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BSOG 1.1 Application, purpose and definitions

Application[deleted]

BSOG 1.1.1 G

1This Guide applies to building societies.

Purpose[deleted]

BSOG 1.1.2 G

This Guide provides guidance on the Building Societies Act 1986 and on various constitutional and other provisions relating to building societies. It is not comprehensive and should not be treated as such.

Interpretation[deleted]

BSOG 1.1.2A G

6The interpretation provisions in GEN 2 apply as guidance to the interpretation of this Guide.

Frequently used terms[deleted]

BSOG 1.1.3 G

The following terms are used in this Guide and have the meaning described here:

"the 1986 Act"

the Building Societies Act 1986 (as amended)6

6

"the 1997 Act"

the Building Societies Act 1997

"the Accounts Regulations"

the Building Societies (Accounts & Related Provisions) Regulations 1998 (SI 1998/504)

"the Act"

the Financial Services and Markets Act 2000 (as amended)6

"AGM"

Annual General Meeting

"amalgamation agreement"

a formal agreement between societies on the terms of their amalgamation

"approved person"

a person approved under section 59 of the Act (Approval for particular arrangements) to perform a controlled function

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"the Banking Consolidation Directive"

the Council Directive of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions (No 2000/12/EC)

"the Banking Regulator"

the Prudential Regulator or other competent authority in another EEA state, as the case may be

"the BCD"

the Banking Consolidation Directive

"the board"

the board of directors of a building society

"borrower" or "borrowing member"

a person who is indebted to a society in respect of a loan fully, or where the Rules so provide, substantially secured on land

"the BSA"

the Building Societies Association

"the Combined Code"

the Combined Code on Corporate Governance, developed by the Corporate Governance Committee of the Financial Reporting Council for accounting periods beginning before 29 June 20103

"the Commission"

the Building Societies Commission

[Note: the functions of the Bank of England under the Banking Act 1987, which was repealed by the Act, were transferred to the Authority by the Bank of England Act 1998. Similarly, the functions of the Commission, and of the Central Office of the Registry of Friendly Societies were transferred to the Authority by and under the Act.]

"the Confirmation Criteria"

means in relation to mergers- the three criteria specified in section 95(4) of the 1986 Act which the Prudential Regulator has to consider when deciding whether to confirm a merger of the business of one society with the business of another society; and

means in relation to transfers- the four criteria specified in section 98(3) of the 1986 Act which the Prudential Regulator has to consider when deciding whether to confirm a transfer of the business of a society to a commercial company

"controlled function"

a function, relating to the carrying on of a regulated activity by a firm, which is specified, under section 59 of the Act (Approval for particular arrangements), in the table of controlled functions shown in the Supervision manual of the Handbook (see SUP 10.4.5 R)

6

"conversion"

the transfer of business of a society to a specially formed company

"credit institution"

an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credits for its own account

4

"the Electronic Communications Order"

the Building Societies Act 1986 (Electronic Communications) Order 2003 (SI 2003/404)

"existing company"

A company which is a company within the meaning of the Companies Act 20062and is a public company limited by shares, or is incorporated in an EEA State other than the United Kingdom and has power to offers its shares and debentures to the public, and which is carrying on business as a going concern on the date of the Transfer Agreement

2

6“FCA”

the Financial Conduct Authority6

"Fees Rules"

the Rules made by the FCA under paragraph 23 of schedule 1ZA and the PRA under paragraph 31 of schedule 1ZB to the Act prescribing the fees to be paid in connection with the discharge of the FCA’s or the PRA’s functions under the 1986 Act.6

6

"First, Second, Third Criterion"

See "Confirmation Criteria", and relating respectively, in relation to mergers, to the criteria specified in subsections (a), (b) and (c) of section 95(4) of the 1986 Act

"First, Second, Third, Fourth Criterion"

See "Confirmation Criteria", and relating respectively, in relation to transfers, to the criteria specified in subsections (a), (b), (c) and (d) of section 98(3) of the 1986 Act

"the IAS Regulation"

the Regulation of the European Parliament and of the Council of 19th July 2002 on the application of international accounting standards (1606/2002/EC)

"Instrument of Transfer"

The Instrument of Transfer of Engagements required by section 94(6) of the 1986 Act

"listed"

included in an official list

"member"

a shareholding or borrowing member of a society

"Memorandum"

the Memorandum of a building society required by paragraph 2 of Schedule 2 to the 1986 Act

"merger"

an amalgamation or transfer of engagements

"Merger Document"

the document or booklet containing the Schedule 16 Statement

"Merger Notification Statement"

a statement sent to members in the circumstances described in chapter 2 of this Guide

"Merger Resolutions"

the shareholding members' resolution and borrowing members' resolution required to approve a merger where no direction under section 42B(3) of the 1986 Act6 has been given

"official list"

(a) the list maintained by the FCA in accordance with section 74(1) of the Financial Services and Markets Act 2000 (The official list) for the purposes of Part VI of the Act (Official Listing);

(b) any corresponding list maintained by a competent authority for listing in another EEA State.

"OFT"

Office of Fair Trading

"PIBS"

Permanent interest-bearing shares, a type of deferred share

6“PRA”

the Prudential Regulation Authority

"proxy voting form"

an instrument appointing a proxy to attend a meeting of a society and vote on the member's behalf

6“the Prudential Regulator”

(a) in relation to a building society which is a PRA-authorised person, the PRA; and6

(b) in relation to a building society which is not a PRA-authorised person, the FCA

"Qualifying Day"

the day specified in the Transfer Agreement as the qualifying day for the purposes of section 100 of the 1986 Act

"rationale"

the explanation of the reasons for a proposed merger provided to the members of a society by its board of directors

"the Rules"

the Rules of a building society

"Schedule 16 Statement" or "the Statement"

the statutory statement required by Schedule 16 to the 1986 Act to be sent to every member entitled to notice of a meeting of the society

"SGM"

Special General Meeting

"shareholder" or "shareholding member"

a person holding a share in a society (by investing in one or more share accounts or holding PIBS or other deferred shares)

"society"

a building society

"specially formed company"

a company formed by a society (and by no other than its nominees) for the purpose of assuming and conducting the society's business in its place, which is a company within the meaning of the Companies Act 20062 and is a public company limited by shares, or is incorporated in an EEA State other than the United Kingdom and has power to offer its shares or debentures to the public

2

"Statutory Cash Bonus"

the bonus required by section 100(2)(b) and (4) of the 1986 Act to be paid to every shareholder of the society who held shares on the Qualifying Day and was not eligible to vote on the requisite shareholding members' resolution

"successor" or "successor company"

A company, whether an existing company or a specially formed company, to which the business of a society is proposed to be transferred

"successor society"

a society accepting a transfer of engagements or the new society in the case of an amalgamation

"takeover"

the transfer of business of a society to an existing company

"the Three Criteria"

the criteria prescribed by section 95(4) of the 1986 Act which the Prudential Regulator has to consider when deciding whether to confirm a merger

[Note: the Three Criteria are varied in certain circumstances see section 6 of chapter 2 of this Guide.]

"transfer"

a conversion or takeover or both, as the context requires

"Transfer Agreement"

the agreement required by section 97(4)(b) of the 1986 Act between a society and its successor company on the terms of the transfer

"Transfer Document"

the document or booklet containing, inter alia, either the Transfer Statement or the Transfer Summary

"Transfer Regulations"

the Building Societies (Transfer of Business) Regulations 1998 (SI 1998/212)

"Transfer Resolutions"

the shareholding members' resolution and borrowing members' resolution required to approve a transfer where no direction under section 42B(4) of the 1986 Act has been given

"transferee society"

a society accepting a transfer of engagements from another society

"transferor society"

a society transferring its engagements to another society

"Transfer Statement"

the statement required by Schedule 17 to the 1986 Act to be sent in or with the notice of the meeting at which the Transfer Resolutions are to be considered or, if a Transfer Summary is sent, made available to every member entitled to notice of a meeting of the society

"Transfer Summary"

The summary of the Transfer Statement which may, in accordance with Schedule 17 to the 1986 Act, be sent, instead of the Transfer Statement, in or with the notice of the meeting at which the Transfer Resolutions are to be considered, to every member entitled to receive that notice

"Trustee Account Holder"

a person who is a shareholding or borrowing member of a society, by virtue of being the sole or representative joint holder of an account which he holds in trust for another person or persons any one or more of whom cannot reasonably practicably act in relation to that account themselves by reason of ill-health or old age or any physical or mental incapacity or disability, as provided by section 102D of the 1986 Act, whether or not the account holder is a shareholding or borrowing member in respect of any other accounts

3the UK Corporate Governance Code

the UK Corporate Governance Code, published by the Financial Reporting Council

"vesting date"

the date on which all the property, rights and liabilities of the society making the transfer, except any shares in the successor company, are transferred to the successor company

BSOG 1.3 Constitutional matters

Constitutional form

BSOG 1.3.1 G

Building societies have a particular constitutional form: they are mutuals run for the benefit of their members (i.e. their borrowers and savers). A society cannot therefore be owned or controlled by an outside institution or major shareholder. Society boards and management have a special responsibility to protect the interests of their members through the highest standards of corporate governance.

BSOG 1.3.2 G

Although societies are not publicly quoted, they should have regard to the UK Corporate Governance Code or the 1Combined Code as appropriate 1when they establish and review their corporate governance arrangements.

Fit and proper test for directors

BSOG 1.3.3 G

A building society's directors are elected by its members. Subject to certain exceptions, any natural person may be elected as a building society director (section 60 of the 1986 Act). Members have the right to nominate any candidate for election. Unless that person is subject to a prohibition order made under section 56 of the Act2, the board cannot refuse to accept a candidates nomination because the board does not regard that person as fit and proper. Prior to the election, the board should take reasonable steps to establish whether there are any facts or matters concerning the candidates fitness and propriety which the members should be aware of. If there are, the board should bring them to the members' attention before the election takes place. The Prudential Regulator2 will not vet candidates for election.

2 2
BSOG 1.3.4 G

A person elected as an executive or non-executive director of a building society must not exercise a controlled function unless the appropriate regulator gives its approval (sections 59 and 60 of the Act). The appropriate regulator will not approve a director unless it is satisfied that he meets, and will continue to meet, the Fit and Proper Test for Approved Persons (see the Fit and Proper Test for Approved Persons sourcebook in the Handbook (FIT)). An approved person must also comply with the requirements of the Statement of Principle and Code of Practice for Approved Persons sourcebook in the Handbook (APER).

Other requirements and guidance

BSOG 1.3.5 G

Part VII of the 1986 Act contains requirements relating to the management of building societies.

BSOG 1.3.6 G

Every building society must have at least two directors and one of the directors must be appointed chairman (section 58 of the 1986 Act). The chairman should not hold an executive position in the society. This helps to separate strategic direction from the day to day management of the business and helps the chairman to take an independent view of management issues. It also protects against undue concentration of power.

BSOG 1.3.7 G

Every building society must have a chief executive (section 59(1) of the 1986 Act). The chief executive should be a member of the board.

BSOG 1.3.8 G

A small building society may not need as many executive directors as a large building society, but every society should have at least one.

BSOG 1.3.9 G

Given the mutual status of building societies, a clear majority of directors on a societys board should be non-executive. Non-executive directors should not be given the expectation that they will remain on the board until retirement. They should serve for a fixed term, both initially and for any subsequent term. The appropriate ratio of non-executives to executives will vary with the scale, nature and complexity of the societys business.

BSOG 1.3.10 G

It will rarely be appropriate or desirable for a chief executive or other executive director to remain as a non-executive board member after his or her retirement.

BSOG 1.3.11 G

The board should have an appropriate range of skills and experience to control and direct the societys activities effectively. The composition of the board should be reviewed at regular intervals to ensure that its management and other resources are at least adequate for the society's current business and the business it proposes to undertake.

BSOG 1.3.12 G

When a director is to be appointed under a formal service contract, the board should consider carefully the terms of the contract it offers. When it does so, it should take into account (for example) the need to attract and retain directors with appropriate experience, knowledge and skill; the need to preserve the boards freedom of action; the potential cost of the contract proposed; the period of notice the society will have to give, and the potential liability it will incur, if it terminates the contract other than for misconduct. The objective should be for notice or contract periods of one year or less.

BSOG 1.3.13 G

The Accounts Regulations require a building society to give particulars of its directors and chief executives service contracts in its annual Report and Accounts. If there are no service contracts, the building society should say so.

BSOG 1.3.14 G

Every building society must have a secretary (section 59(2) of the 1986 Act). The secretary should ensure that board procedures are followed and regularly reviewed. He should also provide guidance on the boards responsibilities and how they should be discharged.

Dealings with directors

BSOG 1.3.15 G

Part VII of the 1986 Act places restrictions on certain types of dealing between a building society and its directors. For example:

  1. (1)

    it requires a director, who is interested in a contract with the society, to declare that interest to the board (section 63 of the 1986 Act); and

  2. (2)

    it prohibits a building society from entering into an arrangement, by which a director will acquire a non-cash asset of more than a certain value from the society, unless the society has approved the arrangement by resolution at a general meeting.

A building society should maintain written procedures and controls which ensure compliance with these restrictions.

Loans to directors

BSOG 1.3.16 G

The 1986 Act also restricts a building societys ability to make loans to a director or a person connected with a director (section 65 of the 1986 Act). In the circumstances, it would be inappropriate for a building society to follow its usual loan procedures when a director or connected person makes a loan application. The responsibility for approving such loans should not rest with staff members, even if the loan falls within a normal staff mandate. A building society should have written procedures for dealing with loan applications from directors or persons connected with them and every director should be familiar with them. Those procedures should include consideration by the board, or a board committee, before any loan application is approved. That review should have regard, for example, to the terms of the proposed loan and whether it is permitted by the 1986 Act.

BSOG 1.5 Electronic communications

BSOG 1.5.1 G

The Electronic Communications Order allows a building society to communicate electronically with its members on constitutional matters, including those referred to in later chapters of this Guide, if certain conditions are met. The Order covers communications about the business to be transacted at annual general meetings. It also covers communications on occasional matters, such as special meetings, mergers and transfers of business. In all cases the consent of the member or other person to the means of communication must be obtained.

BSOG 1.5.2 G

The Electronic Communications Order does not amend the 1986 Act requirement to submit certain returns to be placed on its public file. Nor does it affect the supervisory financial returns required to be submitted by the rules in the Supervision manual.

BSOG 1.5.3 G

This Guide reflects law and practice as at 1 April 20131 and does not take into account subsequent developments.

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