The last two years have presented many challenges for building societies and banks alike. Rachel Le Brocq, public affairs manager at the Building Societies Association (BSA), believes we are now over the very worst of the crisis, but that 2010 could still be a tough year, especially with mutuals facing competition in the savings space from state supported banks, proposals for a 'people's bank' at the post office, and the new liquidity requirements coming in, to name just a few challenges

Financial institutions are feeling the Financial Services Authority's (FSA) reaction to the crisis and suffering somewhat from a regulatory 'hangover'. No-one can deny there is a need for thorough regulation but it should be proportionate and joined-up.

The BSA recently pulled together a list of the main regulatory and compliance matters that building societies may need to address in 2010. Amongst the 25 issues we are currently aware of are changes to liquidity, new capital requirements, the building societies sourcebook, the mortgage market review, the unclaimed assets scheme, the Financial Services Compensation Scheme (FSCS) review of funding - the list goes on and on.

We would strongly urge the government to review the various regulatory and other initiatives introduced in response to the banking crisis. Such initiatives are making it increasingly challenging for building societies to conduct meaningful business activity, quite apart from the impact of the very difficult market conditions. The government should assess the overall impact of all the changes introduced over the last two years, to ensure that traditional, prudent business models are not undermined.

Two of the most significant regulatory changes are the rules surrounding capital and liquidity. The Tripartite Authorities want to see a greater quantity and a better quality of capital across the whole of the banking sector. While we believe societies already have strong levels of capital, and their capital is of a high overall quality as it is based on reserves, which are the best and purest capital of all, societies' ability to raise external capital without compromising their mutual status is being limited by current regulatory policy.

A concern of the BSA is that the starting point on capital, from both the UK authorities and Basel, is entirely based on the plc model. There should be equal respect for mutual and plc structures - the authorities, especially in the UK, should not try to 'shoehorn' mutuals into a plc model. The BSA
stands by its view that Permanent Interest Bearing Shares (PIBS) should be counted as core tier 1 capital, a view contested by the Tripartite.

We recognise the objectives of the authorities on liquidity; clearly following the experience of the last two years it is vitally important that both banks and building societies hold adequate, high quality liquidity. So we supported the FSA's review of the previous, outdated liquidity regimes. However, the assets that the FSA is requiring banks and building societies to hold - basically, government debt only - will always yield a relatively low return, and at the moment it is extremely low. In the current environment one of the consequences of holding high levels of low yielding liquidity is that societies' capacity for lending to homebuyers is reduced. Also, to offset the low yield, savings rates will be lower than they otherwise would be and mortgage rates higher.

As well as regulation, there is unfair competition to contend with. Those banks that are supported by the state are able to compete unfairly for retail deposits and steps need to be taken to ensure that government backing for some institutions does not distort competition for savings.

Another potential distortion to the savings market is the so called 'people's bank' at the Post Office. The government needs to re-think its plans on this. A people's bank would inherit the Post Office's network of 11,500 subsidised branches creating an instant unfair and impossible advantage over competitors.

Building societies are rapidly becoming the only financial services sector not to be directly subsidised by the state. Domestic and overseas banks, National Savings & Investments (NS&I), and the Post Office all have significant tax-payer support.

So is it really just doom and gloom? The answer is no. It's challenging, that's for sure, but societies will do their best to overcome the hurdles and continue to offer their members good value and better customer service. Building societies' knowledge of local markets and their understanding of individual customers' needs mean mutuals offer something different in the marketplace, which many of their members value highly. Building societies need respect and governmental understanding though if they are to survive and to thrive into the future.

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