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Building societies must re-examine risk, says FSA

The FSA says building societies must re-examine their risk management and business models in the areas of liquidity, wholesale funding and lending to ensure they are aligned.

The regulator is today consulting on additional guidance to ensure building societies that are diversifying away from traditional business models have the necessary risk management systems and skills.

The FSA says only societies that demonstrate the risk management systems and skills required will have complete flexibility to run their business under the Building Societies Act.

Others will be forced to operate under “a simpler business model category and activities they can safely undertake”.

Today’s consultation paper forms part of the FSA’s intensive supervisory regime for building societies, where supervisors are judging the sustainability of business models and assessing senior management skills.

FSA retail managing director Jon Pain says: “Our approach is very simple; the more diversification, the higher the level of management skills and systems and controls the FSA will demand from the firm. This interventionist approach is entirely consistent with our heightened supervision and is designed to challenge and encourage a strong and vibrant building society sector for the future.

“Building societies will still be free to innovate and diversify, but not beyond the limits of their risk management skills.”

The consultation will close on September 5, 2009.

Building Societies Association head of savings policy Brian Morris says: “We welcome the positive and sensible messages about building societies that FSA has put up front in its consultation paper. We are pleased that FSA has designed its proposals to encourage the maintenance and promotion of a strong, vibrant mutual sector.

“We also welcome the assurance that this sourcebook is in no way intended to restrict societies’ ability to compete with banks. Societies with the requisite systems and controls will have complete flexibility to operate within the statutory limits set by Parliament.”

City law firm CMS Cameron McKenna partner Paul Edmondson says: “The government seems committed to the building society model and it’s likely that the sector will receive an endorsement when the government’s white paper on regulation is published. These proposals from FSA are a forerunner to that and explain how FSA will manage building society risk in the new regulatory world.”

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