Events

Speech

BSA Conference 2008 - Chairman's Address

Contact: Charlotte Bell Date: 8 May 2008

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Where to start!

A year ago when I was listening to Matthew’s conference speech, I was already thinking about what I might be saying twelve months on – perhaps reciting the traditional list of societies many impressive achievements, and talking about how well we had all fared in an increasingly competitive environment.

I wasn’t, it has to be said, expecting to be commenting on the transformation of the landscape we have seen take place since last July. A transformation which started, in a public sense at least, with queues out the door at the Northern Rock, and culminated in the Bank of England making available £50 billion of liquidity to try and maintain at least some semblance of momentum in the mortgage market.

Twelve months ago the conversations we had at our conference were, as they have been for a number of years, about mortgage margins, asset growth, market share, diversification and TCF.

They were not about liquidity, funding, mortgage queues, cutting back on lending criteria and the potential for greater mortgage arrears.

But those are the conversations we are having now, which goes to demonstrate not just the extent to which our markets and our priorities have been stood on their head over the last 12 months, but also the astonishing rapidity with which it has happened.

And there is clearly is no going back.

The last 12 months have been a potent cocktail of liquidity issues, confidence issues, regulatory issues, political issues, credit issues and capital issues.

What we have yet to see, but soon will, is the extent to which all of these will impact on the wider economy, and it is that which could well turn out to be the most decisive phase of all for our industry.

Whilst we may now have seen the worst in the credit and capital markets, in my view, it is likely to take 18 months to two years for confidence to return fully, and even those markets will emerge are very different to how they have been in the last five years. 

I think it is fair to say that as a sector as we watched events unfold last summer, we did so initially perhaps with a degree of the detachment, and even bemusement. Northern Rock’s loss was our gain as customers took their savings from them, and gave them to us – and it looked like it was mainly upside for us.

Since then there has clearly been an appreciation that no one is immune from the effects of the liquidity crisis and the credit crunch, and that we too will have to adapt to changed circumstances.

But, as much as the environment will present fresh challenges to societies, individually and collectively, it will fundamentally present us with real opportunities – perhaps the kind of opportunities we have not had since the conversion era, to move the sector forward to the benefit of our members – and the promotional role of the BSA in leading that agenda will, in my view, be critical - a theme I will return to in a moment, but first I want to talk a little bit about the BSA and its activities.

Quite obviously, the major role the BSA has had to play this year has been responding to, and managing the events of the last 12 months. That has included managing the public positioning of the sector, and it has also meant ensuring that our voice has been heard by the tripartite authority, at a time when the sheer scale of the issue would have made it very easy for our interests to be neglected.

In PR terms it has been a difficult balancing act. At the outset we were very clear that we did not want to do or say anything to further undermine public confidence – nothing would have been gained by exacerbating an already fragile situation. As time has progressed, not only have we done an excellent job at not walking into any elephant traps – and there have been plenty of those – but we have progressively and very effectively sought to go more on the front foot as the opportunities to do that have grown.  I personally think we have got the balance right, and that the BSA team have done an excellent job in representing us.

We have also been in constant dialogue with the FSA, with government and with the Bank of England.

From the events of the last year there are clearly lessons for everyone in financial services. It is always more tempting to point out the lessons other people should learn than it is to focus on one’s own, and that is a temptation that  I am not going to resist!

From a regulatory perspective, my own view is that the answer to what has happened does not lie in more regulation and more rules badged as principles. Very little in the FSA’s own Internal Audit report into the Northern Rock suggested it didn’t have enough rules. It seems to me, it was more about how they were applied – or not in this case – and crucially about the quality and continuity of the supervisory teams involved. We all have a clear interest in an efficient and effective regulatory regime – more rules don’t create that – better, more experienced people do. And I make that purely as a general point, because I do think that there are some tremendous individuals within the FSA working on building society affairs.
 
As far as the Bank of England’s role is concerned, many of us have had, I believe, considerable sympathy with the ‘moral hazard’ concerns so frequently expressed. However, I also believe that very early on these became comprehensively outweighed by the potentially catastrophic risk of systemic failure. I welcome the latest intervention through the £50 billion special liquidity scheme. It will not in itself solve the credit crisis, it certainly isn’t going to reverse all the changes in lending policies we have seen in recent months, or restore mortgage lending to its former levels, but it should help to underpin confidence. It is vital for the Bank of England to remain very close to what is happening in markets, and it should not hesitate to intervene further and extend the facility if that is what is needed.

And for the government a clear leadership role is required. There are clear and still unresolved tensions between a government which wants us to free up lending and keep making credit available, a regulator which wants us to hoard liquidity and capital and a central bank which is concerned about moral hazard. It is for the government to make sure the tripartite arrangements are more effective and better co-ordinated. I think we should also welcome and work with the government on its work to look at long term funding structures – at the very least to make sure that any solutions are available to building societies – there would be a huge and frankly unacceptable irony if the part of the market which had contributed least to the problems, became competitively disadvantaged by the solutions.

So in all of this, how have we done as a sector.

Clearly we entered troubled waters in a fundamentally sound vessel.

Societies generally are well capitalised, highly liquid and prudent businesses.

No society has anything like the reliance on wholesale funding that Northern Rock had and indeed a number of other major mortgage banks still have.

As a sector we have high levels of consumer trust, a trust built on delivering value to our members. The sector dominated the best buy tables again last year, collectively we delivered more than £1bn member benefits, and we consistently outscore the banks when it comes to quality of service.

That is one of the reasons why societies’ net receipts in 2007 were over £16 billion – the highest figure ever, and almost double the figure in 2006. This impressive performance has continued into this year, with net inflows in January and February the highest in 10 years, and the figure for March the highest ever for that month.

Interesting to note as well that in the first quarter of this year, societies share of net lending was up from 19% in 2007 to 25% in 2008 – in a difficult market, and contrary to popular misconception we are continuing to lend. Though you could be forgiven for thinking otherwise, every single society was active in the residential mortgage market last month.

But clearly there are lessons in what has happened for all of us.

Perhaps the most important reminder that have events have served us, is just how fundamental trust is to our businesses and to our sector; how fragile trust is; and how difficult and expensive it is to restore when it’s lost. And the process of maintaining trust has become far more difficult in world with inherently greater scepticism about institutions.

Through generations, building societies have been exceptionally good at generating and keeping the trust of our members, and we have done that fundamentally by running businesses which ultimately have our members interests at their hearts.

Throughout the last two centuries at least, we have proved that the building society model is not just resilient but can prosper in even the most demanding of circumstances.

And the circumstances we are facing now are more demanding. The economy has already started to slow, the housing market has weakened quite markedly and consumer confidence is precariously balanced.

My own view is that a resilient jobs market, and low and falling interest rates will protect us from the kind of recession that we saw in the late 1980’s and early 1990’s, and that a slowdown and gradual unwinding of some of the imbalances we have seen build up over the last 5 years is the more likely scenario.

And actually, as long as it happens in that way, and the end result is a more sensible mortgage market and a more sustainable housing market, then in the long run we should welcome it.

Whatever the scenario, societies are very well placed to succeed. We will clearly have to focus on running our businesses in a lower growth and higher risk environment, with all that entails, but for me the most important priority will be to go on focusing on the needs of our savers and borrowers, above all else.

In my view that should be the core purpose of any mutual, and we should pursue it with absolute conviction and confidence. And I say that as a society, whose own FSA supervisor once queried whether the board was concerned that we didn’t seem to be growing at the same rate as Northern Rock

But what of the future for the BSA.

Obviously we have a full policy agenda, and there will be a lot of new regulation to contend with.

But beyond that I firmly believe that the BSA has reached a defining moment in its own evolution. It has the opportunity to take a big step forwards, and I don’t believe it has the option of standing still.

The fundamental priority which the BSA must address, indeed has started to address is how to promote ourselves far more effectively and far more assertively.

The need to do this has become acute – despite the higher trust levels we have as societies, there is still a lot of customer confusion out there, and, as we have seen, once the finance sector hits the front pages there is no shortage of commentators to offer a damaging and often only partially informed view.

Circumstances have presented us with a once in a generation opportunity to re-establish our differentiated position in the post-conversion era, so that consumer awareness and perceptions of the sector match what we actually deliver to our members. It is something which we have debated at length during the year and I believe we have a greater collective appetite for this now than we have had for many years.

We have taken the decision to invest substantial resources in the promotion of the sector, and begun that process. The challenge now is develop an agenda with real creativity and vision. We have to be willing to take risks to do this.  A lowest common denominator approach will simply not work.  And most powerfully of all, we have to be seen to speak for our members as well as for societies. A lowest common denominator approach will simply not work.

My personal view is that we also have to think very carefully about how the BSA represents our interests on the mortgage side of our businesses. I am sure a lot of outsiders would think it bizarre that the BSA has so little to say about something which is so integral to our purpose, especially given the focus which is likely to be on the housing and mortgage agendas in the years ahead.

In and amongst this there will plenty of other priorities, but the central challenge as I see it is to make the BSA as effective an advocate for the sector in the consumer arena as it is in the policy arena. And if nothing else the fate of Northern Rock should give us the courage of our own convictions. That is a clear challenge to the leadership of the BSA, but equally to the sector itself.
 
I would like to finish by offering some thank you’s. Everyone of my predecessors pays tribute to the BSA team, but it is only when you see it up close that you really see the quality and ability of the team, and the regard in which they are held both inside the sector and by those with whom we deal.

This year has been exceptionally demanding, but they have risen magnificently to the challenge.

In particular, this will be the last conference attended by Chris French as a member of the BSA’s staff.  Chris joined us in 1982, and his meticulous, careful, planned approach, his eye for detail, and his willingness to work long hours for the BSA, have benefited all of us since that date.  Chris is one of the industry’s experts – in some cases the only industry expert – on a range of prudential matters relating to capital, liquidity, financial reporting and tax, and building society legislation. Chris is retiring.  On behalf of all societies can I thank Chris for his huge contribution to the success of building societies in recent years.

I would also like to thank all the speakers at the conference, and all those who contributed to it.

And I would like to thank my colleagues on the Council. We have had some interesting and challenging debates during the course of the year. They have all been constructive and held in good humour, and I would like to thank them for supporting me in my year of office.

Finally I would like to thank again all the sponsors and exhibitors.

Finally like to wish John good luck. Given the agenda we have, couldn’t be in better hands.

The final speaker at last year’s conference was Hamish McRae,  the economist from the Independent newspaper. He raised then what he regarded then as the remote possibility of a global economic meltdown, and I remember vividly making a flippant remark to handing over just that legacy to John, well John all I would suggest to you is that you are slightly more careful than I was in choosing your closing remarks.