Watchog warns building socities

Jun 6 2009 by Peter McCusker, The Journal

THE City watchdog is launching a new crackdown on building societies branching into riskier business.

The Financial Services Authority (FSA) wants to ensure mutuals moving away from their more traditional conservative business models have the proper controls in place and has launched a consultation on new guidance for the sector.

Some have run into trouble in the financial crisis – such as the Dunfermline – after buying up mortgage books from elsewhere, as well as being heavily exposed to commercial property loans hit by the recession.

Dunfermline’s savings business was bought by the Nationwide and its loan book nationalised in March.

Most building societies are conservatively run, with the lion’s share of lending funded from the deposits of savers.

Mutuals that have the necessary risk management systems and skills in place will have flexibility to run their business, but those which do not will be steered to a more simple business model by the regulator.

FSA retail managing director Jon Pain said: “Recent experience has shown some building societies diversified without having the requisite skills and systems to manage the risks.

“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.”