Societies' survival chance

IT is sometimes said the people who do not panic in a crisis are those who have not quite grasped what is going on. Attending the annual Building Societies Association conference in Manchester these past two days, one could not help notice the tone was distinctly upbeat.

Could these really be the people whose demise has been predicted every year for the past decade?

Has no one told them that, like the dinosaur, they are supposed to be unsuited to the modern world and heading for extinction? Well, if dinosaurs were indeed killed off by a meteor that hit the earth so hard it changed the climate, the societies are about to learn what it feels like because their world is soon to collide with a meteor in the form of the Financial Services Authority.

The FSA takes on mortgage regulation from this autumn, and insurance with which societies are also closely entwined from next spring. FSA chief executive John Tiner yesterday spelled out to them some of what this means.

In fairness, Tiner did not say much that he and his colleagues have not already said at similar gatherings. They worry the societies have not fully grasped the scale of change coming their way - particularly when the impact of Basel II and international accounting standards are added to the mix.

Huge changes will be required to the controls within societies, from the monitoring of exposure and risk to strategy and planning, in governance accountability and transparency and, perhaps above all, in the one area where societies have always thought they had little to fear - treating customers fairly.

The regulator has repeatedly made it clear that, if there are any shortcomings in these areas, it is senior management, not a junior scapegoat, that will be called to account.

All this comes at huge cost at a time when the societies can ill afford it. Figures presented at the conference showed how industry margins are coming under pressure and the smaller the society the more severe the squeeze, because there is less of a business to absorb the overheads.

Even though larger societies will have to keep squeezing costs, if the trends continue then the mid- and smaller-sized ones are going to have to find reductions of between a quarter and a third in the next few years just to stay where they are today in terms of profitability - when all the regulatory pressure is going the other way.

That is a tall order, given there are already signs that, while they can still attract savings, they are finding it harder because of the ferocious competition to lend the money on at profitable rates.

BSA chief executive Adrian Coles recently listed 48 draft regulations and reviews that could have an impact on societies, and which the trade association had to comment on in the past six months. These are not just FSA consultations but include documents produced by the Treasury, European Commission, Inland Revenue and the group reviewing the Banking Code.

The list does not include the review by Paul Myners of mutuality and its appropriateness as a form of governance, announced by Treasury Minister Ruth Kelly as part of the Government's reaction to the Penrose Report into Equitable Life.

Penrose suggested, though did not seem to produce evidence to support the assertion, that the Equitable debacle might not have happened had it been a limited company. The thesis was that shareholders would have been more alert and questioning and would have picked up that the company was paying bonuses it could not afford early enough to do something about it.

As a result, mutuality as a form of governance finds itself in the dock. It may well be that some society boards, confronted with this deluge of regulation and climate change, will think it is no longer worth the effort and seek a merger.

That would be a pity because every day we are reminded of how much opportunity there is for any financial organisation that does deliver a better experience for customers - be they customers who are largely excluded by the current system or simply customers who are fed up buying products they think are good value only to find later they could have met their needs more cheaply elsewhere.

They are operating in an area where competition has rarely been more ferocious - but it is all based on price. Building societies must harness their smallness, their commitment to localities and their flexibility so they can compete on quality of customer service, because this is something the banks with their huge size and reliance on systems have never worked out how to deliver.

Unlike the dinosaur, the building societies have the opportunity to adapt and survive. The issue is whether they choose to seize it.