Sample First Class Business Law Essay with Footnotes (Undergraduate)
Below is a Sample First Class Business Law Essay with Footnotes and bibliography. The law essay was written by an undergraduate law student at one of the leading UK universities. The below essay sample achieved an extremely high first class grade and is meant to provide you with some guidance when writing your law essay on business law or otherwise. Please do not copy this essay or rely on any of the law cited in the essay. This essay does not provide nor does it purport to provide legal advice.
To what degree can mutual building societies be considered ‘social’ as opposed to commercial organisations?
This essay will discuss the development of mutual building societies from the time when they fulfilled mainly a social role in helping people to obtain housing collectively to its expansion into increased commercial activity. The concessions granted to mutual building societies by the Benefit Building Societies Act 1836 came at the expense of restricting building society activity to internal generation of funds through lenders and borrowers. Eventually the terminating societies became less popular and were ushered to the exit by the permanent society system, consolidated in the Building Societies Act 1874. The legislation was rather restrictive and stringent in order to preserve the socially useful role of building societies so that they could continue providing for activities of working people. As mentioned above, directors were under stricter duties and more importantly societies were limited in the kind of business they could undertake which resulted in their lack of competitiveness compared with banks. Most of the 1986 Act was oriented around reforming controls on building society activities to enable them to compete with other parts of the financial sector without the necessity of changing their legal form. The Act is majorly concerned with the creation of new powers and freedoms for societies along with extended prudential supervision. Though there have been recent exceptions with some building societies expanding excessively into commercial property loans, mutuals tend to adopt a lower risk profile because their main source of capital is that generated within the business. Mutual building societies are more regulated by law and there is a greater regulation of building societies than there is on banks. This means that building societies limited their dependence on wholesale funding markets and securitisation.
Early building societies were small collectives of people to facilitate the purchase of property by all members of the society. Each member made a contribution to the fund and a property was allocated to a member at a time on a lottery basis once the collective fund was sufficient. All members would continue saving and contributing to the society until everyone was allocated a property, which was when the society would be terminated. Terminating building societies were therefore no more than ‘self help groups, a direct response by workers to the vicissitudes of industrial life’. The ‘social’ nature of the early building societies can be captured in the view that although the society existed to help individuals, it was an organisation based on collectivity, ‘the labels of “individualism” and “self-help” should be replaced by “collectivism” and “mutual aid”’.[1] These early societies were relatively independent as they could create internal rules as it was ‘earnestly hoped that benevolent institutions of this nature may not be cramped by rules’[2] and to quote Gosden, ‘the principal enemy of independence was thought to be state aid or interference in the field of friendly society activity’.[3]
These early building societies first received legal recognition through the Benefit Building Societies Act 1836 which was passed to “afford Encouragement and Protection to such Societies and the Property obtained therewith”. The Act was contained within nine sections that made building societies legal and enabled the building societies to take action against defaulting and fraudulent members by “such reasonable Fines, Penalties, and Forfeitures upon the Several Members of any such society who shall offend any such rules”.[4] The Act also provided societies with an exemption of stamp duty upon the transfer of shares.[5] In return for this concession, societies had to abstain from investing in “any saving bank, or with the commissioners for the reduction of national debt”.[6] The funds which Building societies could lend to its members must be the fund invested by the members.
For 70 years building societies had been small in size and number, never exceeding 80. But, by 1850 the entire movement was estimated to hold a total annual income of £2, 400, 000.[7] This made the traditional terminating societies increasingly redundant given that they were designed for a small, non-fluctuating group of saver/ borrower members. This saw a reorganisation of the mutual society. This led to the emergence of permanent societies that existed indefinitely.
The permanent society system was very successful and was consolidated in the Building Societies Act 1874. The separation between borrower member and investing member and the individual agreements members would have with the society rather than between each other was statutorily defined in s 9 of the Building Societies Act 1874. This section highlighted that the building society was a “body corporate by its registered name”.[8] This meant that individualised members now had a legal relationship with a distinct entity (building society). The society comprised not of members as it used to do under the terminating building society, but rather of distinct entities vested with responsibility of mediating financial interests between borrowing and investing members. The new provisions were to be enforced by personal responsibility of members. Except societies in existence[9], members of societies that have not registered would be personally liable for ‘every day business is carried on’. Likewise, officers of registered societies that exceeded amounts in loans and deposits stipulated by the Act would be held liable for the amount loaned in excess of the prescribed sum.[10] Furthermore, the Act set out a code of regulation of societies’ finances, allowed sources of funding, rules on withdrawing funds, auditing, powers of directors and penalties for members and the procedure for terminating the society.
The underlying purpose of the Act was the provision of a framework for regulation of building societies in their capacity as independent financial institutions and to facilitate the monitoring of their activities while giving them some freedom in arranging their internal organisation. The legislation was rather restrictive and stringent in order to preserve the socially useful role of building societies so that they could continue providing for activities of working people.
Building societies were scrutinised for their prudential policies which resulted in prejudicial lending practices and an empowered and unaccountable management. In 1979 for instance the BSA decided to raise its recommended mortgage rate to 15 per cent. This along with the prudential policy of lending a percentage of the purchase price excluded less wealthy first-time buyers. The Wilson Committee came to the conclusion that this policy ‘discriminates against those who find it difficult to raise the necessary deposit’.[11] And because of their ‘tradition of encouraging self-help and thrift, they have frowned upon the concept of “low start” mortgages, believing that those who feel that the initial payments impose too great a burden should defer house purchase until such time as they can afford it, rather than be financed for a period by the societies’ depositors’.[12] Instead, the report proposed that building societies should increase the flow of capital available for loans and offer more attractive rates of interest. There was an increased support for changes in the prudential regulation to increase competition and depart from a scene where weaker and inefficient societies are protected from the commercial pressures through a recommended rate system which ‘limits the price competition for deposits, and by excess demand for mortgages’.[13] This could provide a competitive spur to building societies as they would be able to ‘set their own rates according to their circumstances’[14] and therefore compete with ‘other deposit taking institutions as well as with themselves’.[15]
Most of the 1986 Act was oriented around reforming controls on building society activities to enable them to compete with other parts of the financial sector without the necessity of changing their legal form. The legislation was predominantly concerned with preserving mutuality by enhancing the desirability of operating as a mutual. The new privileges enjoyed by the building societies were a small price to pay for the retention of their important social function. In the early stage of Thatcher administration Labour and Liberal MPs were proposing the argument that building societies should be subject to the same market criteria as other financial institutions. Labour and Liberal MPs were particularly dissatisfied with the BSA’s ‘cartel’, the tax privileges enjoyed by building societies, the wasteful number of branches and the problem of making directors accountable. In particular, the BSA’s ‘cartel’ on interest rates especially undermined building societies’ ability to compete as such cartel on interest rates had the effect of reducing the interest of investors. Nigel Lawson disagreed by claiming that the suppression of competition provided the public mortgage interest rates at ‘lower rates than might be expected’.[16] In the face of the new Right’s laissez-faire policy, the government proceeded on introducing a new legislative framework on building societies, first evidenced in the government green paper Building Societies: A New Framework, which was presented in Parliament in July 1984. This paper favoured increased structural control and accountability but at the same time facilitated the ability for building societies to offer some additional financial services. It is now worth examining Nigel Lawson’s foreword to the paper which clearly took the view that the government intended to effect a compromise between free-market disciplines by ‘loosening the legal restraints under which they have operated for a century or more so that they can develop in other fields’[17] and to ensure that ‘building societies continue primarily in their traditional roles- holding people’s savings securely and lending for house purchase’.[18] The paper went on to state that building societies should be competitive in attracting savings, especially in an era where structural changes are taking place in the financial services sector and a likely response is a ‘one stop centres for financial and investment services’.[19] However, this scope for diversification ‘should therefore be limited and subject to proper prudential control’.[20]
The Building Societies Bill was passed in 1986. The ensuing legislation was marked with a desire to make building societies more competitive and vest them with greater powers. The Act is majorly concerned with the creation of new powers and freedoms for societies along with extended prudential supervision. The 1986 Act reinforced the ‘principal purpose’ of raising funds to lend on the security of land. The 1986 Act determines that 90 per cent of all building society’s business must be for this purpose and that the business must relate to land for residential use. The Act also widened the areas where building societies could borrow: as well as raising money from investing members they could also raise money from non-retail funds, such as financial markets, but only 20 per cent of building society liabilities could be raised in this way. The Act also went out to give more powers to building societies: a power to deal with financial products. In banking building societies could provide money transmissions, foreign exchange, overdraft facilities, credit cards, cheque guarantee cards and personal loans as well as the right to dispense funds through automatic telling machines. In terms of investments, building societies could act as broking agents, provide personal equity plans and insurance services. Building societies could now offer a range of services relating to property such as operating estate agencies, offering conveyancing and offering property valuation services and directly developing land and housing. However, these concessions came at a cost in that no unsecured loan could be above £10,000, ownership of insurance companies was limited to 15 per cent, land development was restricted to residential uses, societies could not trade in equities and no business could be conducted with non-EC countries. In the words of Lorraine Talbot, ‘the role of building societies as financial institutions for the industrious classes engaged in savings and house purchase was underlined, while the increased expectations of its members in respect of financial products such as debit and credit cards, overdrafts and ‘one stop’ shopping was realised’.
These measures were a sensible and pragmatic response to modern financial demands and undoubtedly enhanced the building society movement while it continued to operate under mutual status. Certain provisions overshadowed these extensive provisions and provided a possibility to transfer the business of a mutual society to a commercial company. Sections 97-103 with Schedules 2 and 17 of the 1986 Act provide the members with a power to convert to plc status from mutual status. Section 97(1) states that a building society ‘may transfer the whole of its business to a company’. [21] Following confirmation, the stock is floated. All property, rights and liabilities of the building society pass on to the successor company on the vesting date specified in the transfer agreement. The converted society would then be subject to the Companies Act 1985 and would not operate under the Building Societies Act. However, ss 97-103 transformed the building society movement, extracting 80 per cent of assets out of the mutual sector, which in the words of Mr Weetch, Labour MP for Ipswich, has ‘created a new competitive world in financial institutions’.[22]
To date, building societies have generally been shown to have operated a safer business model. Certain features of the building society model, including the ‘comparatively low reliance on wholesale funding and the focus on the protection of members rather then the service of shareholders’,[23] have left building societies better equipped to defend against the shockwaves of the current crisis. Though there have been recent exceptions with some building societies expanding excessively into commercial property loans, mutuals tend to adopt a lower risk profile because their main source of capital is that generated within the business. Unlike with a plc, capital that is destroyed through, for instance, bad lending cannot easily be replaced by raising new capital in the market. Overall, the building societies weathered the storm better than have the banks. Mutual building societies are more regulated by law and there is a greater regulation of building societies than there is on banks. This means that building societies limited their dependence on wholesale funding markets and securitisation. It can be maintained that the building societies closely follow the Management Controlled Organisation (MCO) pattern and thus the pursuit of stability and prudence; group consciousness; steady growth; low membership control over the organisation and an organisation that is considered to be partly public in character and goals. Converted societies such as Northern Rock and Bradford and Bingley have adhered to the Shareholder Value Organisation (SVO) model. They were private, individualised and took on a more competitive approach in the aim of pursuing high profits and quick growth for shareholders. According to Lorraine Talbot, this pursuit of shareholder value by Northern Rock and Bradford and Bingley has transformed their role as monitors of financial arrangements between real people with real money into purveyors of “insane forms”.
In conclusion, this essay therefore showed how the mutual building societies have moved away from serving a purely ‘social’ function of helping people to collectively acquire housing when it was harder to do so individually. Instead, the mutual building societies have expanded in their operation into more commercial activities brought about by the Thatcher administration. Most of the 1986 Act was oriented around reforming controls on building society activities to enable them to compete with other parts of the financial sector without the necessity of changing their legal form. The 1986 Act favoured increased structural control and accountability but at the same time facilitated the ability for building societies to offer some additional financial services. Section 97(1) of the 1986 Act however undermined all the provisions as building societies were given the power to ‘transfer the whole of its business to a company’. Nevertheless, to date, building societies have generally been shown to have operated a safer business model, partly because the main source of their capital is generated within the business. Mutual building societies are more regulated by law and there is a greater regulation of building societies than there is on banks. This means that building societies limited their dependence on wholesale funding markets and securitisation. However, experience showed that the demutualised building societies can only survive crisis by relying on public money; and these demutualised building societies are too big and too complex for society to allow them to fail. The Labour Party and the Conservatives are putting the ‘social organisations’ at the forefront of future economy. The challenge is therefore to build a new, public-value organisation which embraces the positives of MCO’s. According to Gordon Brown, a strong economy depends on socially owned institutions as well as social investment. But effective social solutions cannot rely solely on government provision; they also depend on entrepreneurialism, innovation and competition. Experience shows that although social businesses do not usually grow as quickly as commercial ones, they do not shrink as much either and weather recessions more successfully.
Bibliography
Acts
The Benefit Building Societies Act 1936.
Building Societies Act 1874.
Books
Talbot, L.E. 2008. Critical Company Law. USA: Routledge-Cavendish.
Scratchley, A, Industrial Investment and Emigration, 2nd edn, 1858, London: John W Parker, p 50.
Articles
David Neave, Mutual Aid in The Victorian Countryside: Friendly Societies in the Rural East Riding 1830-1914, 1991.
Other
Preface to the rules and articles of the Castle Eden Friendly Society.
Wilson Report: Committee to Review the Functioning of Financial Institutions 1980 Cmnd 7937.
Hansard, oral answer session, 22 May 1980.
‘Building societies: a new framework’, July 1984.
Hansard 1985, Debate on Building Societies Bill.
Treasury Select Committee, 2009.
[1] David Neave, Mutual Aid in The Victorian Countryside: Friendly Societies in the Rural East Riding 1830-1914, 1991, p98.
[2] Preface to the rules and articles of the Castle Eden Friendly Society.
[3] Op. cit., Gosden, p 163.
[4] The Benefit Building Societies Act 1936 section 1
[5] The Benefit Building Societies Act 1936 section 8
[6] The Benefit Building Societies Act 1936 section 6
[7] Scratchley, A, Industrial Investment and Emigration, 2nd edn, 1858, London: John W Parker, p 50.
[8] Building Societies Act 1874. S 9.
[9] Building Societies Act 1874. S 8.
[10] Building Societies Act 1874. S 46.
[11] Wilson Report: Committee to Review the Functioning of Financial Institutions 1980 Cmnd 7937, p 85, para 289.
[12] Ibid.
[13] Op. Cit., Wilson Report, p 114.
[14] Ibid, p 113, para 380.
[15] Ibid, para 384.
[16] Hansard, oral answer session, 22 May 1980, p 690.
[17] ‘Building societies: a new framework’, July 1984, p 2.
[18] Ibid.
[19] Ibid, p 4, para 1.10.
[20] Ibid, para 1.11.
[21] Building Societies Act 1986, s. 97.
[22] Hansard 1985, Debate on Building Societies Bill, p 984.
[23] Treasury Select Committee, 2009, Paragraph 63
