Neville Richardson is playing himself in as the first chief executive of the ‘super mutual’ – the enlarged Co-operative Financial Services, which now includes the Britannia Building Society. He has been in place since the 1st August, but warns not to expect instant signs of change.
His first priority is simple – integration. The two businesses have a shared culture of ethics and customer service. But what they do not have is a shared IT system. In the demanding world of financial services – where compliance may not be king, but failure to comply can cost millions in fines – integrating IT systems is slow, costly, but essential.
Until those IT systems are shared there can be no common branding, nor any rationalisation of bank branches, warns Richardson. Yet even if the benefits of business synergy are a couple of years off, they will come, he argues bullishly.
“We have a window now to put things together and then be incredibly successful in three or four years’ time,” he says. “We have to focus now and make sure that integration really works.”
Richardson accepts the argument put to him by Co-operative News, that the mutual sector had a very good first half of the recession – yet (and this applies to building societies rather than CFS) a dreadful second half. But, he stresses, that does not mean (as some newspapers have suggested) that CFS rescued the Britannia.
“What we have done is to put together two strong businesses,” he says. “I think one mistake some people make sometimes is almost thinking that because you are a mutual that you are strong.” He says that simply having a “particular form of governance – one which I happen to subscribe to very strongly, that has massive advantages because you don’t have to pay attention to outside shareholders” does not in itself protect an institution from failure or error. “You can have well run mutuals and you can have poorly run mutuals,” he says. “Just like you can have well run PLCs and badly run PLCs.“
As a man who has come from leading the second largest building society, Richardson is fully in tune with the sector’s argument that it is being discriminated against by the regulator, the Financial Services Authority.
He agrees that mutuals are disadvantaged when dealing with regulators, which are demanding levels of capitalisation that mutuals (because they have no share capital) have difficulty in meeting and which have to pay contributions towards the Financial Services Compensation Scheme on the basis of the size of their deposit base, rather than their risk profile.
It is a struggle, Richardson agrees. “But in my very recent meetings with senior people at one of the tripartite regulators, I was delighted that when they were talking about the PLCs and then about the building societies, they said ‘and then we have CFS, which is a different category of its own’. Which comes as a real recognition that we are different.
“But you are right, there has been this mantra for a long time from the regulators that a mutual doesn’t have access to capital in the same way that PLCs do. My immediate answer to that was what happened in the credit crisis? Where did PLCs go for capital then? They went to the Government! So that mantra didn’t work. I think you are absolutely right that we have to convince people of that.”
Yet, we say, surely the quid pro quo for mutuals not needing such high levels of capitalisation was that in turn they adopted low risk business models – a deal which mutuals effectively blew by taking high risks with a low capital base.
“I think that is where you can’t generalise across the sector,” responds Richardson. “I suppose the big question there is, did they know they were taking risks, or didn’t they? I suspect with quite a number they didn’t know the risks they were taking. That’s not a criticism of the mutual model – it’s a criticism of those boards that were taking those risks.”
That, we suggest, implies that the boards of many mutuals need to be strengthened. “Well that, in part, is down to the regulator,” replies Richardson. “They have that responsibility. And they are very, very clearly aware of that now and the FSA interviews new board members. It’s quite a rigorous interview process. As I was effectively joining the board of CFS, I had to go through that process myself and I can assure you they were paying proper attention to it.
“The democratic process – whether it is the co-operative model or the other mutual model – with people questioning the decisions that are being taken, that is something I always valued at the Britainnia. Having members’ meetings, having meetings around the country, getting feedback from members and valuing their contributions. The difficulty, almost, is that mutuals, if they want to, can put their heads in the sand and ignore that. And that is where the regulator has to intervene, or put some controls in place.”
Richardson also defends the criticisms of the Britannia business made by a credit ratings agency for its risk exposure. He argues that this risk was appropriate, limited and ultimately profitable. It was conducted through a subsidiary, Platform, where the losses were significantly below the profits it generated for the society over the six years since it was acquired.
Richardson gives the impression of already enjoying the challenge of leading a much enlarged organisation and intends to do so with enthusiasm. Many hopes are riding on him.