BSA Annual Lunch, 13 November 2014 - David Cutter, BSA Chairman’s remarks
Just 25 weeks from today, on May the 7th, the UK goes to the polls for the General Election.
In preparation for this we have already seen the media gearing up, and all the political parties are putting their election manifestos together.
Today, the BSA, together with the Association of Financial Mutuals contributes to this process with the launch of our own joint Manifesto for Financial Mutuals.
This is not an academic exercise but a number of serious proposals.
They are designed to help the next government deliver for their primary stakeholders, the UK public, by supporting building societies and mutual insurers in a few crucial ways.
In summary, our proposals aim to change the legislative and regulatory landscape so that businesses which are mutually owned are considered side by side with public limited companies. Today, they tend at best to be an afterthought, or worse, receive collateral damage.
Without getting out my placard, what do we want? At the top of the list are three crucial asks:
Firstly, an explicit requirement to be placed on our regulators to set regulation which is appropriate and proportionate for different organisational forms.
Secondly, an extension to the current requirement on the regulators’ statutory competition duty to include specific consideration of the impact of regulation in fostering diversity of financial providers. And
Thirdly, removal of the restrictive barriers to raising mutual capital, making it easier for financial mutuals.
The Manifesto also calls for the lowering of the barriers to entry for new financial mutuals in line with what has already been done to facilitate new banks, plus more joined up policies to promote mutuals; create a stronger savings culture, and tackle the issue of housing.
The how is in the manifesto.
So a reasonable question at this point might be – why? Why does what we want matter?
Building societies serve over 20 million people and if we add the customers of the mutual insurers we’d be nearer 40 million. These people trust us with their finances. We know this because we ask them, and we work hard to keep their trust.
In particular, building societies support homebuyers. Our natural share of residential mortgages is 20%. But we are punching above our weight, accounting for 29% of all new mortgages, one in three for first time buyers.
For our savers we know that the ultra-low interest rate environment has made it difficult for them. But, even though absolute rates are low, many existing customers still receive rates that are higher than those available to new customers. More often than not these rates are a multiple of the Base Rate.
Of course, our banking competitors operate in the same markets as we mutuals do. But what fundamentally differentiates us is our purpose.
We operate with the same external pressures, mostly with the same regulatory requirements.
And yes driving for a sustainable level of profit is important. Our success equally depends on good governance, implementing sound strategies, and strong risk management.
But whereas the purpose of a plc bank is to maximise the return to shareholders, ours is to work for the benefit of our members and policy holders, both now and in the future.
Both purposes are equally valid, with their own strengths. Our mutual purpose isn’t soft, or fluffy, but it is at the heart of how and why our customers see that we are different when they do business with us. It also adds a crucial level of diversity into retail banking.
And why is corporate diversity so important? Yes because it gives customers a choice of different types of provider which is an additional dimension to competition. But also because it gives greater stability to the market as firms adjust through the economic cycle and ride crises when they happen.
When the credit crunch hit, the wholesale funding market dried up almost overnight. The building society sector, predominantly retail funded, has been instrumental in bringing the housing market back to life. Net mortgage lending by building societies from the beginning of 2012 to the end of June this year has been a positive £33 billion. During the same period net lending by all other lenders has been a negative £1 billion.
Let these numbers serve as a reminder of the importance of diversity in our financial systems. Today, we can celebrate and be proud of the contribution we have made to helping borrowers and the wider economy.
“…the recent reporting season has undoubtedly been a strong one for the building society sector”. This is not me saying so – that’s a quote from the KPMG Building Societies Database, an independent report published in September.
I am proud of what building societies have achieved in recent years.
But I am acutely conscious that there are several reform agendas that could gradually throttle the whole mutual sector, whether we are talking about building societies or mutual insurers.
There is very real risk of diversity being regulated out of the market.
Many of the issues we face can be categorised under the single concern of inappropriate or disproportionate regulation.
At the Skipton Building Society we have a significant change agenda, I expect you all do. We group ours under four main headings:
Our customers and proposition;
Financial strength, and
It is now seven years after Northern Rock, and the heading which makes up the largest component is regulation. And there is no change in sight...I find that frustrating.
I do also have concerns about our long term ability to attract and retain talent in our industry. What would a graduate think if he or she knew there was a consultation document over 400 pages long looking to strengthen the accountability in banking? We all know that change is necessary but let’s make it proportionate and customer-focused. It’s perhaps worth remembering that the Hippocratic Oath is less than 400 words!
On the vexed question of mutual capital, some progress has been made for BSA members at least.
I am talking particularly about the recent FPC leverage ratio announcement and the publication by the FCA of their consultation on retail capital for mutuals.
However, until we reach a complete and satisfactory conclusion, this issue remains of huge interest to the whole mutual finance sector.
I congratulate Nationwide on their pioneering work to make Core Capital Deferred Shares a reality.
But we now need that achievement to work across a range of societies. Indeed let’s have something suitable to sit in an ISA wrapper, as announced in the Budget.
And let’s not forget that our mutual insurers are still in need of a mutual capital instrument which works for them.
If the political parties adopt the policies we outline in our Manifesto, I genuinely believe that consumers will get a better deal from a more diverse, responsive and sustainable financial service sector.
Now seems the right moment to invite Andrea Leadsom MP, Economic Secretary to the Treasury to speak to us.
Her department’s responsibilities include making consumer credit markets fairer; creating stronger and safer banks; and improving regulation of the financial sector to protect consumers and the economy.
Minister, you have just heard me set out what we need from the parties and ultimately the next Government.
Just before I hand over it would be churlish not to say thank you for what this government has done.
I would point particularly to the achievements by Treasury officials in their negotiation on the EU Deposit Guarantee Schemes Directive, a massive win in relation to pre-funding for the UK and our sector. Plus the ISA rule changes in the last budget; the confidence that Help to Buy gave to the housing market; and of course the impetus put behind the Funding for Lending Scheme.