Speaking at the Building Societies Association conference in Harrogate, Hugh May, reading a speech on behalf of FSA manager of retail firms division Nick Lock, attacked societies for their alleged lack of awareness and inadequate risk policies over the last few years.
This conference was in stark contrast to the event last year, which was characterised by collective back-patting by mutual bosses for not following the aggressive growth strategies and reliance on wholesale funding of demutualised lenders Northern Rock and Bradford & Bingley,
May said some societies saw the onset of the crisis as a growth opportunity. He said: “We see that as a fundamental error, as was carrying on or even starting commercial and high-risk lending, even in 2008.”
The FSA also hit out at mutuals’ for mispricing risk and lending at unsustainable margins. He criticised some societies for their wholesale loan acquisitions. He said: “There was also a failure to understand risk infection arising from acquired portfolios, a failure to evaluate the downside risks and upside potential as well as overpayment for subsidiary business lines. Societies have purchased what have turned out to be unmarketable securities.”
Outgoing BSA chairman John Goodfellow says: “We need to see action, support and a desire to build a better future gaining traction in the minds of the Tripartite. It is time to remove any lingering sense of complacency.”
But he warns: “The Dunferm-line episode shook all of us in the building society world. No one can foretell that similar episodes will not happen.”
Yorkshire corporate devel-opment director Andy Caton says the FSA’s comments should not be taken to mean that the society sector has handled the crisis worse than any other type of financial institution. He says: “The regulator tried to emphasise that is not the case but its message was that there were some building societies that have more extreme business models than others.”
Caton believes that the FSA’s more intrusive style of regulation is heading in the right direction but Skipton chief executive David Cutter is fearful that the new environ-ment could “stifle innovation”.
He says: “The FSA clearly wants everyone in the sector to be ultra, ultra prudent and cautious. But this model we have has been going for 20 years and we have taken risks – some have been successful, some we have had to manage away. We have proved risk works but it has not been achieved overnight.”
Brentchase Financial managing director Mike Fitzgerald is sympathetic to the FSA’s view.
He says: “I feel some building societies have tried to imitate specialist lenders like the big banks and GMAC in the products that they offered. It might be wrong to brand everybody with the same brush, there is a hint of truth there from the FSA with certain lenders. Hopefully, they have learnt their lesson – stick to what you know. It is good to be a bit inventive, you do not want grey all the way through, but some really went a bit too far, even surprising some intermediaries.”