Written evidence submitted by the Yorkshire
Building Society
EXECUTIVE SUMMARY
— Building
societies make a crucial contribution to the competition, diversity
and strength of the UK's retail financial services sector. Yorkshire
Building Society (YBS), as a mutual, is able to offer competitive
rates on savings and mortgages because it does not have to maximise
returns to shareholders. YBS believes that, provided they are
able to compete on fair and level terms, building societies can
further enhance the level of competition in the financial services
market.
— YBS
believes that, in investigating competition and choice in the
banking sector, the Treasury Committee may wish to scrutinise
(a) the distortions that injecting public funding into plcs has
created in the market, and (b) how current and proposed regulation
of financial services is a significant and growing barrier to
fostering competition, choice and innovation in the sector.
— YBS
has welcomed the Government's stated intention to "foster
diversity in financial services, promote mutuals and create a
more competitive banking industry"[42]
and is encouraged by the Chancellor's recent statement that "building
societies and mutuals have an important role to play in the future".
YBS looks forward to seeing how this stated intention to promote
mutuals is translated into action.
— One
of the biggest priorities for YBS is to ensure that current and
future regulatory requirements appropriately reflect the mutual
model. A number of new and proposed regulatory requirements have
been created or implemented. These new and proposed regulations
have tended to favour large legacy institutions, with additional
prudential regulation typically representing a disproportionate
cost to small firms. In addition, we believe that little account
has been taken of organisational entity in terms of regulating
the financial services industry.
— YBS
therefore believes that the Government should commit to alter
the terms and approach of regulatory and supervisory authorities,
including the FSA and its successor bodies. This would include
appropriate and proportionate treatment of mutuals in respect
of capital and liquidity requirements, and other key regulatory
issues such as the funding model for the Financial Services Compensation
Scheme. In particular, the financial mutual sector needs access
to a mutual capital instrument.
1. INTRODUCTION
1.1 Yorkshire Building Society (YBS) welcomes
the opportunity to contribute to the Committee's important and
timely inquiry into competition and choice in the banking sector.
YBS, which also incorporates the Chelsea and Barnsley building
societies, is the second largest building society in the UK, with
a strong belief in, and commitment to, the mutual ethos. With
total assets of £30 billion, the Society holds £23 billion
in residential mortgages and £23 billion in members' savings
from 2.8 million members, and employs approximately 3,000 staff
in a network of 178 branches and 77 agencies located across the
UK.
1.2 The Yorkshire's geographical reach creates
a business that is big enough to compete, yet small enough to
care. Its commitment to the communities it serves is reflected
in its retention of branches in areas where many other lenders
have withdrawn. Over the last few years YBS has experienced a
growing high street presence, at a time when many others have
been reducing theirs. Our approach to mergers (see also paragraph
2.5 and 3.1) is predicated on the creation of a strong organisational
centre balanced by the retention of local names, brands, character
and presence in and understanding of the local communities from
which we derive our strength and sense of identity and purpose.
1.3 YBS views its approach to financial stability
and strength as being a direct consequence of its mutuality and
the governance arrangements this entails. Strong capital and liquidity
positions ensure the Society and its constituent brands are well
funded. Although not untouched by the financial crisis, YBS's
financial resilience enabled it to emerge from this period of
instability in much better shape than many quoted banks, without
having recourse to taxpayer support. Moreover, the mutual sector
as a whole, through consolidation, has largely protected the sector's
own strength and, in turn, enhanced the stability, vigour and
diversity of the wider UK retail financial services market and
supported its recovery.
1.4 YBS continues to work hard to maximise opportunities
for its members to contribute to the effective running of the
Society and in order to develop and sustain over time a robust
mutual governance model. This accountability structure is a key
differentiator between the mutual model and that of the plc. Member
forums, a members panel and member "question time" meetings
also play their part, as part of a coherent and self-iterating
programme of member engagement, in ensuring that the Society's
leadership team remain continuously accountable (with votes on
key issues, for example, remuneration), take decisions for the
longer-term, and act with the interest of members at heart. The
long-term, sustainable approach to lending that YBS has maintained
in the past decade and more has allowed the Society to retain
a strong financial position during and after the financial crisis.
1.5 This submission seeks to address important
issues in relation to competition and choice in the banking sector,
including:
— The
distortions that injecting public funding into plcs has created
in the market for competitors which do not have the benefit of
the implicit guarantee that State support entails.
— Throughout
the period of financial crisis and following it, building societies
retained a higher level of consumer confidence than plcs. This
is reflected in regularly measured levels of customer satisfaction[43].
— How
current and proposed regulation of financial services is a significant
and growing barrier to competition to the sector. How regulation
disadvantages building societies by failing to take into account
comparative organisational structures on issues such as capital
and liquidity requirements.
— Specific
proposals on how to ensure the future stability and growth of
the mutual sector in a way which creates a level playing field
with the banking sector, something which YBS does not believe
currently exists.
2. THE IMPACT
OF THE
FINANCIAL CRISIS
ON COMPETITION
AND CHOICE
2.1 An immediate consequence of the financial
crisis of 2008 was, for mutuals and quoted banks alike, a substantial
tightening in credit available to consumers. YBS, in common with
other building societies, was less badly affected than the retail
banks—most notably the nationalised and part nationalised
banks—and has been able to continue to offer a wide and
well balanced range of competitively priced products which continue
to top "best buy" product league tables[44].
2.2 But, whereas the retail banks benefited handsomely
from taxpayer support (variously including the Bank Recapitalisation
Programme, the Asset Protection Scheme (APS) and the Credit Guarantee
Scheme), these initiatives, although ostensibly accessible on
fair and level terms by the building society sector, were largely
unavailable to most mutuals to draw down upon.
2.3 YBS was in a position to utilise the Credit
Guarantee Scheme (CGS), which was for it a potentially suitable
vehicle. Although in principle the scheme was the perfect vehicle
to strengthen depositors' and broader market confidence in the
mutual sector, in practice, it was much less accessible to the
mutual sector than to banks, when the need arose, because many
building societies were too small to issue debt securities which
this initiative sought to underwrite with State support.
2.4 Although YBS did not require the type of
support that other, more short-term, shareholder-focused financial
entities did, counter-intuitively, those retail deposit taking
institutions that took State aid came to be seen by many as enjoying
a special status as "too big to fail" which enhanced
the perception of their attractiveness in the eyes of actual and
prospective depositors. Consumer inertia to switching means this
remains a legacy of the period of instability. YBS believes that
this situation could be exacerbated as the Special Liquidity Scheme
is withdrawn.
2.5 Nonetheless, the building society sector
in general, and YBS in particular, has played its part in reinforcing
the stability of the mutual sector, and the continuance of a diverse
and more robust financial services sector, through a process of
defensive consolidations: YBS merged with the business of the
Barnsley Building Society in December 2008 and merged with the
Chelsea Building Society in April 2010. It is important to note
that this strengthening of the building society sector was achieved
at nil cost to the taxpayer.
2.6 So far as consumers were concerned, the market
in mortgages saw a reduction of products from 27,105 in April
2007 to just 2,516 products in January 2010, according to Money
Supermarket. Today, although lending criteria remain strict, that
figure has risen to 2,990, and among the best mortgage products
are to be sourced from the building society sector.
3. THE IMPACT
OF WIDESPREAD
CONSOLIDATION AMONG
BANKS AND
MUTUALS
3.1 In the course of the past two years, YBS
has merged with other building societies (see paragraph 2.5 above).
The circumstances and rationale for each transaction were different,
but both building societies share YBS's commitment to mutuality
and the values which go with this.
3.2 The financial services market has changed
fundamentally in recent years, and scale is increasingly important
for the efficient operation of building societies and access to
funding markets. However, while remaining big enough to compete,
YBS is small enough to care about its customers and the communities
it serves. In addition, YBS strongly believes that its retention
of the three separate brands of "Yorkshire", "Barnsley"
and "Chelsea", with their own high street presence and
product sets, competing with each other and other providers in
the sector, sustains strong competition, while helping to ensure
the longer-term strength of the mutual sector in the utility retail
financial services.
3.3 In YBS's view, the system protects and in
fact entrenches incumbency; militates against dynamic competition
in the marketplace; and, most crucially, denies consumers real
choice; and, structurally and behaviourally, obviates the switching
between brands and products that, in a truly competitive banking
sector, this would predicate.
3.4 New regulation to support financial stability,
as well as enhanced capital and liquidity requirements, have collectively
had the perverse effect of further entrenching the position of
the large quoted banks, a number of which are supported by substantial
taxpayer support. This has further protected their positions and,
in inverse proportions, enhanced the disparity between the competitive
positioning of banks and mutuals to high street consumers. As
the BSA has noted, in 2009, the Lloyds Banking Group had a 24%
share of new mortgage lending and 28% of the increase in deposits;
Santander took about an 18% share of new lending and 23% of the
increase in retails deposits.
3.5 Existing regulators can easily give the impression
that they find it easiest to deal with large deposit-taking institutions,
based on a plc model. This has the effect of further legitimising
the plc model in preference to the mutual one, in spite of the
fact that, as we explain elsewhere in this memorandum, and as
the coalition Government has made clear, mutuality has a key role
to play in delivering choice, competition, value, innovation and,
therefore, enhanced financial stability. Mutuals, which stick
to utility banking, have played their part in ensuring the continuance
of diversity and vigour in the mutual sector. YBS has, through
its merger with the Barnsley and Chelsea, strengthened all these
businesses, as well as provided reassurance to their depositors,
members and staff.
3.6 It is worth remembering none of the building
societies which went down the path of demutualisation have succeeded
in remaining independent entities.
4. THE KEY
BARRIERS TO
ENTRY INHIBITING
INCREASED COMPETITION—INCLUDING
REGULATION
4.1 Building societies make a crucial contribution
to the competition and diversity of the retail financial services
market. YBS is, as a mutual, able to offer competitive rates on
savings and mortgages as it does not pay dividends to shareholders.
YBS believes that, provided they are given a level playing field,
building societies can further enhance the level of competition
in the sector, in the interests of consumers.
4.2 YBS believes that regulation is a significant
and growing barrier to competition in the sector. A number of
new and proposed regulatory requirements (such as capital and
liquidity requirements, the Mortgage Market Review, changes to
the Financial Services Compensation Scheme) have been created
or implemented. While the intention to further stabilise the system
is welcome, there needs to be greater recognition and understanding
of the cumulative effects of all these regulatory changes on market
competition.
4.3 These new and proposed regulations have tended
to favour large incumbent organisations, protecting them from
competition, with additional prudential regulation typically representing
a greater proportionate cost to small firms. In addition, we believe
that little account has been taken of organisational structure
in term of regulating the financial services industry.
5. EXPLORE THE
GOVERNMENT AND
COMPETITION AUTHORITIES'
STRATEGY TO
INCREASE COMPETITION
IN BANKING,
INCLUDING THE
LIKELIHOOD THAT
NEW ENTRANTS
WILL SUCCESSFULLY
ENTER THE
MARKET
5.1 YBS has welcomed the Government's stated
intention in the Coalition Agreement to "bring forward detailed
proposals to foster diversity in financial services, promote mutuals
and create a more competitive banking industry"[45].
YBS has also been encouraged by a recent statement from the Chancellor
that "building societies and mutuals have an important role
to play in the future" and the Government wants to "strengthen
them and support those who want to create mutuals".[46]
YBS looks forward to seeing how this stated intention to promote
mutuals is translated into action, and believes that the mutual
sector could benefit from and support new entry.
5.2 But YBS believes that more emphasis should
be placed on strengthening existing financial mutuals to ensure
that they compete vigorously, sustainably and effectively with
plcs. That provides the shortest route to enhancing the competitive
dynamic in the retail financial services market. That means providing
mutuals with a non-publicly funded vehicle that enables them to
draw down upon fresh capital, recognising that their organisational
structure inhibits their ability to inject capital from the markets
in the same way as quoted banks. In YBS's view, the only credible
way to achieve this highly desirable public policy outcome is
to provide mutuals with a capital instrument to capacity build
within the existing mutual sector and, in this way, drive choice
and competition in the interests of consumers, rather than shareholders
(see also paragraph 5.5 below).
5.3 One of the biggest priorities for YBS is
to ensure that current and future regulatory requirements appropriately
reflect the mutual model. We believe, for example, that the Financial
Services Authority (FSA) has not, to date, taken organisational
structure into account when regulating the financial services
industry and has failed to cater adequately for building societies
both in its regulation of the UK market and in its European and
international negotiations. We believe that the mutual sector
should be treated as a sector in its own right and not be treated
in the same way as plcs.
5.4 YBS therefore believes that the Government
should commit to alter the terms and approach of regulatory and
supervisory authorities, including the FSA and its successor bodies.
YBS proposes the following:
— An
appropriate treatment of mutuals with regards to the Capital Requirements
Directive in order to ensure a capital instrument consistent with
mutuality. The definition of core capital needs to be consistent
with mutual ownership if it is not to disadvantage mutual firms.
— A review
of the current funding model for the Financial Services Compensation
Scheme (FSCS), where allocation does not reflect risk and the
burden falls disproportionately on building societies. New arrangements
are needed that more accurately reflect the relative risks faced
by banks and building societies. In particular, the way in which
building society regulation has developed over time has created
an anomalous position in which the FSCS—and, therefore,
the depositor protection threshold of £50,000—applies
to the consolidated group of businesses within a mutual, whereas
for a plc with banking licences per brand, the consumer protection
is multiplied by the number of banking licences it possesses.
This could sustain an existing behavioural incentive for understandably
risk-averse depositors to see banks rather than mutuals as the
best home for their savings.
— The
European Commission has proposed that deposit protection cover
should increase to EUR 100,000 per individual from 31 December
2010. At this time coverage will also be limited to each deposit
taker and the temporary arrangement for dual cover for merged
building societies will end. As building society legislation makes
it far more difficult for the operating of subsidiaries, this
potentially places building societies at a disadvantage to plcs,
which do not operate under such restrictions and can therefore
continue to benefit from dual protection. We fully accept that
if dual protection received a dual levy that would be appropriate
and fair.
5.5 These changes can be implemented without
cost to the taxpayer.
6. CONCLUSION
6.1 YBS has been pleased to offer these thoughts
to the Committee which it trusts the Committee will find helpful.
YBS would be delighted to have the opportunity to expand on its
views and ideas, in oral evidence, if the Committee would find
this useful.
September 2010
42 The Coalition: our programme for government, page
9 Back
43
see Building Societies Association report "Customer service
at mutuals is better than at banks" (March 2010) Back
44
In 2009, YBS received 1,130 best buy mentions. 2010 (between January
and July) YBS has received 1,351 best buy mentions (this excludes
Chelsea Building Society between January and March 2010) Back
45
The Coalition: our programme for government, page 9 Back
46
Hansard, 16 June 2010 Back
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