Hansard

Thank you, Presiding Officer, for the opportunity to make a statement to Parliament on the Dunfermline Building Society.

Everyone in the chamber will have followed closely the developments of recent days around the Dunfermline, one of Scotland's key financial institutions. The United Kingdom Government's announcement at the weekend that elements of the Dunfermline were to be transferred to the Nationwide Building Society presented questions, challenges, and—indeed—opportunities. I am pleased that we have the time to discuss them today.

Aspects of the announcement should concern everyone in the chamber. First, I will recap on some key facts. The Dunfermline has a proud history at the forefront of the financial sector in Scotland. It employs more than 500 staff in 34 branches around Scotland. In the accounts that it published in March 2008, the society confirmed assets in the region of £3 billion. The Dunfermline has provided loans of more than £675 million to the business sector and has around a 22 per cent market share in lending to the Scottish social housing sector. No-one in the chamber can therefore be in any doubt that the future of the Dunfermline is of vital importance to Scotland.

The UK Government has announced that, because of a significant deterioration in the society's financial position over the past few months, the Dunfermline's core member business has been transferred to the Nationwide Building Society. To be precise, the Dunfermline's retail and wholesale deposits, branches, head office and originated residential mortgages other than social housing loans and related deposits have been transferred to the Nationwide. The transfer follows a process that the Bank of England conducted over the weekend, under the special resolution regime provisions of the Banking Act 2009.

The Dunfermline's social housing portfolio was placed into a bridge bank that is wholly owned by the Bank of England to allow HM Treasury and the Bank of England time to secure a permanent solution, working with other stakeholders. Under the terms of the agreement, the Dunfermline's deposit business will continue to operate normally. Branches and telephone banking will continue to open and customers can access their account in the usual way. Savers can be assured that their money is safe.

A court order was made on Monday 30 March to place the remainder of the Dunfermline's business into the building society special administration procedure and to appoint KPMG as the administrator. That part of the business includes the society's commercial loans, acquired residential mortgages, subordinated debt and most Treasury assets.

I can now tell members the full extent of the Scottish Government's involvement in recent weeks. Our officials met representatives of the Dunfermline on Monday 2 March. They informed us that the society needed extra capital if it was to meet the Financial Services Authority stress test requirements and qualify for entry into the credit guarantee scheme. The society was about to declare a loss for 2008 in the region of £26 million, largely as a consequence of write-downs in its commercial loan book.

Although the Dunfermline had substantial reserves of more than £100 million, which it had accumulated over time, it was required to satisfy FSA capital adequacy ratios in order to access Treasury support schemes, if required, and to enable its directors to provide a going-concern opinion on the 2008 accounts. Last October, the capital that the society required to meet the FSA requirement was originally estimated at £20 million. However, more recently, the FSA had indicated that the figure would have to rise significantly in light of adverse market conditions.

As the chamber knows, the Scottish Government has no responsibility for financial regulation. However, we have responsibility for employment in Scotland and, indeed, for social housing provision. On Monday 16 March, we confirmed to the FSA and the Treasury that the Scottish Government was willing to provide a capital investment of £25 million to the Dunfermline, subject to guarantees on social housing loans, if that would help to find a solution. We put forward a number of proposals, the most likely being that we would use our end-year flexibility money that is held by the Treasury to provide that capital sum. For obvious reasons, we sought to keep the offer confidential.

From then on, Scottish Government officials were in constant contact with the FSA and the Treasury to seek to reach a positive conclusion. I spoke to Adair Turner of the FSA on Sunday 22 March and met the Chancellor of the Exchequer in London on Wednesday 25 March. It was extremely difficult to obtain from the FSA information on the level of capital required. However, others were willing to help. A consortium of seven building societies was prepared to inject up to £30 million in capital. On Friday 20 March, when we were told of that potential interest from Scottish mutuals, our officials immediately informed the FSA. In the event, the Treasury took the view that value-for-money considerations decided the outcome in favour of a break-up of the society. We have requested, but have yet to see, the details of that case.

It should be remembered that, although a payment of £1.6 billion has been made to the Nationwide by the Treasury in return for taking responsibility for all depositors' accounts with the Dunfermline, any losses will be met from the Dunfermline's reserves and other holdings. Any further loss would be set against the financial services compensation scheme, 90 per cent of which would be funded by the financial sector itself. As a result of that, the Treasury's potential exposure has been estimated by informed observers at £10 million.

Apparently, the FSA finally estimated a capital requirement figure of £60 million, and the Treasury doubted the Dunfermline's ability to service that amount. However, we had argued that a lower interest rate on our proportion of the capital required could be justified, because of the very low risk on social housing loans and the desirability of supporting our social housing policy objectives. The Treasury and the FSA made their decision on Friday 27 March, calling in Nationwide and, I understand, three other potential acquirers of the Dunfermline's assets.

The chancellor spoke to me on Saturday at lunch time. On Saturday afternoon, the FSA wrote to the Dunfermline effectively to instruct the directors to call a meeting and vote through a special resolution. The other building societies were told on Saturday morning that no public money was available for investment in the Dunfermline. Given that our offer of investment was still on the table, I have written to Lord Turner to question whether the FSA's letter provided a full and accurate account of the position. I will make that letter available in the Scottish Parliament information centre. That is the position in which we find ourselves as of today.

The Government is working on a number of fronts to ensure that Scotland's interests are taken properly into account. I and the Cabinet Secretary for Finance and Sustainable Growth have been in close contact with Dunfermline and Nationwide all this week. I spoke to the chief executive of the Nationwide on Monday morning. Mr Swinney and I met Stuart Bernau, executive director of Nationwide, this morning, and we have held constructive discussions about the impact of the merger on Scottish jobs and the future of Dunfermline's operations. The dialogue this morning confirmed that there will be opportunities for Dunfermline staff to apply for vacancies within the Nationwide's network. Mr Bernau confirmed the Nationwide's intention to invest in the Dunfermline brand going forward.

Nationwide is a highly reputable organisation with an impressive track record. I welcome its announcement that there will be no compulsory redundancies among Dunfermline branch staff in the next three years. However, I am clear that we must continue our dialogue in the interests of the longer-term future of those staff. There must also be abiding concern about the retention of functions, and therefore staff, at the Dunfermline's headquarters.

We are working to consider the implications for the Dunfermline's social housing portfolio. We must ensure that the upheaval of recent days does not jeopardise the successful delivery of our policy objective of increasing the availability of affordable housing in Scotland, and that the risk of an aggressive repricing of loans to the sector is minimised. The chancellor has promised dialogue with us and others on the future of the social housing portfolio, and we look forward to engaging with him.

We need to think creatively about what sort of model best serves the interests of the social housing sector in Scotland. Recent events potentially present an opportunity for solutions that could not only secure the future of lending to the sector, but offer us a framework for building on that provision. Our central objective is to secure at current rates the £500 million of existing Dunfermline lending to the social housing sector, and the £200 million of undrawn facilities on offer. We also want to secure a stream of further lending into the sector going forward. The Chancellor of the Exchequer has indicated to me that he shares those concerns and our objectives in this matter.

Responsibility for the position of the Dunfermline rests with the management of that institution—the present management and particularly the recent past management. Its exposure to the commercial property market and some aspects of its mortgage book, together with its difficulties with a major information technology project, left the society vulnerable. However, many aspects of the society—indeed, the bits that have gone to Nationwide—are highly attractive, for example the more than 300,000 depositors who have invested their money in a Scottish institution with a long and proud history going back 140 years. As was confirmed to me this morning, Nationwide has inherited a domestic mortgage book and a loyal staff of the very highest quality.

As I have said, we will work our hardest to secure the best outcome possible from the present position. However, there must be concern over whether the process has been adequate. Clearly, Dunfermline found it impossible within the tripartite arrangement to obtain constructive dialogue about how to solve the institution's problems. Those frustrations would be shared by ourselves and other participants and potential investors. Throughout the process, those at the Dunfermline Building Society seemed to be the last people to hear of their fate.

Some might argue that, regardless of the process, the present outcome was the only one possible. If the process had been more orderly, however, I believe that it could have produced a better outcome for the members of the society, for the headquarters staff of the Dunfermline and for Scotland.