Nature of Building Society
Building societies are bodies corporate with their own regulatory regime equivalent to those for companies. They are most similar to friendly societies and industrial and provident societies. Building societies may be formed with the object of permitted activities under the Act. It must include the objective of raising funds for making housing loans.
A building society is formed in accordance with the procedures under the Act. On formation, a certificate of incorporation is issued. Ten or more persons may form a society by agreeing and filing the formation papers with the Central Bank.
The registered name of a building society or its Irish equivalent must be included in the name. Societies must use their registered name and must fix the registered name on the place of business, letters, cheques, receipts, documents etc. Letters must include its registered number and the address of its chief office.
Every building society is to have a chief office in the State to which all communication and notices may be sent.
Building Societies Act 1989 modernised building societies legislation. It transferred regulatory functions from the Registrar of Friendly Societies to the Central Bank.
The Central Bank must be satisfied that it has the capacity to undertake its functions, and its registration would not be prejudicial to the orderly regulation of building societies, generally. An appeal against refusal by the Central Bank to incorporation may be made to court.
The rules of the society are binding on any every member and persons claiming through them. The Central Bank may make regulations in relation to the terms and conditions of which building societies may be formed.
They may prescribe rules in respect of housing loans. Rules similar to those ultimately embodied in the Consumer Credit Act may be prescribed.
Acts of the Building Society are binding if undertaken by persons who have ostensible authority in favour of persons in good faith, notwithstanding the absence of power in that regard. The position is effectively equivalent to that in respect of companies.
The rules of the Society may be altered by special resolution of its members. Alterations must be filed with the Central Bank and must be compliant with Central Bank requirements.
Every member or person holding shares in a building society is a member. A person is a member subject to the rules of the society.
A person to whom a housing loan is made, or to whom a loan supported by a mortgage is given may be a member or who holds shares in the society and his liability as such may be no greater than the liability of a member in that capacity. This is not prejudicial to his liability as a borrower.
Building societies may admit persons as members who are not of full age, and they are deemed able to give good receipt. Two or more persons may hold shares jointly. The person whose name first appears in the books is the representative holder.
A building society may not raise funds or solicit deposits without a Central Bank authorisation. Certain exceptions are provided. An authorisation may be granted in such terms that the Central Bank determines. Central Bank may impose limits and conditions. It may make requirements in respect of the conduct of business.
A building society may raise funds and borrow money in any currency, subject to Central Bank approval.
Subject to conditions, the building society may invest in subsidiaries or takes their stakes in companies; they may support entities. Group entities may be supported by way of loans, grants, guarantees or use of services or property. Capital must be held as specififed by the Central Bank, referable to the investment.
Shares and Accounts
Where a shareholder or depositor dies, funds may pass without a grant of representation, provided they are below a specified amount fixed from time to time by the Central Bank, having consulted with the Minister for Finance.
A building society may hold and acquire development for residential or commercial purposes.
A building society may make housing loans to its members, including in foreign currencies on the security of a mortgage of a freehold or leasehold interest of the house for the purpose of enabling the mortgagor to improve the house, or to purchase an interest or a stake.
The power to make housing loans is on such terms may be approved by the Central Bank. The capital element of the mortgage must not exceed the value of the security on the initial advance. Second mortgages are prohibited. Central Bank may regulation permitting a second mortgage.
A building society may make other loans with the approval of the Central Bank, including.
- loans which are fully secured and mortgages of interest in property,
- loans to members, before the mortgage has been created, not exceeding the amount which the society has agreed to lend by way of a housing loan;
- loans fully secured by one or more securities or guarantees of such description as are from time to time specified by the Central Bank;
- loans to be applied in or towards payment of the deposit for the purchase of freehold or leasehold estate or interest that will secure a loan by way of mortgage, but such a loan may not exceed 15 per cent., or such other percentage as may be prescribed by the Central Bank, of the amount to be paid for the purchase of the estate or interest;
- loans, whether unsecured or secured to any extent, to an individual for the provision or improvement of accommodation for himself or his family; and
- loans, including loans on overdraft or other facility accounts, whether unsecured or secured to any extent, to any person.
- loans to members before the mortgage has been created, not exceeding lending for housing loan, loans secured by securities approved by the Central Bank
The above loans are subject to certain other provisions and limits which may be specified by the Central Bank. In the case of bridging loans, the mortgage must be created as soon as practicable thereafter.
Building societies may not charge tiered interest rates other than in certain historical cases. In this context, a tiered interest rate is one referable to the amount of loan outstanding or the income of the member to whom the loan is made and is within the lowest rate of interest applicable at the time loans of the same type made to members generally.
Building societies are obliged to assess the security offered for loan. The assessment may be made by an employee of the society who must obtain a written report on the value of the security, factors likely to affect its value. There are restrictions on the classes of persons who may issue valuations.
Where a property is sold in exercise of a power of sale, the society must ensure that it is sold at the best price obtainable. The society is to obtain an independent valuation.
Building societies may discharge mortgages by endorsement of a receipt under seal. This provision was later extended to all mortgage lenders.
A building society may provide financial services. This includes.
- giving of guarantees and indemnities,
- undertaking financial obligations,
- debts and securities,
- investment service,
- discounting of creditors,
- maintenance of company registers,
- taxation and financial planning and advice
- money transmission,
- operation of credit transfer system,
- acceptance of deposits for current account
- collection of cheques and payment of cheques drawn on society,
- arranging provision of credit, including arrangements with credit card companies.
This is subject to approval by the Central Bank in all cases.
It was contemplated that conveyancing services might be provided by building societies subject to regulations to be made. Regulations were to include provisions for protection of persons for whom services were provided by societies and conflicts of interest, showing adequate compensation in respect of negligence, fault or dishonesty, the extent to which a person is required must be practicing solicitors, classes of services which may be provided, restrictions on the classes of services that may be provided. Societies providing conveyancing services were to provide separate accounts.
Building societies were authorised to provide auctioneering services and other services relating to them. They did not acquire separate licensing. Regulations might be made by the Minister for Justice after consultation with the Minister and Central Bank in respect of auctioneering services provided by societies and other subsidiaries., There may be equivalent provisions for those above in respect of conveyancing services, including provisions in relation to avoidance of conflict of interests, classes of services likely provided, requirements and qualifications, separate accounts for income and monies received.
The Society may exercise its powers outside the State.
The Building Societies are prohibited from offering or requiring linked services in the context of housing loans. This prohibition was later re-enacted in the Consumer Credit act. Linked services prohibited loans being made available on condition that other services were availed of.
The powers in relation to advancing unsecured loans, investment in subsidiaries or bodies corporate, financial services conveyancing and auctioneering services and operating abroad required a special resolution of the society. It required specific approval of the Central Bank as to the terms and conditions of which it might be provided. Conditions might be imposed in respect of the provision of services.
Central Bank Powers (Pre-2009)
The Central Bank has powers to regulate in order to protect the funds of shareholders and depositors and maintain the financial stability and wellbeing generally of society. The building society must keep specified asset and liability ratios as the Central Bank determines. Provision may be made in respect of particular societies or societies generally. The Central Bank may make requirements in respect of the composition of assets and liabilities.
The Central Bank may revoke a building society’s authorisation by consent, if it fails to trade or breaches certain of its obligations and conditions attached to its authorisation. A range of circumstances are set out in respect of which an authorisation may be suspended. The suspension may preclude raising the firm’s disposal of assets and making of payments without the consent of the Central Bank. Detailed provisions apply in respect of revocation of authorisation.
An authorised person may be appointed to investigate the affairs and business of a building society or its subsidiaries and associated entities etc. The officer may require production of documents and records. He may enter, inspect, remove books, documents et cetera. There is protection for privileged communications.
The Central Bank may make conditions regarding advertising by building societies. It may prohibit certain types of advertisements, modify them, require withdrawal of certain advertisements, or require specified information to be furnished.
The Central Bank may apply to court, where it is of the opinion that a society is in contravention of the Act, failing to comply with conditions of authorisations or other conditions applicable on their legislation. The court may make orders by way of interim or interlocutory injunction above a final order.
The Central Bank may appoint inspectors on application by one-tenth of its members or 200 members, whichever is less or where it is of the opinion that an investigation into the affairs of the society is required. A special meeting of the society may be called, in addition to appointment of an inspector. Applicants may be required to give security for costs in the case of an application by the member to the Central Bank. The Central Bank may compel holding of a special meeting and appoint a person to conduct the meeting.
Inspectors have power to require production of all accounts, documents, records etc, in relation to the society. They may examine officers, members and agents of the society. They may examine present or past directors or other appropriate persons. It may require them to produce all documents in their possession.
An inspector may make an interim report and shall make a final report to the Central Bank. It is furnished to the Minister and the Minister for Finance. It may be laid before the Houses of the Oireachtas.
Where offences are disclosed, it may be referred to the DPP. The Central Bank, if it considers that proceedings are to be brought by the Society for damages in respect of fraud, misfeasance or misconduct in connection with formation, promotion and management of a building society or for the recovery of property. The Central Bank may bring proceedings in the name of the society. The copy of the report is admissible in legal proceedings as evidence of the opinion of the inspector in relation to matters contained.