Financial Conduct Authority
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FSA consults on additional guidance for building societies

The Financial Services Authority (FSA) is today consulting on additional guidance to ensure that building societies diversifying away from the traditional business model have the risk management systems and skills necessary to operate safely.

Using a combination of existing and new guidance, the FSA expects building societies to re-examine their risk management and business models in the areas of liquidity, wholesale funding and lending to ensure they are aligned.

Societies that demonstrate the necessary risk management systems and skills will have complete flexibility to run their business within the statutory limits set by the Building Societies Act. Those which cannot, the FSA will steer to a simpler business model category and activities they can safely undertake.

Jon Pain, the FSA’s retail managing director, said:

"Our approach is very simple; the more diversification, the higher the level of management skills and systems and controls the FSA will demand from the firm.  This interventionist approach is entirely consistent with our heightened supervision and is designed to challenge and encourage a strong and vibrant building society sector for the future.

"Building societies will still be free to innovate and diversify, but not beyond the limits of their risk management skills."

Today’s consultation paper forms part of the FSA’s intensive supervisory regime for building societies, where supervisors are judging the sustainability of business models and assessing senior management skills.

Building societies have statutory freedoms to diversify and innovate, but recent experience has shown some building societies diversified without having the requisite skills and systems to manage the risks.

The guidance outlined today would not limit those freedoms to diversify, but would clearly set out the skills and controls buildings societies need to have to manage more complex business models.

The consultation will close on 5 September 2009.

Notes for editors

  1. The Consultation Paper 09/17 is available on the FSA website.
  2. The guidance on treasury management approaches has been reorganised under three headings: liquidity, funding and financial risk management.  It represents expectations the FSA has developed and applied during 2008, under the enhanced supervisory regime, together with expectations which flow from our current plans to strengthen liquidity standards.
  3. This guidance would not change the FSA’s existing rules for building societies’ governance and risk management but will provide additional guidance for the sector on how the FSA intends to supervise building societies in assessing compliance with the existing systems and control (SYSC) rules.
  4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
  5. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.

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