We welcome the opportunity to comment on this latest consultation on revising parts of the handbook inherited from the old Financial Services Authority. We are focusing our response on the building-society specific questions.
The Prudential Regulation Authority proposes to replace the guidance in the building societies regulatory guide and the building societies specialist sourcebook respectively, with two new supervisory statements “Exercising certain functions under the Building Societies Act 1986” (Appendix 2c) and “Supervising building societies’ treasury and lending activities” (Appendix 2d).
While PRA supervisory statements may not have the same status of rules, they are in many cases, in practice, treated as such – by the regulator, and by the firm. But when the PRA proposes a change in rules, the changes are clearly shown. This has not happened with the proposed supervisory statements on the material in the building societies’ regulatory guide or sourcebook. Section 1.5 of the paper says merely, “… the rules proposed in this CP do not represent a policy change; they are, in substance, the same as the rules currently in the Handbook”. There is no way of knowing what changes have been made (apart from the numbering), even if they are only minor. Few firms (or trade bodies) have the resources to compare the different versions line by line – even if very small changes are proposed, these must be highlighted to stakeholders.
Building societies’ regulatory guide
When the Financial Conduct Authority and the Prudential Regulation Authority were created, the whole of the building societies’ regulatory guide (BSOG) was assigned to the FCA, and all but BSOG 1A to the PRA. In practice, the majority of BSOG is relevant only to the PRA as the prudential regulator for building societies, rather than the FCA. Material in BSOG is crucial to building societies (and regulators) as it spells out the sector’s distinct governance, ethos and operations.
In line with its policy of placing existing and new guidance into supervisory statements, the PRA has proposed removing the material from BSOG and turning it into a supervisory statement. We support this move – so long, of course, as no material changes are effected during the transfer – and welcome the PRA’s openness in keeping the material clearly in the public domain. Before making the supervisory statement final, we would urge the regulator to proof read the document fully. There are a series of minor errors and typos in the consultation paper, some old and others newly introduced.
Building societies’ specialist sourcebook
Guidance in the building societies’ specialist sourcebook came into force on 1 April 2010. At the time we urged the then FSA to review (i) the need for separate guidance just for building societies and (ii) the content of the guidance 12-18 months after implementation. That never happened. But now the PRA has stated it will review the treasury and lending supervisory statement (the former specialist sourcebook) in 2015 and consult on any changes at a later date.
Before launching into the detail of the review, we urge the PRA to question if such separate guidance is truly necessary. 2009, when the sourcebook was drafted, is a wholly different place to 2015 and beyond. European directives such as capital requirements, regulatory reporting and recovery and resolution and domestic legislation like the mortgage market review that apply to the whole banking sector have taken hold. Much of the sourcebook material on liquidity will have to be substantially revised as part of the move to a liquidity coverage ratio and the move away from a simplified approach. Even a footnote saying the current text will be superseded would be useful.
We would like the PRA to set out why separate guidance on treasury and lending is necessary and why it applies solely to building societies. At the very least, we urge the PRA to explain why other firms involved in residential lending are not bound by the guidance. As the regulator knows well, several in the sector believe that the sourcebook is anti-competitive.
To ensure any future review, whatever the scope, has maximum effectiveness, it is imperative the sector is fully involved well before any consultation paper is written, let alone published. That way, misunderstandings can be identified, discussed and dealt with.
And finally, some minor errors have been spotted.
The Building Societies Association represents all 44 UK building societies. Building societies have total assets of over £330 billion and together with their subsidiaries, hold residential mortgages of over £240 billion, 19% of the total outstanding in the UK. They hold over £240 billion of retail deposits, accounting for 19% of all such deposits in the UK. Building societies account for about 28% of all cash ISA balances. They employ approximately 39,000 full and part-time staff and operate through approximately 1,550 branches.
23 January 2015
 In paragraphs 3.15 / 3.16 of the supervisory statement references to the OFT and to the Competition Commission are now both out of date as both bodies ceased to exist on 1 April 2014 and their functions were transferred to the new CMA.
Footnotes 26 - on page 11, and 28-30, on page 12, are in the wrong place. Footnotes 28-30 should be brought forward to page 11, and are then only needed once.
In several places, references to monetary amounts lack the pound sign. For instance, in paragraphs 2.12 to 2.14 on page 3, these should read £100,000. Similarly, in paragraph 3.113, reference should be to £100.
In several places, the apostrophe - indicating the possessive - has been omitted. See middle of paragraph 2.28 which should read "board's freedom of action" and repeatedly in paragraph 2.38 - the sense requires "directors' ".
Finally, there are numerous formatting errors - mostly of spacing under sub headings, but in one place - above para 2.18, a sub -heading "fit and proper test" should for consistency be shown in light blue but is in the same black type as the text.
 Paragraph 6.1 refers to various repealed directives - CAD, BCD etc, where these should now refer to the CRR and/ or the revised CRD.