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.
SUMMARY
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—
(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.
NS&I AND TAX-FREE
SAVINGS PRODUCTS
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.
BUILDING SOCIETIES
AND NS&I
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.
REGULATION AND
SUPERVISION OF
NS&I
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.
CONCLUSION
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
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