Building Societies Association
In mid-June the Financial Services Authority announced a new form of core tier one capital for building societies, offering societies new opportunities to enhance or replenish their capital resources - Profit Participating Deferred Shares (PPDS).
The issuance of the new capital has provoked a healthy debate within the building society sector about the extent to which the traditional mutual model has been compromised by the new form of capital. After all, up to 25% of the profit of a society can now be allocated to PPDS holders; this group of investors share some characteristics of ordinary share investors in a plc. Arguably, a society issuing such deferred shares now has to generate profits to meet the expectations of these investors, compromising the traditional ability of a society to concentrate solely on the needs of its members – its savers and borrowers. Moreover, opponents of the change point out that the markets for existing forms of marketable capital - sub-ordinated debt and PIBS - have been damanged by the change.
Those supporting the change point out that there are also substantial advantages for members of a society which is issuing PPDS. Firstly, the core tier one capital ratio of the institution is strengthened. This means that members’ funds are more secure and are backed by more loss-absorbing capital than was the case before the issue of the PPDS. In today’s febrile financial world, this is an important advantage.
Members are also better off, it is argued, in that in the short to medium term the payments to be made to the new PPDS holders are likely to be lower than the interest payments payable to those same people in their former guise as holders of subordinated debt. Furthermore, each holder of PPDS has only one vote, as a member, irrespective of the value or number of PPDS held – a clear contrast with the plc sector, where institutions can buy voting power in the market.
Finally, it is notable that the PPDS announcement was made in the same week as the announcement of the disappearance from British high streets of all the branches of Abbey, Alliance & Leicester, Bradford & Bingley and Cheltenham & Gloucester banks – albeit that some of them will be retained under a different name. One of the casualties of the current recession is consumer choice. Whatever the outcome of the debate on the appropriate forms of capital for building societies, the retention of as much consumer choice as possible in the new market conditions will be welcomed by many commentators.
An extended version of this article appears in the July edition of Mortgage Finance Gazette and can be viewed via the link below -
