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Societies must show strength to rise to challenges

The time for building societies to crow about their virtuous position in the financial services landscape is well and truly over.

With Dunfermline having to be rescued, a slew of other building societies having to merge and rumours of trouble at other institutions, the collective back-slapping we saw on occasions since the credit crunch is now a distant memory.

At the BSA conference last week, the FSA was forthright in its assessment of the sector’s behaviour. Building societies were attacked for having inadequate risk policies and over-ambitious growth targets. In particular, the regulator highlighted the fact that some firms saw the credit crunch as a business growth opportunity.

In recent years, some societies looked on jealously at the banks’ use of the wholesale markets and used whatever methods they could to get their share of the action.

We must not forget the FSA’s own failures with regard to its supervision of the sector but the societies themselves must own up to their mistakes and learn from them.

As outgoing BSA chairman John Goodfellow said in his conference speech: “It is time to remove any lingering sense of complacency in building society boardrooms”.

Societies must prove to the FSA they are ready to face tough challenges. With recent rating agency downgrades and negative press coverage the sector must also prove strength to the public.

But the FSA must be careful to find a balance in the way it regulates the building societies. The mood of many delegates at the conference last week was one of acceptance of the FSA’s criticisms but concern that a too aggressive approach from the regulator could damage the sector irreparably.

Building societies must be allowed the freedom to innovate and take certain risks if they are to compete and serve their communities properly.

Funding of the Financial Services Compensation Scheme must also be revisited. Even allowing for recent events in the sector, societies are paying an unfair and disproportionate levy and this must be addressed urgently.

Building societies play a vital role both within the financial services industry and in wider society.

The FSA must keep in mind the positive force and diversity of supply this sector provides while societies themselves must prove they can meet future challenges.

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