Bradford & Bingley and Icesave bailout bill is 'unfair on building societies'

14 November 2008 / by Rachel Mason
The Financial Services Compensation Scheme to bail out Bradford and Bingley and the Icelandic banks is unfair on building societies and their members, according to the Building Societies Association.

At the association's annual lunch yesterday, chairman John Goodfellow commented on the "strength of the mutual model" but highlighted the unfair way in which the building societies sector has been forced to pay for failed banks.

"What is notable, however, is that the building society sector has looked after its own so far," he said.

"There has been no requirement for any government bailout of the building society sector; rather difficulties have been dealt with within the sector.

"At the same time, however, societies have been called upon to pay a significant share of the cost of bailing out failed institutions in the banking sector," he said.

Mr Goodfellow said that the cost of the bail out is a significant factor that must be considered by building societies when structuring their interest rates, which in turn, affects members.

"There has been a political and media chorus for all institutions to "pass on" the Bank of England base rate reduction announced last Thursday.

"Nationwide Building Society has already announced that it will do so in respect of its base mortgage rate.

"For all societies, however, there are a range of issues to be considered when looking at the structure of interest rates – these factors will affect each society differently," said Mr Goodfellow.

"In the light of building society performance, it is essential that we examine the future funding of the Financial Services Compensation Scheme.

"At the very least we need to examine the pros and cons of risk related funding of the Compensation Scheme so that those institutions that act in a prudent manner are appropriately rewarded."

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