News from Charlotte Atkins
Labour MP for Staffordshire Moorlands
March 2009

Charlotte Atkins MP attacks ‘disproportionate’ levy on building societies

“I have the good fortune of having the headquarters of two mutual building societies in Leek in my constituency — Britannia and Leek United,” Charlotte Atkins told MPs during a Parliamentary debate on the Financial Services Compensation Scheme (FSCS).
“They differ in size, but they are trusted institutions and very much part of the local community in Staffordshire Moorlands,” the Staffordshire Moorlands Labour MP said.
“In the late 1990s, they were subject to the challenges of the carpetbaggers, but they resisted because of the loyalty, good sense and commitment of their members, who would not be bribed by cash handouts in return for demutualisation.
“How right they were. The 10 building societies that went down that route no longer exist as separate entities; they have been swallowed up by larger banking groups such as Barclays and Lloyds.
 “Leek United and Britannia offer something special to their customers. They offer a save haven for cash, trustworthy advice, sympathetic handling of mortgage arrears and membership benefits. They also make a huge contribution to the local community through charitable giving, volunteering and financial education.
“No wonder that, as trust in banks slid in the past year, 1 million new building society accounts were opened. That shows that building societies are perceived by their customers as outperforming banks in every aspect of customer service.”
Charlotte Atkins pointed out: “That is not surprising because, as mutuals, building societies do not have shareholders to please and are accountable only to their members.
“Some 74 per cent of building society borrowers are extremely satisfied or very satisfied compared with 63 per cent of borrowers from other institutions; 67 per cent of building society customers think that their provider offers value for money compared with only 48 per cent of bank customers; and 68 per cent of building society customers agree that their institution treat customers fairly compared with 55 per cent of bank customers.
 “Building society business models are based on old-fashioned values that are relevant today in our financial crisis. The money deposited by building society customers is used as a basis for lending to other customers.
“Unlike the banks, which borrow in the wholesale markets to lend to customers, building societies are legally required to obtain a minimum of 50 per cent of their funding from retail savings. Therefore, their exposure to the wholesale money markets is significantly less than that of banks.
“Building societies operate far less risky business models and take a prudent approach to lending. That is borne out by their low level of arrears and repossessions, which are in stark contrast to the latest figures published by the banks.
“Building societies support the aims of the FSCS. In the current climate, it is important that savers in the UK feel confident about investing in the UK. The FSCS is an insurance policy and it is right that building societies pay a fair premium.
“However, I cannot believe that the Treasury intended the FSCS to discriminate against prudent organisations such as Britannia and Leek United.
“By calculating the levy based on the share of the savings market and excluding, for example, current account balances, the burden is falling disproportionately on building societies and, more particularly, on their members, for it is they who will pay.
“For 2009-10, the FSCS bill will be around £130 million to the building societies, which is about 9 per cent of the sector’s pre-tax profits for the 2007-08 financial year. The societies’ share of the levy for the years beyond 2011 is totally uncertain, but it could well cost as much as £200 million per annum.
“That contrasts starkly with the banking sector, in which the FSCS levy for management expenses is typically less than 3 per cent of pre-tax profits over a similar accounting period, or one third of building societies’ exposure.
“There are two reasons for that. First, the current allocation of FSCS levies relates to the size of each contributor’s retail deposit balances. Building societies, which have always raised the great majority of their funds from their traditional retail savings customers, will pay, relative to their total balance sheet, much more than the banks.
“Secondly, building societies aim to provide the best rates to both borrowers and savers, rather than maximise their profits and pay dividends to external shareholders. That is why so many building societies are at the top of the best-buy tables. Building societies’ stated profits, even in good times, are much lower.
Charlotte Atkins told MPs: “Having said that, Britannia has produced some excellent results for the past year — it must be congratulated on its ability to sustain itself in this period of financial turmoil.
“Leek United is by far the smaller of the two building societies in my constituency. The charge against its 2008 accounts will be a whopping 20 per cent of its pre-tax profits. It will also be faced with significant charges in future years and a great deal of uncertainty about the size of the levy beyond 2011.
“Proportionately, the cost to Britannia is not as great, but the cost to its members will be huge, as it is the members who will bear it. I should declare an interest: I am a proud member of Britannia Building Society.
“The 2008 charge to Britannia was £19.8 million. In 2009, it expects the figure to be about £12 million. That money would otherwise have been returned to Britannia’s 3 million members, either through better rates or directly through its annual profit sharing scheme, which gives money to members based on the building society’s performance in the previous year.
“Surely it is grossly unfair that building societies should pay for the failure of dysfunctional banks. No building society has ever called on the FSCS or its predecessor schemes. That is not to say that it will never happen, but it never has, and that should be recognised.
“The Financial Services Authority (FSA) should overhaul the UK’s deposit protection scheme to ensure that building societies do not bear a disproportionately large share of the £1 billion annual bill.
“Should not building societies’ and banks’ payments into the compensation scheme be risk-related? Methods exist to do that and they must now be considered urgently. It is not fair that building societies, which have operated such a prudent financial system, should be so penalised.
“It would be ironic and devastating if, having seen off the rapacious carpetbaggers of 1999, Leek United should find its position compromised by the FSA’s bid to bail out the very building societies that went down the risky, high-profit route of becoming banks.
“Leek United, helped in the battle by Britannia Building Society, rightly rejected that route because it decided that that was the best option for its members, and those members overwhelmingly supported it.
“Let us ensure that building societies are given the confidence to go forward rather than being penalised for being prudent and risk-averse,” Charlotte Atkins stressed.