Good morning. I’d like to start by adding my welcome to David’s.
Welcome to you all – BSA members, associates, our sponsors, our regulators and our guests from other trade and professional bodies.
And a bit like the guest who arrives at a dinner party, and thanks the hostess for a wonderful evening before it has started – can I also thank the whole team that have worked tirelessly to make this conference happen – and to make it the great event that we all hope it will be.
You may recall that last year’s conference was opened by a Scot called David who was expecting the call-up to Old Trafford. I bet David Webster’s glad now that he didn’t get the job! Well, my name is Robin. And to be clear, I didn’t used to play for Arsenal.
I must admit to some trepidation this morning. Having been leading the BSA for less than six months, I am the first to recognise that you all have far more experience and expertise in the building society sector than me. So if I get stuck, will someone out there please step in and help out!
That is actually one of the characteristics of the sector that has really struck me since I started getting to know you last summer. The real deep friendships and camaraderie that run right through the building society movement. The deep commitment to mutuality, to running our businesses in the genuine interests of our members.
There is a huge positive will to succeed – a will that I believe extends to our politicians and to our regulators.
Which brings me to the main theme that I want to explore today. A theme which runs through many of the sessions at this year’s conference:
“What is the financial services sector that we want for the UK in 20 years time?”
“What are the steps that we need to take now to have the best chance of achieving that outcome?”
In other words, what is the legacy that we of this generation are going to establish for our children? Or looking round parts of the room, our grandchildren?
If we are going to have any real success in answering either – or preferably both of these questions – we are really going to need your input, your expertise, your active support.
Why? You may say. Trading is strong. The sector is fine. We currently have around 20% of both the cash savings and residential mortgage markets. Building societies last year wrote more than 100% of the net mortgage market. The number of societies may have fallen – but our market share is steady, even rising in some markets.
Some of you have suggested that the sector would be better placed with further consolidation.
I worry. It is part of my job to worry. When consolidations happen, they tend not to be perfect. There tends to be leakage. We have seen this in the recent past with Britannia and Kent Reliance.
I worry that regulation, by its nature, tends towards creating regularity, uniformity, commonality, even homogeneity. That, ultimately, can lead to new, unintended concentrations of risk.
At the heart of my question is: Are you going to let the future happen to you? Or are you going to take an active role in trying to mould what the future looks like?
So coming back to the first question – what is the financial services sector that we want for the UK in 20 years time?
Personally, I would like to see a financial services sector that is characterised by:
- Diversity of business model
- Diversity of ownership type
- Strong competition
- Continual innovation
- Well capitalised
- Sustainable and resilient
Which truly focuses on great consumer experiences and outcomes. And is deeply embedded in its communities.
And I fear actions which are often taken with the best of intentions by our policy makers and regulators. Driving us inexorably down the path of sameness, whether we are talking about the products available to consumers or the providers around to serve them.
If the financial crisis taught us nothing else, we must learn the lesson that concentration risk is dangerous and that from diversity comes strength.
I fear an environment in which different business models, non-vanillla lending, product innovation are seen as non-conforming and treated with suspicion.
I fear an ever increasing tendency towards a single corporate structure, a monoculture driven by the need to be able to raise capital rapidly and the anti-competitive constraints on non-corporate entities being able to do so.
I fear a legislative and regulatory regime that makes it ever more difficult for smaller businesses, to flourish. In which the barriers to new entrants become ever greater.
I fear a situation where it becomes increasingly difficult, if not impossible, to deliver a great consumer experience and outcome, so tied up in regulation are we that we cannot deviate from the script.
This may appear to be a bit black and white. It is intended to be.
Better I think to look into the abyss, and then up to the stars, than to settle into blinkered complacency. Or as my old French teacher used to say when we made those elementary mistakes…
“And the Heffalump was walking along, humming a little song and looking up at the sky wondering if it would rain and so he wouldn’t see the Very Deep Pit until he was halfway down, when it would be too late”.
So how do we avoid the Heffalump Trap? Remembering, of course, that it was actually Pooh and Piglet who ended up at the bottom of it!
In a financial services and, particularly, banking sector that is characterised, fairly or unfairly, by greed, ego, appalling conduct and a real lack of integrity…
We have an opportunity to secure a sustainable competitive advantage from having our members and customers right at the heart of our businesses. As we believe, mutuality for us is not an ownership technicality, but a way of doing business that recognises member ownership.
This is not being rose-tinted. It is that firm belief that has seen building societies grow and flourish in times of plenty and times of crisis – that if you really look after your customers, then business and profit will follow.
I was struck the other day reading parts of the history of the Ipswich Building Society - about how they responded in the 1940s as the first bombs began to fall on properties on their mortgage book.
Some people continued to live in homes that had been damaged but were in need of repair. Others had to move out while repairs were done. In both circumstances the society advanced extra money to pay for the repairs. Could we and would we do that today?
We often say to our prudential and conduct regulators that whilst we may sit on opposite sides of the table, we have a true common purpose. We will have vigorous debates and, at times, real disagreements about specific policies and regulations.
For our part, the purpose is to see building societies as a strong and flourishing component of a truly diverse and competitive banking sector.
So we agree that building societies should be well capitalised, consistently profitable. Should exhibit great behaviour and really strong governance. All motherhood and apple pie, and very easy to say. In this challenging post crisis business environment, how much harder to deliver!
And what is the role of the BSA in all of this? Our strategic review, the first phase of which we completed in March, was focused in large part on the BSA’s mission to support the sector to tackle some of the big issues that are facing us all.
And to campaign relentlessly for recognition that consumer and market interests, as well as our own, are best served by having strong, independently-minded mutual players in the banking and financial services sector.
- We will continue to provide outstanding individual support to all BSA members
- We will campaign and advocate relentlessly on behalf of the sector
- We will work closely with regulators, politicians and officials on matters that impact positively or negatively on the building society and financial mutual sector
- We will continue to build alliances in support of our cause, both in the UK with other trade bodies, with our associates, with think tanks, and of course, with our members.
- And in Europe through our membership of the European Association of Cooperative Banks.
But, I don’t think that is enough. We have also agreed with the BSA Council that we will start a number of work streams designed to help support sector development in this new economic and regulatory environment.
I would like to talk briefly about three of these:
Firstly - Governance
A number of commentators have asked whether the troubles at the Co-op signal an end to the cooperative movement. In fact, as we have seen, the number of cooperative, employee owned and mutual businesses in the UK continues to grow. The model is far from bust¹
A view echoed by Sir Christopher Kelly in his report published last week, where he said that “it is the particular model of governance adopted by the Co-operative Group and bank which manifestly failed not the co-operative ideal in general.”
The likes of John Lewis, mutual insurers and our own building society sector have far more conventional looking governance structures. We are able to recruit specific talent and skills to building society boards. We are able to seek out the sort of diversity which study after study tells us contributes so positively to the success of businesses. Talented, committed individuals with a mix of backgrounds and skills who have the intellect and rigour to challenge and ask the right questions.
The Approved Persons and forthcoming Senior Persons and Certification regimes add a level of additional rigour to the process. And I am delighted that our regulators are the first to agree that the drive for diversity on building society boards should be reflected in the way SIF interviews are approached.
Too often in the past, when building societies have got into trouble, poor governance was a significant contributing factor.
We have long had a BSA guide to the voluntary application of the UK Corporate Governance Code to building societies. We all “have regard” to the Code in our annual reports. I do not think that is sufficient in the world we live in today.
The current environment and understandable focus on corporate governance is helpful.
In my view there is a genuine opportunity for building societies to stand out from the crowd in the future for the right reasons. With distinctive governance which goes beyond having regard to what is basically a code designed for plcs.
We can argue for hours and days about the pros and cons of external shareholders, hedge funds, activist investors and agencies.
Will Hutton, writing in the Observer the weekend before last lamented the loss of long-term investors and the rise of “non-owners” – the hedge funds or multibillion global asset management groups that don’t so much own companies as trade their shares like casino chips. His words.
Whether forces for good or not, absent external shareholders and activists, weakness in governance in the financial mutual sector will fall to our regulators to deal with.
This summer the BSA team will, therefore, start a fresh review of what excellent and distinctive corporate governance looks like in today’s building society world.
We will, of course, involve you all, members, regulators, associates. We will consider carefully the background, such as changes to the regulatory rules on senior managers and others, and the next review of the UK Corporate Governance Code.
Our aim is to provide an up to date practical guide, that reflects our cumulative experience and wisdom. Tailored to the specific challenges of running successful mutual businesses year in and year out. And about what really good governance looks like in practice.
Secondly – I want to talk about Capital for Mutuals
Nationwide’s issue of Core Capital Deferred Shares last December will be seen as a milestone – the first issue of Core Tier 1 compliant capital by a building society in the UK post CRD4. A fantastic achievement, but not something, as it stands, most smaller societies can immediately copy.
The costs of issue, finding the right investor base, ensuring adequate liquidity, and coping with the imposition of arbitrary minimum lot sizes are all challenges that individual societies will have to work through for themselves.
But it is a great start.
And we particularly welcome the Chancellor’s announcement in this year’s budget that CCDS will be eligible to be included within stocks and shares ISAs.
The BSA has been working on securing the scope for a CRD 4 compliant core tier 1 instrument since 2009.
And particularly since 2012 on how the CCDS model might be applied far more widely in the sector.
The first step was the BSA’s commissioning, and rolling out, of model rule amendments to cater for the issuing of CCDS. Many of you will recently have adopted those rule changes at your AGMs.
The next step, which we are already working on, is to challenge the arbitrary, inconsistent and anti-competitive regulatory approach to CCDS being sold to retail investors. It is early days and this will remain a challenging project.
But in an era when prudential regulators place particular emphasis on firms being able to raise core capital at short notice, we view this project as an essential part of our support for the sector.
Another question that I am asked quite frequently is when or whether a new building society will be created? Isn’t it about time? Will the Ecology go down in history as forever the youngest in the line? I sincerely hope not.
The generous among you say that starting up a new building society today would be a formidable challenge. Others say it would be practically impossible.
We can have new challenger banks, peer to peer lenders, crowd funders and new credit unions, so why not new building societies as well?
The ability to raise mutual capital would be a key component. Whether for a start-up or for the mutualisation of an existing firm.
And thirdly – I want to talk about Regulation
One of the things that has really struck me coming into the sector relatively recently, is that all the talk we have about proportionate regulation tends to be interpreting regulation that has been developed primarily for a multinational and corporate banking model, proportionately to a mutual model.
I think we should be talking far more about appropriate regulation.
What I mean by that is regulation that recognises the value of a financial services sector that is truly diverse.
That is far more resilient and competitive by having a diversity of business model and ownership structure. And therefore a regime that actively permits or enables that diversity rather than restricts it.
And one of the fears that I have about regulation of all sorts is that it tends towards homogeneity. It tends towards trying to create entities that are the same. That can be compared with each other. That look alike. That are actually easier to regulate.
What we really want, if we are to have a resilient sector come the next crisis (and there will be one – whatever it looks like) is a huge diversity that, in a crisis, has the opportunity to respond and react in different ways and to different degrees.
As Sir Richard Lambert rightly identified in launching his report in March:
Regulators can punish wrong doing, but they find it hard to legislate for what constitutes good behaviour.
A bit like your driving test!
Something we might explore with Clive Adamson tomorrow.
So, to start drawing things to a close, let’s return to the question I posed about 20 minutes ago. What is the financial services sector that we want for the UK in 20 years time?
- A sector that is trusted and respected
- Puts customers’ and members’ interests first
- That is strong, diverse, vibrant and with a strong mutual component
Our work is cut out.
As the American comedian Lily Tomlin said “the road to success is always under construction”.
The BSA with a team of 27 can do only so much on your behalf and on behalf of the sector. How much more can we achieve with the active contribution of the 39,000 people who work in our 45 member societies? How much more again with the additional support and contribution of our Associates and friends.
And, as we are in Manchester, the new home of the BBC, in the words of that great broadcaster, John Ebdon² , “if you have been, thank you for listening”.
¹ Kelly himself said this in his report "my comments on governance should not be interpreted as a criticism of the co-operative model or of co-operative principles and values for which I have a great deal of respect. It is the particular method of governance adopted by the Co-operative group and bank which in my view has manifestly failed not the co-operative ideal in general."
² Ebdon presented Archive Feature on the Home Service and Radio 4 from 1961 to 1987. He also presented the archive-based Nonsense at Noon on the Home Service, 1965-66. "His facetious patrician tones every third Monday morning, his sense of the absurd, his ear for a word mistakenly taken out of context, his famous cat Perseus, delighted much of middle England as much as it infuriated a small minority."