Concern is mounting over the future of smaller building societies operating in the mortgage market. With margins in the market tighter than ever, there is a emerging belief that compliance and administration costs attached to the introduction of the Financial Services Authority’s (FSA) new regulations could prove too much for smaller lenders and persuade some to abandon the market altogether.
Barry Robson, managing director of Genesis, said: ‘It seems smaller building societies are not up to pace when it comes to the reality of regulation and how it will affect them next year.
‘Like all building societies, their priority has been to defend their mutuality and their eyes have been taken off the ball regarding compliance issues. They are not paying sufficient attention to the mortgage industry and in my opinion, it is likely some may decide that with the added cost of regulation, mortgages are not their thing, that they are making more money on other products and pull out of the market altogether.’
However, Jennifer Holloway, external affairs manager of the Building Societies Association, said most societies are taking the impending regulation in their stride and do not believe it will be such a concern.
‘In terms of regulatory cost, smaller societies are displaying a positive attitude. In a way they are better equipped to deal with change than larger lenders because of their size ‘ they can make decisions and implement changes faster. If the new regulation means more cost, then they are determined to create new business in order to cover those costs. The regulations that came into force in 1996 were, in a way, much harsher and they coped with those, so they are feeling positive,’ she said.
However, Holloway also said two mergers involving smaller building societies have already been announced and in both cases it was down to financial problems, rather than choice. Organstone Permanent BS has had to merge with Derbyshire BS and Gainsborough BS has been forced to seek financial sanctuary by joining forces with Yorkshire BS.
According to Yorkshire BS, the merger with Gainsborough BS was due to cost problems linked with the valuation of its head office.
‘It was found that its capital assets ratio was unacceptable to the FSA. So we are likely to merge on or before 31 December,’ said Tanya Mills, spokesperson for Yorkshire BS.
The increase in mergers between building societies could be curbed if more lenders share back office and support functions, according to Pricewaterhouse Coopers (PwC). A new study found costs could be reduced and mergers avoided if smaller societies exploit their collective size and strength.
The study, which included face-to-face interviews with chief executives from 25 building societies, found a service centre model, where several societies establish a joint venture company to develop, own and operate a shared service, would be the most effective solution. As well as cutting cost, PwC suggested a shared system would also strengthen independence and regional franchise, help societies to keep abreast of technology, free up people resources and improve customer service.
Stephen Thomas, director of PwC Consulting, said: ‘For some smaller societies, the options available may come down to a straight choice between entering into a significant sharing arrangement and giving up their independence. Sharing back-office and support functions would enable a society to provide the desired, cost-effective service to its customers, while allowing them to perceive the society as being the same, local, independent entity as before.’
Robson believes other ways to help cut costs can be seen with the innovative moves already being made by certain individual societies.
‘Smaller building societies need to innovate in order to fight to survive and take the lead of other lenders that have created subsidiaries and concentrated on product development and design,’ said Robson.
One example of this can be seen with Market Harborough Building Society (MHBS). It has been trying to stay ahead of the game with its recent move into correspondent and through lending via GMAC.
‘The reasoning behind this move was to create another distribution channel and help cut costs without compromising on quality. GMAC now foots the administration bills, which makes our job much simpler and more cost effective,’ said Catherine Parker, public relations officer at MHBS.
Even so, as a direct result of increasing regulation, MHBS expects its costs to rise considerably over the coming year.
‘Smaller societies are worried about the rising number of regulators they have to answer to. We are expecting our own costs to triple this year,’ added Parker.
With the introduction of pre-application illustrations, most lenders are turning to technology to make sure they stay compliant and this means more cost.
However, trading platform IFonline, which has already signed a number of smaller societies such as Stafford Railway BS and Hinkley & Rugby BS, insists compliance solutions are affordable for all sizes of lender and will not create the financial burden that many are anticipating.
Richard Hurst, marketing manager at IFonline, said: ‘The key is that there are modular components for the software so it is scaleable. Everyone needs the core modules, but if a lender only transacts 500 mortgages a month, they can scale their needs down and adjust the fees accordingly, without losing out on technology.’
How lenders cope with the extra layer of regulatory cost remains to be seen. If smaller societies are forward-thinking and look at new ways to meet the added costs through innovation ‘ not only in terms of product design, but also by looking at more cost-effective methods of administration ‘ they could stand their ground just as firmly as the big boys.