Taylor Joynson Garrett acting for Halifax Loans – a wholly owned subsidiary of the Halifax Building Society – has completed the purchase of the centralised lending business of Banque Nationale de Paris, acquiring u1.5 billion in mortgage assets representing 0.5 per cent of the total UK mortgage market. This new acquisition has raised Halifax Loans' total mortgage assets to u2.7 billion.
This is the first time that Halifax has acquired a centralised lender and it plans to use the business, which will be called Halifax Mortgage Services, to introduce a range of mortgage products distinct from those available through its branch offices to the major introducers such as insurance companies, mortgage brokers and independent financial advisers.
This was a particularly difficult transaction to structure because of the legislative constraints imposed on a building society. A society is restricted from entering into many commercial arrangements one would normally expect to see in transactions of this type and creative solutions had to be found.
The deal also sheds light on potential problems that other societies could face if they attempt similar acquisitions.
The recent growth in the range of personal financial services now offered by building societies might suggest that they can operate in much the same way as banks.
In fact, the commercial activities of building societies are severely constrained. Advisers to societies must look carefully at the regulatory framework to ensure that a society is not restricted from entering into a commercial transaction or carrying on a proposed business. For example, a society itself may not carry on estate agency work. These constraints are particularly relevant in the context of acquisitions when generally the first question to be asked is “can the society make the acquisition at all?”
To answer this question, the complexities of s.18 of the Building Societies Act need to be considered. The section must be analysed along with various statutory instruments to see if the target company or, more often, target group may be acquired by the society or one of its subsidiaries and, if so, whether any constitutional or other changes are required before acquisition.
A society cannot invest in companies which, broadly speaking, have objects that extend beyond those of the society. However, an exception to this rule is investment in accordance with the 1993 Designation Order. This order lists certain conditions that must be met, in particular the 'qualifying activities' condition.
This condition permits a society to hold a group provided that 60 per cent of the consolidated income from that group is derived from “qualifying activities” – broadly, activities which the society is empowered to carry out either itself or through a direct subsidiary. If this condition is not met for two successive financial years, then the society must disinvest itself of that business.
Once it has been established that the group may be acquired, any element of support proposed by the society will need to be examined closely. Support includes the provision of money, loans, giving guarantees and the use of services or property. Typical examples of this support in the context of group acquisitions are the giving of a guarantee for a target company's borrowings or the assumption of a contractual obligation to allow the vendor's release from obligation.
S.18 prohibits a society's support of a company in which it has not invested, for example by the direct holding of shares. Accordingly, a society will have difficulty in providing a guarantee of, say, a target group subsidiary's borrowings. Restructuring may resolve the problem or support may be filtered down through each tier of the target group until it reaches the final recipient.
Care must also be taken to ensure that no arrangements of the target group are contrary to the guidance given to societies by the Building Societies Commission through the system of prudential notes and 'Dear chief executive' letters. For example, a draft prudential note issued last year dealing with securitisations sets out guidelines which a society must observe to originate or participate in a securitisation.
The commission also requires a society to consult with it regularly before proceeding with any significant development. A 1994 order relaxed regulation of societies by permitting them to conduct activities through their subsidiaries when such activities are within the power of that subsidiary although they may be outside the powers of the society itself. However, the commission nonetheless expects a society to consult with it before exercising this new power.
Peter Shepherd is a partner at Taylor Joynson Garrett.