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Speech

Speech by the Economic Secretary to the Treasury, Kitty Ussher, MP, at the Building Societies Association Annual Lunch, London

Contact: Katie Errington Date: 9 Nov 2007

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Introduction

1.   As Iain said, I've been Economic Secretary for just over four months now, and I'm responsible for the Treasury's interests in the full range of financial services, amongst other things. There's been a lot to learn, and a lot to focus on. But to me, the mutuals sector has always stood out.

2.   Firstly, because of its scale. Although not all of us might realise it, 30 million of us in the UK are members of a mutual society - and the sector holds over £400 billion of assets, £315 billion of them in the building societies that the BSA represent.

3.   Secondly, because of mutuals' unique strengths. Because they're owned by members, rather than shareholders, the benefits of efficiency and innovation can be passed straight on - and mutuals financial products are consistently in the 'best buy' sections of the financial press.

4.   And thirdly, because I've always been struck by the unique nature of mutuals. They inspire a real sense of trust, and loyalty; through Credit Unions in particular, they help to tackle financial exclusion by serving markets that others ignore; and they make a special contribution to local communities. That reflects their unique history, and the sense of community from which they've evolved over the centuries.

5.   So this really is an amazing sector: unique strengths, a unique role, and a unique history - and very much a relevant and vibrant sector today. And I was delighted to find out more about one particular part of it when I travelled to Manchester two weeks ago to meet with Mark Lyonette, Dame Pauline Green, and others in the Co-operatives sector, and to visit the East Manchester Credit Union.

6.   I'm delighted to be able to speak to you here today, too. And I wanted to talk to you about the review of the Co-operatives and Credit Union legislation that my predecessor, Ed Balls, launched at this Lunch a year ago tomorrow.

7.   I still want to do that - but of course we can't ignore the events of the summer, and I'd like to start by talking about them.

Market turbulence

8.    As I'm sure you all know, the market turbulence we've seen over the last few months was triggered by problems in a section of the American mortgage market - but it's gone on to affect every major economy in the world.

9.   That, of course, includes Britain. We saw share prices fall in August, followed by the problems at Northern Rock - although it's important to remember that it wasn't direct exposure to the US sub-prime mortgage market that caused those problems, but the drying up of liquidity in the markets that the company's business model depended upon.

Lessons to learn

10.   Despite those events, our economy and our banking sector remain strong. But we do have to learn the lessons of what has happened. And as we do that, we have to remember three important principles:

First, the primary responsibility for managing risk is, and must remain, with individual financial institutions and investors;

Second, this needs to be backed up by strong national regulatory frameworks;

And third, regulatory authorities in different countries need to co-operate effectively across borders.

11.   With those principles in mind, the Chancellor set out our proposals for international reform last month - and we'll continue to work with the key international institutions, the IMF and the Financial Stability Forum, on the international response.

12.   But there are also lessons to learn at home, particularly about consumer confidence.

13.   We have, as I'm sure you all know, a Financial Services Compensation Scheme to protect customers. Since 2001, the FSCS has dealt with a wide variety of firm failures, and paid out nearly £1 billion to customers.

14.   But it was never designed to be able to deal with every potential failure on its own, or to be a crisis management tool in the event of a large-scale failure. And that contributed to the problems of consumer confidence that we saw so clearly in September.

15.   We need to address that, and as a first step, the FSA has increased the Scheme's coverage to 100 per cent of deposits up to £35,000, rather than 100 per cent for the first £2,000 and 90% for the next £33,000.

16.  However, we think that more change may be required - and so last month we published a discussion document called Banking Reform - Protecting Depositors. That document raised two particular issues: whether we need further reforms to the FSCS; and whether there is a case for preserving some critical banking functions in the event of a bank failing.

Reforms to FSCS

17.   On the FSCS, much of the debate has been focused on the £35,000 limit to compensation. That compares well internationally, and the vast majority of deposits are now fully covered by the Scheme. But the document asks whether this should be increased - and we would certainly welcome your views.

18.   It also asks whether there should be changes to other characteristics of the scheme, like reducing the length of time taken to make payments, and the scheme's funding, which the FSA has recently consulted on.

Critical banking functions

19.   The second issue is whether, in the event of a bank being in distress, some critical banking functions should be preserved for a certain period.

20.   Customers, and the wider economy, are more reliant than ever on the banking system. 88% of the UK's adult population now has a current account, and we are increasingly reliant on payments systems that enable banks to operate ATMs and direct debits; customers to withdraw money, receive salaries and pay bills; and companies to pay salaries and settle invoices.

21.   The questions that the document raises are whether there is such a concept as 'critical banking functions'; if so, which functions are so critical to the modern economy that they should be provided in the event of a bank failing; and for how long. We would also, of course, have to consider how those services might be provided.

Consultation

22.   All of these questions - on the FSCS and on critical banking functions - are clearly both difficult and important, which is why it's so important that we work together to get the right answers. The discussion document is the start of that process, and the closing date for comments is the 5 December - and I'd urge those of you here today, and the BSA's membership more widely, to contribute to the debate.

23.   The next step will then be to consult on a set of proposals in the new year - and the Chancellor has committed to bringing legislation forward next year if that proves necessary.

24.   We are ready to take action quickly if we believe that change is needed, but we do want the fullest possible consultation with everyone involved first - and I can assure you that we won't be rushing into heavy-handed reforms that we'll later regret.

Co-operatives and Credit Unions legislation review

25.   As we deal with the issues of the summer, though, and as we respond to the lessons that we've learned, we can't lose sight of our other priorities - and so I'd like to return now to another consultation, this time on the Co-operatives and Credit Unions legislation.

26.   As I said at the start, mutuals have a long history - but some of the legislation that governs the sector is a little too historical.

27.   Over the last ten years, we've removed some of the restrictions to mutuals, and helped them to compete on a level playing field - giving mutuals more flexibility in their membership, for example, and the ability to offer ISAs.

28.   And Sir John Butterfill's Private Members Bill, which was passed last month after receiving Government support all along, will provide a useful update to the Building Societies legislation - in particular giving building society members parity with other creditors in the unlikely event of a society winding up.

29.   But the Credit Unions Act is nearly thirty years old, and the legislation for Industrial and Provident Societies hasn't been reconsidered since the 19th century.

30.   So last year at this Lunch, as I said at the start, Ed Balls launched a review of that legislation - and in June, we published a consultation aimed at identifying the restrictions that limit co-operatives and credit unions from competing with companies.

31.   We were delighted, and very grateful, to receive nearly 200 responses to that consultation - which I think showed your commitment to helping the sector grow, and perhaps also the extent of the need for change.

32.   We're now analysing those, and next month we will publish a second consultation on specific proposals. As I announced in Manchester two weeks ago, those will include allowing co-operatives to communicate with their members electronically, removing one of the out-dated restrictions that can limit them.

33.   And we also intend to relax the membership qualifications for credit unions, by working with the FSA to include tenants and employees of housing associations within the common bond of existing credit unions. That will enable mutuals to provide their services to a wider range of people, and allow them to make an even greater contribution to tackling financial exclusion.

Conclusions

34.   Those proposals will move towards our vision of it being as easy to set up a mutual as a company; continue to remove the barriers to mutuals competing fairly in the marketplace; and make it easier for mutuals to tackle financial exclusion.

35.   And they will continue our support for the sector to thrive and grow further - because we recognise its importance, and the unique role and strengths that I talked about earlier.

36.   I hope that you'll be part of that process, because as with the questions about the FSCS, and critical banking functions, we need to work together to find the right answers.

37.   So my message today is simple. These are important issues - for the Government and for you. We want to hear your views, and we look forward to hearing them. So I'm very grateful to you all for listening me this afternoon - and we're certainly ready to listen to you.