Speech by the Financial Secretay to the Treasury, Mark Hoban, MP at the Building Societies Association
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by the Financial Secretary to the Treasury.
[Check against delivery]
Good afternoon and thank you for inviting me to speak today.
It is great to be here to set out our policies to support and sustain the mutual sector. As you know the Coalition Agreement committed us to promoting the diversity of the mutual sector.
This isn’t because of some misty eyed, romantic idealism, but because we recognise that deep within the sector is a strong commitment to meeting the needs of your members.
It is the heritage and history of building societies to meet the needs of their members. From the earliest days of the sector when societies were set up to enable their members to buy a home of their own to today, the ethos of the sector is to put members first.
Those early societies were temporary, they were wound up when their founding members had bought their home. The change to more long lasting institutions was recognised in their names - the first savings account I opened was with the Leeds Permanent Building Society.
It of course is no longer there but the fact that today the BSA has 47 building societies as members is a sign of the sector’s strength and longevity.
Of course, the need to offer members a better deal through mergers and frankly the impact of the financial crisis has led to a consolidation of the sector.
But the challenge that you and I face is how to help the sector navigate its way through change in a way that ensures that we don’t lose sight of those founding principles of societies to meet their aspirations of members.
So I would like to set out today the steps we are taking to support the sector and leave you with a challenge.
Let me be clear at the outset,
We want a framework for the sector that means no penalties for mutuality, but no special favours either…
A framework that helps you meet the needs of your members but does not compromise their security, and…
A framework that removes not erects barriers to the expansion of your services.
As we continue to emerge from the financial crisis, the building society sector has a huge role to play in supporting our economic recovery.
Rebalancing our economy away from the debt fuelled consumption of the last decade to one based on saving and investment.
We entered the crisis with a chronically and dangerously low level of savings…over a quarter of households had no savings whatsoever and 60% still do not have a private pension.
We are committed to bucking the trend, encouraging lower and middle income households to start saving, for the long term and for retirement. Rebalancing the economy to a sustainable recovery based on saving and investment.
As part of your heritage, you are well placed to encourage people to save - mutuality provides reassurance to savers.
But today’s savers are different to those who helped build the sector in the past. We need to look to new ways to get people to save - new products for you to offer.
Junior ISAs for example. I am grateful for the big part that many of you here have played in helping us launch these products.
I know that many BSA members offered Child Trust Fund schemes and were concerned by our decision to end the scheme.
But I believe that Junior ISAs will provide all parents wishing to save for their children’s future with a suitable account, regardless of their income.
And those funds in a Junior ISA will by default roll over into an adult ISA, on maturity, helping set young adults on a path of prudence and saving.
And Junior ISAs are the type of clear and simple products that set the standard for other simple products to emerge across the market.
Because consumers need to understand and be able to confidently compare products when navigating the financial services market.
That is why we have recently announced the creation of a new steering group, chaired by Carol Sergeant, to take forward initiatives to develop a suite of simple financial products.
I believe simple products have huge potential to help many consumers make appropriate financial decisions and save for the future.
And we want the building society sector to continue to support those endeavours. A strong building society and mutuals sector, working in the interests of its members, embedded in its community, is in the perfect position to support Government efforts to develop a culture of financial responsibility.
Mortgages and housing
Of course, the flip side to saving, is supporting building societies in the vital role that they play through lending in the housing and mortgage markets - the roots of the societies here today.
Since 2007, mortgage lending has decreased considerably reflecting a fall in demand, but also a fall in supply as financial services take a more cautious approach to lending.
But we are determined that creditworthy borrowers looking to buy a home or move should have access to affordable mortgages. And that goes hand in hand with ensuring we increase the number of homes built across the country.
That’s why our Budget this year announced £250m through the FirstBuy Direct scheme to support first time buyers…
reforms to the rate of stamp duty land tax applicable to bulk purchases…
and why we are reforming planning laws to lift the layers of stifling bureaucracy to embed a presumption in favour of sustainable development.
At the same time I fully understand that the building society sector faces significant challenges on the regulatory front, both domestic and international.
There are some who would use the current economic uncertainty to pull the rug from under regulatory reform.
Those that argue that regulatory reform and financial sector reform would stifle growth at a time of economic recovery.
But I do not believe that recent events diminish the case for reform.
We have to reform the financial sector and regulation of the sector now in order to increase stability in a turbulent environment.
But at the same time we have listened carefully to your concerns, and worked with the industry to get reform right.
That’s been particularly the case as we fundamentally reform the failed Tripartite system.
As I’m sure you’re aware, we are reforming that system to create a permanent Financial Policy Committee to bring focus to and monitor macro risks in the financial system.
We are also transferring the oversight of systemically important financial institutions to a new Prudential Regulatory Authority that will sit in the Bank of England group.
And we are also bringing a new approach to protecting consumers, to ensure that they are at the heart of the financial system, through the new Financial Conduct Authority.
Together these bodies will bring judgement and foresight to regulation rather than mere box ticking.
But through these domestic reforms we are committed to promoting a level playing field between plc and non-plc ownership models.
And we have listened to the concerns that the mutual sector raised. That’s why the new regulatory authorities will be under a duty to say whether the rules they propose treat mutuals and non-mutuals equally. There should be no penalty for mutuality.
In addition, earlier this year we received the final recommendations from the Independent Commission on Banking.
The report itself marks an important step towards a new banking sector - a stable but competitive sector. It recommends ring-fencing retail banking activities, an equity capital surcharge for the ring fenced part of large banks, and statutory powers for bail-in of private investors.
Of course, the report also notes that current building society legislation appears to already provide a good basis for the risk management functions of ring-fenced banks.
We shouldn’t pretend that the building society sector was immune from the effect of the crisis, or that there aren’t lessons to be learnt, but in many ways, building societies are already ahead of the curve.
In some areas we are going beyond the ICB’s recommendations.
In particular we are looking at improvements in the UK’s payments system.
Because whilst we have a world class payments industry in many respects, I want it to be even more responsive, innovative and competitive.
Today, this is more important than ever, given the pace of technological development.
The future of the cheque is one example of how things can easily and quickly go wrong. Where decisions taken by the industry can have enormous impacts on consumers.
Indeed, the Treasury Select Committee has already raised concerns around representation of consumer interests, and has asked that the current regime be changed to address these concerns better.
We are therefore looking at the TSC’s recommendations and I can announce today that we will go beyond this to consult in the New Year on how the regulatory framework for payment systems can be enhanced.
But of course, reform is not only being driven from Westminster. There is an ambitious agenda for reform at the international level.
Reform that is vital to embedding greater stability in global financial markets, but reform which can quite easily suffocate our financial services if it is merely knee jerk and disproportionate.
Basel III often takes the headlines, and we have been pressing for full and consistent implementation of that agreement across the EU.
We are working with the Commission to ensure that CRD4 reinforces rather than weakens the Single Market by having high, common, and consistently applied standards for capital.
And at the same time we are adamant that jurisdictions must retain the right to apply higher levels of regulation to ensure financial stability.
To impose requirements that reflect the unique risks and characteristics of their home markets.
But I know from my work with the sector that you were concerned that Basel III didn’t take into account the specific needs for mutuals. You highlighted the impact that this would have on your ability to manage your balance sheet and meet customer needs. You pointed out that this would disadvantage the sector compared to banks.
I listened and made sure that creating the framework for mutuals to raise capital was a top priority for us in CRD 4. We have delivered on that.
And we will continue to engage with societies and European colleagues to ensure the final regulation and its implementation are appropriate.
FSCS legacy loan
Back at home, I know from conversations across the financial services sector about the importance of the Financial Services Compensation Scheme. It provides reassurance to depositors and investors. But there is a cost to this - a cost I am acutely aware of.
The size of any future FSCS levy is of course linked with the EU negotiations on the Deposit Guarantee Schemes Directive.
We have been clear that the Directive must ensure improved protection for consumers, but cannot impose unreasonable costs on firms. I am particularly aware of the potential impact of increased FSCS levies on building societies, given the high volume of retail deposits that they hold.
That is why we have pushed for low pre-funding levels and flexibility on the building up of the fund and we are continuing to work to ensure that the Deposit Guarantee Schemes Directive is proportionate and appropriate for the UK market.
There is one issue about the FSCS which I want to touch on.
During the financial crisis the resources immediately available to the FSCS proved to be inadequate to the task at hand.
The previous Government had no other choice but to step in to loan over £20bn to the FSCS to facilitate the resolution of Bradford and Bingley, and the Icelandic Banks.
I believe this was the correct course of action and the financial sector as a whole benefitted hugely as confidence in the system was restored.
The terms of this loan are now up for renegotiation. It is vital that new terms are reached which are fair to taxpayers and levy payers alike - the balance which I alluded to earlier.
The current interest rate on the loans of LIBOR + 30 bps, was set at a time when LIBOR was over 7 per cent and the sector was experiencing crisis conditions.
That rate is no longer appropriate. LIBOR is now 1.7% and the FSCS loan rate is now below the Government’s own cost of financing.
This is not acceptable and the Government is, therefore, negotiating revised terms with the FSCS.
Affordability for the sector will be a key consideration but any deal must also be fair to taxpayers and industry and robustly defensible to the public and to Parliament.
Challenge to building societies
It is very easy to focus on the here and now and I know that the FSCS is a big issue for you but I would urge you not to lose sight of the medium to long term future of the sector.
We know building societies play a key role in the UK economy, in our recovery, and we will support the industry in that task.
We will look at ways to enhance competition in financial services so that you can effectively challenge the big incumbents.
We will ensure that regulation in the financial sector protects fair and open competition between all its participants.
But there is only so much we can do.
It’s up to the sector itself to set a vision for its future.
Whilst there are many immediate challenges to navigate your way through, it is vital that you use this time to lay the foundations for the future.
How do you reinvigorate the sector to capitalise on your history, trust and stability to lead financial services in the 21st Century?
How will you use the opportunity that new capital presents to better meet the needs of your customers and attract new customers?
What does that mean in terms of new products? Innovative services? Improving efficiency?
We are in the middle of the most fundamental transformation of the financial sector for a generation, and there is a huge opportunity to seize the mantle of responsible, trustworthy, productive financial leadership.
I believe the building society sector is ideally placed to assume that leadership. It won’t be easy, and these are especially difficult times.
But it’s up to the sector to drive the kind of innovation that will see the sector grow and increase diversity across our financial services.
And where there are obstacles to such innovation we will work with building societies to resolve them.
As we said in our Coalition Agreement, we are committed to promoting mutuals and creating a more competitive banking industry.
We will do all that we can to create a framework and the challenge to you is how you use it to build on the heritage and history of building societies to help people realise their hopes and aspirations.