The Building Societies (Designated Capital Resources) (Permanent Interest Bearing Shares) Order 1991

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 in section 45(3) of the Act, the maintenance of adequate reserves and other designated capital resources.

It designates, by article 4(1), as capital resources the amount paid up in sterling on Permanent Interest Bearing Shares (“PIBS”) that is to say shares which comply with the following requirements–

• they are shares which are deferrred shares as defined by the Building Societies (Deferred Shares) Order 1991 (under which principal is in general, only repayable on winding up of the society after all creditors and holders of other shares have been paid in full), (article 4(3)(2))

• in respect of which interest is payable, which may be at a fixed or variable rate, but which is not ascertained by reference to the society’s profits (article 4(3)(b))

• which are issued upon terms which prohibit the payment or crditing of interest (which is non-cumulative) in respect of any interest period in which the society has cancelled deferred or suspended the interest on the society’s deposits or shares other than deferred shares, (article 4(3)(c) and Schedule 1 paragraph (a))

• which prohibit the payment or crediting of interest where there is a failure or prospective failure by the society to satisfy the first criterion of prudent management (article 4(3)(c) and Schedule 1 paragraph (b))

• they are issued upon terms that on a merger of the society with another society they will continue as PIBS in the transferee society (article 4(3)(c) and Schedule 1 paragraph (c)) and

• upon the transfer of the society’s business to a commercial company the shares will be converted to subordinated debt (article 4(3)(c) and Schedule 1 paragraph (d)).

Shares do not comply with the specification of PIBS if they are issued upon terms which have any effect so as to prohibit or restrict amalgamation with another society or the transfer of its business to a company of if there are terms as to interest which cause the interest to rise by more than a specified percentage (article 4(3) (b) and (4) and Schedule 2).

The capital of PIBS is not aggregable if the rules of the society permit any shares other than deferred shares to be written down. If the Commission gives consent to repayment of PIBS under the Building Societies (Deferred Shares) Order 1991 the capital thereupon ceases to be aggregable.

A society which has not yet been authorised under section 9 of the Act to raise money from members or accept deposits may only count the capital of PIBS up to the amount which it is permitted to issue by that section in advance of authorisation, taking into account also any deferred shares which it has in issue under a previous Order and Regulations (article 4(2)).

The Building Societies (Designated Capital Resources) (Deferred Shares) Order 1989 is revoked (article 7) but any deferred shares to which that Order applied may still be aggregated with reserves up to the limit to which they were previously permitted to be aggregated (article 3). And an unauthorised society may count the capital of such shares along with any PIBS up to the limit permitted by section 9 (article 4(2)).

The Order gives effect, in respect of PIBS 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 paid up capital of a credit institution may be counted, to any extent, as own funds for solvency and prudential purposes.