Events
Speech
CHAIRMAN’S ADDRESS
Text of a speech by Graham Beale, Chairman, The Building Societies Association and Chief Executive, Nationwide Building Society To the BSA Annual Conference, Manchester, 5 May 2010|
Date:
5 May 2010
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Introduction
Good morning everyone and a warm welcome to the BSA’s Annual Conference here in Manchester. For those of you who do not know me I am Graham Beale and I have had the privilege of being Chairman of the BSA for the last 12 months. Before I share some of my own observations on the events of the past twelve months, I want to open the event by saying how pleased and encouraged I am to see so many of you here today, during what is such an incredibly busy time for us all. This year we have put together an especially compelling series of events so I am confident that your time will be well spent and you will leave the conference tomorrow informed and refreshed and ready to vote.
I would like to make one or two thank you’s and acknowledge the support we have received for this year’s event. Firstly to our speakers – We have 15 chairmen and chief executives of institutions, representing the very large to very small, plus a wide range of technical experts. Knowing many of them, I can assure you that their addresses over the next two days will be thought provoking, interesting and relevant to your businesses and you will be able to participate in the debates as they unfold.
Second, many thanks to our exhibitors for showing continued faith in the building society sector. I encourage you to spend time with them at the exhibition to discuss your business needs and the services that they offer.
Finally, I would like to thank our sponsors. A special welcome goes to Credit Suisse, our lead sponsor for the first time this year, and I would also like to offer our many thanks to Aviva for sponsoring today’s lunch, Bank Machine for sponsoring tonight’s reception and conference dinner, Deloitte for sponsoring tomorrow’s business breakfast and Legal & General for helping to provide tomorrow’s lunch. And for those of you who were here last night, can I also extend my thanks to Benenden Healthcare as the sponsors of last night’s drinks reception in the offices of the Manchester Building Society.
Central messages
Today I want to cover a number of issues which I believe are of significant importance to the continuation of a thriving and successful building society and mutual sector.
Firstly, I will discuss the economic and market conditions which continue to exert pressure on our sector and I will reflect on our performance and also what lies in store.
Secondly, I want to talk about the strengths and benefits of the building society sector and the importance of its role in the financial services industry.
Thirdly the timing of this conference is unique being only hours away from the General Election. It would be remiss not to reflect on the three main parties attitudes to the building society and mutual sector more generally
And finally I will reflect on the dramatically changing regulatory landscape, the impact that these changes will have and the response that I believe is required by both the sector and the Tripartite authorities.
Economic and Market Conditions
Holding a successful conference, with good levels of attendance, sponsorship and exhibition sales is a small mark in itself of the resilience of the building society sector in these difficult market conditions. We will have plenty of analysis of those conditions in the next session and the housing market session later this afternoon, but there are one or two key points I would like to emphasise.
It is now fairly clear that building societies, for the first time for 50 years at least, are operating against a background of declining levels of owner occupation in the UK, that percentage having peaked in 2003 at 71% and fallen for the remainder of the past decade to a current figure of 68%.
Housing market activity, as you will all know, has also fallen sharply, although I am constantly surprised by the number of people who fail to realise just how sharp that reduction has been – from net mortgage lending across the entire market in 2005 of a £100 billion a year to just £12 billion in 2009. While many industries have been affected by the recession, few have seen their markets for new business collapse by 88%.
Similarly, in the savings market new deposit flows, which were averaging £70 billion a year pre-crisis, fell to £28 billion last year a drop of 60%.
My final indication of the dramatic change affecting our markets comes from the data about mortgage equity withdrawal published by the Bank of England only a few weeks ago. In the middle part of the last decade, about half of all net mortgage lending eventually left the housing market and was available for re-investment elsewhere in the economy contributing, on average, a 6% boost to households’ post-tax incomes. By 2009 the situation had totally reversed with equity withdrawal amounting to minus £22 billion, equivalent to 2% of post-tax income not available for expenditure elsewhere in the economy. This 8% turnaround is both a symptom and a cause of the wider economic recession.
So given this market context, I am particularly proud of what building societies and the wider mutual sector have achieved in the past two and a half years and the resulting display of strength that this performance fully justifies. Against a background of financial instability, market uncertainty and recession; in an landscape of collapsing banks, forced takeovers and full and part-nationalisations; and competing in an environment of Government subsidies, taxpayer support and market distortion, building societies – and other deposit taking mutuals – have at the very least held their position. With the sole exception of the Dunfermline Building Society – the taxpayer support for which represents a tiny fraction of the support given to the banking sector – the building society sector has ably looked after itself. Stronger building societies have absorbed those that made mistakes in the run up to, and during, the recession and other mutuals have voluntarily joined forces to strengthen their proposition and increase fair competition in the retail market. And although there has been intense pressure on margins caused by the continuation of unprecedentedly low interest rates, societies are still collectively profitable and indeed some societies have had and exceptionally strong year reporting robust levels of profit and a growth in their balance sheets.
Despite an inability on the part of most societies to access the Special Liquidity Scheme and the Credit Guarantee Scheme operated by the UK authorities, funding pressures of unprecedented magnitude have been absorbed and managed. However, while congratulating ourselves on this achievement we must remain vigilant to preserve future funding. We may face further market distortion as some of the banks refinance to repay SLS and CGS funding over the next two or three years, and the unwinding of a wide range of private sector borrowings as they mature. I must emphasise this - funding will continue to be a key issue and as well as the need for the sector to plan ahead, it is imperative that the authorities continue to work with the financial services industry to preserve market stability and effectively manage these funding challenges as they develop.
Let me add a word or two on mergers. Some commentators mistakenly write about a contraction of the sector whenever there is a merger, giving reference to a “dwindling” number of societies. I don’t see it this way. Rather, the merger process has strengthened, rather than weakened, the sector. All of the largest building societies, including my own, have been involved in merger activity over the last two years and have strengthened their institutions as a result.
While I am certain that there will always be space for well run national, regional and local building societies, the precise number of building societies is far less important than the strength of the sector as a whole, the real competition that this creates both within the sector and with the plc banks and the customer benefits that emanate from this.
So all told quite an eventful year for us but certainly not the disaster some were predicting twelve months ago.
Strength of mutuals
So what is it about mutuals that make them so resilient? Our ownership structure is fundamental to our strength and to our success. With only the needs of our members to consider, building societies and mutuals can focus on providing consistently good value, operate in a fair and honest way and provide an excellence of service which is the envy of our competitors.
Before the beginning of the credit crisis and then again in Autumn 2008, the BSA undertook research which showed that the customers of building societies regarded the service that they received as much better than the equivalent service from the banks. That research has been repeated this Spring; the results were published last week and I am delighted to confirm that, despite all of the pressures to which I have referred, building societies remain firmly in the lead on what is now an extended range of measures.
The benefits to the customer of the mutual approach to business are clear for all to see. Building societies and other mutual deposit takers lead the banks by very significant margins on measures such as offering good value for money, treating customers fairly, being trusted to give good advice, offering help in the event of financial difficulties, being responsive to feedback and valuing individuals as individuals. There is not a single measure of consumers’ attitudes that puts the banks in the lead!
General Election
A few words on tomorrow’s election. The three main political party manifestos reveal their views and plans for mutuals and co-operatives, both within financial services and wider public services.
The Labour Party notes the value of building societies and the strength and diversity that a healthy mutual sector brings to financial services. The Party says that they will consider a mutual solution as one option for the disposal of Northern Rock, while ensuring that the sale generates maximum value for money for the taxpayer. Labour also commit to consulting on measures to help strengthen the building society sector.
The Liberal Democrats assert “mutuals, co-operatives and social enterprises have an important role to play in the creation of a more balanced and mixed economy’’. The Party will seek to turn Northern Rock into a building society and pass a new Mutuals, Co-operatives and Social Enterprises Bill to bring the law up to date and give responsibility for mutuals to a specific minister.
The Conservative Party sees mutuality as the way forward within public services and pledge to support co-operatives and mutualisation as a way of transferring public assets and revenue streams to public sector workers; essentially employee-led co-operatives. The Conservatives also have the most radical approach to the governance of future regulation with the proposed amalgamation of the FSA into the BoE, a proposal re-asserted by David Cameron in last week’s television debate by the three party leaders.
Whilst I hope that the Conservatives will extend their support for mutuals in public service delivery to the financial services industry, it is encouraging to see all three manifestos pledge support for the mutual sector.
Over the last Parliament we have heard many warm words spoken in praise of mutuality and I would urge all three parties to deliver on their election pledges with concrete actions, and support the mutual sector by amending the FSCS and modernising the Building Societies Act.
Reforming financial markets
I want to come on to my final point of today, which is the significant number of regulatory reforms being proposed for the sector. Just before Easter, HM Treasury published its paper, “Building Society Capital and Related Issues”, which I thought provided a very useful summary of some of the key issues. The paper was a welcome output of the work of the Expert Group, established by the Treasury following the publication of its White Paper, “Reforming Financial Markets”, last July. The Expert Group has provided some very useful output and thinking on capital instruments for building societies, on corporate governance, on shared services and on pooled funding and I would like to thank everyone connected with that process for the generous amount of time they have spent examining all of these issues. Furthermore, I would especially welcome the commitment by HM Treasury to look carefully at how the impact of VAT on shared services can be reversed.
Of all the reforms being contemplated, the proposed changes to capital are the most difficult to resolve and have far reaching consequences on the mutual model. As member-owned organisations, we do not pay dividends to equity shareholders and we do not concentrate on equity shareholders’ requirements. This means we can take less risk, retain a greater share of profits and still offer better pricing to our customers and, as I have already noted, provide much higher standards of service.
There has been reaction from regulators across the globe to increase the quality and quantity of capital held by financial institutions. Around 85% of building society capital is of the very highest quality – it is retained profits. However, modern mutuals need to be able to proactively manage their capital base, and have traditionally used PIBS for this purpose. Although the BSA has a strong legal opinion that PIBS meet capital definitions, the FSA is not prepared to accept that PIBS count as either Core Tier 1 Capital or Tier 1 Capital in the future.
One of the interesting developments of the recent past has been the innovation shown by societies such as the West Bromwich, the Yorkshire (following its merger with the Chelsea) and the Newcastle, in developing the concept of profit participating deferred shares along with a contingent version of this instrument. However, it has yet to be proven that these instruments can be used in any situation other than the restructuring of a balance sheet and it is therefore clear that whilst this innovation will be helpful in particular circumstances, it is not the universal answer to the replacement of PIBS.
European and UK regulators have developed a definition of capital which encompasses four key characteristics:
- Fully loss absorbent in a going concern situation
- Permanent
- Subordinated; and
- have an un-capped distribution mechanism
It is this final point, the desire to have variable distributions i.e. to pay dividends which cuts right across the mutual model and compromises the interests of our members. It contradicts the fundamental premise that a mutual exists for its members, not for equity shareholders.
We will continue to work to find a solution. The regulatory landscape is complex comprising, the UK’s own tripartite (each of which have subtly different views on the solution to this dilemma), the Basel Committee on Banking Supervision, the Committee of European Banking Supervisors and a range of agencies connected with the progress in Europe of the Capital Requirements Directive, especially the document known as CRD 4.
I have recently returned from meetings in Brussels to discuss the definition of capital with those charged with amending CRD4. It is very clear that they attach significant value to the contribution of the mutual sector, the mutual ethos and the diversity the sector brings to the financial landscape and it is not their intention to undermine or minimise the mutual sector.
And in the UK the Treasury’s capital paper states that building societies must be treated with parity of esteem to banks when applying principles on capital quality to building societies.
I am therefore very encouraged to see such support and feel confident that between Europe and the UK we will find a way of addressing the capital needs of the sector without compromising the mutual business model.
To achieve this, the mutual sector must be regarded as a distinctive, proper, complete sector in its own right. We should guard against amended versions of capital instruments designed for the plc sector but which introduce to the mutual sector the instability that led to the destruction of many of the plcs in the first place.
Other regulatory challenges
Although capital is top of the regulatory priority list, it is not the only area in which new regulations have been introduced. The BSA’s current regulatory checklist contains over 30 regulatory initiatives ranging from governance and compensation arrangements to the distribution of financial products. I am sure you will be relieved to hear that I am not going to talk about every single one of these, but I do briefly want to mention the Mortgage Market Review and the Building Society Sourcebook. It is essential that these two important documents are coincident in their intention, their design and, most importantly, their outcome. We are grateful to the FSA for their participation in our technical workshop on the Sourcebook later today and we will continue to engage with the FSA on the Mortgage Market Review.
Finally, it is disappointing to report that we are no further forward than we were a year ago in our calls for a revision to the Financial Services Compensation Scheme. Because proportionately, we have more retail funding than any other group of institutions in the UK; then perversely we have to pay disproportionately more for the failure of banks based in Bingley and Iceland. This is a moral hazard that must be corrected. It is not right that the prudent pay for the mistakes of the imprudent. The BSA, and I am sure many other societies, will all be keen to play an important role in the review of FSCS funding to which the FSA is committed to undertake over the next year or two.
More generally, I and many others hold a concern that the intense level and wide range of regulatory activity in the last two and a half years could have a range of unintended consequences, which must be kept under very close observation if we are not to suffer perverse outcomes in the near future.
There is no doubt that higher and better quality levels of capital, higher and purer levels of liquidity, extended funding maturity profiles and more stringent conduct of business requirements will improve and strengthen the financial market place. But with all this change there must be balance and awareness. There is a real danger of regulatory overshoot the full consequences of which are difficult to predict but will almost certainly result in increased costs for consumers. I trust the tripartite have their collective eye on this issue and I look forward to the results of the quantitative assessment currently being undertaken in the UK.
Conclusion
So, in conclusion, set in the context of an unprecedented market environment, squeezed margins, unfair competition from heavily subsidised competitors, severe dislocation of funding markets (including intense competition for retail savings) and a rapidly declining mortgage market, mutuals have maintained extremely high levels of service, have resolved problem cases without material recourse to the taxpayer, have benefited less from Government funding schemes than their competitors and as a sector have remained resilient, contributing to the diversity of financial services and continuing to provide a competitive and real alternative to the banks.
There is much to be proud of in the building society sector: our unique ownership structure makes us inherently prudent and solely focused on the needs of our customers. We offer great value and outstanding service. We have survived the financial crisis thus far but we must learn from the crisis and evolve our societies to adapt to the changing world and the more onerous regulatory environment. Building societies and mutuals are, to quote from one of Nationwide’s advertisements, Solid, Stable and Dependable. We may be reassuringly boring but this is just what our members want!
Thank you for your support and attention. I wish you an enjoyable, interesting and informative conference. Thank you.
