Page last updated at 12:06 GMT, Friday, 5 June 2009 13:06 UK

Building society rules to tighten

Dunfermline Building Society headquarters
Excessive commercial property loans undermined the Dunfermline

The Financial Services Authority (FSA) has told building societies it may stop some of them expanding into risky types of lending and borrowing.

The plan follows in the wake of the collapse of the Dunfermline building society and the forced rescue of several other societies last year.

The FSA wants societies to have senior managers who are sufficiently skilled to oversee any riskier lending.

The Building Societies Association (BSA) has welcomed the proposal.

"We are pleased that the FSA has designed its proposals to encourage the maintenance and promotion of a strong, vibrant mutual sector," said Brian Morris of the BSA.

"Societies with the requisite systems and controls will have complete flexibility to operate within the statutory limits set by Parliament," he added.

In the past year, eight of the remaining building societies have fallen into the red due to a mixture of losses on cash held with Icelandic banks, lending self-certified and sub-prime mortgages, and making commercial property loans.

Risks ignored

At the annual conference of the BSA last month, a senior FSA official openly accused some societies of taking far too many risks with their lending in the past few years, and of ignoring earlier warnings from the FSA about what they were doing.

"We have seen unsustainable margins on prime lending, over-ambitious growth targets and a risk appetite that was too great," said Hugh May of the city watchdog.

"The fact remains that a number of societies did not act sensibly at the onset of the crisis and some saw it as a business growth opportunity. We see that as a fundamental error, as was carrying on or even starting commercial and high-risk lending in 2008."

The FSA believes that, when some societies diversified from their traditional business of using savers money to offer mortgages, this increased the financial risks to those societies.

Dunfermline

The FSA's new guidance is initially the subject of formal consultation.

But there is no doubt that it intends to scrutinise the activities of building society directors much more closely than before, and to take action if necessary.

"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," said Jon Pain of the FSA.

"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," he warned.

When the Dunfermline building society collapsed in March, it was discovered that it had made loans worth £628m secured on commercial properties.

Little of this was evident in the society's published accounts, even though the FSA had been warning the society about the potential risks of its move into commercial property lending, and self-certified mortgages, since 2005.



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