The new chairman of the Building Societies Association was to have been Britannia chief executive Neville Richardson but he had to step aside due to the upcoming merger with Co-operative Financial Services so first, how do you see that merger?
GB: I wish Richardson and the new venture every success because it’s important we see growth in the mutual sector and also that it becomes stronger.
The deal has the potential to show the way forward where like-minded mutual organisations are prepared to get together. It has not happened yet as the process has to go through a members’ vote but clearly the management teams are confident or they wouldn’t have taken matters this far. I hope it goes through as it will provide another option in the mutual sector.
The bottom line is that the merged organisation remains a mutual entity and anything that strengthens mutuality is a good thing.
Richardson has gone on record as saying that he is ambitious in terms of his desire to grow the business, and if it can be proved that the model works the new organisation will no doubt be seeking to expand beyond being simply a combination of two societies.
JM: Our paths last crossed in a Lending Strategy interview last year but that was in your capacity as chief executive of Nationwide. I recollect asking you about your involvement with the government and your talks with the Treasury about the Special Liquidity Scheme. Have those relationships been ongoing or has the government’s attention been elsewhere?
GB: A bit of both, but I’ve not had any breakfast meetings with Prime Minister Gordon Brown lately. When I went to that meeting I think it was largely put on as a show for the journalists rather than me having any substantial input.
But in the past year a number of ways for the government to have a dialogue with the industry have been developed and we have been a part of these.
For example, there’s a monthly meeting at which members of the tripartite authority get together. This is chaired by chancellor Alistair Darling, and the chief executives of seven banks plus Nationwide are also in attendance. At the first of these meetings we made the authorities aware of pressures in the domestic and international markets in an effort to ensure a coordinated response.
It is important to have this sort of dialogue, and also that it should be ongoing. The events of the past 18 months have been unpredictable so to have a point of contact is vital.
The Financial Services Authority also has a chief executives’ committee, providing regular contact. When necessary, the regulator meets on a one-to-one basis with key players and that’s also important because we’re outside Lloyds Banking Group -the largest retail player in the country.
Obviously, the authorities have been massively preoccupied with all the issues that have arisen with regard to Lloyds Banking Group of late but they always have to respond to priorities.
Thankfully, Nationwide and the wider building society sector has not been a priority in the sense of having problems that need sorting out.
JM: You recently gave evidence to the Treasury Select Committee. What was that all about?
GB: There was a Treasury Select Committee and also an Economic Affairs Committee in Parliament at that time, and I attended both. The point of the meetings was to see if any lessons could be learnt from the mutual sector, the premise being that societies have kept their noses relatively clean.
So there was quite a bit of questioning about that, and then there were discussions about the impact of the Financial Services Compensation Scheme – particularly the fees payable to the FSCS which we feel are disproportionate in terms on how they affect societies.
JM: I’d like to pick up on that last point a little later but when I spoke to John Goodfellow, the outgoing chairman of the BSA, at about this time last year he saw his year in office as one in which to beat the drum of mutuality.
The BSA has now strengthened its secretariat so it represents members on mortgage issues as well as mutual matters but doesn’t this undermine the role of the Council of Mortgage Lenders?
GB: There are a number of ways of looking at this question. First, the BSA is there to represent societies and it was something of an anomaly that as part of that process it covered savings and other activities but not mortgages, when mortgages are what societies primarily do. So there was a desire to correct that.
Also, although the CML speaks out on industry matters, by virtue of the factthat it has all the biggest players around the table it tends to be orientated towards what you might call the plc view of mortgage affairs.
So the BSA was responding to feedback from its members – and smaller players in particular – that they weren’t having a loud enough voice.
As for the longer term implications for the CML, I don’t think many societies have resigned from it and I suppose we’ll have to wait and see what the future holds. But we now have the British Bankers Association, the CML, the BSA and the Association of Mortgage Intermediaries all representing sectors of the industry. When you think about it, that’s more representation than is required and perhaps we’ll see some consolidation in the sector.
JM: Looking at the programme for this year’s BSA annual conference in Harrogate I notice the familiar names of David Smith, economics editor at the Sunday Times, and business visionary Richard Scase. They should deliver an insight into what we can expect in the next couple of years but given the prevailing instability, how difficult is it to plan strategically?
GB: Any strategy a company develops should span a number of years. For example, at Nationwide we have a strategy that kicked off two years ago when I took over as chief executive but clearly you have to modify your plans to a degree in response to changing market conditions. Equally, you’ve got to have a longer term vision and we are continuing with the broad strategy we formulated.
But in the current climate, any institution must give priority to trading through the recession and if you consider the disparate factors in play it adds up to a pretty a complicated picture.
The full impact of the recession is only starting to become apparent and this will dominate the domestic market for at least two years. We’re seeing a massive contraction of margins in the marketplace.
Meanwhile, plc players have become increasingly focused on retail activity, largely because they are being encouraged to do this by politicians. Let’s face it, in some cases they are partly owned by the state.
All these factors come together to create a highly confusing marketplace in which to operate. That’s why it’s important that we work through this period carefully and methodically. We must ensure we don’t suffer from any unintended consequences or see too much market distortion as a result of state activityJM: Again looking at the BSA conference programme, you will be devoting some time to mortgage rescue schemes and helping individuals manage debt. Does the BSA take a particular view on government initiatives in this regard?
GB: I think you’re probably referring to the government’s mortgage support scheme, and both the BSA and Nationwide are supportive of the principles and intentions that underlie this.
But at the same time it’s important to ensure such schemes are simple to operate and understand from the point of view of lenders as well as borrowers. Bearing this in mind, there are still discussions to be had about the application of the initiative. After all, any scheme that is too cumbersome or bureaucratic is not ultimately going to have the desired effect.
JM: Isn’t there a danger of the scheme giving buyers a false sense of security?
GB: It’s important to make clear that the purpose of the initiative is to support individuals who are suffering a temporary reduction in income. They will still be required to service 30% of the interest on their debt so it’s not an open-ended cheque book and we need to ensure that it doesn’t motivate the wrong sort of behaviour. I know that’s a concern felt by the government too.
In short, the message must be – this not an easy way out, it’s meant to help families who have been genuinely disrupted by the current economic crisis.
JM: I’d like to go back to the FSCS levy, and Nationwide says it is facing a £250m contribution. How are societies generally being affected by the scheme and how would the BSA like to see it changed?
GB: The FSA has said it will cap the cost of the FSCS levy to no more than £1bn per year for the next three years so if the three-year cost is £3bn and Nationwide makes up about 10% of the market, that puts our exposure at £300m. We’re saying the £250m figure you mention because since the initial numbers came out interest rates have fallen and a lot. So the figure we quote is just an estimate.
But more broadly, the situation is outrageous in terms of the impact it’s having on societies. It’s eating significantly into their levels of profitability. I don’t think we’ve yet seen this but it has the potential to turn trading profits into losses for some societies.
The FSA’s point of view is that societies should bear a larger share of the cost because they have most retail deposits and therefore enjoy a greater proportion of the benefit from the scheme. The trouble is, that benefit only crystallises if a society gets into a situation whereby it can’t meet its liabilities, and we’ve not yet seen such a situation.
Meanwhile, the bigger point we are making – and it’s one we feel particularly strongly about – is that the FSCS does not differentiate between contributors based on the risk of their respective business models.
It doesn’t seem right that a situation could arise whereby a plc that is much more highly leveraged than a society and also probably involved in racier lending activity got it horribly wrong and a conservative and prudent society had to pick up the pieces.
We have made a strong recommendation that the levy should be based on the risk models of contributors. I’d like to see a situation whereby contributors are grouped by business model – for example, you could have banks, foreign banks operating in the UK and societies all in separate groups. Then, if you had a failure in a society that sector would take 75% of the pain and everybody else would take 25%. Of course, the same would go for the other sectors.
I’m not sure of the precise percentages that should be used in this model but as a principle it would be easy to apply and considerably more equitable than the way the scheme currently works. JM: Staying with that subject, I hear Santander received a substantial sum from the FSCS to cover the risk of acquiring the savings book of Bradford & Bingley. I’m not alone in failing to understand that payment and believe some members of the BSA have questioned its transparency, asking the BSA to express an opinion. Where do you stand?
GB: To be honest I’m not aware of any payment being received by Santander. I thought it paid several hundred million pounds to acquire the liabilities and branches of B&B but I’m not sure about a payment going the other way.
However, I agree that there’s a serious lack of transparency in terms of how the affairs of B&B were handled, having been routed through the FSCS. It seems that B&B started off with a balance sheet with assets generating income that serviced liabilities, then the liabilities were passed on to Santander, the cost being borne by the industry.
So it seems that somewhere there must be a pile of assets raising income. How this has been fed into the overall equation I don’t think anybody is clear.
We are trying to get to grips with that question and of course the big issue is – when the assets are ultimately liquidated, will there be a net deficit or a net asset? I suspect it may well be a deficit and that will be another cost for the industry to bear.
So I agree that we should have transparency – big numbers are involved here. With Nationwide being liable for some £250m, I think we have a right to understand the basis of the FSCS’ charges.
JM: FSA chairman Lord Turner recently published his views on the future of regulation. Do you have a view on the reforms he is proposing?
GB: Lord Turner has made a number of recommendations and he’s also posed some questions that require further debate. In terms of his comments so far, I think they are targeted more at the big banks of this world than societies but I can see a lot of common sense in his thinking which has been generally well received.
But as always the devil will be in the detail and in this case in the application. It’s great to publish a glossy report but it’s only when suggested measures are applied in practice that difficulties become apparent.
For example, I think the notion of having professional non-executive directors is great for the likes of the Royal Bank of Scotland which have huge resources. They can probably afford to pay for what might become shadow management teams, with full-time non-executives having their own advisers.
So it’s fine if you’re a big bank but if you’re a more modest organisation it’s pretty challenging to put that sort of governance in place. We need to look closely at Lord Turner’s recommendations and determine what makes sense at the plc player level and what is feasible at the society level.
JM: Talking of big and small, Nationwide is becoming something of a white knight for failures in the mutual sector, the most recent example being Dunfermline. How do you square this with your conviction about the value of mutuality and can you continue to be the ultimate safety net?
GB: There’s a still a lot of value and strength in the mutual sector. The model is robust and particularly appropriate in the present financial climate. The typical mutual is highly capitalised, with high levels of liquidity and a low reliance on wholesale funding.
Clearly, Dunfermline found itself in a challenging situation but it’s important to remember that it’s fundamentally a sound business and I don’t think its experience will tarnish the mutual sector as a whole, which still commands a great deal of respect.
And Nationwide is not the ultimate safety net for the sector. We have always been clear that we will consider mergers and acquisitions where they are right for our business, our members and the sector as a whole, but that any such activities must create value for our members.
Also, we’re not the only society to have gone down the merger route. Chelsea recently took on Catholic, the Yorkshire has taken on Barnsley and Skipton has taken on Scarborough.
JM: Which issues do you think will take up most of your time in your year of office at the BSA and how optimistic are you about the next 12 months?
GB: I think it’s going to be a difficult year, not just for societies but for everyone in the industry.
The past 18 months have been dominated by what I have described as corporate failures and now we’re facing the full impact of the recession. Societies will have to exercise reasonable forbearance with their borrowers, while savers are facing historically low interest rates so we also need to give them as much support as we can.
At the same time, we have to ensure that the mutual sector remains strong. At the moment I’d say respect for societies is at an all-time high and it’s important to maintain that and do what we can to support our members.
Consumer confidence has taken a huge knock in the past 18 months and individuals are now taking much more interest in where they invest their money. There is likely to be much more questioning of the financial stability of deposit-taking institutions from now on and I want to see the resurgence being experienced by the mutual sector continue.