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10 Mar 2009 : Column 26WHcontinued
Mrs. Ann Cryer (Keighley) (Lab): May I mention that I have ditched half of my speech to accommodate those who wish to participate in the debate? On 13 January, I tabled early-day motion 426 entitled Financial Services Compensation Scheme Levy on Building Societies. It now has 158 signatures, which is why I requested a long Adjournment debate this morning.
Let me give some background to the debate. The Financial Services Compensation Scheme is a safety net for customers of financial institutions in the UK and it steps in when institutions fail. In the recent economic turmoil, a number of banks have failed, including Bradford & Bingley, Kaupthing Singer & Friedlander, Icesave, Heritable and London Scottish Bank. However, not one private individual with a UK deposit in a failed bank has lost any money. In cases in which the amount insured by the FSCS has been exceeded, the FSCS covers the first £50,000 of an individuals deposit, and £100,000 in the case of a couple. At the time of the Bradford & Bingley failure, the equivalent figures were £35,000 and £70,000. The Governmentor the taxpayerhave paid the remainder. That is to be welcomed and has helped UK depositors feel confident that their money is safe. However, the impact on building societies is unfair, which is why I requested this debate.
The compensation payments have been made in the first instance by the UK Government. Part of such payments have been in the form of a loan to the FSCS, which currently amounts to £18.7 billion. The principal of the loans will not become due until September 2011 by which time it is hoped that there will have been substantial recoveries from the assets of the failed banks. However, it is likely that a significant proportion of the £18.7 billion will still be outstanding. Although there may be some rescheduling of the loans, the principal will still need to be repaid and will need to be met by the FSCS levies on the industry.
In the meantime, building societies and banks are being required by the FSCS to service the interest on the loans made by the Government to the FSCS. Those interest payments are capped at £1 billion a year, of which the Building Societies Association estimates that building societies will be required to pay a fifthup to £200 million a yearin each of the next three years. Building societies consider that a disproportionately high share of the compensation costs associated with failed banks. Societies are annoyed that although, by and large, they behaved prudently during the housing market upswing they are now being forced to pay for organisations that acted much less prudently. As mutual member-owned organisations, any additional costs such as those ultimately work to the detriment of society membersboth savers and borrowers.
The cost to societies of up to £200 million per annum in each of the next three years would be equivalent to about 15 per cent. of the sectors annual pre-tax profitbased on the 2007-08 financial year. With the recent reductions in interest rates, the latest estimates are that the £1 billion per annum cap will not be reached this year. The Financial Services Authoritys forecast is that the FSCS levy for 2009-10 will be £645 million, of which the BSA estimates that building societies will be
required to pay £130 million. The impact on building societies contrasts starkly with the banking sector, in which the levy for FSCS management expenses is typically between 3 and 5 per cent. of pre-tax profits over a similar accounting period. It is particularly galling that in the few cases in which societies have got into difficulty, mergers have been arranged with stronger building societies, without recourse to the public funds. Such funds have been needed to bail out depositors at Bradford & Bingley and the other banks.
The fact that building societies are not profit-maximising organisations is fundamental to their mutual ethos. However, their modest profits, which contribute to their reserves and increase their financial strength, are being hit hard by the FSCS levies. Several building societies have recently announced their financial results for 2008, and all show the significant impact of FSCS levies caused by the bank failures of late 2008. Based on the 10 building societies that have reported annual results for 2008 so far, FSCS provisions have reduced reported pre-tax profit by a staggering 75 per cent. Without the FSCS levy, pre-tax profits for the 10 would have been £135 million. After providing for the levynot all societies have provided for the levy in the same waypre-tax profits were reduced to £34 million.
Building societies are a model whose time has come and should be encouraged. However, the FSCS-driven onslaught on building societies comes at a particularly bad time when one looks at the bigger picture. There is a backlash against the reckless, bonus-driven excesses that have characterised some sections of the banking industry over the past 20 years, which ultimately led to the near collapse of the system. A consensus is emerging that there is a need for a return to the old and possibly boring values of risk-averse banking.
There are 55 building societies in the UK, with total assets of £395 billion. They hold about 20 per cent. of the total outstanding mortgages in the UK, with about 2.9 million borrowing members, 20 per cent. of retail savings in the UK and more than 23 million investing members. Building societies employ more than 51,500 full and part-time staff and operate through more than 2,000 branches. On 22 February, the Prime Minister, in The Observer, said:
We do want to see the reinvention of the traditional savings and mortgage bank in Britain, for loans to be made on prudent, careful terms.
Building societies fit that bill. They are, in many ways, an antidote to the banking excesses of the recent pasta small corner of sanity. It thus makes no sense to be kicking them via the FSCS levy. Instead, they need to be nurtured and encouraged.
There are some possible solutions. Having demonstrated that the building societies and their 23 million investing and 2.9 million borrowing members are being treated unfairly under the arrangements for allocating FSCS levies, and that that is not a good idea given the valuable role performed by the societies, what now needs to be done to give building societies a better deal? Building societies are very supportive of the need for a deposit protection scheme. Although it is unlikelythough not impossiblethat they will ever need to call upon it, they are happy to pay an appropriate share of the costs of the scheme. The point at issue is what that share should be. Societies consider there to be a strong case in
equity for the allocation of the FSCS levies to be modified to reflect better the relative risk profiles of building societies and banks.
There are several ways in which that could be done. For example, the contribution groups for deposit takers could be recast to include sub-pools so that the banks meet in full the first slice of any FSCS levy resulting from a bank failure. By that I mean before building societies and other deposit takers are required to contribute. Similarly, in the event of a building society-generated call on the FSCS, building societies would meet in full the first slice of any FSCS levy, before the banks and credit unions were required to contribute. Secondly, FSCS levies could be capped at a proportion of a deposit takers pre-tax profitsfor example, at 5 per cent. of the rolling average of the most recent three-year pre-tax profits. Thirdly, we could base the FSCS levies wholly on balance sheet quantities, but take account of the size of the total balance sheet rather than simply the retail balance sheet. Any of those things is likely to produce an outcome that is, over time, more fairly reflective of the relative riskiness of bank and building society businesses models.
How might the FSA and FSCS respond? I was encouraged to read the report of the Treasury Committees questioning of the chairmen and chief executives of the FSA and FSCS on 25 February. They confirmed that in the light of the building societies concerns, they would be embarking on a review of the FSCS. Loretta Minghella, the FSCS chief executive, told the Committee:
I think we are all very conscious of the fact that the compensation scheme has to be funded by the live industry and that does mean that good firms pay for bad firms that have gone, so there is always an element of unfairness about any of the bills that we produce for people...I do think it is time to look again at the way the scheme is funded. One of the things that has come out over the past few months is that of course we have had the money that we have needed to pay the claims as they have fallen due, but the bills are coming at a difficult time and this does raise the question again of whether or not there should be an element of pre-funding for the scheme which I think will now come back onto the agenda.
After hard questioning by my hon. Friend the Member for Leeds, East (Mr. Mudie) on the unfairness of the FSCS levies on building societies, Lord Turner of Ecchinswell assured the Committee that the issue would be looked into. The Committee also had considerable sympathy for the plight of building societies. The Chairman, my right hon. Friend the Member for West Dunbartonshire (John McFall), said:
We have had unsung witnesses here who came after the press, namely the Building Societies Association, who did not get themselves into trouble and that has made quite an impression on us.
Finally, I was puzzled that there was absolutely no mention of a review in two letters that I received subsequently from Mr. Jon Pain of the FSA. I shall pursue that with the FSA, but it would be helpful if my hon. Friend the Minister said what he knows of the review that was promised by the FSA and FSCS to the Treasury Committee, and when it is likely to happen.
Charlotte Atkins (Staffordshire, Moorlands) (Lab): I congratulate my hon. Friend the Member for Keighley (Mrs. Cryer) on her excellent early-day motion and on securing this important debate.
I have the good fortune of having the headquarters of two mutual building societies in Leek in my constituencyBritannia and Leek United. They differ in size, but they are trusted institutions and very much part of the local community in Moorlands. In the late 1990s, they were subject to the challenges of the carpetbaggers, but they resisted because of the loyalty, good sense and commitment of their members, who would not be bribed by cash handouts in return for demutualisation. How right they were. The 10 building societies that went down that route no longer exist as separate entities: they have been swallowed up by larger banking groups such as Barclays and Lloyds.
Leek United and Britannia offer something special to their customers: a safe haven for cash, trustworthy advice, sympathetic handling of mortgage arrears and membership benefits. They also make a huge contribution to the local community through charitable giving, volunteering and financial education. No wonder that, as trust in banks slid in the past year, 1 million new building society accounts were opened. That shows that building societies are perceived by their customers as outperforming banks in every aspect of customer service. That is not surprising, because, as mutuals, building societies do not have shareholders to please and are accountable only to their members. Some 74 per cent. of building society borrowers are extremely satisfied or very satisfied compared with 63 per cent. of borrowers from other institutions; 67 per cent. of building society customers think that their provider offers value for money, compared with only 48 per cent. of bank customers; and 68 per cent. of building society customers agree that their institution treats customers fairly compared with 55 per cent. of bank customers.
Building society business models are based on old-fashioned values that are relevant today in our financial crisis. The money deposited by building society customers is used as a basis for lending to other customers. Unlike the banks, which borrow in the wholesale markets to lend to customers, building societies are legally required to obtain a minimum of 50 per cent. of their funding from retail savings. Therefore, their exposure to the wholesale money markets is significantly less than that of banks. Building societies operate far less risky business models and take a prudent approach to lending. That is borne out by their low level of arrears and repossessions, which are in stark contrast to the latest figures published by the banks.
Building societies support the aims of the FSCS. In the current climate, it is important that savers in the UK feel confident about investing in the UK. The FSCS is an insurance policy, and it is right that building societies pay a fair premium. However, I cannot believe that the Treasury intended the FSCS to discriminate against prudent organisations such as Britannia and Leek United. By calculating the levy based on the share of the savings market and excluding, for example, current account balances, the burden is falling disproportionately on building societies and, more particularly, on their members, for it is they who will pay. For 2009-10, the FSCS bill will be around £130 million to the building societies, which is about 9 per cent. of the sectors pre-tax profits for the 2007-08 financial year. The societies share of the levy for the years beyond 2011 is totally uncertain, but it could well cost as much as £200 million per annum.
That contrasts starkly with the banking sector, in which the FSCS levy for management expenses is typically less than 3 per cent. of pre-tax profits over a similar accounting period, or one third of building societies exposure. There are two reasons for that. First, the current allocation of FSCS levies relates to the size of each contributors retail deposit balances. Building societies, which have always raised the great majority of their funds from their traditional retail savings customers, will pay, relative to their total balance sheet, much more than the banks. Secondly, building societies aim to provide the best rates to both borrowers and savers, rather than maximise their profits and pay dividends to external shareholders. That is why so many building societies are at the top of the best-buy tables. Building societies stated profits, even in good times, are much lower.
Having said that, Britannia has produced some excellent results for the past yearit must be congratulated on its ability to sustain itself in this period of financial turmoil. Leek United is by far the smallest of the two building societies in my constituency. The charge against its 2008 accounts will be a whopping 20 per cent. of its pre-tax profits. It will also be faced with significant charges in future years and a great deal of uncertainty about the size of the levy beyond 2011.
Proportionately, the cost to Britannia is not as great, but the cost to its members will be huge, as it is the members who will bear it. I should declare an interest: I am a proud member of Britannia building society. The 2008 charge to Britannia was £19.8 million. In 2009, it expects the figure to be about £12 million. That money would otherwise have been returned to Britannias 3 million members, either through better rates or directly through its annual profit sharing scheme, which gives money to members based on the building societys performance in the previous year.
Surely it is grossly unfair that building societies should pay for the failure of dysfunctional banks. No building society has ever called on the FSCS or its predecessor schemes. That is not to say that it will never happen, but it never has, and that should be recognised. The Financial Services Authority should overhaul the UKs deposit protection scheme to ensure that building societies do not bear a disproportionately large share of the £1 billion annual bill. Should not building societies and banks payments into the compensation scheme be risk-related, as my hon. Friend said? Methods exist to do that, and they must now be considered urgently. It is not fair that building societies, which have operated such a prudent financial system, should be so penalised.
It would be ironic and devastating if, having seen off the rapacious carpetbaggers of 1999, Leek United should find its position compromised by the FSAs bid to bail out the very building societies that went down the risky, high-profit route of becoming banks. Leek United, helped in the battle by Britannia building society, rightly rejected that route because it decided that that was the best option for its members, and those members overwhelmingly supported it. Let us ensure that building societies are given the confidence to go forward rather than being penalised for being prudent and risk-averse.
Willie Rennie (Dunfermline and West Fife) (LD): I congratulate the hon. Member for Keighley (Mrs. Cryer) on securing the debate and thereby doing a great service to building societies in the UK, which are angryfuriousthat they are being penalised for other peoples mistakes. I have signed her excellent early-day motion. I declare an interest of which she just reminded me I am grateful to her for triggering my memoryin that I am a member of Dunfermline building society in my constituency. Unfortunately, I will have to leave early, if you will excuse me, Mr. Pope. I have another engagement, but I will read closely the Ministers response in Hansard to ensure that all points have been dealt with.
In the heart of my constituency sits a modest but important building, the Dunfermline building society headquarters. Dunfermline building society has been a strong constant in west Fife and Scottish society for almost 150 years. While others have boomed and many have gone bust, it has stayed steady and strong. It is now the largest Scottish building society, with assets topping £3.3 billion and a network of 34 branches and 37 agencies. It is playing a crucial role in the expanding social housing sector in Scotland and recently announced an additional £30 million in funding for 500 affordable homes across Scotland during the next three years. In its strong support for social housing, Dunfermline building society has made a huge contribution to something important not just to the Government, but to all politicians in the House during these difficult times for the construction industry. I hope that the Government recognise that building societies contribute hugely to such important Government objectives and help the Government to achieve their aims.
Other institutions have chosen to travel a riskier route over the past decade or so. They have made substantial profits during that time, but those have profits have proven unsustainable. Meanwhile, societies such as the Dunfermline building society have steered a much steadier course involving lower profits and have turned out to be much stronger institutions in the long term as a result.
My mother and father are in their 70s. They are safe drivers who have hardly had an accident during their whole time as drivers and who, in recent years, have had no accidents at all. They secured a special deal through their insurance company that involves lower premiums. They are not required to pay as much as Jimmy Smith who lives next door, drives at breakneck speed at every opportunity and crashes regularly. They are rewarded for safe and responsible driving. That policy is not available only to my parents, by the wayit is not a special deal that I secured for thembut is available to lots of people throughout the country who are responsible drivers. Driving discounts arise through no-claims bonuses, but some are due also to age. Organisations such as Saga offer cheaper insurance for older drivers, who are regarded as safer.
The Government and the state seem to offer a different scheme. Those who are irresponsiblethose who have the car crashes of the financial sectorhave others to pick up the tab for them. That is fundamentally unfair and does not reflect fair and decent regulation. We require urgent change so that people are not penalised
for responsible behaviour. We have encouraged people to save, and now they are being penalised for doing so. That is extremely unfair.
When the Financial Services Compensation Scheme was at a lower level, the building societies accepted the fee that they were required to pay. They might have felt that it was disproportionate and unfair, but still they accepted it, perhaps because they could afford it. However, now that the fee has increased dramatically, those anomalies are being magnifiedthey have mushroomed tenfold. That must be addressed. Even though the arrangement might have been accepted in the past, that does not mean that it is acceptable now that the fee is much higher.
As a proportion of their profits, building societies are required to pay almost three times as much as the riskier banks. I am genuinely puzzled why that is the case. Why have we not got a better balance between value and risk? Surely we have learned something over the past year to 18 months. What is important is not just value and profits, but the associated risk. We should be encouraging the behaviour that encourages fine saving and safe saving, so that we do not end up having to pick up the tab for those who behave inappropriately. Does the Minister believe that we require an urgent change? Will there be a review to ensure that those who have chosen safer and more secure routes are not penalised for it?
Dunfermline building society is part of my community. It is well respected throughout west Fife and Scotland and it is a safe institution. There is an important point to be made in the wider perspective. When even the safe bodies that have not chosen the rocky road of high profits are under threat, the whole fabric of society begins to unravel and people have even less confidence in Government institutions and the advice provided by Government, Ministers and politicians. We must take an extra step to ensure that institutions such as the Dunfermline building society are rewarded, not penalised, for being trusted.
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