A few weeks into the new government and the signs are not looking good either for the co-operative and mutual movement, nor for its natural supporters.
The Budget has been analysed by the respected Institute for Fiscal Studies as adversely affecting the lower paid more than the wealthy and those on benefits more than those in work. Specific measures, both in the Budget and prior to it, have badly affected mutual organizations.
While there has been widespread support for the banking levy – which aims to raise £2bn a year – it will be regarded by many people in the movement as being applied in a very unfair way. The levy will be imposed on all banks and building societies with total liabilities of £20bn or more.
The Building Societies Association is relieved that the levy is being applied on the basis of the size of balance sheets, rather than the amount held in deposits. It is also pleased that smaller societies will not to have to pay a levy, but disappointed that the levy is not restricted to the PLC banks. “In an ideal world we would have preferred this,” says the BSA’s Rachel Le Brocq. “As we understand it – and don’t have the details as yet – it will only affect the largest of our members. We think most of our members will be exempt.”
But this still raises the question of whether building societies should be subject to the levy at all. Rescuing the Royal Bank of Scotland, Lloyds/Halifax, Northern Rock and Bradford & Bingley cost taxpayers around £600bn – enough to threaten the foundations of the national finances. Yet the only building society rescue involving money from the Treasury was of the Dunfermline Building Society, at a cost of £1.5bn.
“We have done our best to look after our own,” says Le Brocq. Several building societies – including Derbyshire, Cheshire, Catholic, Chesham, Scarborough and Barnsley – have been rescued under the building society umbrella, without state support. This raises serious questions about whether it was justified to apply the banking levy on building societies at all. This is especially true as part of the reason for the levy was to hit the high rates of profits now emerging from some banks. No such profits will be declared by building societies in the current low interest rate environment – and profits are required, anyway, to repair societies’ capital positions.
The particular problem of building societies’ capital reserves is separately a matter being closely considered by the Treasury – though its consultation paper was issued before the Conservatives won the last election. The Council of Mortgage Lenders – which represents many building societies, as well as banks – has pointed out that, historically, building societies have been well capitalised. The shallow capitalisation that some societies are now suffering from reflects both their weak competitive position in the current market environment of low interest rates and also the excessive risks entered into by the managements of a minority of societies.
CML director general Michael Coogan says: “We agree with the Treasury’s analysis that building societies as a sector face a number of significant challenges. We believe more needs to be done to ensure the long term contribution of a thriving mutual sector to future competitiveness and growth in the UK retail markets. Reform is needed to ensure the future resilience of the building society model and we hope the new government will take a wider view on the actions that could help, including taking another look at the regulatory burden on societies and examining funding issues, and not focus exclusively on capital issues.”
As this column has previously complained, international measures to require higher levels of capitalisation for banks – which will apply equally to building societies – are not appropriate for building societies. The solution should be to ensure that mutuals adopt the low risk approach they have traditionally been associated with, rather than to force them to hold large reserves that enable them to undertake high risk activities.
The BSA makes a similar point. Jeremy Palmer, its head of financial policy, says: “Proposed international core capital criteria are not currently compatible with the mutual and co-operative model, as commentators increasingly recognise. We are calling for the Treasury, which has direct responsibility for the EU Directive negotiations, to help secure the right outcome at a European level on the issue of capital for the mutual sector.”
The failure of the Budget to recognise what should be the fundamental difference between building societies and banks does not augur well for the Treasury’s attitude in those negotiations.
Other changes to the financial services market place are also very worrying for the mutual sector. The transfer of responsibility for banking regulation to the Bank of England and the creation of a new Consumer Protection and Markets Authority is a specific concern, which the SDLP MP Mark Durkan highlighted when campaigning for wider powers for credit unions in Northern Ireland. While the Financial Services Authority proved itself ineffective in regulating and tackling the major financial institutions, it did at least understand credit unions. There are now anxieties that the Bank of England and the Consumer Protection and Markets Authority may not share that understanding.
Credit unions suffer another threat – one that sits oddly with a new financial regime intended to promote savings and reduce consumer expenditure. This month was to have seen a new savings system to encourage the lower paid to put more money aside – the Saving Gateway. For every pound saved by people on low incomes, the Government would have added 50 pence. Over a hundred credit unions had established systems to operate these savings accounts: but the scheme was abolished in the Budget.
This was on top of the announcement soon after the election that Child Trust Funds are being wound down. Friendly societies and credit unions were leading providers of the funds, which built-up savings for young children that would later help give them a reasonable start to adult life.
But perhaps the most depressing development was the eagerly awaited report from the Office of Fair Trading on high cost loans. This was widely expected to come down hard on payday loans and door-to-door credit providers – whose interest rates can be sky high. This is the sector against whom credit unions compete best.
While the OFT praised credit unions, it came to a surprisingly mild conclusion regard those institutions that charge interest rates (which can be 2,000%) that most of us regard as extortionate. Yet the OFT said that price controls “will not address the problems identified in the high-cost credit sector, which stem from both limited supply options and consumers’ lack of ability to drive competition”. It added that “such controls may further reduce supply and [the OFT] considers there to be practical problems with their implementation and effectiveness”.
In fact, the whole point of the OFT’s review was thrown into doubt by an extract from its own conclusion. “To the extent that problems arise from more deep-seated issues, such as weaknesses in the financial capability of consumers, the OFT recognises that the sorts of recommendations it is making can make only a limited difference. More radical approaches which are beyond the OFT’s remit would be required if the Government or others wanted to tackle the wider social, economic and financial context in which high-cost credit markets exist.”
All of which might seem to raise existential questions for the OFT – and ones that will probably be music to the ears of an administration determined to eradicate quangos.
It might be unfair to blame the Government for the outcome of the OFT’s deliberations, given that its investigations are supposed to be independent. But it is hard to avoid the feeling that the wind of change is blowing into the face of the co-operative and mutual movement.