The UK government has announced new plans to exclude certain sources of funding from the funding limit calculation and update building society corporate governance requirements after receiving support from the building society sector. 

The government proposals form part of the ‘Edinburgh Reforms’ of UK financial services which chancellor Jeremy Hunt unveiled today.

The reforms aim to “unlock investment and turbocharge growth” in towns and cities across the UK.

All these policies follow the government’s announcement in the Autumn Statement that it would announce changes to EU regulations in four other high growth industries by the end of next year.

Following engagement with the building society sector, the government launched a consultation on several amendments to the Building Societies Act 1986. 

The government received five individual responses from the Building Societies Association (BSA), Nationwide Building Society, Coventry Building Society, Leeds Building Society, Leeds Building Society and Hargreaves Lansdowne.

Proposals included the exclusion of some sources of funding from the funding limit calculation and updating building society corporate governance requirements in line with modernisations made to the Companies Act 2006.

The sources included funding from specific Bank of England liquidity insurance facilities which exist to allow banks and building societies to access liquidity in stress scenarios as well as funding from senior non-preferred debt instruments raised to meet Minimum Required Eligible Own Funds and Liabilities (MREL) requirements, given that funding to meet capital requirements are already excluded from the funding limit.

In addition, funding from repurchase agreements of high-quality liquid assets where funding essentially counts twice for the purposes of the funding limit and deposits from small and medium-sized enterprises (SMEs) with a turnover of up to £6.5m to bring building societies in line with ring-fenced banks.

Hunt states that the government will legislate, “when parliamentary time allows, to amend the Building Societies Act 1986 to give building societies in the UK greater flexibility to raise wholesale funds, enabling them to grow and compete on a more level playing field with retail banks, while retaining their mutual model”. 

The consultation also requested feedback on whether there are future trends that respondents see as having the potential to cause future funding difficulties for building societies in the next four to five years. 

Respondents raised the issue of funding from deposit aggregators, also known as intermediated savings platforms. 

These platforms partner with financial institutions such as banks and building societies to advertise savings products, which individuals can choose to deposit into. 

The responses requested the government either class funding from these platforms as retail funding or exclude it from the funding limit calculation, given that the underlying depositors are retail customers.

Commenting on this, the government says it “acknowledges that the savings platform market is likely to continue to grow and therefore hold a greater share of the market in the future”. 

“In recognition of this, the government will commit to revisiting the treatment of funding obtained through the intermediated savings platforms in the medium term.”

“This will allow government and the regulators to develop a clearer sense of the market and its impact on building societies.”

The consultation proposed to update the corporate governance requirements for building societies and bring them into line with the Companies Act 2006. 

Specifically, it proposed to explicitly allow for real-time virtual member participation in general meetings, remove the requirement for building societies to affix a seal when executing a deed, and require only one director to sign the balance sheet of a building society, instead of two directors and the chief executive officer. 

Commenting on the government’s response BSA chief executive Robin Fieth says: “We have been working with the Treasury for some time on secondary legislation that will partially update the Building Societies Act, which has not been fully revised for 25 years.”

“We heartily welcome this announcement which marks excellent progress in delivering legislation that is fit for purpose, enabling building societies which are a key part of today’s financial services sector to better serve their members and provide competition in financial services.”