Text of the speech by David Cutter, BSA Chairman and Chief Executive, Skipton Building Society
My Lord, Ladies and Gentleman. Welcome to the BSA Annual Lunch, and firstly a big “thank you” to Legal & General for sponsoring today’s event. We will be hearing from Dr Mike Smith, L&G’s Strategy, Change and Governance Director a little later.
It’s been a long time coming, but five years after Lehman Brothers it is pleasing to see growth returning to the economy and an improvement in business confidence.
Whilst nearly all sectors are at last enjoying an upturn, GDP growth cannot be put down to net exports - which we had hoped for - nor government investment - which we knew would be constrained. But the economy is at last being helped by a turn in the credit cycle, where more lenders are willing to lend, and more companies and consumers have the confidence to borrow.
In the UK residential mortgage market it has been building societies that have been at the vanguard of renewed growth. Today we can celebrate and be proud of the contribution we have made to help stir the housing market back to life.
Before I comment further on our sector I would like to take this opportunity, in front of his friends and colleagues from the societies he has represented with distinction for the last 34 years - 20 of them as the BSA’s Director-General, to pay tribute to Adrian and thank him for his contribution and leadership of the Association for so many years.
Adrian has witnessed enormous change in our sector, including the break-up of the building society cartel in the early ‘80’s (those must have been grey days), the withdrawal of Sterling from the European Exchange Rate Mechanism; carpet-bagging, and the disastrous outcome from the demutualisations around the 90’s; to the recent global financial crisis.
I am sure you would like to join me in thanking Adrian for his support and commitment to the BSA over so many years, and to wish him well for the future. Thank you Adrian.
Adrian still has two weeks left as Director General. Then he will be succeeded by Robin Fieth, as Chief Executive. Robin’s current role is Executive Director, Members & Operations at the Institute of Chartered Accountants in England and Wales (ICAEW).
I know he has made great efforts to meet many building societies in recent months, but for those of you who have not yet met him, and would like to know who to make a bee-line for afterwards, may I ask Robin to stand and make himself known?
Finally, whilst on the subject of farewells, I would like to make special mention of Chris Martin, CEO of the Tipton & Coseley Building Society, who will be retiring at the year end. He joined them from school 43 years ago and has been their Chief Executive for more than 25 years.
Tipton & Coseley is a great example of a local building society keeping things simple and doing them well. I read with interest Chris’s parting interview with Mortgage Finance Gazette, in which his messages were:
- To those who run building societies: don’t be greedy
- To those who regulate building societies: be proportionate
- To those in power who wish to see a diverse finance sector: deliver tangible support as well as fine words.
Wise messages, Chris, all the best for the future and welcome to Richard Newton who will be filling your shoes from the end of the year. (note Richard Newton has been Finance Director at the Tipton since 1991)
Ladies and Gentlemen, standing here today I sense a mood of measured optimism throughout our sector. And this is a view supported by external commentators, such as KPMG, who said in their recent 2013 Database publication that “taken as a whole, the results of the building society sector paint an optimistic picture of an industry returning to ’business as usual’ following the stresses of the recent financial crisis”.
It is true that challenges remain, and there is currently lots of publicity and parliamentary scrutiny surrounding a particular mutual at the moment. But I don’t want to dwell on the affairs of one institution today.
I mentioned that mutual lenders have been at the vanguard of the renaissance of the UK mortgage market. During the first nine months of this year, mutuals have increased gross lending by 28% compared to the previous year, taking 29% of the UK market against a natural market share of 21%.
But it is at the net lending level - after redemptions and repayments - and the figure which measures the growth or otherwise in total outstanding UK mortgage balances, that shows how successful and important the mutual sector has been in supporting the country’s residential mortgage market.
During the same nine month period, net UK lending in total has grown by £6.8bn. Mutuals have grown their mortgage books by £12.4bn whereas the same figure for banks shows a contraction of £5.6bn.
Let this serve as a reminder for those who question the need for diversity in our financial system. It will always be folly to put the whole of the financial services sector’s eggs in the “plc basket”.
Choice is important to consumers. This year, mutual lenders have accounted for the whole of the growth in the market, and considerably more - just as they did last year.
We wait with interest to see what impact the Government’s Help to Buy: Mortgage Guarantee Scheme will have upon the market. I make the observation that so far no building society has signed-up to the scheme, whereas all the major banks and a few challenger banks have done so.
I question whether such a scheme was ever needed by building societies, many have been consistently lending in the lower deposit space for months and some for years.
This year, one in every three loans by a mutual lender has been made to a first time buyer, accounting for 31% of the whole FTB market. 29% of these loans were made at 90% loan to value or above.
And there are no signs whatsoever that our performance has been based on reckless lending. As Standard & Poors said last year “building societies survived the financial crisis in better health than the UK banking industry as a whole, grounded on franchise stability; prudent management and customer deposit-based funding profiles”.
Since we met here last year, and typical for the UK, we seem to have moved from the language of“mortgage famine” to cries of “house price bubbles and over-indebtedness”. The reality lies in the grey area in between.
Yes, the number of property transactions is up but we are still running well below the historic average.
Yes, in this part of the world, house prices are rising strongly, but for most regions in the UK they are rising modestly, and remain below their 2008 peak.
One thing that does worry me about Help to Buy is the confusion that exists amongst consumers and some pundits, who are muddling up elements of the two schemes or believing in benefits that don’t exist at all.
A recent survey amongst active first time buyers and home movers showed that 43% didn’t understand the scheme benefits, with a decent minority believing wrongly that they could borrow more; that their monthly payments would be lower; or that they were protected by the scheme if they couldn’t make payments.
Ultimately, the only thing that that will be a counter-balance to unaffordable house prices, the factor that locks so many first time buyers out of the market, is to build more homes. There has been a modest uplift in new housing starts, but nothing yet approaching what we need. In their turn house-builders blame the planning system, something over which Government has control. Whatever the block or blocks are, this is something that must be resolved if our growing population is to be housed.
A major policy initiative which has had a profound effect on the markets in which we operate is the Funding for Lending Scheme. This has clearly helped to turn the credit cycle, ultimately benefiting lenders’ capital.
But I am acutely conscious of the impact the scheme has also had on the returns for savers. Some of you would argue that the associated increase in various asset prices has helped them. But this is of little benefit to savers who are so reliant on cash deposits.
Savers remain the bedrock upon which our lending industry is based, and it is therefore vital to encourage and foster a long term savings culture.
Which is why the BSA is submitting various proposals for consideration by the Chancellor in his Autumn Statement, on December 5th, to further encourage saving and to help redistribute the tax burden. We are again calling for a rise in the subscription limit on Cash ISAs to equal that on Stocks and Shares ISAs; and to permit transfers from Stocks & Shares ISAs to Cash ISAs; to allow Child Trust Funds to transfer to Junior ISAs; and to introduce an incentive for savers who take out their First ISA.
There are also many non-financial metrics where building societies lead; consumer trust, customer satisfaction, and complaint handling - as demonstrated by the uphold rates at the Financial Ombudsman Service - to name a few.
And next Tuesday the BSA will be publishing a new report showing how actively building societies participate, and how important they are, in local communities and regional economies in terms of lending, employment and community activities.
I remain optimistic about the contribution that mutuals can make to the growth of UK financial services.
But challenges remain, none more so than how the authorities extricate the markets from the unprecedented central support which exists at present: quantative easing, ultra low interest rates, Funding for Lending, and the end-game for Help to Buy.
Our plea remains for proportionate regulation and the avoidance of unintended consequences. An example of this is leverage ratios where we hope that the UK authorities will adhere to the sentiments and approach expressed in the EU’s Capital Requirements Regulation. The BSA supports a moderate leverage constraint as a backstop, but with suitably differentiated limits of the Leverage Ratio based on different business models.
And finally, there is a plea on another matter which could have a huge impact on our sector over the next decade. And which brings me nicely to the introduction of our guest speaker for today, Mark Neale, Chief Executive of the Financial Services Compensation Scheme.
Mark has previously worked at the Treasury, the Home Office, the Department for Work and Pensions, and the Employment Service. He now leads a body that plays a major role in ensuring financial stability in the UK.
All building societies absolutely recognise the importance of a scheme that protects consumers and underpins financial stability in our market place. But the cost of providing this must be fair and proportionate.
We are still paying dearly to clear-up the mess of the last financial crisis. And if EU authorities are too aggressive with their plans to introduce a pre-funded scheme to build-up a pot to pay for the next crisis then it will be a major drag on future lending growth.
Over the last two years, building societies incurred P&L charges of £217m due to the FSCS; equivalent to almost a quarter of post tax profits. That’s a big pill to swallow for a sector that is reliant on self-generated profits to improve capital.
Last year, 61% of societies charged more against their profits for the Financial Services Compensation Scheme than they did for mortgage losses.
Most of the current charge is to pay for the interest due to the Treasury on the outstanding loan it has made to FSCS, most of which arose in 2008 as a result of the demise of Bradford and Bingley.
As a levy payer, I find the absence of any legally constructed Credit Committee to be very frustrating. There is therefore a huge responsibility on the FSCS to fairly represent the interests of all levy payers.
But the Banking Reform Bill introduces a new duty on the FSCS “to have regard to minimising public expenditure” in connection with its borrowings.
Renegotiation of the interest rate charged by the Treasury is likely to commence next year, and must be concluded by April 2015.
Personally, I would interpret any increase in the interest rate currently charged as a further tax on savers.
Ladies & Gentleman, thank you for joining us today. I hope you would agree with me that building societies are having a good year, and have played a vital role in breathing life back into the mortgage market.
BSA Head of External Affairs
020 7520 5926