Building societies and credit unions are member owned financial institutions. Building societies specialise in savings and mortgages, while credit unions focus on savings and personal loans. Both are UK domestic with a relatively simple business model. The regulatory framework and legislation should recognise this simplicity.
Why do we need a strong and simple framework?
The legislation governing building societies and credit unions needs updating in each case to reflect what their members need, such as the ability to participate electronically in building society AGMs and for credit unions to access well priced insurance and modern car finance.
The current EU-derived system of financial services regulation is often disproportionate for small institutions. The EU’s Single Rulebook was based on rules designed for globally systemic banks, not small domestic institutions, but it continues to apply to both. Brexit provides an opportunity to review the regulatory landscape and move away from the one size fits all to create a strong, but simpler, regulatory framework.
Regulatory standards need to be proportionate to the risks they address, and avoid undue regulatory burdens on smaller firms. The benefits of a more proportionate system include:
- Better regulation through allocating limited supervisory resources to the greatest risks, and benefit from potentially more accurate regulatory reporting,
- Improved performance, resiliency and customer outcomes, by focussing senior management time on managing both prudential and conduct risks rather than administering compliance, and
- Increased competition through lower operating costs for small firms by removing inefficient compliance and reporting.
What’s already happening?
The Government and regulators are already taking welcome action on proportionality with Treasury consultations on the Future Regulatory Framework, the Prudential Regulatory Authority’s work on Strong and Simple, and the Department of Business, Energy and Industrial Strategy’s (BEIS) consultation in response to the work of the Taskforce on Innovation, Growth and Regulatory Reform (TIGRR). However, this is not yet consistently applied across Government. Examples include the BEIS’ audit reform proposals (extending the scope of Public Interest Entities (PIE) and the introduction of a Consumer Duty by the FCA (that risks additional complexity for consumers and firms).
What more can be done?
1. Apply a consistent approach across Government and Regulators
The proportionate approach that is being developed by the Treasury, PRA and others should be applied across Government and regulators. ‘In-flight’ initiatives, such as the BEIS extension of PIEs, should be challenged and reappraised in line with the evolved thinking as illustrated in the TIGRR report. Similarly, in increasing its reliance on data, the FCA needs to take care that this does not place a disproportionate burden on smaller firms.
2. Update the legislative framework, so building societies and credit unions can better serve their members
Building Societies Act
There are a number of changes that would help building societies operate more efficiently, thereby better serving their members. These include:
- Adapting the funding nature limit (which requires building societies to obtain at least 50% of funding from members’ savings, and at least 75% of lending must be on home mortgages) would allow societies to serve small businesses by facilitating Sharesave plans and the holding of tenancy deposits.
- Updating the Building Societies Act, to achieve parity with Companies Act on issues such as retirement ages, signing accounts, and electronic voting.
Credit Unions Act
The key change for credit unions is broadening their objects to allow them to offer additional services to people who are often underserved. In particular, credit unions need to be clear that they can mediate basic personal or household insurance, such as contents cover, to members separately from a loan, and finance cars through hire purchase or personal contract plans, not just through traditional unsecured personal loans. These changes were proposed in the Government response to the Treasury consultation ‘British Credit Unions at 50’ in 2014.
3. Create a regulatory framework that is strong and simple
We have strongly supported the PRA’s ground-breaking ‘Strong and Simple’ initiative for smaller domestic banks and building societies. In our response to their CP we said that the simple regime should be based on a straightforward size measure, such as total assets size (e.g. under £5bn),and that ceiling should increase in line with banking sector growth.
Quick wins could include simplifying ICAAP reporting, switching off parts of certain returns that add no or little value, removing most Pillar 3 reporting and creating templates to demonstrate regulatory expectations.
Longer term policies, which could be reviewed in line with the ‘strong and simple’ regulatory principles, include elements of CRD V, e.g. Pillar 2, Governance, SREP (Supervisory Review and Evaluation Process). The need for the Building Society Sourcebook could also be revisited with a view to levelling the playing field with banks (which have no comparable sourcebook).