Next month will see the great and good of the building society sector gather in Manchester for the annual Building Societies Association conference. In the past some of these events have served as little more than yearly get-togethers where chairmen and chief executives pat each other on the back and congratulate themselves on a job well done.
The sector has always been known for its sensible style of lending and ’slow and steady wins the race’ approach. Indeed, when the credit crunch first took its grip societies could have been forgiven for succumbing to the temptation of smiling smugly at their banking counterparts with a look that said “I told you so”. Not that any did, of course.
But in truth this year’s BSA conference is less likely to be about revelling in success and more about clinging to survival.
This change in tone began with the near-collapse of Dunfermline Building Society in March 2009. It was the sign the sector didn’t want to see – the one that read ’nobody is invincible’.
Rumours that Dunfermline was in trouble began circulating early in 2009 but no formal statement was forthcoming for some time. In fact, it wasn’t until March 24 that Jim Willens, chief executive of Dunfermline, said enigmatically that the society would not be making any comment on speculation that it was seeking a bailout after seeing losses in the region of £26m.
May’s BSA conference is less likely to be about revelling in success and more about clinging to survival. This change in tone among mutuals began with the near-collapse of Dunferm line last March
“Press articles on this subject are speculative,” said a message on the society’s website that morning. “Our results are due out in the next two weeks and we will not comment on them until that time.”
The society had made a £2m profit in 2007 but it was understood the Financial Services Authority had been forced to step in and look for a buyer.
A number of societies were believed to have been approached by the regulator at the time, but a deal had yet to be done.
Then on March 30 it was announced that Nationwide Building Society had taken on the collapsed society’s 34-branch retail network, its £1bn mortgage book and its £2.3bn deposit book.
A statement from the Treasury at the time said loan and mortgage customers could continue to contact Dunfermline in the usual way and should make their repayments as normal.
All of Dunfermline’s staff were transferred to Nationwide and its social housing portfolio was placed into a bridge bank owned by the Bank of England.
The problems at Dunfermline caused uproar in the society sector and beyond.
On April 1 Lending Strategy reported that a Scottish MP had asked the Financial Services Compensation Scheme to repay the £7.2m levy it had imposed on struggling Dunfermline.
Willie Rennie, Liberal Democrat MP for Dunfermline and West Fife, appealed to the organisation amid reports that the society was on the brink of collapse.
The near-demise of Dunfermline was also cited as one of the reasons several societies had their credit ratings slashed by Moody’s. The mutuals vowed to challenge the agency over its judgment.
The ratings agency hacked West Bromwich Building Society’s strength rating to E+ from C and did the same to Chelsea Building Society.
Moody’s seemed to be tarring all societies with the same brush when it emerged there was a vast difference between the way Dunfermline operated and practice at other mutuals.
Unlike many other societies Dunfermlin had got involved in a significant amount of specialist lending including in the commercial buy-to-let sector. It had also bought a bundle of self-cert mortgages from GMAC-RFC.
Diversification caused issues
Jeremy Hicks, senior corporate affairs manager for regional brands at Nationwide, says that while Dunfermline was a fundamentally sound business its div-ersification into commercial lending caused significant issues at a turbulent time for the financial services industry.
The Building Societies Act 1986 sets a statutory limit of 50% on wholesale funding for societies. Each organisation’s board sets its own limit and this is acknowledged and monitored by the Financial Services Authority. Dunfermline adhered to this but it’s foray into uncharted waters cost it dear.
“When organisations take chances that go beyond their traditional model it is clear they risk compromising their balance sheet in the way we saw with Dunfermline,” says Hicks.
If mutuals seize the day and stop relying on the likes of the BSA to do their thinking for them 2010 could be the year the sector reinvents itself but unless there is bold leadership at all levels pressure will build
Tony Yorke, principal of Think Strategically, a consultancy advising societies and other financial services firms, believes mutuals should go back to their roots.
“That means returning to prudent ways and sticking to their knitting,” he says. “Societies that have stuck to what they know have done relatively well and kept out of trouble.
“But without exception, those that acted like quasi-banks have got into difficulties. They have either been forced to merge or been required to take exceptional action to minimise the problems they have been confronted with.”
Yorke says Dunfermline fell apart for two main reasons.
“It tried to be too clever and got greedy in markets it didn’t understand while lax regulatory supervision by the FSA meant any shortcomings – such as lending £600m in commercial mortgages from a total book of £3bn – were not detected until it was too late,” he says.
“I’d like to think the sector has learnt from these mistakes and put its house in order. But unfortunately, knowing what I do, I can tell you this is not the case. The mistakes that characterised some societies in recent years are still in evidence in parts of the sector.”
The regulator may have been criticised for not acting sooner in the case of Dunfermline but it has certainly been concentrating on the society sector since.
It is introducing a Building Societies Sourcebook which is intended to help the sector learn from its mistakes. The basic principle of the sourcebook is that more diversification demands a higher level of management skills, systems and controls.
But will the new guidelines be enough? Problems at Dunfermline rocked the mutual sector in 2009According to Yorke, medium-sized organisations face the biggest problems.
“Large and small organisations have either the mass or the niche knowledge needed to survive,” he says. “But the jack-of-all-trades merchants are finding it tough because they haven’t got a grip on their raison d’etre.
“Making a profit in traditional areas such as high street savings and prime residential loans is now a tough ask. In a short space of time we have seen prime retail savings become the most expensive type of account, while prime mortgages now deliver the lowest returns.”
Yorke says societies should stick to what they know best, and believes those at the top should be pushing this.
“The government should encourage all parties to stick to their knitting,” he says. “Mutuals can play an important role in society provided they are allowed to represent the communities in which they are embedded.”
A sense of direction
Yorke says many societies have lost sight of why they are in business.
“The government and the FSA have contributed to this situation,” he adds. “It would be helpful for mutuals to be offered a sense of direction and they might get this if the Tories come to power.”
He says that tinkering with regulation is inadequate solution to a situation that needs careful handling and an injection of long-term thinking.
“If mutuals seize the day and stop relying on the likes of the BSA to do their thinking for them 2010 could be the year the sector reinvents itself,” he says. “But unless there is some bold leadership at all levels pressure will build and there will be yet more consolidation.”
So experts believe there is much to be said for the society sector reverting to its traditional values. It’s safe to assume that will be one of the topics du jour at the LSBSA conference.