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Talk about mutual interests

With the chief executive of the Financial Services Compensation Scheme due to address angry attendees, John Murray reckons this year’s BSA annual conference in Harrogate on May 20-21 could be one to remember

The good news about the Building Societies Association’s annual conference in Harrogate next month is that director-general Adrian Coles has dropped the once-mandatory opening address by the chief executive of the Financial Services Authority, but judging by the level of hostility in the sector towards the Financial Services Compensation Scheme at the moment it is pretty unlikely that Hector Sants would have turned up anyway.

Instead, we will have to wait until 4.15pm on the first day of the conference for the first regulatory representative – FSCS chief executive Loretta Minghella – to address angry mutuals.

This could prove to be brilliant planning on Coles’ part because, depending on what Minghella has to say, the day could end in tears or cheers.

There’s a widespread expectation that the terms of the scheme will be revised to make them less onerous to the building society sector which is forking out millions of pounds to bail out depositors in failed Icelandic banks as well as mortgage banks nearer to home.

If Minghella chooses to announce some such reform delegates may end up toasting her with champagne at the conference dinner that night. On the other hand, if there is a positive outcome to the issue it might just be greeted with a deep sigh of relief because the FSCS is hitting societies hard.

Indeed, the issue has been taken up at Westminster by MP Ann Cryer who on January 13 tabled a parliamentary early day motion concerning the FSCS levy on building societies. The motion achieved 158 signatures and was the subject of a parliamentary adjournment debate on March 10.

That debate not only helped to define the scale and severity of the problem but also provided Cryer and her supporters with an opportunity to press the Treasury and the FSA to address the levy question.

During the debate Cryer said she had been encouraged to read up on the Treasury Committee’s questioning of FSA and FSCS executives on February 25.

According to Cryer, in light of the widely held concerns of building societies Minghella had given an assurance to chairman John McFall and his colleagues on the committee.

“I think we are all conscious of the fact that the compensation scheme has to be funded by the industry and that means good firms pay for bad firms that have gone, so there’s always an element of unfairness about any bills we produce,” Cryer quoted Minghella as saying.

“It’s time to look again at the way the scheme is funded,” Minghella apparently added. “One thing that has emerged in the past few months is that we’ve had the money we have needed to pay claims as they have fallen due but bills are coming at a difficult time and this raises the question of whether there should be an element of prefunding for the scheme.”

So without Sants to send us into a deep depression as he did so effectively at the opening of last year’s conference, what do we have to look forward to as the curtain raiser to this year’s event?

The bad news is that the opening speaker is an economist so we should expect to hear large dollops of gloom and doom concerning house prices teetering on the brink of descent into Hades and GDP plunging.

But the good news that the speaker is David Smith, economics editor at the Sunday Times who, as readers of Lending Strategy as well as his own newspaper will know, strives towards moderate interpretations of the doom-laden data that seems to assault us on a daily basis.

Of course, Smith has the charming ability to soothe us by telling us more or less what we want to hear, although it has to be admitted that he has been pretty consistently wrong about the credit crisis and its consequences so far.

But in that he is not alone. Those in higher places than Smith such as Prime Minister Gordon Brown and chancellor Alistair Darling seem also to have woefully underestimated the crisis that their policies may have or may not have created and which they have certainly proved incapable of mitigating.

And those two are likely to be on the agenda of the next speaker on the conference programme, broadcaster and columnist David Aaronovitch. In his entertaining way he will be considering the political outlook which can’t be much better than the economic outlook, although with a general election to look forward to in 2010 at least we can anticipate an end to the present government if not the economic crisis.

Although I have implied that most of the first day of the conference may be an anticlimax, there’s still fun to be had in the two concurrent sessions after lunch.

Sparks may fly in the session on the mortgage market, with a volatile mixture of speakers. These include Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, who is down for a realistic assessment of the immediate outlook. Also present will be Peter Williams, in his role as an independent consultant, who has the interesting challenge of looking a decade ahead when nobody can even anticipate what’s going to happen next week.

Finally, David Orr, chief executive of the National Housing Federation, is charged with delivering a more optimistic view. Given the record of the government on housing, he’s probably living in cloud cuckoo land anyway.

Competing with this is a seminar on controlling costs which features two of the industry’s more entertaining characters – Philip Dearing, managing director of Mutual One, and Mike Lazenby, the chief executive whose building society – Kent Reliance – has one of the lowest cost bases in the UK. How Shane Larkin, head of affinity marketing at Royal & Sun All-iance fits into this session is a bit of a mystery and could prove to be so even on the day, but a sponsor has to have a slot somewhere.

Then we have the tears or cheers slot with Minghella, who would have been a hard act to follow if Coles hadn’t made sure he had an ace in the hole with the inspiring Richard Scase for the finale of the first day. Scase’s resumé includes the title of emeritus professor of organisational change at the University of Kent as well as visiting professorships at universities in London, Beijing, New Zealand, Australia and The Netherlands.

According to his CV, Scase has also written more than 20 books including Britain in 2010: the changing business landscape.

“This book influenced a swathe of UK government policy,” he states on his CV, but if this is meant to be a proud plug, one has to assume that the government has done some things right.

Kidding apart, Scase is fun to listen to. Indeed, he has the happy knack of bringing together ideas and facts from different disciplines to challenge the way we see things, and thought-provoking ideas are no bad thing at the end of a long day.

Day two opens brightly enough with Coles giving his Robin Day impression in a Question Time session. His guest panel includes Julia Dunn, head of building societies at the FSA, Iain Cornish, chief executive of the Yorkshire Building Society, David Harding, chairman of Coventry Building Society, and Alan Bennett, a partner at law firm Addleshaw Goddard. I can’t help but wonder why there should be a legal expert on the panel. But then again, why not?

The rest of the morning fragments into concurrent sessions, with one on arrears management looking at operational matters and one on mortgage funding which has obvious strategic importance and will be the choice of many delegates.

In addition to a paper on the savings outlook by Coles and BSA economist Andrew Gall the session on funding includes a presentation on covered bonds by Paul Summers, chief executive of Collins Stewart ISTC, and a paper on government policy. With no speaker yet named for the latter slot, one wonders if the problem for the government is finding a speaker or identifying a policy.

And what can I say about the afternoon, which appears to peter out almost as if the planners expect it to and so have not bothered about adding much zest or excitement because delegates will be heading for their Mercedes and baby Bentleys by then.

That’s not to say that some of the papers and speakers won’t be interesting. The session on talking to MPs by Stephen Mitcham, chief executive of Cambridge Building Society, should be interesting but as part of a seminar on communication it is competing with a concurrent session on strategic planning that includes presentations by Gary Styles, strategy, risk and economics director of Hometrack, and another on business models that work in the new environment by John Berry, director of Quickheart.

It’s a pity but by 2.30pm on the second day the chances are that many delegates will be opting for the car park rather than a seminar room, and that won’t be a fair reflection on the event.

The case for FSCS reform

Compensation payments made as a result of the failure of Bradford & Bingley and Icelandic banks have so far been funded by government loans to the Financial Services Compensation Scheme to the tune of £18.7bn.

Some of that money may be recovered from failed banks by September 2011 when the loan principal becomes due but the chances are that a large percentage will still be outstanding and this will have to be financed by FSCS levies on the industry.

Meanwhile, building societies and banks have to service the interest. The figure is capped at £1bn a year and of that the Building Societies Association estimates that its members will be required to pay up to £200m per year for the next three years. That equates to about 15% of the sector’s annual pre-tax profit based on the 2007/08 financial year.

Because of the prevailing low interest rate regime the Financial Services Authority argues that the FSCS levy for 2009/10 will be £645m, of which the BSA estimates building societies will be required to pay £130m.

The BSA’s case is that the effect on its members contrasts starkly with that on the banking sector. For banks, the levy for FSCS management expenses is typically between 3% and 5% of pre-tax profits. Also, in the few cases in which societies have got into difficulty mergers have been arranged with stronger societies without recourse to public funds.


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