Banking StandardsWritten evidence from the Building Societies Association

Executive Summary

The BSA supports the exemption from ring-fencing for building societies (and instead amending the Building Societies Act where necessary to bring it into line) including the intention not to legislate for structural restrictions on building societies.

The de minimis threshold for ring-fencing should be lower so that banks compete on equal basis with building societies.

Building societies should continue to be allowed to provide derivatives and structured retail deposits, subject to the same safeguards as ring-fenced banks.

Requirements for loss absorbing capacity should be targeted at the most systemic institutions. The minimum leverage ratio should reflect differences in the riskiness of different business models, and bail-in requirements should be proportionate to the risk an institution poses to the system.

The BSA would support increasing coverage of depositor preference to all retail deposits as this would aid consumer understanding.

To enhance competition, a greater diversity of providers should be supported. This would result in more effective competition, and greater financial stability. Mutuals’ ownership structure ensures that consumers’ needs carry greater weight, meaning they operate to different incentives than shareholder-owned banks.


1. The Building Societies Association (BSA) represents mutual lenders and deposit takers in the UK including all 47 UK building societies. Mutual lenders and deposit takers have total assets of over £375 billion and, together with their subsidiaries, hold residential mortgages of £245 billion, 20% of the total outstanding in the UK. They hold more than £250 billion of retail deposits, accounting for 22% of all such deposits in the UK. Mutual deposit takers account for 31% of cash ISA balances. They employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches.

2. The BSA has described elsewhere in more detail its position in relation to many of the points made below in response to the Commission’s questions. This submission is therefore brief, and more expansive explanations can be found in our previous submission to the Treasury White Paper and our response to this Commission’s review on banking standards. These are attached as appendices to this submission. The questions in the Commission’s call for evidence to which our points are most relevant are identified in square brackets.

3. The BSA supports structural changes to the banking system. Reforms that expose large, complex banks to greater market discipline shall enable mutuals and other challengers to compete on a more equal basis. Increased competition from a more diverse range of institutions shall provide a more effective challenge to the big banks, giving consumers increased choice, counteracting malformed incentives, and improving financial stability.

Exemption of building societies from ring-fencing [Q13]

4. The BSA believes that exempting building societies entirely from the definition of a “ring-fenced bank” is sensible. Mutual lenders and deposit takers, such as building societies, did not cause the financial crisis. Building societies have long been subject to legislative restrictions on their activities so are already, in effect, ring-fenced. To enable building societies to continue to focus on lending for house purchase funded by retail deposits, the Government’s intention not to introduce new legislative restrictions on a number of building societies’ supporting activities (such as estate agency and independent financial advice—activities which support societies’ principal purpose and do not increase their exposure to global financial markets) is also sensible.

5. The BSA endorses the Treasury’s high level principles for amending the Building Societies Act to bring it into line with ring-fencing and introduce other reforms so that building societies are free to compete on an equal basis with ring-fenced banks subject to retaining the distinctive nature of building societies. The BSA looks forward to working with the Treasury on the necessary amendments to the Act on this basis.

The de minimis exemption [Q13]

6. The draft Bill grants the power to amend the Building Societies Act 1986 where necessary to bring it into line with the ring-fencing provisions. This means that all building societies, regardless of size, will be subject to these amendments. However, it is proposed that ring-fencing via the Bill will not apply to banks with less than £25 billion of deposits from individuals and SMEs. If the same de minimis exemption applied to building societies, all but the largest two would probably be exempt. There is therefore a potential competitive disparity if large to medium sized banking groups are not subject to ring-fencing legislation, but a building society of equal size is subject to ring-fencing via the amended Building Societies Act. As well as potential distortions to competition, £25 billion may simply be too high a threshold. This would have excluded Bradford & Bingley plc before it failed, even though at the time that bank was undoubtedly of systemic importance. For both these reasons, the BSA proposes that the de minimis exemption should be set at £10 billion of assets or £5 billion of deposits from individuals or SMEs, whichever is lower.

Product restrictions [Q16, Q18]

7. If any building societies are to diversify into small business banking, they would need to be able to offer derivatives commonly provided to SME customers, consistent with those ring-fenced banks are permitted to offer.

8. Building societies currently sell a range of retail investment products, such as protected equity bonds, collective investment products and life assurance-based investments. These complement building societies’ core purpose, and the potential for higher returns are particularly valued by consumers in the current low interest environment.

9. Provision of these products does not necessarily add to the risks to an individual firm or the financial system as a whole. It is important that outright bans in these areas preventing the provision of valued services to individuals and SMEs do not take the place of effective conduct regulation which should be sufficient to prevent mis-selling.

10. Deposit-taking and lending subsidiaries in the Crown Dependencies should not be prohibited for ring-fenced banks or building societies as the close links with these islands and the absence of currency risk make such operations a much lower risk undertaking than operations in other non-EEA states.

Loss absorbency and depositor preference [Q25, Q27, Q21]

11. The BSA supports the Government’s decision, proposed in the White Paper, not to go beyond the Basel III requirements for the minimum non-risk weighted leverage ratio. A leverage ratio is a blunt measure that discriminates against low-risk businesses, like building societies and other mutuals, in particular. The BSA would endorse the further differentiation of minimum leverage ratios according to the riskiness of business models, as proposed in the European Parliament during the passage of the CRD4 package.

12. The BSA has argued that the requirement to hold of a stock of liabilities that are capable of being bailed-in should be targeted at the most systemic banks. Imposing substantial bail-in requirements on smaller and simpler institutions would raise their cost of funds with little benefit to financial stability. To this end, we draw attention to the criteria set out in Article 39 of the draft RRD for determining the minimum amount of liabilities eligible for bail-in, which clearly (and correctly in our view) emphasise the size, business model, risk profile, and interconnectedness of the institution.

13. The BSA would also support depositor preference [Q21] being widened to include all retail deposits held with a ring-fenced bank or building society, not just those covered by the FSCS. This would be much simpler for savers to understand. Any changes to creditor hierarchies should be carefully managed and communicated.

Competition and market structure [Q2, Q8]

14. As described in our previous submission to the Parliamentary Commission, mutuals’ ownership structure has been seen to deliver a long-term, low risk approach. As a result, they were less affected by the credit crunch than were many other financial services providers. Mutuals’ organisational culture stems from the primacy of member savers and borrowers, rather than external shareholders, with a mutuals’ staff knowing that when they serve a member they are serving an owner of the business. Mutuals go to great effort to get their members engaged in how the organisation is run.

15. Building societies and other mutuals provide a competitive challenge to the large incumbent banks. Structural reforms that break the power of banks which are too big and complex to fail are likely to enhance this challenge. Rather than the market being dominated by institutions with very similar organisational structures or business models, a diverse range of providers can increase competition by competing across a range of factors and widening the choice available to consumers. A greater diversity of providers can also make the financial system more stable, if firms operate to different incentives and are affected by external shocks in different ways. Firms competing in different ways can also help to prevent incentives that are detrimental to society from becoming widespread1. Diversity of financial services provision should therefore be supported, as the Government committed to in its Coalition Agreement. And the implementation of ring-fencing arrangements in complex banking groups should ensure that the internal separations are strong, particularly regarding treasury functions, and that governance structures support the development of cultures and incentives that fit the needs of society.

30 October 2012

1 For instance, the Bank and FSA recently drew attention to the inherent incentives to excessive risk-taking at shareholder-owned plc banks, stating in The PRA’s approach to banking supervision: “When a firm is owned by private shareholders whose stake is leveraged through borrowing from depositors and other creditors, the owners will tend to have an incentive to take on more risk than is in the interests of the firm’s creditors. That is because shareholders, although the first bearers of loss, typically have limited liability in the event of failure but enjoy the unlimited upside associated with successful risk-taking.”

Prepared 2nd January 2013