Events
Speech
Chairman's Address to the BSA Annual Lunch 2010
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Contact: Christie Sharp Date: 11 Nov 2010 |
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Speech by David Webster, Chairman of the BSA
Introduction
It gives me great pleasure to welcome you today to the Association’s annual lunch. These are tough times in the mortgage and savings markets, and indeed there is an austere mood in the wider economy. However, we continue to feel that it is right and proper to provide an opportunity for Members of Parliament, BSA members, the media, other trade bodies, regulators and suppliers of services to our sector to come together annually to discuss the best way of addressing the issues we face. You are all very welcome.
I am extremely pleased to welcome our sponsors today, iRed, who will be addressing you in a few minutes. At this stage, however, I would just like to thank them for their generous support. We certainly would not have been able to put on such an impressive event without that support, which we at the Association very much appreciate.
Our guest speaker Mark Hoban, Financial Secretary to the Treasury, is unfortunately unable to join us as had been planned. Mark has been detained by Parliamentary business. Instead we are joined by Alison Cottrell, Director of Financial Services at HM Treasury. I’ll introduce Alison more formally at the end of my remarks, but may I say many thanks to her for stepping in at such short notice.
Business Performance
The financial services market has faced huge changes over the last few years, not least those markets in which BSA members operate. Net advances in the residential mortgage market have fallen from an annual figure of around £110 billion in the four or five years running up to 2008, to perhaps £10 billion this year. Few UK industries will have experienced such a precipitous decline in activity. In the market for savings deposits the figure for new savings across the entire household market of £70-80 billion a year fell to £23 billion last year, although it has recovered a little this year. These figures reflect really difficult conditions for building societies and other mutuals, the main business of which, as you will all know, is in the mortgage and deposit savings markets.
However, it is important not to become despondent. Business performance in the building society sector has differed between societies over the last few years, and such has been the highly unusual nature of the markets that even in our sector there have been a few difficulties; some societies have faced significant stresses. Most of our members have had a ‘good recession’ and are performing well; a few have found it tougher, and were loss making in the 2009. It is worth noting however that the majority have remained profitable during the economic downturn.
One notable feature of the recession is that size has not provided any indication of success. The largest mutuals have been successful, as have many of the smaller institutions. One can hardly claim that size has been closely correlated with success in the banking sector. What really matters is having a sensible business plan, and the ability to implement it. There is plenty of evidence that many smaller mutuals possess both of those characteristics.
I am very optimistic about the role of mutuals in general. First let’s be clear – mutual mortgage lenders are open for business. If you can forgive me for a brief mention of my own society, we have a hatchback car, brightly painted in our corporate colours, and festooned with the words, loud and clear, “We’re lending”, touring our operational area in Staffordshire at the moment. We’re a small mutual, and eager to do business. Indeed three of the top ten lenders in 2009 were mutuals, as were nine of the top 20.
Across the vast majority of our members, capital ratios, a key indicator of financial strength, increased in 2009, and reliance on the wholesale funding markets decreased. Cost ratios have been cut in almost every society, and well over half of our members have cut the absolute level of their costs. Indeed, one of the big firms of auditors, in their September 2010 analysis of the sector, noted that “cost control has been a key plus point in societies’ recent performance”.
Cost control, however, has not compromised some of the key aspects of what makes mutuals distinctive, and good for the UK’s financial services market. In March this year the BSA commissioned its latest research into consumer perceptions of service standards in plc banks and mutuals. Compared to our previous research we included many more performance indicators. We still failed to identify an area in which mutuals’ performance was inferior to that of the banks. Whether it is in relation to overall consumer satisfaction, perceptions of being treated fairly, being trusted to give good advice, offering good value for money, being given help at a time of financial difficulties, being valued as a customer, or having suggestions on improving service listened to by management, mutuals come out better than banks. At a time when there are widespread concerns among many commentators about service levels, charges and trust, building societies and other mutuals clearly have a lot to offer.
And let’s not forget that mutuals’ record on mortgage arrears is, proportionately, better than that for the mortgage market as a whole. Generally - although in not every single instance, I agree – mutuals lent more sensibly in the boom years.
So, we’re open for business, we’re getting more efficient, and we’re maintaining very high service and lending standards. What else do we offer? Linked closely to high levels of service is our democratic structure. We offer our customers - our members - a say in what we do. What about? Who is on the board of directors, for example. And, importantly, as the debate about bankers’ bonuses rumbles on, we offer a vote – voluntarily, not mandated by legislation, as proved to be necessary in the plc sector – on board remuneration policy. I don’t believe there are any other institutions in financial services in the UK that give customers a say in that crucial decision.
I could go on for much longer on the benefits of mutuals, and talk about the diversity and choice they bring to the market, at a time when there is a danger of the UK market losing these characteristics, and about the advantages of not having all our financial institutions based in the City of London, but tailoring their products for their localities, or the specific groups they were established to assist. However, I just don’t have the time, and we’re all keen to hear what Alison has to say.
Regulatory Change
Before I conclude, however, just one more major point. I cannot ignore the vast programme of regulatory change occurring at the moment that affects, or will affect almost every area of our business. In the mortgage market we’ve had the building society Sourcebook, we’re having the Mortgage Market Review, and we’re going to have the EU’s Responsible Lending policy. More onerous and expensive liquidity arrangements are already with us, and we’re having capital requirements increased, and more tightly defined. The Payments Services Regulations and the Banking Conduct of Business regulations added, last year, to the complexity of offering even simple savings products. The imposition of International Financial Reporting Standards on even our smallest members will add to costs over the next couple of years, but not significantly to the transparency or usefulness of the annual accounts issued by those institutions. And we face a complete overhaul of the regulatory system, as the FSA disappears, and is replaced by a new system with the Bank of England at its heart, and a new series of acronyms to be learnt – the FPC, the PRA, and the CPMA, all of which could potentially increase our costs at a time, as I have said, that we are succeeding in becoming more efficient by lowering costs.
Two points: first, given the huge changes in the markets we have already seen, does the regulatory revolution (and what I have listed is little less than revolutionary) represent overkill? Certainly in the mortgage market one might reasonably suggest that the MMR represents a regulatory solution to issues the market dealt with many months ago, while making it more difficult for the market to deliver the growth in lending, house purchase, and house building that the economy will require over the next few years. More generally, it would be very helpful if we, those that make up the market, could see the authorities’ analysis on the cumulative impact of the whole bundle of measures that I have just mentioned, when combined with the very different market conditions which we are likely to face in the future. Yes there were certainly examples of irrational exuberance on the part of institutions in the run-up to 2007, but there are also currently examples of irrational pessimism on the part of regulators, as they seek to address the problems of recent years in what might be a far too restrictive manner, given the need to create the conditions for continued economic recovery.
My second, and final, point is a plea to give the mutuals a level playing field as the reform agenda unfolds. Let’s build in to the new processes a proper respect for, and appreciation of, mutuals. It is crucially important for the regulators, internationally, in Europe and within what is currently the Tripartite to see mutual forms of institution as at least equal to the equivalent plc structures, and to acknowledge the differences when appropriate, rather than force mutuals into a plc straightjacket that risks compromising the very advantages that I mentioned earlier. We need a proper appreciation of the mutual need for a capital instrument that would enable them, to boost their capital ratios as necessary, and we need to ensure that the new regulatory structure does not disadvantage mutuals through high costs, or restrictions not placed on others. And we need to ensure that those institutions that failed in 2007/08 do not emerge from that failure strengthened, and almost immune to competition, as a result of the tax-payer support that enabled them to ride out the crisis.
Introduction to Alison Cottrell
That’s enough of my thoughts. In a moment I’d like to invite Alison Cottrell to the stage. Alison is Director of Financial Services at HM Treasury, responsible for teams covering a range of financial services policy issues including the mutuals sector, the insurance sector, bank lending, securitisation, financial inclusion and capability, corporate governance, payments services and competition in financial services.
Alison joined HM Treasury in late 2001, having previous been a City economist covering international fixed income and currency markets. Within the Treasury she has also worked on European economic reform and UK labour market policy, and took up her current post in 2009.
Ladies and gentlemen please welcome Alison Cottrell to the stage……..
