Does new capital compromise mutuality?

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.

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FSA building society statistics 2008

The FSA has recently published statistics relating to the building society sector’s activity in 2008. These give an indication of the response of building societies last year to the ongoing financial crisis and the deterioration in the wider economic environment.

Funding

Building societies raised £27.2 billion of funding in 2008, compared to £41.9 billion in 2007 when deposits were boosted by inflows from Northern Rock. At the end of 2008, 31.5% of the outstanding stock of building society funding was from wholesale sources. This is a slight increase on the 31.2% at the end of 2007.

Lending

Building societies made 503,000 loans during 2008, a reduction of 31% on 2007, and the amount lent, at £42.6 billion, was 43% lower than a year earlier. According to the FSA, building societies and their subsidiaries had an 18% share of total net lending in 2008, less than their 20% share in 2007.

Efficiency and Profitability

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Lords Committee echoes building societies' concerns on FSCS levies

The influential House of Lords Select Committee on Economic Affairs has echoed the sector’s concerns on disproportionate Financial Services Compensation Scheme levies and has called on the Government to make the scheme fairer for building societies. 

In its report published earlier in the month, Banking Supervision and Regulation, the Committee say “Some inequity in the levies charged by the Financial Services Compensation Scheme is inevitable. The current scheme is nevertheless clearly unfair to institutions which, like the building societies, are constrained from the riskiest business. It is also a potential source of destabilising moral hazard. The Government should promote changes to ensure that contributions to the FSCS should be at least broadly related to the riskiness of the business in which regulated firms engage. In particular, it should consider the introduction of a different basis for calculation of the levy on mutual building societies, or the creation of a separate depositor protection scheme for building societies.”

The BSA welcomes the Committee’s support, which follows appearances in front of the Committee by the BSA and Chief Executives from Nationwide and Norwich and Peterborough building societies. 

Diverse directors make up building society boards

A building society’s board of directors ensures that the society is run appropriately in the interests of its members.

Recent analysis of building society boards suggests that they are more diverse than many boards of directors of publicly quoted companies, such as banks, and show that societies draw on a wide range of professional expertise, skills and experience from a diverse set of directors to help to ensure they are run for the benefit of their members.

For example, 13.8% of all building society directors were female, compared to 11.7% of FTSE 100 directors, and just 7.0% of FTSE 250 directors.

Across the UK’s 53 building societies, there were 471 directors, of which 142 were executive directors, and 329 were non-executives. Non-executive directors are not involved in the day-to-day running of the society, but monitor the activities and strategy of the society.

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