remaining 10 per cent. could embrace (as Class
2
assets) commercial first mortgages, and take in new ventures such as
second mortgages, and (as Class
3
assets limited to 5 per cent.)
unsecured loans, property ownership and some equity investment.*
But whilst these proposals are being considered, let us review the
present law embodied in the intricate provisions of sections 21 to 24
of the Building Societies Act 1962, dealing with special advances,
particularly as these advances led to the demise of the New Cross
Building Society in March 1984.3 The current basic rules are that a
building society may not make fresh special advances in any financial
year exceeding 10 per cent. of all its advances in that year, nor
Building Societies:
a
new framework
(1984),
Cmnd.
9316,
1,
32, 34
&
35.
Zbid.
at
pp.10-13.
’
The investigation and notices by the Chief Registrar of Friendly Societies in
1983,
leading to the Society’s closure and transfer
of
engagements to the Woolwich Equitable
Building Society, were triggered by problems under the special advance provisions (see
New Cross Building Society,
Cmnd.
9033 (1984),
vii:
25),
which featured in
5
of the
11
grounds ultimately put forward by him. The Registrar revoked the Society’s designation
of
trustee status under
s.1,
House Purchase
&
Housing Act
1959,
and made an order
under
s.48,
Building Societies Act
1962,
preventing the acceptance of any further
investments. The
s.48
order led to the automatic revocation of the Society’s authorisation
under
r.8(2)(a),
Building Societies (Authorisation) Regulations,
S.I.
1981,
No.
1488.
The
Registrar’s decision (reported in full in Cmnd.
9033)
was quashed at first instance by
Webster
J.
whose decision was not reported,
so
that
I
have relied on the transcript
of
his
judgment. Webster
J.
was reversed and the Registrar’s decision restored by the Court
of
Appeal in
R.
v.
Chief Registrar
of
Friendly Societies,
ex
p.
New Cross Building Society,
[1984]
Q.B.
227.
I
must declare an interest as an erstwhile director
of
that Society.
389
390
THE MODERN LAW REVIEW
[Vol.
48
should it normally have a stock of advances akin to special advances
at the end of any year exceeding 10 per cent. of its mortgage debt.4
A “special advance” is an advance (a) to a body corporate, or (b)
exceeding the prescribed sum5 (currently
f60,000).6
There is one
other difficult category that
I
shall describe later.’
The detailed rules for special advances were first introduced by the
Building Societies Act 19608 after the collapse (in the previous year)
of the State Building Society, which had lent large sums to
development companies. Ironically, building societies began-as the
name indicates-for the purpose of assisting subscribers to build (or
purchase) their own houses, but on the second reading of the 1960
Bill the Chancellor of the Exchequer said that the restrictions on
special advances sought “to ensure that building societies concentrate
their main efforts on their traditional and proper business, which is
advancing money on the security of owner-occupied pr~perty.”~
The main stated purpose of a building society remains in general
terms the raising of money “for making advances to members out of
the funds of the society upon security by way of mortgage of freehold
or leasehold estate.”l0 When dealing with tax relief on interest, more
recent Finance Acts” happily define socially acceptable advances (by
any lender) by reference to their purpose, namely the purchase or
improvement of residential property; yet those responsible for the
1960 Act felt unable to legislate for building societies in the same
way. The rough-and-ready criterion became the type of borrower
(companies, etc.), or the amount of the advance, which is currently
twice
the fiscal limit of
f30,OOO.
l2
Notwithstanding the Chancellor’s
remarks
in
1960, owner-occupation is not an indispensable factor
under either the fiscal or the building society legislation, although it
can be relevant under both.13 As indicated above, the government
wants to recognise the present practical emphasis on owner-occupation
in the new Building Societies Act.
An
“advance of any amount to a body corporate” comprises the first
category of special advances,14 and this can lead to some fine
CORPORATIONS
~~
s.22(3), Building Societies Act 1962. All subsequent statutory references are to that
Art.2, Building Societies (Special Advances) Order,
S.I.
1982, No. 1056.
and repeated in the same sections of the Building Societies (Northern Ireland) Act 1967.
Hanrard
(H.C.),
625, col. 35.
lo
s.l(l). The government proposes to amend this
“to
provide that the primary
purpose
of
a building society is to raise funds from individual members for lending on
security by mortgage of owner-occupied residential property.” Cmnd. 9316, 7.
Para. 1, Sched. 9, Finance Act 1972, as amended by para. 4, Sched. 1, Finance Act
1974.
For
building societies and other institutional lenders, see also paras. 2
&
3, Sched.
7, Finance Act 1982.
s.3(1), Finance
(No.
2) Act 1983.
l3
See para. 4(l)(a), Sched. 1, Finance Act 1974, and part
5,
section
D,
col.
2
of
A.R.ll,
the prescribed form of annual return under the Building Societies (Accounts
&
Annual Return) Regulations, S.I. 1983,
No.
1768.
l4
s.21(1)(a).
Act, except where otherwise stated.
s.21(1).
’
s.22(l)(c).
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