Select Committee on Treasury Minutes of Evidence

Memorandum submitted by the Building Societies Association

  1.  The Building Societies Association is the trade association for the UK's building societies. There are 63 building societies in the UK with total assets of over £260 billion. About 15 million adults have building society saving accounts and over two and a half million adults are currently buying their own homes with the help of building society loans.


  2.  As a trade association representing 63 competitors of National Savings and Investments (NS&I) in the retail savings market, the BSA's paramount concern in regard to NS&I is that its presence in the market should not impact unfairly on societies' retail savings business, and consequently consumer choice. Our members perceive that the unique privileges enjoyed by NS&I; ie—

    (a)  tax exemptions,

    (b)  government backing, and

    (c)  a more favourable regulatory and supervisory treatment compared to its competitors

  do have an unfair impact, but the lack of detailed, timely, data from NS&I makes this difficult to quantify.

  3.  The BSA considers NS&I should be obliged to take explicit account of the impact its activities have on the markets within which it operates. It should be required to ensure its activities do not distort the retail savings market in any way that is detrimental to competitor firms or consumers. The other actions the BSA recommends are as follows:

    (a)  We would like to see independent analysis of the extent to which the privileges enjoyed by NS&I in the market for retail savings cause a crowding-out of products offered by private sector providers, including building societies. The BSA has recently urged the Treasury to commission such analysis as part of its current review of NS&I.

    (b)  The Treasury should actively consider the removal of the monopoly currently enjoyed by NS&I in the provision of certain products, such as fixed-term, tax-free deposits.

    (c)  NS&I used to publish product data on a monthly basis and it would be helpful if this service were to be restored.


  4.  A consequence of the Government's increased borrowing requirement is that NS&I, backed by HM Treasury, is seeking to attract increased volumes of retail deposits. To facilitate such borrowing the Government has, over the years, granted to NS&I certain advantages over its private sector competitors.

  5.  NS&I is able to offer a selection of tax-free savings products; namely, fixed term savings certificates, premium bonds and the cash ISA, whereas the only tax-free cash savings product that can be offered by building societies, or other private sector institutions, is the cash ISA. Since April 2004, the limit on the amount that can be saved in NS&I fixed-term savings has been £15,000. Given that there are typically four issues per year, individuals are able save £60,000 per year in NS&I fixed-term tax-free deposits. By contrast, the maximum that an individual can save tax-free in building society deposit accounts is the £3,000 per year they are able to save in a cash ISA.

  6.  The BSA has no objection in principle to the tax-free status of a range of NS&I products, but we do consider it unfair that NS&I should be the only deposit taker allowed to offer such products. Building societies should be free to compete fairly in the market for tax-free savings and we would like to see societies being allowed to offer similar products to those available from NS&I.

  7.  The BSA is confident that if building societies were allowed to compete freely with NS&I the consumer would benefit. Where NS&I has a monopoly, as with tax-free fixed term savings products (and, indeed, premium bonds) it has 100% of the market and building societies have 0%. But where there is free competition and customers can choose their provider—as in the market for cash ISAs—NS&I has around 2% of the market and building societies have more than 35%. It seems clear, therefore, that in denying the private sector the opportunity to compete fairly with NS&I in these markets, the Government is denying consumers a choice.

  8.  The impact of NS&I on the market is likely to become more significant as Government borrowing via NS&I increases. NS&I has a target, set by the Treasury, to increase its financing—ie its contribution to government borrowing—by £15 billion in the period 2002 to 2007: an average of £3 billion a year. To put this in perspective, over the past five years net receipts for the entire building society sector have averaged less than £8 billion per annum. Accordingly, NS&I's growth plans could have a significant impact on building societies' funding.

  9.  Even though NS&I must account for tax forgone in calculating its cost-effectiveness relative to Gilts and Treasury Bills, its ability to offer tax-free products is a significant advantage in selling its products to higher rate taxpayers, both in terms of convenience, since interest earned on such products does not need to be declared on tax returns, and marketing: "tax free" is a potent selling point.


  10.  Building societies are in a unique position in relation to NS&I: they are the only competitors to NS&I that are constrained by legislation to raising a certain proportion of their funds in the retail deposit market. Accordingly, the impact of NS&I on building societies is potentially greater than that on other institutions. The "nature limits" in the Building Societies Act 1986 prevent societies from obtaining more than 50% of funds from non-retail deposits. The effect of the nature limit on funding is greatest when interest rates are low—as they are currently—making borrowing relatively attractive and saving relatively unattractive, other things being equal.

  11.  Building societies are the only institutions seeking funding for mortgage lending that are forced to compete with this state-backed institution.

  12.  The BSA's ability to assess the impact of NS&I is hampered by a lack of detailed product-specific data on NS&I products. Although NS&I does publish some product data on an annual basis, this is insufficient to facilitate comprehensive analysis. NS&I used to publish product data on a monthly basis and it would be helpful if this service were to be restored. Greater transparency of product sales would help to an extent to ameliorate the impact of the privileges enjoyed by NS&I through government backing and tax exemptions.


  13.  The regulatory and supervisory treatment of NS&I is more favourable than that of its competitors in the retail financial services market. The BSA welcomes NS&I's compliance with the Banking Code, having lobbied for this for some time. Voluntary compliance with the Banking Code is appropriate, in that all NS&I's significant competitors in the retail savings market—including building societies—subscribe to the Banking Code and all do so on a voluntary basis. However, it is anomalous that NS&I's compliance with "relevant" FSA rules is also voluntary. It contrasts starkly with NS&I's competitors, such as the building societies, that are obliged to comply with FSA rules. Such inconsistency of treatment must be at least as confusing for consumers as it is for NS&I's competitors.

  14.  There are other instances where NS&I receives special treatment. One such is the Treasury's current initiative on unclaimed assets. In contrast to banks and building societies, NS&I has so far been spared involvement in the Treasury's initiative to facilitate the payment to charity of lost account balances. The BSA does not find convincing the Treasury's assertion that NS&I should be treated differently because its dormant funds are already being used for the public good.


  15.  Building societies are concerned that the unique privileges enjoyed by NS&I are creating distortions in the market for retail financial services. Building societies, as institutions obliged to obtain a majority of their funds from the retail market, are particularly sensitive to unfair competition in that market. The BSA has asked the Treasury—as part of its current review of NS&I—to commission an independent assessment of the extent of unfair competition by NS&I and its impact. We have also urged that removal of NS&I's current monopoly in certain tax-free products should be considered as part of this. The Treasury Select Committee may feel that these are areas worthy of further investigation and the BSA would be happy to assist in this in anyway we can.

10 October 2005

previous page contents

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2005
Prepared 29 November 2005