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Wholesale change could boost societies

Guy Anker looks at proposals that could help mutuals with funding

The Treasury has begun a consultation process that could see building societies getting cheaper access to funds which could enable them to offer better value mortgages.

Treasury Economic Secretary Ed Balls revealed last week that the Government is proposing changes to offshore deposits and the contents of summary financial statements, directors’ reports and annual business statements.

The main aim is to relax rules that mean societies must get at least 50 per cent of their capital from retail funding, such as deposits and savings, when many would rather use cheaper wholesale funding, which can only comprise a maximum of half their finance.

Any deposits held in offshore subsidiaries, such as Jersey and Guernsey, are technically classified as wholesale funding even though they are usually deposited by investors and are more similar to retail funding. Balls is proposing to change that classification to retail funding to give mutuals greater access to wholesale funding.

Balls said: “Now is the right time to act. Taking these steps should relieve pressure on building societies who are close to their funding limits. It will enable societies to raise more, generally cheaper, wholesale funding and facilitate the provision of cheaper and better products.

“We will continue our programme of monitoring the legislation and, where necessary, updating it using the existing powers within the Building Societies Act.

“The Treasury will now consult on a number of changes to update the building societies legislation, enabling building societies to communicate better with their members and enhancing their ability to offer good value products.”

The Treasury is conducting a 12-week consultation that closes on February 1, 2007, aimed at seeking stakeholders’ views on the proposed changes to the Building Societies Act 1986.

But there is caution from the UK’s biggest building society Nationwide about whether the proposals will help the sector achieve better pricing.

Spokeswoman Tamsin Hemsley says: “It is too early to say whether the move will result in cheaper products. We need to sit down and scrutinise the details behind the proposals before making strategic decisions in that direction. Suffice it to say that one of the main aims of building societies is to give members the best value possible.”

The Building Societies’ Association is also warning members that any benefits are only likely to be felt by societies with offshore deposits and a lot of the smaller societies do not.

If societies are able to raise cheaper funding then it is likely to be a shot in the arm for a sector which has contracted over the past decade with numerous high-profile demutualisations.

Nationwide chief executive Philip Williamson is reported to have said last week that the 61 active societies could become 20 in 10 years due to consolidation.

But while Nationwide is keeping its feet on the ground, it is pleased by the changes being proposed.

Hemsley says: “Anything that frees up funding and allows building societies to compete on more of a level playing field with the banks has to be warmly welcomed.

“We would add that Nationwide is operating very effectively under the current regime and that the society already does all that it can to pass on cheaper funding costs to its members and, where possible, will look to pass on any further benefits to members through better pricing.

“It should be noted, however, that Nationwide’s offshore deposit operation is a very small proportion of its total retail and wholesale funding book.”

One of the societies that is disappearing is the Portman after being bought by Nationwide in September. That acquisition led to much talk that Nationwide could emerge as the biggest challenger to HBOS’s domination of the mortgage marketBut some commentators have also pointed to societies being under threat from new entrants to the mortgage market which are owned by investment banks and firms that are building on leading-edge technology, which features instant offers and full online capability.

Another concern is the upcoming Basel II regime which some people believe will mean that bigger firms will be able to demonstrate they are calculating risk better, meaning their cost of funds are lower which will give them an edge over smaller players, such as the smaller societies.

BSA head of external affairs Rachel Snow says any initiative that will help societies is welcome.

She says: “It is a changing market and building societies have different plans to remain competitive. Some are going into niche areas and some are concentrating on their localities through their branch networks.

“We welcome what the consultation says and we will be responding positively. If building societies are able to access capital cheaper, it will enable them to offer cheaper deals.

“It is not a pressing issue that we need to get to members now but these changes will mean that societies have the facility to raise capital in a more beneficial way to them and we think it is a sensible move.”

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