Mutual savers offered extra deposit protection
Building society savers have been offered additional deposit protection by the financial watchdog with new rules that take into account the number of mergers across the mutual sector.
The Financial Services Authority (FSA) is introducing new rules that enable building societies which merge to keep their separate compensation limits. These rules will come into place from 1 December.
Unlike banks, building societies that merge are legally required to operate as a single entity with just one FSA license. The Financial Services Compensation Scheme rules that the £50,000 deposit protection it offers only covers customers per bank (i.e. per FSA license). Find out more about FSCS protection.
However, with a number of mergers already in the pipeline across the building society sector (and, no doubt, more on the horizon), concerns have been mounting that savers with more than £50,000 spread across different societies could be at risk if these institutions later merge.
Jon Pain, retail markets managing director at the FSA, says the rule change is designed to protect consumers as well as merging societies that fear a run on deposits.
“Following mergers this will help existing savers with the societies who want to keep below the deposit protection limit and also reduce withdrawals from the successor society driven purely by compensation considerations on the part of savers,” Pain explains.
The new rules only apply if a successor society decides to continue to operate the business of the dissolved society under the name of that society.
Adrian Coles, director-general of the Building Society Association, has welcomed the move.
"It would not be appropriate that moves designed to reassure and protect members, such as the mergers currently underway, ultimately result in a reduction in the levels of FSCS protection for members with savings in both societies," he says. "This change to the FSCS allows those members to enjoy the same levels of protection as they would have if the merger had not taken place.”
This is not a permanent rule change; additional protection for building society savers will only apply until September 2009. The FSA says this is because it needs to address the "immediate issue of consumer detriment" that could transpire following any building society merger.
It is also a sign that more building society consolidation is likely over the next 12 months, and that any new mergers will receive the FSA's blessing.
Where do you stand?
* This rule applies from 1 December 2008 to 30 September 2009.
Therefore, it is only applicable to mergers that take effect between 1
December 2008 and 30 September 2009.
* It is up to the the successor building society to decide if it wants the savers from the combined society to receive the extra protection.
* Only existing savers that were with both/all the societies before the merger took effect will benefit from additional protection.
* The rule only applies when the dissolved building society continues to operate under its former name.
* The FSA says it will publish the names of any building societies that have been given separate £50,000 limits
Nationwide is currently bringing into its fold two smaller societies, the Cheshire and the Derbyshire. Although the former has yet to be approved by the FSA, the Derbyshire merger will take effect from 1 December. Cheshire’s merger is due to take effect on 15 December.
Nationwide says savers with the three societies will benefit from the extra protection, meaning anyone with up to £150,000 spread equally across the three institutions will still receive full protection from the FSCS.
Savers with joint accounts could be protected for up to £300,000, as long as they have no more than £100,000 in each society.
However, with the Derbyshire merger coming into effect from 1 December, it is likely that many savers will have already taken action to protect their money by either closing accounts or reducing their balances.
A spokesman for Nationwide says it has seen people close accounts because they were concerned about exceeding the FSCS £50,000 limit. However, he was unable to give an exact figure for how many people took this action.
Yorkshire Building Society is on the verge of merging with the Barnsley Building Society, subject to FSA approval. It says it will apply to allow members of the combined society to benefit from extra protection.
Iain Cornish, chief executive of the Yorkshire, says: “Members of the Barnsley, although being provided with the additional financial strength of the Yorkshire, may have been concerned that they would lose one FSCS compensation limit on the merger if they also have savings with the Yorkshire. They can now be reassured that this will not be the case.”
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.