Themes for today's boards - BSA Annual Conference 2018

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Thank you Jonathan for your kind and generous introduction.

Good morning everyone and a warm welcome to the great city of Manchester.

According to the website: “20 bizarre facts everyone should know about Manchester”:

  • It doesn’t actually rain here all the time – Manchester’s average annual rainfall is only 807mm compared with the UK average of 1,125mm
  • The first programmable computer (known as the “Baby”) was designed here – good to know for our sessions on technology and digital over the next couple of days
  • And in 1904 car salesman Charles Rolls met engineer Henry Royce at the Midland Hotel and over lunch created Rolls Royce – so I will be looking forward to hearing what has been agreed over dinner there tonight!

And much more seriously, we know just how resilient the people of Manchester are.

They have demonstrated it many times over the years.

Most recently how they came together as a community after the Manchester bombing a year ago yesterday evening.

As Jonathan mentioned a moment ago I am sure we all salute the people of Manchester.  Let us pause for a moment to show our respect for all of those affected by last year’s horrific attack.

Thank you.

At a recent society board meeting, I was asked what I thought should be on their current agenda.

I think there are six or seven such themes.

But, before we get into those this morning, let’s put them into some context.

2017 was another strong year for our sector.

We continued to take share in the mortgage market, helping almost 200,000 people move home last year, over half them first-time buyers.  Last year, building societies wrote almost 450,000 new mortgages.

In 2010 our share of the total market was 18%.

Today we hold 22%.

Of a £1.4 trillion market.

We have been told on a number of occasions in recent years that the annual business plans of the top six banks amount to more than the whole of UK Mortgage market demand.

And we hear a lot about the aggressive growth plans of the challenger banks.

But it is the building societies with their dedicated focus on UK home lending and steady growth that have continued to take the market forward in real terms – by focusing on homebuyers as individuals rather than data points.

We have led the way in lending to older people;

In custom and self-build lending;

In lending to the self-employed;

The workers in the gig economy;

Those with more complex lives and, perhaps, credit histories that benefit from individual review and understanding.

To borrow a phrase – seeking to meet the aspirations of the many, not the few.

Earlier this month the Resolution Foundation’s Intergenerational Commission reported on the challenges caused by inequality between generations[1].

In housing, it found that young people today are paying more, owning less and commuting further.

And since 2006/7 we have seen the average age of a first time buyer increase from 30 to 33.

At last year’s Conference we published research by the International Longevity Centre UK[2] which forecast that mortgage borrowing by those aged 20-29 will have halved by 2030 compared with today.

Given the importance of first time buyers to building societies, I asked the BSA team a couple of months back what it might take to bring that average age back down again – and most importantly what we as a sector might be able to do to contribute directly.

Today, I am pleased to announce that the BSA is commissioning specific research from Bob Pannell and Dick Jenkins on intergenerational mortgages, to look at potential new ways for building societies to help the older generation support and broaden housing choices for the young.

In the savings market, building societies also stand out.

BSA research shows that in 2017 savers were £775m better off by entrusting their money to a building society rather than the big banks.

As mutuals, building societies and credit unions can pay better rates as they don’t have to meet the demands of external shareholders.

And our customer service surveys continue to show that the sector is more trusted and provides better service than the banks.

But of course, societies need to balance the needs of today’s savers and borrowers with ensuring the business can be sustained for future generations of members – and of course nothing ever stands still.

So societies have continued to strengthen their capital positions, with an average Common Equity Tier 1 ratio across the sector of 20.1%, up from 19.3% last year, and compared with 13.4% at the big five banks.

We have two significant building society anniversaries this year.

The Scottish, the oldest surviving building society in the world, celebrated its 170th birthday earlier this year with a reception at the Scottish Parliament and the publication of “A Short History of a Proud Society”.

The Dudley, just ten years younger, will be 160 years old this summer.

This year also sees two contrasting bicentenaries in the socio-economic space.

Earlier this month saw the two hundredth anniversary of the birth of Karl Marx.

And we know where that led, via Manchester incidentally, where he met Friedrich Engels.  Enough said.

More interesting for this audience, March saw the two hundredth anniversary of the birth of the great pioneer of co-operative finance, Friedrich Wilhelm Raiffeisen, who is being celebrated in the co-operative world with a whole year of commemoration.

Our links with the Raiffeisen inheritance come both through our colleagues in the European Association of Cooperative Banks, some of whose members still describe themselves as Raiffeisen-banks, and through credit unions, which also trace their ancestry back to Raiffeisen.

So the BSA is pleased to join in honouring his memory today.

Now, let’s come back to those six or seven themes that should be on all of our agendas

And let’s start with a structural shortage in housing

1969 was famous for many things:

  • Neil Armstrong’s “One small step for man, one giant leap for mankind” on the first moon landing;
  • The fifty-pence piece replacing the ten bob note;
  • The introduction of the Boeing 747 Jumbo Jet; and
  • The Beatles final gig on the roof of Apple Records in Savile Row, London – which later went on to become the BSA’s headquarters.

1969 was also the last time we built more than 300,000 houses in England in a year.

More than 140,000 of those were built by local authorities and housing associations.

Last year local authorities and housing associations combined built just 30,000 houses.

This is a cross party issue.

Labour, Coalition and Conservative administrations have demonstrated equally poor records in public sector house building over the past 35 years.

We are not alone in calling for strong and innovative approaches to dealing with the ongoing housing crisis.

And we are not alone in calling it a crisis.

Our proposals to all parties include:

  1. Very substantial public investment in housing, whether funded at a central government or a local authority level;
  2. Creative use of public land and different property tenures to create truly affordable key worker homes for both rent and purchase; and
  3. Full use of the range of modern construction methods, including modular and precision factory built homes.

Let’s be clear, we are not preferring one type of housing tenure over another.

We are talking about fulfilling our country’s obligation to provide decent homes for everyone.

We are talking about the positive economic benefits of people being able to move easily for work.

And we are talking about building societies lending on homes made available for sale or private rent, whether outright or on a shared-ownership basis.

Second, ring-fencing and competition

Last year I set out some of the areas in which building societies can sustain comparative advantage in an increasingly competitive ring-fenced retail banking world.

Let me repeat them now:

  • Building Society and Credit Union are both terms protected in law.  No matter how much some banks may advertise their mutual credentials, no bank can call itself a building society or credit union.  We should make the most of that.
  • There is no customer / owner conflict; no shareholder demanding a dividend equivalent to 30% of your cost base; no pressure to grow the business above the typical four to eight per cent rate at which it can naturally accrete capital.
  • Therefore, as financial mutuals, we can genuinely and consistently take the long term view, whether in terms of investment, product development or growth.
  • As organisations founded from a social purpose, we have the real opportunity to contribute back into our communities as a truly integral part of how we do business.

I often talk with members about the privilege of stewardship.

The simply phrased but challenging duty of passing the organisation on in a better state than we inherited it.

The satisfaction gained from doubling in size about every twelve years and laying the foundations for the next doubling over the next twelve years.

The conventional assumption is that this slower growth model is less profitable, with less value added than the more aggressive shareholder owned business model with its focus on profit maximisation.

Comparative research into the performance of Europe’s shareholder owned and co-operative banks since the Global Financial Crisis gives the lie to this[3].

The co-operative banks have demonstrated that their lower leverage, lower volatility model results in stronger long term performance and higher long term average profitability.

We have continued to explore all these aspects of competitive advantage through our member discussions, forums and thought leadership programmes.

I am delighted that Joe Garner has agreed to speak again at this year’s conference.

And on the power of purpose.

What it is.

And why it is so important as we face the challenges of a changing society.

Turning now to the future in funding

With final drawdown on the Term Funding Scheme at the end of February, attention is now turning to repayment and re-financing.

Many, including our Prudential regulators, are actively starting to focus on the likely impact on both wholesale funding and retail deposit taking, as the money printing press stops and starts to go into reverse.

Not entirely by co-incidence, last year we started exploring alternative funding strategies with members.

Focusing both on the social purpose and the commercial business case for building societies and credit unions to think harder about the benefits of resilience or rainy day savings.

Toynbee Hall, started their report “Savings for the Future”[4] by saying that the UK has a very severe savings problem.

The issue for many people is not that they aren’t saving enough.

But that they are not saving at all.

An Ipsos Mori survey which we ran last October showed that 31% of all UK households have absolutely no cash savings whatsoever.

Even among those in households earning over £55,000 a year, 18% said they had no cash savings.

2014 StepChange research found that 13 million people would not have enough savings to support themselves for a month if their income fell by 25%.[5]

And in their 2017 “Deadline to the Breadline” report, Legal & General found that 23% of UK workers do not save any of their income each month[6].

We should take inspiration from the very foundation of the building society movement to help tackle this major societal challenge.

Back in 1775, Richard Ketley suggested to a bunch of drinkers in his Birmingham pub that they should start saving rather than buy another pint.

Those small value savings started the great social movement that is today’s building society sector.

In a similar vein, Toynbee Hall’s Savings for the Future report identifies the real status symbol of savings among poorer households.

Thrift is often seen as a bit of a Victorian ideal.

It is as relevant today as it ever was and forms the basis of much of the work we support through Young Money and MyBnk in financial education in schools.

Even if the word “thrift” is not actually used.

I am very pleased to see that some of our members have already started to address the issue with small value regular savings accounts, payroll deduction savings accounts and similar initiatives.

In an increasingly competitive market for retail deposits, regular savings should prove a good source of sticky money.

This should be profitable business – and that is important if it is to be sustainable through the economic cycle.

It is also the right thing to do in fulfilling our purpose as a force for good in the UK’s 21st century Financial Services sector.

Today, I am delighted to announce that, with support from the Building Societies Trust, we are commissioning follow-up research with Toynbee Hall to explore how building societies and credit unions can make a real positive impact in developing the UK’s savings culture.

Next, with AI and digital strategies on all of our minds,

Is Moore’s Law the biggest strategic question of our age?

Moore’s Law, the observation that the number of transistors in a dense integrated circuit doubles every two years, has been with us since Gordon Moore, the co-founder of Intel, set it out in a snappily titled 1965 paper, “Cramming more components onto integrated circuits”[7].

To help us visualise what a doubling of computer processing power ever two years might look like, Richard and Daniel Susskind in their book , “The Future of the Professions,[8] ask us to think about it in terms of repeatedly folding a piece of paper in half.

We all know that in practice, no matter how large the piece of paper, you can only fold it in half seven times.

So you will have to use your imagination here:

  • If we start with an ordinary sheet of paper
  • Fold it in half four times and it will be as thick as a credit card

This is not particularly spectacular

Now, we have to move into the thought experiment:

  • If it could be folded eleven times, it would then be as tall as a can of Diet Coke

This is still not that remarkable

  • After ten more folds, however, it would be taller than Big Ben
  • After a further ten folds, it would reach into outer space
  • After twelve more folds, it would reach the moon
  • And if you could fold this single piece of paper in half 100 times, it would create a wad over 8 billion light years in thickness.

Conventional thinking is that exponential curves top out.

But where are we on the Moore’s Law curve?

And what innovations to come will overlay new factors and new curves that continue the exponential trend in processing power and capability?

And critically, what will we as a society choose to do with this power?

I love (and in equal measure am quite scared) by the prospect set out by Google futurist, Ray Kurzweil, that by the 2030s we will be able to use a nanobot to get a brain extension by plugging directly into the Cloud.

On the other hand, at a recent FCA lecture, Professor Joanna Bryson from Bath and Princeton Universities put the challenges of creating artificial intelligence into some context:

There are more possible 35 move chess games than there are atoms in the universe.

I am not sure how you count the atoms in the universe.

But these sorts of statistics make us realise, for example, just how much has gone into the development of driverless cars so far.

And how much more is needed.

That said, there is a growing consensus of the challenges artificial intelligence will pose in the immediate future for competition in some markets.

Many of you will have seen the KPMG EVA (Electronic Virtual Assistant) clip.

How many of you have already invited Alexa or one of her competitors into your lives?

Whether it’s managing household utility contracts or personal savings, these products already have the processing power to be able constantly to seek out the best deal for you.

It may sound bizarre, particularly from a conduct point of view, but I would suggest that taking human inertia out of a market can end up taking competition out of the market.

Logically, all products end up having to be identical.

Perhaps you can understand why I am so interested in responsible approaches to sticky money.

How many organisations talk about their people being their most important asset?

As a sector, we certainly do.

And with good cause, because our research involving both building society employees and customers demonstrates clearly the real strength of culture and care our people bring to our organisations.

But, how do we show we really mean it?

The U.S. management guru, Jim Collins talks about how great organisations grow their own talent[9].

Do we do enough to grow our future leaders?

Do we think hard enough about how we grow teams that are properly diverse?

That bring a wide range of experience, culture and backgrounds to our businesses?

That provide us with the skills and perspectives that we need for the future success of building societies, rather than just meeting the needs of today?

If we are seriously to tackle the challenges of diversity across the sector, we need to go beyond unconscious bias training and look hard at how we select, develop and retain a much broader workforce than that which currently characterises most of our businesses.

In my time at the BSA, one of the things I am most proud that we have created is our three-year Masters programme in Strategic Leadership at Loughborough University School of Business and Economics.

This unique, world class, award winning programme currently has 64 students enrolled.

From 28 building societies and one credit union.

50% of the students do not have a first degree.

42% are women.

Among our students, one has already been promoted to chief executive.

Several others have progressed significantly in their own businesses at the same time as studying for their Masters degree.

From this October, the MSc will also be available as a Level 7 Apprenticeship, for those of you who pay the Apprenticeship Levy.

Now, let’s shift the focus to resilience, security and operational efficiency

How the debate on cybercrime has moved on.

Back in 2014, the last time I stood on this particular stage, we were still in the era of thinking we could build ever higher and stronger firewalls.

I was dissuaded then from warning that the issue had moved on from “if” our defences are breached to “when”.

Speaking to the Commonwealth Business Forum last month, the then Home Secretary, Amber Rudd, said that 70% of large businesses in the UK have experienced cybercrime.

The average cost of a cyber-incident was £20,000, with some breaches leaving companies on their knees.

I can’t help thinking that both the incidence of cybercrime and the average cost quoted by the Home Secretary were under-estimates.

Here in Manchester last month, Jeremy Flemming, the Director of GCHQ, spoke of the wider societal promise in technology, but also of the threat.

He referred to hostile states, terrorists and criminals as the early adopters of new technology, products and services.

Of them investing heavily in strategies and tactics to further their causes.

He also spoke about the attackers not caring about the size or sector of their victim.

The 2017 Cyber Security Breaches Survey [10]found that 46% of UK businesses overall had identified cyber security breaches or attacks in the previous twelve months.

The survey result for micro and small businesses was 45%.

For medium and large businesses: 66%.

Cyber security briefings have continued to be regular features in BSA seminars this year.  We have also provided all members with a guide to cyber-attack incident management and, in conjunction with EY, have started running a series of intense simulation exercises for teams from individual societies.

And finally on board themes (or seventh if you have been counting), a focus on why ownership really does matter and thinking about some radical approaches to member engagement

The week before last, I was privileged to lead a delegation of senior building society executives to Massachusetts on our second study tour to meet with co-operative and community bankers, regulators and other key stakeholders.

And I am delighted to welcome some of our American friends to our Conference today.

Over three days we shared experiences and ideas, comparing and contrasting our commercial and regulatory environments from the common viewpoint of customer ownership.

Two of the things that, perhaps, stood out for me during the week were:

Firstly, how we create a sense of membership and belonging among today’s customers of co-operative and mutual banks and building societies.

The common heritage we have is that of mutual movements.

The challenge is what that looks like in the 21st century.

The question that especially struck a chord with me was:

“As a customer, why is it in my interests to be part of this?”

And secondly, a number of organisations that we met are focusing on under-served parts of the community, typically immigrant groupings.

I think there are interesting lessons to share in terms, for example, of providing documents in languages other than English for those parts of our population whose first language is not English.

Some of you may be doing this already.

But more broadly, we should all be looking beyond the AGM for points of interaction with members.

We should all be thinking about lifelong strategies for membership.

Who are our future members?

How do they live their lives?

How do we reach out to them?

Starting in primary school.

Most importantly, how to we continue to convert customers into engaged members when more and more of them come to us through physical and virtual intermediaries.

When our organisations may become invisible to them as our customers?

Is their relationship with us?

With the broker or intermediary?

With a price comparison website?

With Alexa?

I have spoken before about the importance of the personality of our organisations and about putting humanity at the heart of our digital strategies.

We have a good base to build on, clearly demonstrated by our Ownership Matters survey of over 2,400 building society employees last summer.

They think 37% of the benefit created by building societies is received by our customers.

Compared with only 13% from a parallel survey of employees of publicly listed companies.

Closing comments

There has been huge change in the sector since I joined the BSA at the end of 2013.

This year alone, a number of long-serving leaders associated with our industry have retired or are moving on to the next stage of their careers.

I know that it is invidious to single out individuals, and we should, and do, celebrate the work of all of them, but I do want to mention a number people who are with us today.

Firstly, Dick Jenkins, recently retired chief executive of the Bath Investment Building Society and former chair of the BSA.  Dick has been an inspiration to many of us, demonstrating how to bring creative thinking, wisdom and prudence to running one of our smaller societies.

Having heard Dick perform at his own retirement party in Bath last month and very successfully out-perform our professional after-dinner comedian in Newcastle two years ago, I tried to sign him up to provide our after dinner entertainment this evening.

I’m sorry to say that he declined!

Dick, I would like to record my real appreciation for all the support you have given me and I am delighted you are here at this year’s conference once again, in your new capacity as a non-executive director of the Buckinghamshire Building Society.

Secondly, the legal duo of Richard Slynn and Adam Bennett, who between them have advised and acted for building societies for well over 50 years.

Richard is one of the leading experts on statutory, constitutional, corporate governance and regulatory issues.  He led the building societies and mutual practice at Allen & Overy and, along with Adam, is one of the leading legal figures in the industry.

Adam, of Addleshaw Goddard, has advised on every one of the last 22 building society mergers, regularly advises well over half the sector, and has been central to the defence of the sector against external threats including the carpetbagger activists in the 1990s.

Richard’s and Adam’s experience and expertise are considerable and I would like to thank them for their fantastic support of the sector over decades.

This will be Martin Stewart’s final BSA conference as one of our lead regulators.

My first encounter with Martin was at the 2013 BSA Annual Lunch, before I had even started.

In those days we enjoyed an excellent lunch before all the CEOs were ushered into a seminar room for a series of regulatory updates.

Martin spoke that afternoon about how he saw the sector evolving over the next five to ten years – and it wasn’t a pretty picture.

His words have echoed across the sector ever since.

But, I want to thank him publically today for the brutal honesty he expressed back in November 2013 – which provided some of the impetus and inspiration behind the BSA’s focus on building societies as an essential and integral part of the future of UK financial services.

And rumour has it that this might also be Eric Engstrom’s last BSA conference as one of our regulators.

There have been rumours to this effect on a number of occasions in the past, so I am led to believe.

But this time, Eric himself tells me it is for real.

I am not even going to try to summarise Eric’s career in the sector.  Suffice to say that it seems like he has been an ever-present and powerful force since the days of terminating building societies.

Among the high points, we should mention the extraordinary work on the New Cross case and the promotion of good practice in systems and controls across the sector for more than thirty years.

Gentlemen, I am sure there were times over the years when you both have felt under-appreciated by the sector that you have shown so much concern for.

I am equally sure that everyone here today absolutely appreciates the huge contribution you have both made in encouraging building societies to be the strong, professional, forward looking businesses that they are today.

And finally, Richard Gabbertas, KPMG’s Mr Building Society, has also announced that he will be retiring this autumn after 23 years with the firm.

Richard, we will miss your smooth and expert sessions at our annual accounting update, your wise counsel, and your close involvement with so many building societies and, of course, with the KPMG Building Societies Database – one of our sector bibles.

Six or seven themes for today’s boards.

From housing to funding and competition.

From technology to people

Why ownership really does matter

And why social purpose is as vital to our future success as it has been to our foundation and history.

It is no coincidence that these all feature strongly in this year’s BSA Annual Conference.

I hope you all enjoy the next couple of days, and go away informed and inspired with new thoughts and ideas to take back to your businesses.

Thank you all.


[1] A New Generational Contract: The final report of the Intergenerational Commission - Resolution Foundation (2018)

[2] Lengthening the Ladder: the future of mortgage borrowing in older age – International Longevity Centre UK (2017)

[3] Europe’s Co-operative Banking Models - European Economic and Social Committee (2018)

[4] Savings for the Future: solving the savings puzzle for low income households – Toynbee Hall (2017)

[5] Life on the Edge: towards more resilient family finances – StepChange (2014)

[6] Deadline to the Breadline 2017 – Legal & General (2017)

[7] Cramming more components onto integrated circuits – Gordon E Moore (1965)

[8] The Future of the Professions: how technology will transform the work of human experts – Richard and Daniel Susskind (2015)

[9] Good to Great – Jim Collins (2001)

[10] Cyber Security Breaches Survey 2017 – Ipsos Mori Social Research Institute and Institute for Criminal Justice Studies, University of Portsmouth (2017)