WIREDGOV

Financial Services Authority (FSA) Chief Executive Hector Sants acknowledged the important role of mutual building societies in the financial system in a speech to the Building Societies Association Annual Conference in Manchester this morning.

“Mutual building societies add a welcome element of diversity within the financial sector and, whilst we at the FSA do not endorse any specific model, we certainly encourage diversity as a way of adding strength and stability to the system and to encourage beneficial competition.”

In a wide ranging speech Mr Sants stressed that in ‘more turbulent’ times firms need to ensure they are taking account of the key FSA agenda – from liquidity and credit to Treating Customers Fairly (TCF) and corporate governance.

Mr Sants told the audience that the more difficult financial conditions had increased the FSA’s supervisory engagement with the sector. But he dismissed recent reports that the FSA was imposing new minimum liquidity requirements, reducing mortgage lending capacity, by several billion pounds as simply wrong. As a principles-based regulator, the key underlying principle has always been that societies need to meet the FSA’s threshold conditions including having a credible and sustainable funding model and appropriate levels of capital.

However Mr Sants underlined the FSA’s view that building societies stress testing assumptions needed to be much more robust:

“Most of the stress testing performed before last August was based on a firm-specific rating downgrade and, even where firms modelled the closure of some wholesale markets, it was assumed these would reopen quickly. I would like to underline that your stress testing assumptions need to be much more robust and, in particular you must also have robust operational contingency plans, which means looking at the practical operational issues such as internet site capacity and branch transaction processing.”

Mr Sants went on to emphasise the importance of treating customers fairly:

“It is, therefore, vital that you do not lose sight of your TCF strategy in the current conditions. In this ever more challenging economic environment, arrears and possessions are set to increase significantly, albeit from a very low base and concentrated in specific sectors of the market. We do expect lenders to meet the requirements on the treatment of customers in payment difficulties set out in our mortgages conduct of business sourcebook. Firms must have in place, and operate, a written policy and procedures for dealing fairly with customers in arrears.”

Moving onto corporate governance, Mr Sants stressed the importance of boards fully discharges their responsibilities:

“If a building society is to survive, prosper, and bring real benefits to its members, it must have a good quality board. A board, together with the senior management team, has to lead their society through these challenging, competitive and more complex times.”

Full text of speech