The Building Societies (Supplementary Capital) Order 1988

Explanatory Note

(This note is not part of the Order)

This Order specifies supplementary capital as a description of capital resource of building societies.

Section 45 of the Building Societies Act 1986 requires, among other things, the maintenance of adequate reserves and other designated capital resources. Section 45(5) provides that the Commission may specify descriptions of capital resources of building societies for this purpose, by order, with the consent of the Treasury. That order may specify the extent to which capital resources may be aggregated with reserves and may make aggregation subject to conditions. In specifying supplementary capital as a description of capital resource, this Order sets limits on the extent of its aggregation.

Supplementary capital derives from supplementary financial resources, that is to say the resources derived from sums received from a lender on terms which have the effect of subordinating the lender’s rights to receive the debt due to him in the event of a winding up to the rights of other creditors including shareholders in the society as respects the principal of their shares and interest due on them.

The main requirements which must be met are that the debt has an initial maturity of at least five years and one day and that it must be denominated in sterling. The exceptions to the maturity requirement are that the terms may provide first for early repayment with the consent of the supervisory authority, and secondly for automatic early repayment following winding up or dissolution.

The extent to which the resource can be counted as capital amounts to the principal received less the principal repaid but—

(i) the amount counted must not exceed 50 per cent of the amount of a society’s reserves (excluding revaluation reserves); and

(ii) from the time when the residual maturity falls to five years, the amount to be counted is progressively reduced to zero over that five years. Where the lender is to be repaid by instalments of principal, the residual maturity reduction is applied to each instalment separately, save where repayment is by equal instalments over a prescribed period commencing more than five years after the full principal is received.

There are additional provisions that the terms of the instrument governing the debt must not include restrictions on amalgamation, transfer of engagements or transfer of business to an authorised institution.

The Building Societies (Designated Capital Resources) Order 1988 which is revoked by this Order provided for aggregation of the principal amount outstanding of the debt and neither allowed for automatic early repayment following a winding up nor included the additional provisions mentioned in the previous paragraph. It also did not provide for separate application of residual maturity reduction to instalments.