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On track with retro lending

With so much innovation in the mortgage industry the diminutive Stafford Railway Building Society should have been shunted into the sidings of history long ago but under Mike Heenan’s leadership it’s well placed to steam into the future as a retro lender

JM: The name of the organisation of which you are chief executive, Stafford Railway Building Society, is evocative of a bygone era. Did the society originally help engine drivers, stokers, signalmen and guards buy trackside cottages with coal bunkers in their backyards, and how different is it today?

MH: The society was formed by the London & North Western Railway which ran the rail line from Euston to Crewe and at that time -1877 – its head office was in Stafford.

A number of directors from the rail side became the first directors of the society including one from the unusually-named Shropshire & Union Railways and Canal Company. The other directors were local townspeople so it was a joint effort.

In the early days we lent down the line so your point about lending to signalmen is correct. In fact, our first office was at the train station. That’s an interesting cross-selling thought – you could go to the station for your ticket and your mortgage.

But within seven years a separate office was established for the society and subscriptions were collected at a local school on Friday nights.

By the turn of the century the society was pretty much running on its own. These days, we have no railway connections.

JM: Stafford Railway is a small society – I think when Chesham Building Society goes to Skipton in the summer you’ll be 42nd by asset size in the league table of the remaining 50 mutuals but you’re often quoted in the national and regional press, and on television.

How do you explain your high profile? Is it down to the fact that you’ve got a good story to tell and the drive to tell it?

MH: I think we get a lot of press because we’re different and traditional. People like to hark back to the way things were don’t they? Because we run the society on the model of how mutuals were run 50 years ago it’s an interesting story to report on.

It’s partly that and it partly because we’re making a success of our business in difficult times. But to be honest, I reckon we get most of the interest we do because we’re so traditional.

JM: Retro cars such as the Mini are popular these days so would it be fair to say you’re a retro lender?

MH: You could say that. I’m not offended by the term because there’s a lot to be said for the old model. We’re certainly profiting from it.

JM: I think it was the BBC that contrasted your 130 year old office in Market Square in Stafford with the nearby Alliance & Leicester branch which was to be rebranded as an office of Santander.

Anyhow, this was after the demise of the Cheshire and Dunfermline societies and the BBC pointed out that you should be worried about the future but instead seemed confident.

That was a few months ago and a week is a long time in the financial services industry these days, so are you still as confident as you were then?

MH: The old Abbey office has been changed and we now have Santander in the town. And yes, I’m still confident. Our business model, which is prudent and has been tried and tested over a long period of time, is still appropriate in today’s lending market.

We’ve gone through a decade or so of large numbers of mortgage products being available and I’m not sure the public appetite for those was ever truly there. I think a lot of those deals were foist on the market by providers.

I believe consumers want a straightforward product they understand and that’s what we provide – our customers know precisely where they stand. So rather than being less appealing and unable to attract business we find we are more appealing than ever. That’s why I’m confident.

I know a lot of societies have found it difficult to attract retail funding but we haven’t had that problem first because people feel we’re safe and second, because everything in the society is on administered rates so we can offer reasonably attractive savings rates compared with most others.

And we don’t have wholesale funding – we are funded by retail deposits.

Consumers want a straightforward product and that’s what we provide – our customers know precisely where they stand. So rather than being unable to attract business we are more appealing than ever

JM: Looking at your annual results that show record profits and lending you’ve done rather well compared with many of your contemporaries, partly for the reasons that you’ve just explained.

Even so, I’m wondering if you’re too small to be hit badly by the Financial Services Compensation Scheme and perhaps too wise to have held deposits in Icelandic banks.

MH: Well, your assumption about the FSCS is incorrect because the scheme recognises balance sheet size. As you know, there’s been a big debate about the unfairness of the scheme and some societies have been protesting that they’ve been harder hit than other financial institutions because of the way the scheme looks at retail deposits.

Because societies – and in particular this society – have no wholesale funding we have taken a disproportionately heavy hit.

But the reason we’ve done well goes back to the point I made about having administered rates. For example, we’ve not suffered loss of income by having tracker mortgages.

Quite a lot of lenders had trackers – the Bank of England base rate has gone right down so they are probably making a loss on those mortgages now. We don’t have that problem – all our residential mortgages pay the same rate. No borrower gets a rate other than the SVR, not even me. All deals pay the same so we are able to adjust our rates accordingly.

And one other factor has been helpful. We prudently invested our surplus liquidity in 2008. Believe it or not I started to build a buffer back then and bought gilts. We have held gilts for many years – a lot of societies haven’t but we’ve always felt they are a worthwhile asset. It transpires that I bought at the right time and they’re now producing a quite nice income and yield.

So we have the benefit of administered rates and we’ve also had some pretty good advice when it comes to the investment of surplus funds.

JM: When you distil all that down it seems the secret of your success is keeping things simple, especially with regard to your products. Is that true?

MH: Yes, that’s our big secret – to have a simple product on the mortgage side and do something similar with savings. We have just two main savings products – the Pullman Account with its obvious railway connection and an ISA.

Obviously, we have things for young people too but generally speaking those are our main accounts. Product terms are simple with no penalties, traps or fees.

JM: And your lending is also safe. Your average LTV suggests you are somewhat risk-adverse.

MH: Our average LTV across the book is less than 40%. We don’t lend above 75% LTV and never have done. When you look back to the times when the market was going mad with advances of 125% LTV we kept to around 75% LTV. But obviously, we’ll lend more than that if there’s another guarantee available.

JM: But isn’t that a sector of the market some of the big lenders such as Barclays are also focussing on?

MH: Yes, they realise it’s the place to be.

JM: But aren’t you worried about the competition?

MH: I’m always worried about competition. We’ve got to bear it in mind but we are uncomplicated compared with most of the big players – although I have to say I’ve watched HSBC over the years and to be honest it offers a simple product that constitutes competition for us.

JM: Does most of your business come through the front door rather than via brokers?

MH: We don’t get much business through brokers – probably less than 10%. A lot of business comes through the branch and write-ups in the press. People read about us and then go to our website.

So we get a lot of consumers ringing up and we don’t just lend locally. Because of our railway connection we’ve lent outside our local area right from the beginning. In fact, I think the first mortgage we issued was in Northampton. I suppose about 40% of our lending is now outside Staffordshire.

And we often lend to families. We lend to the father, then the son or daughter will come in for a mortgage and they might not be living in Stafford – they could be anywhere. We are pleased that we enjoy strong member loyalty.

JM: So there is an upside to being a small society but I suppose the downside must be the regulatory burden. A former head of the European Mortgage Federation once said that big players welcome pan-European mortgage regulation because it makes life difficult for smaller lenders that have few economies of scale and don’t have the resource to cope with the bureaucracy regulators spawn.

Does regulation have a disproportionate impact on you and how do you cope?

MH: Yes, regulators tend to think that one size fits all. For instance, take the returns we have to send to the Financial Services Authority. There’s a large number of them and obviously they must be accurate.

And of course there’s been even more regulation since all the difficulties in the market. One is almost tempted to say that inevitably there’s been an overreaction on the regulatory side because of what’s happened. For example, instead of just giving guidance on how much liquidity a society should hold the regulator has started to tell us what this has to be – the make-up of it.

This is tying our hands to some extent, but having said that most of the regulation that has come out is not a problem for us because of our prudent ways.

Nevertheless, it has to be handled and you have to have people to handle it. Take money laundering – it’s not regulation as such but a tremendous amount of effort is required in an organisation like ours to meet official requirements in this regard.

And the burden is incremental – you add bits onto bits and eventually it becomes a mountain.

I’ve never added it up but we must have two full-time staff just dealing with regulation, and to put that in perspective we employ just 15 people.

It’s a big proportion and that feeds into management expenses and costs.

JM: Picking up on that, your management expenses ratio compared with Coventry or Kent Reliance looks on the heavy side even though you’ve outsourced your IT and don’t have a big branch network.

Is having few economies of scale a problem or is it the cost of regulation that makes it difficult to drive down this metric? Alternatively, is it a remuneration issue because the skills required of today’s managers are so much greater than they used to be, affecting small societies more than large ones?

MH: You can’t go below a certain level of management expenses when you are of a certain size. You mention Kent Reliance which has done some clever things with moving operations abroad, but we aren’t big enough to contemplate doing that. I mean, I have one person dealing with mortgages – how do I change that?

It’s a tough question but I think there’s still an opportunity in the mutual movement for sharing services between societies of a similar size. We’ve outsourced our IT to another society – Newcastle – and there’s a lot more opportunity for working together. Treasury management is a classic example. I think this will happen eventually – it must be the future.

For many years we’ve been reducing our management expenses. This is the first year they’ve remained level and I’m conscious that we need to get back onto that agenda.

JM: Moving to the political landscape when I Googled your name ahead of this interview I was surprised at the number of references to a mayor of Stafford who also seems to be called Mike Heenan.

At first I thought that two high profile Heenans in the same community could be a bit of problem but then it dawned on me that you’ve an interest in politics and that in addition to being chief executive of Stafford Railway and a partner in an accountancy firm you might also be a local councillor and mayor. Am I right, and how difficult is it manage all these interests?

MH: I was mayor in 1990 and I’ve been on Stafford Borough Council for a long time. In fact, I was first elected in 1976 but had a break from 1995 until 2003.

I’m currently the leader of the council. It’s very much a political role and I enjoy it a lot.

JM: Clearly, but how do you manage to fit everything in? MH: I spend a lot of my free time being leader of the council. Most council meetings are in the evenings which fits in neatly with working at the society. But it’s also about delegation and looking at key things all the time – concentrating on important issues and ensuring everything is running smoothly.

JM: Sticking with politics, there’s a story going round that you were involved in selecting Tory leader David Cameron as a Parliamentary candidate. True or false?

MH: True. He stood for Stafford in 1997 and I was involved in the selection process. I was chairman of the local Conservative Party at the time so I was also involved in his campaign. We worked closely for almost two years and became friends. We still keep in touch.

JM: And is he as confident about the future as you are?

MH: Well, obviously he has a big hurdle to jump. I know he will handle himself well but there are significant challenges ahead of him.

JM: As a financial institution are you troubled by the political uncertainty?

MH: No, because we are simply a savings and mortgage lending institution. Obviously, the market is not buoyant at the moment and we are affected by that but it’s not a big issue for us because we’re not a market-driven business with an eye on the stock market.

JM: Finally, I know you’re confident about the future of societies but aside from being regulated out of the market doesn’t the biggest threat come from within, especially when the time comes for a chief executive to step back? There are two issues here – the cost of attracting the right person for the job and the mutual ethos.

Some succession planning has been successful – I’m thinking of David Stewart at Coventry and Ian Ward at Leeds Building Society – but some other changes at the top have either led to mutuals adopting adventurous strategies and failing or making the most of opportune merger offers. I don’t want to imply societies are an endangered species but is there not a vulnerability issue?

MH: I understand what you’re saying and have some sympathy with it – the situation certainly becomes difficult when there is change at the top.

Inevitably, when there’s a change of chief executive the new guy wants to alter things. This may not be the safest route for the institution involved and we’ve seen some come unstuck when that sort of approach has been taken. It’s difficult and you have to embed a clear succession plan.

We’ve seen some failures in the market but we’ve also seen some great successes. And don’t worry, at Stafford Railway we have robust arrangements in place.

Mike Heenan – personal profile

Position: Chief executive of Stafford Railway Building Society.

Always wanted to be a lender? I started as a chartered accountant and got into this line because the firm I joined as a partner ran the society. I never thought I’d end up being a lender but I’ve been on the board for 27 years now and thoroughly enjoy my involvement.

Likes: Travel, politics and community involvement.

Hates: Speed cameras and fast food.

Relaxation: I have a house in France where I like to relax. I also have a boat there.

Favourite food/restaurant: I love Italian food.

Current bedside book: Operation Mincemeat by Ben Macintyre. It’s a World War II deception story my son gave me for my birthday.

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