Policy
Building Society-specific Proposals
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49. Some of the CP's proposals specifically relate to the building society sector, as follows –
(i) Chapter 3 makes proposals to ensure that building societies have similar access to liquidity as banks (by exempting funds provided by the Bank of England from the calculation of the proportion of building societies' funding that arises from wholesale funding) (see paragraphs 3.55 – 3.58 and A.85 – A.92)
(ii) Chapter 3 also proposes to give building societies power to grant floating charges to the Bank of England (see paragraphs 3.59 – 3.62 and A.93 - A.100).
(iii) Chapter 4 proposes that there should be similar 'rescue' tools as proposed for banks (directed transfers, bridge banks and bank insolvency procedure) available to use for building societies (see paragraphs 4.56 – 4.64 and A.162 – A.163).
(iv) Chapter 4 also confirms that the Government will bring forward secondary legislation - under the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 - to ensure that, in the unlikely event of a winding up of a building society, the liabilities are applied equally to creditors and members (see paragraphs 4.66 – 4.68).
50. As noted above, the BSA does not believe a sufficient case has been made for us to support some of the far-reaching proposals (notably, SRRs) in the CP and, as far as any of the building-society specific proposals are integral to them, the support set out below applies only if the decision is ultimately taken to introduce SRRs.
(i) Access to liquidity
51. While the BSA believes that building societies follow a safe business model (see above), we also believe (as also stated above) that the Authorities should examine potential threats to financial stability as widely as is both practicable and reasonable. It would be inconsistent with that position if we were not to support the proposal in paragraph 3.57.
52. Section 7(3) of the Building Societies Act 1986 specifies certain items that may be disregarded in calculating the funding limit, including 'own funds', certain sums deposited with the society etc. By section 7(7-8), the Treasury may modify section 7(3) by, among other things, providing for particular liabilities of undertakings to be disregarded. The BSA supports the proposal to add to this list funds provided by the Bank of England. This would sensibly place building societies on par with banks in this respect and, as the impact assessment states (at paragraph A.91), have a positive impact on competition.
53. We note that relevant provisions will be made by the Building Societies (Financial Assistance) Order 2008, currently before Parliament.
(ii) Power to grant floating charges
54. The CP correctly notes that the restriction on building societies granting floating charges was intended to protect members from the risk that secured lenders might exercise an inordinate degree of control over the society in question (paragraph 3.60). We also agree that, in relation to the general business activities of societies, there is no strong case for removing the prohibition.
55. We agree with the CP that it would be sensible to create a small exception whereby building societies could create a floating charge in favour of the Bank of England only. This would, as the CP states, allow the Bank of England to grant liquidity to a building society, in the unlikely event that a society should ever need it from the Bank. Again, this would create a pro-competitive level playing field with the banks. The only risk we can envisage is that stated in the CP at paragraph A.100, but we agree that the risk is of an extremely limited nature.
56. We note again that relevant provisions will be made by the Building Societies (Financial Assistance) Order 2008, currently before Parliament. We are pleased that the Order will ensure that societies will not need to amend rules or memoranda.
57. However, as with all the proposals set out in the CP, unforeseen consequences should be guarded against. We understand that, some societies' contractual documents in respect of wholesale borrowing prevent a society from issuing a floating charge, and this matter needs to be addressed.
(iii) 'Rescue' tools
58. The FSA already has powers, outlined in paragraphs 4.59 – 4.60 of the CP, to direct a transfer of a building society's business. We acknowledge the limitations on that power referred to in the CP. Once again, we believe it highly unlikely that the powers would ever need to be used, but recognise the good sense of putting banks and building societies on broadly the same footing with regard to this matter. We believe that, in the event of such problems, a directed transfer to another building society would be the most likely option, but we recognise that – in very extreme circumstances – this might not happen.
(iv) Winding up of a building society
59. Paragraph 4.66 proposes that an order should be made to ensure that, should a building society be wound up, any assets available should be applied equally to creditors and members. The mechanism for this now exists under the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007. The BSA's settled policy is in favour of pari passu for creditors and members in the unlikely event of a winding up and we support the Authorities' proposal.
