Events
Introduction
It is with great pride and pleasure that I welcome you to this annual Building Societies Association conference, held here in Birmingham for the first time for 15 years. We are delighted to be able to return to the birthplace of the building society movement, over two centuries ago, to celebrate the successes of building societies over the past year or two – I can assure you that even in the very difficult markets that we have experienced there are some successes to celebrate. But I also want to acknowledge the challenges that we face and give you some thoughts on how mutuals can seize the moment and strengthen our position in UK financial services.
First of all some thank yous. I am delighted to see so many delegates here – many thanks for taking time out of what I am sure for all of you are busy diaries to attend what we believe to be a very interesting event. I would also like to take this opportunity to thank the exhibitors – and to encourage delegates to visit the exhibition. It is a mark of the esteem in which the BSA conference is held to note that, once again, the exhibition is sold out. I can assure you that a visit to the exhibition will be well worth while during your two days here in Birmingham.
I would also like to thank the sponsors. I am grateful to the Coventry Building Society for their generous sponsorship of the reception yesterday evening. For the second year running our overall conference sponsor is Credit Suisse and we are very pleased to be able to work with them. Our lunch today is jointly sponsored by Allen & Overy and Genworth Financial. Tonight we will enjoy a networking dinner sponsored by Sun Life Direct, part of AXA Wealth. Tomorrow Deloitte, for the twelfth time in a row, will be sponsoring breakfast for many delegates, while we have lunch courtesy of Legal & General tomorrow. The BSA is extremely grateful for all the support we receive from our closest partners in putting together what we think is a very powerful showcase for all that is special about our sector.
Finally, of course, I must spotlight the outstanding quality and broad diversity of speakers that we have attracted to the event this year. I think we have 18 chief executives, chairmen, founders or editors of the various organisations for which they work. I can promise you a set of stimulating speeches which will convince you that your time here at this year’s Conference was well spent and extremely worthwhile.
Business Conditions
Ladies and Gentlemen,
In his opening speech at last year’s event my predecessor, Graham Beale, emphasised the very difficult business conditions within which building societies and other mutuals operated in our core savings and mortgage markets. Matters barely improved at all during 2010. Owner-occupation continued to decline so that it is now down by around 3.5% points since its peak in 2003; indeed, the overall percentage of owner-occupied households in England now stands at the same level as 20 years ago - a sobering statistic for those of us expecting to see owner-occupation inevitably and gradually edge upwards. The idea that, year by year, more and more people will own their own homes is over for the time-being.
Both gross and net mortgage lending fell sharply. This will not be a speech peppered with statistics, but the extent of the decline cannot be adequately appreciated without quoting a few numbers. On average, between 2003 and 2007 gross lending across the entire lending industry amounted to £313 billion a year. In 2009, the figure fell to £144 billion, in 2010 to £136 billion. Net mortgage lending was just over £100 billion a year in the five years to 2007. In 2009, it fell to £12 billion and in 2010 to £9 billion. There is little sign of an early recovery, although in the first quarter of 2011 net lending was 7% higher than the first quarter of 2010. The mortgage market is a long, long way from returning to any form of normality, although I must say I am encouraged to read of the number of building societies keen to improve their mortgage lending performance during 2011.
I won’t burden you with too many statistics on developments in the savings market; suffice it to say that the market remains much smaller than in the pre recession days. One recent development that has been distinctly unwelcome is the decision of the coalition Government to reverse the previous Government’s policy of giving National Savings & Investments a zero funding target – in other words to refrain from competing with building societies and other mutuals in the retail savings market. We were disappointed to see that in the budget the Treasury announced that National Savings - backed by the tax-payer and able to design its own tax-free products - would be seeking to take £2 billion net from the savings market during the current financial year. This is money that banks and building societies could otherwise have been lending to first time buyers and other borrowers.
Continuing on that theme, I was interested in, and partially supported, the remarks of the Prime Minister when he was speaking at a “meet the people” meeting in Leicester earlier this year. He made the point that some lending in the past – was simply inappropriate; he gave the example of six or seven times incomes and 120% of the value of the property. I agree with this. He also added that lenders seemed to have swung too far the other way and lamented the absence of loans up to 80% of the value of the property or four times the salary.
I applaud the Prime Minister’s sentiments but it is important to draw attention to the regulatory constraints and government actions that will make it more difficult for us to contribute to the Prime Minister’s vision of the housing market moving again. I have already mentioned the National Savings initiative which will reduce the funding available for the mortgage market this year. In addition, we have the significant uncertainty created by the FSA’s Mortgage Market Review, the new Building Societies Sourcebook that limits the amount of high loan to value lending that building societies can undertake, the requirement to generate additional capital to meet new EU and international standards, and the need over time to replace the entire stock of issued capital as these new standards have moved the goalposts on what counts as capital.
These points are illustrative of a wider truth, as we contemplate the actions that may be taken by the new Financial Policy Committee. It will not be easy to marry together the natural demand on the part of politicians and, similarly, good quality potential borrowers, to have reasonably priced loans that enable the housing market to thrive again, while at the same time meeting the concerns of regulators determined to prevent the emergence of a further credit boom with all the difficulties that are associated with such a development. Financial stability is not cost free, nor is meeting government borrowing targets, and may affect other targets that society as a whole regard as important.
Having said this, building societies remain determined to play their part - I have already alluded to the plans of many societies to increase their lending. The BSA will also play a small part later today. We have a conference session on how to help that group of individuals whom we used to refer to as first time buyers. There will be contributions from the funders of the buy-to-let sector, from the housing association sector and from the building society sector. The BSA itself is showing on its exhibition stand the prototype of a website that it has developed to enable housing associations, developers and lenders to come more closely together to be able to fund, build and manage shared ownership initiatives. The BSA is also working closely with the National Housing Federation to develop the mortgagee protection clause on shared ownership lending. This should reduce the very high apparent LTV that the FSA insists is attributed to lending of that nature, due to its interpretation of the relevant European directive.
I know that these are not huge developments but they will, nevertheless, if successful, be important as part of a tapestry of measures that we need to assemble to get the market moving again. To quote our most successful UK retailer – ‘every little helps’.
Protecting Vulnerable Members
Before returning to my main theme of markets and regulation, I would like to divert at a brief tangent now and talk about one particularly unwelcome consequence of the current tough economic climate – the increase in levels of crime against elderly and vulnerable account holders. This is something that we know that BSA members take seriously so I am very pleased to confirm in this speech the BSA’s continued support for the Trading Standards Institute’s national banking protocol on safeguarding vulnerable adults from rogue traders. Trading Standards are exhibiting at this conference and I would urge everyone to visit to see how the protocol can help to protect our vulnerable members. This is a very worthwhile initiative.
The Political Climate
Against what generally remains a hostile business climate, how are building societies and other mutual deposit-takers performing in both political and market terms? Our leading mutual deposit-takers have recorded sharp increases in profitability compared to 2009. Indeed those of the largest twenty building societies that have so far declared their results are showing a doubling of profits compared to 2009 – and I can certainly confirm that many of our smaller members are trading successfully too!
In the mutual model this narrow success indicator would not normally be a matter for congratulation. Indeed, building societies have often emphasised over the years how we are not profit maximisers. In today’s climate, however, where regulators and consumers insist that institutions demonstrate continued and transparent business success, it is essential that mutuals are seen to be efficient, viable and profitable businesses – able to demonstrate financial strength in a way that convinces regulators and market participants, including members. Indeed, if we cannot show this then we will struggle to implement those other indicators of success – commitment to our communities, high service levels to our customers, and provision of keenly priced products in the mortgage and savings markets. So, in the current climate, I certainly make no apology for celebrating BSA members’ business success. At the same time we need to consistently emphasise that mutuals did not cause the banking melt down, and have survived it in general terms without seeking taxpayer support. Whatever vulnerabilities have been exposed in the mutual sector over the past few years, they bear no comparison to the catastrophic collapse of large segments of UK banking institutions.
It is notable that our success has, for some time, been catching the attention of politicians. The coalition agreement establishing the Conservative/Liberal Democrat Government last May contained a commitment to “foster diversity and promote mutuals” as a way of ensuring that the UK’s retail financial markets become more competitive and responsive to customers’ needs. Before the election, Lord Myners, Financial Services Secretary in the previous Government, said in the House of Lords that he was “very happy to confirm the Government’s absolute commitment to the concept of mutuality, a form of ownership which has served its members well and has been free from much of the scandal and mischief that we have associated with the plc model in the financial services sector”.
I have been pleased to see this year that the Early Day Motion in the House of Commons calling for the remutualisation of Northern Rock is being supported by MPs from a wide range of political parties, including the three largest.
Elsewhere, the interim report published by the Independent Commission on Banking – the Vickers Commission – made the point that regulators should take care that prudential requirements do not result in the unintended consequence of reducing consumer choice and business diversity by rendering certain business models, such as the mutual model, unviable.
This general support is, albeit slowly, translating into policy. The Government’s February consultation document “A new approach to financial regulation: building a stronger system” records the Government’s intention to ensure that the consultation requirements for both the PRA and the FCA must include a special cost benefit analysis of how new proposed regulatory rules will effect mutually owned institutions differently to other ownership models so as to assist the regulators, the public and the Government in understanding whether the legislative framework continues to treat diverse financial business models appropriately.
This is welcome. We would like to see further tangible steps taken to bring to life this stated political support for mutuals. The first is for the Government to facilitate the return of Northern Rock to the mutual sector. What more powerful signal of commitment to its policy of corporate diversity in financial services could there be than that? The second would be to help us resolve the issues that remain in the development of a replacement capital instrument for mutual lenders, which is, as Graham Beale described last year, important for the long term prosperity of our sector.
Regulatory Revolution
We ought not to underestimate the enormity of the change which is taking place in the regulatory structures surrounding our – and to be fair our competitors’ - activities. The abolition of the FSA and the creation of the Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority represent a seismic upheaval in the regulatory system. We welcome the strong focus that each of the new regulatory bodies will have on particular aspects of the regulatory process. On the other hand, we are concerned about the accountability, especially of the Bank of England which will have huge powers under the new arrangements. The Governor of the Bank of England – whoever that person is – will be Chairman of the Monetary Policy Committee, the Financial Policy Committee, and the Prudential Regulatory Authority, as well as overseeing the Special Resolution Regime, and the integrity of the payment system.
This concentration of power makes its essential that the new arrangements work effectively, efficiently and with appropriate democratic accountability. We know from the earlier consultation document produced by the Treasury last July that smaller mutuals should expect an increase in their ongoing regulatory costs. The new regulatory authorities must do their utmost to address this by ensuring that costs are appropriately controlled, that rules are applied proportionately to smaller businesses, that the diversity of business models is respected and that there is appropriate dovetailing of domestic regulation with international and European regulation. We also need to work hard to ensure that the unfortunate impression given that the new FCA will not take firms’ concerns as seriously as consumer concerns by its designation as a “consumer champion” will be properly addressed.
Having said this, we have been left in no doubt from recent speeches by senior people at the FSA that a tough, interventionist, judgemental based approach on conduct of business issues is intended from the FCA. It is up to building societies and mutual deposit-takers to convince the regulators that their activity in this area should be directed towards their competitors in the market rather than to us. I have to say to this audience, however, that there will be an even greater onus on directors of all institutions, including mutuals, to be able to articulate and promote both to regulators and consumers, the particular business strategy that their institution is pursuing in the light of the economic, political and regulatory environment within which we all operate.
Vision
That environment is currently more threatening for building societies’ competitors than it is for us. Mutuals have been subject to nothing like the vitriol reserved for our banking cousins since the near collapse of the system two or three years ago. As you will have noted I am keen to offer others’ views of our performance, rather than making the obvious points myself, and I was struck by the conclusion of a Financial Times journalist writing last September. The story was headlined “Building societies refuse to roll over” and the first sentence read “For a sector deep into one of the worst downturns in its 150-year history, UK mutuals are showing few signs of surrendering.” How right that journalist was, even if she missed about 75 years off our history!
In the light of the position of our competitors, the resilience we are clearly demonstrating to the outside world, (and I have used just one of the many similar opinions expressed that would support that view) and our fundamental business ethic, mutuals have a tremendous opportunity to emerge as even more successful businesses in the future. Frankly, if we cannot seize this moment and demonstrate a distinctive, robust, customer-focussed alternative to the banks, then we may well look back with regret on any prevarication or lack of resolve.
We know that mutuals are committed to operating for the benefit of members and communities through offering good value for money products, excellent service and a commitment to building up trusted relationships at both individual and community level. We need to do that in a sustainable manner; mutuals must be efficient, profitable, prudent and well capitalised. We are, and can be, different from the plc, banking sector but we should resist conveying the impression that somehow we operate in an uncommercial, woolly, unaccountable fashion. We must remain committed to good corporate governance, engaging members in our activities and committing ourselves to the diversity of the communities from which we are drawn. We must have an open and honest organisational culture and in this respect I would like to personally record my support – and this is not BSA policy necessarily, as that is yet to be determined – to the principles set out in the recent Davies Report which looked at the representation of women on firms’ boards of directors. This report was aimed solely at quoted plcs, but there is much in it that will resonate in the building society and wider mutual sector. Building societies’ boards contain a higher percentage of women than those of plcs, but the gap is narrowing and we need to be able to be in a position where we don’t undermine our arguments about being representative of the communities we look to serve. I know that this is a concern to some building society members and it is one that I think we need to properly address. Mutual boards need to utilise all the talents at our disposal and a blend of skills, experience, background and gender will give us a contemporary platform to excel in the 21st Century marketplace.
Let’s not hark back to some mythical golden era for building societies, instead let’s combine the traditions and values that mutuals are rightly proud of with the values and adaptability of a modern, customer focussed business. In conclusion, let me say that I am very optimistic about the outlook for the mutual sector; I hope you already know that! There will always be issues that we need to address. Our product offerings, our behaviour, our corporate governance, the environment in which we operate will never be perfect.
The very quotable Peter Drucker once said that “strategy is not about forecasting the future; it is about understanding the future implications of today’s decisions”. The decisions we make now will shape the mutual sector for many years to come, I believe those decisions should be bold and confident. As we look around and see our banking competitors trying to mimic the way us mutuals do business, we need to strive to be consistently distinctive and more in tune with what the customer wants.
The disgrace within which our competitors are now held, many of whom owe their very existence to taxpayer subsidy because they were unable to stand on their own two feet, gives mutuals the opportunity of a lifetime to gain people’s trust and to prove that they are relevant, indeed essential, to the age in which we live. Many external commentators agree with that view. Our job now is to ensure that increasing numbers are persuaded to that view. I believe that we are pushing at an open door.
Thank you.
