The Treasury has published a discussion document setting out options for securing the long-term stability of the building society sector.
The paper seeks views from investors, members, societies and others on options for:
– New, more resilient capital instruments (ranking as core tier 1 or tier 1),
– Modifications to existing capital instruments to make them more resilient in times of economic stress,
– Enhancing the government’s role in supporting societies with regard to raising capital, including possible changes to legislation,
– Exploring whether capital instruments abroad should be adopted in the UK.
The Treasury acknowledges that societies have historically been well capitalised and the majority of mutuals have responded well to challenging conditions since the credit crisis began.
But it adds that the changed regulatory environment and increased competition in the market has highlighted a number of areas where reform could improve the resilience of the society model.
These include improving corporate governance and looking at different capital and funding models.
Paul Myners, financial services secretary to the Treasury, says: “Societies have long been at the heart of financial services in this country. The mutual sector encourages a diverse financial system and offers a strong business model. The government is keen to ensure that this remains the case in the longer term.
“I am confident that the range of options available will allow mutuals to increase their resilience to stress and give the sector the capacity to grow.”
He adds: “There is a need to consider whether the capital instruments currently available to societies are sufficient to ensure the longer term stability of the sector, as well as to explore alternatives and any changes that might be needed to introduce these.”
Adrian Coles, director-general of the Building Societies Association, says: “We welcome the publication of this discussion paper which seems to be well researched.
“It clearly identifies important issues surrounding core capital requirements for societies, specifically the need for a new tier 1 capital instrument that is compatible with the mutual model.”
He adds: “The Treasury has also effectively summarised the need for a mutual-compatible form of capital instrument that meets European Union regulatory requirements.”
Coles says the Treasury raises some interesting questions about a new form of capital instrument that could lead to institutional shareholders being entitled to a governance role at societies, while ensuring mutual values remain at the heart of their business.
He questions how this might change the existing mutual business model.
Coles adds: “We will take our time and put forward a considered response to the idea of developing a new core tier 1 capi- tal instrument.
“But this can only be a work in progress until European legislation is finalised and we can proceed with the certainty that a new instrument will not only meet the needs of the mutual model but also be compliant with all requirements.”