Mutuals’ anger at watchdog’s funding ‘U-turn’

BUILDING societies have criticised a ‘U-turn’ by the City watchdog over funding for a customer compensation scheme, which could force mutuals to subsidise firms they have no connection with.
By The Newsroom
Published 19th Jan 2013, 06:00 BST

The Financial Services Authority yesterday issued a consultation on the Financial Services Compensation Scheme (FSCS), which proposed a bail-out pot be set up to cover the failure of insurance and investment intermediaries – funded by all FSCS firms, including mutuals.

The FSCS ensures depositors get their money back when an institution collapses. It was used to cover the deposits of savers in Northern Rock and Bradford & Bingley.

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Building societies have long argued their FSCS contributions are unfair, as risk-averse mutuals are forced to pay disproportionately for others’ recklessness, simply because they hold high levels of retail deposits.

The FSA opened a one-month consultation on the latest proposed changes. “Finding consensus on this subject is always going to be a challenge but we remain committed to finding a workable solution that firms can afford and live with,” said Sheila Nicoll, FSA director of conduct policy.

Adrian Coles, director general of the Building Societies Association, said: “It is very disappointing to see the FSA proposing a U-turn on a key part of its original proposals.

“This new consultation includes a provision that building societies, together with banks and insurers, be required to contribute to compensation costs arising from future failures of insurance and investment intermediaries.

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“Such a cross-subsidy of firms with which they have no connection or affinity is unwarranted and we oppose it. Introduction of such a measure could cost the mutual sector millions of pounds, money that would no longer be available for the benefit of members.”

A Leeds Building Society spokesman said it also opposes the cross-subsidy of insurance and investment intermediaries.

He added: “FSCS levies are currently calculated based on retail deposits only, and not on the whole of the deposit taker’s liability. Therefore, as a strong ‘A’ rated building society, who are mainly funded by retail deposits, we already pay disproportionately for the failure of others.”

The FSA also rejected calls to isolate building societies and mutuals from banks with their FSCS contributions, adding it would be “inconsistent”.