Under the guidance document- “A specialist sourcebook for building societies”, mutuals who plan to diversify will have to ensure their liquidity, wholesale funding and lending models are aligned.
The more risky the diversification, the higher the levels of required management skills and controls which are expected from the firm.
If building societies demonstrate that they have the appropriate risk management and skills, they will have complete flexibility to run their own business.
But those that cannot will be forced to introduce more appropriate risk management or else move to a simpler business model where they undertake less risky activities.
The changes will come into effect on 1 April. Building societies will then have until 30 September 2010 to identify any possible mismatches between their risk management and their business model and agree with the FSA on how to address them.
The FSA consulted on these changes with building societies last June in consultation paper 09/17 ‘A specialist sourcebook for building societies: enhanced supervisory guidance on financial and credit risk management’.
The regulator introduced the guidance as it believes that some building societies have diversified without having the necessary skills and systems to manage the risks they were undertaking.
Adrian Coles, director-general of the BSA, said the BSA had concerns that the guidleines may disadvantage building societies by imposing a tougher and more prescriptive regime on them than banks or other lenders.
He added: “We believe the FSA should commit to a full post-implementation review of the sourcebook within 12-18 months of it coming into force.Such a review can address any harmonisation needed between the sourcebook and the final policy that emerges at the end of the mortgage market review process.”
