My blog has moved location

Hi my blog can now be found contained within the Saffron Building Society website, either as a link direct from the homepage or via the links below.

http://www.saffronbs.co.uk/blog/

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Good day for the building society sector?

Friday last week was on the face of it a good day for the building society sector, with West Bromwich saved from the wolves have been hounding it for what seems like weeks now and an announcement that building societies will have access to a new method of capital raising that evens out some of the structural disadvantage they have against the banks.

I am genuinely pleased for West Brom, not just because it is a large society with a strong regional franchise, but because everyone had effectively written it off as the next Dunfermline and yet it has managed to prove its critiques wrong.

What they did was swap subordinated debts for new profit participating deferred shares (PPDS). The first question my wife asked me is what is subordinated debt?
Well they are long term loans usually with a fixed rate of interest payable. The loans cannot usually be recalled before their end date and they are used by companies to boost capital to use for growth. Whilst they are long term, they do at some point get repaid and therefore can only be treated as secondary capital. Primary tier 1 capital or permanent capital has to be actual funds with no repayment date in the future, such as retained profits and this is where the PPDS come in. They have no repayment date, the capital that pays for the PPDS is therefore permanent, so better quality than subordinated debts. This permanency has had the effect of increasing the capital ratios of West Brom and therefore suring up its balance sheet for the future.

So everything is great then? Well as I have said I am genuinely pleased, however for me personally there is one issue with this scheme. As a mutual we are not driven to maximise profits for shareholder return and can therefore return some of our profits to members by way of quality products and also through building up capital which earns a return that again gets ploughed back into product development and other member initiatives.

However a society which has issued PPDS, now effectively has a perverse anomaly in its objectives. One group of investors want profits maximised so that they receive a strong profit share on their deferred shares and the other group (saving and borrowing members) want better returns and service that detract from profit.

This balancing act will requires skill from the relevant board. For me serving only one master (our members) is what makes mutuality come alive, so maintaining that mutual advantage will be key for those societies that issue PPDS.

Green shoots or just early summer madness?

While the recent warm weather has seen my garden bursting into life with gusto, I wonder if the same can really be said about the economy. Having just returned from a weeks holiday in France, where the effects of the weak pound became acutely apparent to me in terms of the sheer cost of things in Europe for us now on a £1 = 1 Euro basis, I have been surprised to find my inbox and various data feeds littered with evidence of green shoots, or at the very least claiming that the plant is not dead.

Firstly the FTSE, the pound and the commodity markets have all had a bit of a positive rally. Looks like I bought my Euros too early and my diesel too late but never mind.

The service sector has today reported a return to growth since the decline commenced in April last year and the CIPS Purchasing Managers Index leapt in May by the biggest chunk in its history, from 48.7 to 51.7, with 50 plus representing a positive number.

Human Resources magazine’s daily news feed today, claimed that the rate of decline in jobs had slowed in May and Nationwide have even recently reported a monthly increase in house prices of 1.9%.

Other green shoots bursting from my in tray on my return, included a survey of CEO’s that stated that a significant majority felt more optimistic than they did at the start of the year.

So are there really emerging signs of recovery or are we all just desperate to spot some? Well I am not sure and I have learnt the hard way that predicting things is a fools science. I hope there is some light now at the end of the tunnel. If house prices stop going backwards lenders will feel more comfortable in lending again which in turn will stimulate the market and a bit of upward inflation will pave the way for interest rates to go up a little and allow deposit takers to give some much needed extra interest to savers.

But none of us should un-cork the champagne just yet, there are many theories on whether this will be a V or W shaped recession, i.e. will it bottom out and then start to gradually increase again, or will it appear to have turned only to take another dip before sustained recovery really comes?

Why the long face?

It is, I think, fair to say that the Building Society sector has taken a bit if a bashing of late, but I am struggling to see quite why.

The press have reported on collapsing profits, potential mergers, Moody’s downgrades, counterparty losses and local authorities making decision not to invest with building societies and it seems that all the positives have been overlooked.

Firstly let’s talk about the sector profits collapsing. It goes without saying that in one of the worst recessions in history, most sectors of business will experience some reduction in earnings capacity and for building societies the extremely low interest rates that we currently have been dealt by the Bank of England compound these issues further. However, building societies have faired massively better than banks through the results cycle. At least most societies made a profit which is a stark contrast to the quite astounding losses and write downs seen in the banking sector. In addition we have had to account for huge levies to the FSCS to fund the bank failures, which come straight off the bottom line.

It is true that some societies lost money through Icelandic investments; but then so did many local authorities and had the UK government not underwritten the balances, so would huge numbers of UK savers. These exposures were not purely as a result of poor investment decisions by those societies, after all, how many of us really foresaw the catastrophic melt down that occurred?

The Moody’s downgrade of some societies, which has seen lots of press comment, was inevitable in an extreme economic downturn. In fact the UK as a sovereignty is on the verge of a downgrade, but I very much doubt this great nation will go bust. The tests Moody’s performed were too severe, using house price falls of 60% plus, which if such falls transpired, would make a hell of a lot of us homeowners significantly underwater on our house value to mortgages.

The point around local authorities is sad. Societies and authorities have been working together for years, and had those authorities who lost millions in Iceland, placed more in their local societies, they would be significantly better off now as a result. The problem here is the advisers they use, looking to cover their own back to recover from the Icelandic egg on face, through stressing the need to invest with the government for absolute peace of mind. Firstly what is the point of paying an adviser to tell you to invest only with the government and secondly the incredibly low rates they will be earning from the government will eventually mean council tax rises to restore the kitty to more normal levels.

Having just returned from the BSA annual conference in Harrogate and seen the passion and commitment that exists within the sector for looking after members and maintaining a low risk business model, I personally believe the negativity is completely overdone.

In such stark economic times I cannot be absolutely certain that some societies won’t conclude that they will do a better job for their members through merger with a stronger partner, but one thing I can be sure of is that Saffron will not be one of them and that the sector overall will still be a strong and vibrant part of the financial services landscape in years to come, doing what we have done for many years already, helping people to save, purchase homes and protect what is important to them.

Mail on Sunday article on the health of building societies.

I was surprised to open the Mail on Sunday money section this weekend and find my photograph in it in a section on Building Society Chief’s pay. As I know Jeff Prestridge the Editor, I was a little disappointed that he had not mentioned it in advance.

The mentions of Saffron through the article on the health of the sector were on the whole very positive, but Jeff made a play about my pay increasing in 2008, however this is as a function of 2007 performance in which Saffron had its best year ever. In fact no Director has taken a pay increase in 2009 to reflect the economic climate in which we find ourselves; a fact which the article did not make clear. Directors pay is a matter for the non-executive remuneration committee and our membership vote.

Jeff is quite right in many ways, the UK is facing the worst recession in recent History and Building Societies do face many challenges as a result. There has been the significant levies to the financial services compensation scheme for the failures of the Icelandic Banks and Bradford and Bingley, the low interest rate climate driving lower returns on capital, margin squeeze and of course the potential for mortgage arrears to worsen with unemployment increasing. However societies are fairing much better than banks in these troubled times, which is a testament to their less complex and less risk orientated business models.

It was nice to see Saffron Member Chris Jossaume quoted in the article. He stated that “Saffron seems good at communicating” and felt that our AGM was a useful source of good financial information, in simple laymen’s terms. It was also lovely to read his quote that read “The Society is a cornerstone of the local community”. It was just a shame that it was under the headline “Saffron members are lost for words”, which was true during the section of my AGM presentation which showed the 40 financial firms that had failed or had to be bailed out since the “credit crunch” began, as the article goes on to say.

Unfortunately blunt comparisons sometimes leave important facts out. Saffron’s operating profit was actually better in 2008 than the previous year, but of course with £1.1M put aside to fund the next 3 years levy to the FCSC and the Boards desire to sure up a potentially worsening economy through increased provisions for bad debts, the final pre-tax profit number was reduced. But Saffron is in great shape and the sector as a whole is much more robust that the Mail on Sunday article would have readers believe. But I guess boring, traditional, un-complicated and safe are not words that sell papers. Of course one could envisage some consolidation in all business sectors and it is not beyond the pale to assume that a few societies may decide they can provide a better deal to members through merger over the coming months, but this is not a new phenomenon and should by no means be regarded as a sector in danger. Mutuality has got legs as have building societies. Saffron celebrates its 160th birthday this year and on my watch I fully intend to ensure that it will be doing so in another 160.

My realisation that we haven’t got it quite right.

Savings rates are the subject of pretty much every discussion I hear or partake in at the moment and I guess that is no surprise when a saver with a base rate tracker product who was earning 5.75% as recently as November 2007 and 5% for the lion’s share of 2008, is now receiving a rather derisory 0.5%. On a £10,000 deposit balance that is the difference between £575 annual interest and just £50.

As a Mutual Building Society our primary job is to protect the safety and security of the cash that our members entrust to us to look after, but secondary to that is also the provision of a return that represents value for money. This is not such an easy task with a base rate to work with of just half a percent.

It is fair to say that we have done nothing more than pass on base rate reductions to our savings products and in some cases have decided not to pass them on in full, thereby improving the relationship of many of our savings rates with base rate; however I have heard enough from members over the last few weeks to suggest that we need to do better in their eyes.

No financial institution can have every one of their products continuously representing the “best buys” in its given category as a strategy such as this would firstly see a flood of new business, followed by an eventual inability to make a profit on the margin between savings and lending, but at our AGM last week members were clear that in some areas we have come off the pace too far (or more likely others have upped their game in the pursuit of new funds) and that, coupled with a few letters that have come across my desk in the last few days have confirmed to me that we need to review things and look to help our members where practical.

There is little point in following unrealistic expectations of a full suite of “best buys” for the reason stated above, my job is primarily to protect member’s capital, not chase transient money with rates to make up shortfalls in balance sheets which one could argue is happening elsewhere. However having conducted a long and robust review today, the executive team here concluded that we need to try harder in 3 core areas: our traditional branch based accounts, our ISA range and our fixed rate bond offerings. We also debated a key theme of finding ways to reward the loyalty of our existing members and as a principle will endeavour to make enhanced products available to those already with us.

Over the next week or so we will increase the rate on our cash build 90 account to make it compete strongly with the best of the traditional high street account. We will also be launching a new fixed rate bond with rate incentives for existing members and we have agreed a new 2 year fixed rate ISA that again will be very competitive and without the small print and tie in of many of the offers from the big banks and we will also have a new online corporate account to help local businesses.

We are also looking to work up some branch and online reward products that will allow instant access, but pay a great rate if no withdrawals are made and finally we debated how as a mutual we should be looking to help those members who are experiencing real hardship as a function of the current economic situation. We will seek council from the likes of Citizens Advice to help us with our thinking in this area.

We can’t please everyone all the time, I am fully aware of that, but I hope those members who have taken the time to offer views will see that where practical Saffron listens and takes action.

What a great AGM.

Last night was our Annual General Meeting, which this year we held at the Duxford Imperial War Museum.
I have to admit to being slightly apprehensive as to the mood I would find our membership in, as to be fair the financial services sector has not exactly covered itself in glory in the last 12 months and recently the building society sector too has taken some flack over the Dunfermline issues.

As a breed, CEO’s in the finance industry are clearly not the most popular animal at present, in fact in the popularity poles we had risen to the top in the “disliked stakes” above even journalists and estate agents (no offence to any estate agents or journalists reading this). Therefore I needed in my mind an ice-breaker, so began my presentation with a statement of fact that Saffron made £24,001,115,000 more profit in 2008 that the Royal Bank of Scotland; not a statement that I ever expected to be able to make, but a fact none the less. I then provided an overview of the current UK economic climate and a review of our results for 2008, which seemed to be well received by the members.

Richard Herbert our Chairman then led us through the formal AGM, before handing back to me to finish with some insights into the results of our recent members survey and our plans to develop new product offerings to help loyal members in the current extremely low interest rate environment, followed by a robust Q&A session.

It is fair to say that members wanted reassurance about the longevity of the society and our ability to survive the recessionary storms, which we were confidently able to provide; and there was some robust questioning to the Chairman on executive pay packages, with assurance needed that these packages were designed to promote long term sustainability, not simply short term profit maximisation, which Richard Hebert happily shared.

After the formal meeting though, it was really nice for me and the Board to have time to chat to members about there views on the society and wider economy. I always find myself extremely proud to run a mutual with members who take an active interest in their society and for me the insight and feedback they provide really does help to shape what we do next.

One key theme that came through was a desire from members to receive personal notification when we change or launch a new product and whilst not cost effective to write to every one, I committed that we would create a register of email addresses and send an email to all those wanting to know about new initiatives as and when they happen. Anyone who would like to receive such updates, please simply send an email saying “please keep me up to date” to our marketing team marketing@saffronbs.co.uk and they will happily add you to the list.

I also enjoy an increasingly growing personal relationship with some of our members; I was surprised how many of the 70 plus attendees I knew by name or had spoken to or exchanged correspondence with over the last few years. For me this is what it’s all about; fulfilling my role of taking care of our members' money.

Finally it was Richard Herbert’s last AGM as he retired as Chairman last night, but it has been a pleasure working with Richard and he will certainly be missed in the boardroom. Peter Harrison, our current Vice Chair will take over as the successor at a Board meeting later this week, and will no doubt continue the diligent and prudent steerage of the board that Richard has provided over the last 6 years.

How to make £100 into £1,000...

Quantitative easing (QE) is a subject that has been must discussed but also much misunderstood in the media and believe it or not lots of people have actually asked me to explain exactly what it is, why the Bank of England is doing it and how will it help!

So here goes….

QE is basically the creation of money out of thin air. In the UK only the Bank of England has the authority to “make” money, but the government could give itself the right to and in fact it did so in world war one. It can take the form of actually printing notes, but notes are only a small part of the money supply so QE involves the Bank creating electronic money.

You may think that the Bank of England controls the money supply but this isn’t really true. In fact the banking system creates money through a process called the “money multiplier”. It works like this: if you deposit £100 in a bank account, the bank then has £100 to lend. When it lends, the £100 will deposited in the borrower’s or someone else’s bank account, giving that bank £100 it can lend and so on and so on.

The only break in this money roundabout is the bank’s need to maintain cash, because at any given time their depositors may want their money back. Most countries have regulation to maintain a minimum cash reserve and in the UK it is governed by the FSA’s liquidity requirements. In the US the limit is 10%, which means a £100 deposit can become a £90 loan, this £90 deposit then can become an £81 loan etc. etc.

Therefore in a strong economic climate electronic money is effectively created in bucket loads through normal bank lending activity, but as at today, lending has been reduced and banks, businesses and individuals are looking to pay down debts; which in turn has the effect of shrinking money supply.

QE is therefore all about increasing the level of money (bank deposits) in the economy and whilst not directly designed to increase lending, higher levels of deposits give banks the opportunity to lend more. There are a number of ways to implement QE, but the simplest and chosen route of the BOE is to buy assets from the non-bank private sector with cash it has “made”, such as gilts and some commercial bonds. This increases bank deposits and will stimulate lending if the bank chooses to lend the money.

The primary objective of QE is counter the recession, but to boost the economy it needs to increase spending on goods and services. For this to happen, the additional bank deposits need to provide additional comfort for the banks and in turn increase their lending activity and ease pressure on the inter-bank funding markets. However there are risks, if the banks don’t lend or demand to borrow does not materialise, and people’s primary focus remains to reduce debt, it will be some time before spending increases and therefore boost the overall economy. On the flip side, the additional money supply could over-stimulate spending and drive inflation upwards.

I have no doubt that the BOE will use it wisely, and if needed, reverse it once it has done its’ job and I personally think the risks of upwardly inflation spiralling out of control are minimal. But for the sake of jobs, savers and so much industry that revolves around the principle asset of the home in this country, I hope it has the desired effect.

What the Government give, the Bank of England take away!

Depending on how you read it, pensioners are about to get a boost to their income with the UK state pension increasing on the 06 April by £7.25 per week for couples and £4.55 per week for single pensioners. This is the biggest increase in both percentage and cash terms since 2001, when the basic state pension was increased by £5 a week following criticism of the previous year’s measly increase of 75p.
I have no doubt that the increase will be welcomed by the majority of pensioners, many of whom are estimated to be struggling with personal inflation levels of 9.2% for a single male pensioner, 9.1% for a single female pensioner and 7.7% for retired couples. However in real terms they will not have extra cash to spend.
The average pensioner has around £10,000 in savings, upon which they rely on interest to supplement income. Even if we keep the maths simple and compare 5% base rate to the current 0.5% base rate, those savers have seen their income reduce from £9.60 per week to just 96 pence. So in real terms the increase in pension does not even get back to square one.
Let us hope that today’s report by Nationwide of house price increases of 0.9% in March signal some hope of recovery for the wider economy. That way we can get back to fair interest rates for borrowers and savers alike.
More stability of house prices will bring back lender and consumer confidence and may allow more pensioners to take advantage of equity release mortgages to enhance their standard of living.

Scotland's Biggest Building Society Sorted!

With the eventual news of Dunfermlines plight today I can't help thinking what a shame it is that Scotlands biggest building society could not survive on a standalone basis.
However in keeping with the history of the mutual sector looking after its own, it is great to know that the member business, branches and staff are all being taken on by Nationwide.

The press releases from the Bank of England and Nationwide allude to the issues centering around purchased commercial mortgage assets; but as we will almost certainly not see the awaited report and accounts now, we will not be able to get to the bottom of things. Whatever the issues were that caused the speculated losses and long term capital erosion it is likely that the risks were not fully understood at the point of aquisition.

All businesses take risk, this is what generates return, but our motto at Saffron is do not take risks you don't understand. If a business wonders about its skill set in relation to a particular risk, the chances are you don't have the skills.

I had lunch today with a journalist from a well known pink broadsheet and he was a little disapointed that the Dunfermline story was not really much of a story. The savings are safe, the brand and branches will remain, in fact from the members perspective it is business as usual. Good news for Dunfermline members and the good news for Saffron members is that we don't do commercial!

Feed the positive dog!

CNN reported the other night that one-third of all Americans (and I would imagine the same applies over here) are losing sleep over the economy, 8 out of 10 people are stressed out, and an increasing number of people are turning to popping pills to deal with the stress and lack of sleep. While these pills may work in the short term, there is a better way. It's the secret weapon against stress, it doesn't cost a penny and it is only a thought away.

The answer is to feed the positive dog.

Here is a simple story about a man who travels to the village to speak to the wise man. He says to the wise man, "I feel like there are two dogs inside me. One dog is positive, loving, kind and optimistic and then I have this fearful, pessimistic, angry and negative dog and they fight all the time. I don't know who is going to win." The wise man thinks for a moment and responds, "I know who is going to win. The one you feed the most. So feed the positive dog."

The fact is we all have a positive and negative dog inside of us. It's part of our human nature. The key is to feed the positive dog and starve the negative dog. The more we feed the positive dog the bigger it gets and the stronger it becomes.

It is true there are times when nothing seems to go right and negativity can be a downward spiral, but taking time to think about what has worked, what we all have to be thankful for and what we can achieve if we put our minds to it, for me is time well spent.

Running a building society can be a roller coaster. We don’t always get things right and when I see a complaint from a customer I feel genuine pain, as it is really important for my own value set that we try our best to do the right thing. However each month we gather feedback from our customers and below are the comments we have received recently from customers who use our Saffron Direct contact centre.

Having read these comments, my positive dog is contented, on the rug in front of the fire, having just polished off a large Aberdeen Angus fillet steak…….What will you be feeding yours?

“When customer service becomes consistent it's then out of the ordinary... everyone is really impressive."

"I've been in contact with a number of your staff and colleagues... extremely impressed by how helpful, positive and friendly they've been... beyond the call of duty...
I have relationships with other banks and financial providers, I don't ever find them as helpful"

"A short note to say thank you for the excellent service you have provided in the past couple of days. You have shown a desire to follow matters through to a conclusion rather than just pass the issue around the system. You are a credit to Saffron and I trust this is reflected in your appraisal system."

"Thank you for prompt and comprehensive response. It is very refreshing to get such good service."

"Very Very many thanks for arranging this. It is terrific in the day and age of "rules" that cannot be broken just because "they are just rules" as another Society has done and caused me great inconvenience. Your flexibility and understanding is so refreshing."

"Thank you very much for your letter... and for your swift response. I am so relieved that the confusion has been quickly put right... Thank you, again. I am very pleased indeed with your service."

"Dear Mr Golding, I would like to take this opportunity to thank the staff of Saffron Building Society... Cherrelle of your Customer Services who took ownership of the slow moving problem and urgently chased through information... thank you"

"Throughout these difficult circumstances your employee acted in a very helpful and professional way, nothing was too much trouble... I would like to commend her to you!"

"I would like to say that dealing with Saffron has been a pleasure, especially when I have telephoned.. Thank you for your excellent service... You all seem to be such nice people there."

Is Scotland’s biggest building Society in trouble?

According to press reports the Dunfermline is on the brink of unveiling a significant financial loss, exposing another of Scotland’s financial institutions to the threat of a takeover.
The reports say that the 130-year-old mutual, which has about 240 staff, has been plunged into turmoil through its exposure to the beleaguered commercial property market.

It is understood the society will reveal an expected loss of about £26 million in the next few weeks, compared with a £2 million profit last year.

Sir Menzies Campbell, former leader of the Liberal Democrats and MP for North East Fife, said: "If the Dunfermline is taken over by a UK national institution, then it is another example of a Scottish bank finding it difficult to maintain its independence."

Its Scottish roots appear only to be a hindrance at the moment with speculation of following in the footsteps of Halifax Bank of Scotland and the Royal Bank of Scotland into some form of state ownership.

Will deposit customers be secure is a key question for most. In my view the government will not allow any UK depositor to lose money, this precedent has already been set with the treasury funding the Bradford and Bingley balances not covered by the Financial Services Compensation scheme limit of £50,000 and picking up the tab for un-protected balances in the failed Icelandic Banks.

Lots of people have already asked me if the rumours are true and of course I don’t know. However reading between the lines the Scotsman asked the Dunfermline if they stood by a pledge by Mr Dalziel (the previous Chief Executive) six months ago that the Dunfermline would remain "an independent mutual building society", a spokesperson replied: "Graeme is no longer here. That was his statement back then, not now. We are committed to remaining a mutual."
This tells me that Merger is on the cards or there is at least a requirement for them to raise more capital to survive and as a deposit-taking institution, the Dunfermline would potentially be eligible to apply for some of the government's bail-out schemes.

The commercial property market caught out several lenders in the recession of the early nineties and at the time drove a number of mergers at that time. I am thankful that Saffron has never really been pro-active in this area and consequently has less than 1% of its book in commercial assets. For Dunfermline’s sake I hope they can find a way to get through the current difficulties, to see another Scottish institution fail would be a real blow to Scotland, but I guess time will tell.

No need for tax payer support of government guarantees caused quite a stir!

Last week Saffron was the first mortgage lender to declare that we would not be signing up to the government’s latest housing market initiative, the Homeowner Mortgage Support Scheme. There was not an intention on our part to snub the initiative, but having reviewed the 200 plus pages of documentation, our decision to opt-out was based on the following:

• The borrowers who qualify for the scheme will in our opinion be pretty few and far between, nationally, let alone amongst our 6,000 mortgage members
• The rules of the scheme from the customers perspective are quite prohibitive
• It would involve system changes and significant reporting back to the government, which I would suggest does not represent good value for money for our members bearing in mind that we may have only one or two borrowers who make the scheme hurdle
• Fundamentally we believe that all borrowers in difficulty should get fair and inclusive treatment

Therefore in a press release which we issued last Thursday I said:

“As a regional lender, with an expectation that very few of our borrowers would qualify for the scheme, we feel we would better serve our members by maintaining our excellent current processes. That isn’t to say that we believe the basis of the scheme to be wrong, in fact I commit that saffron will at least do all the things the scheme suggests for relevant borrowers in difficulty. But our duty is to serve our entire membership in a fair and appropriate way at a time when they need us, regardless of whether or not they qualify under a national scheme. In addition, opting out of the scheme allows us to continue operating independently of Government and taxpayers’ assistance - as a well-run, risk-averse business, we are proud to champion our self-sufficiency.”
This release was picked up by the Times on Friday and led to a pre-record for Working Lunch on BBC2 that day and a live interview on BBC Radio 5 Live in the evening. Throughout the process I could not really see too much comment disagreeing with the position we took, except for one comment from “Which” suggesting that the government force all lenders to adopt the scheme.
Well if this voluntary scheme becomes compulsory, of course we will embrace it, but in my opinion ministerial efforts would be better placed ensuring that all mortgage lenders treat all their borrowers in difficulty fairly and only repossess peoples homes as an absolute last resort. This should not involve the provision of lender government guarantees effectively provided by the tax payer, but should involve a high dose of common sense, pragmatism and empathetic treatment of borrowers.

Borrowing from the Government, underwritten by the FSA

Tomorrow, Lord Turner, Chairman of the FSA is due to announce a wide ranging package of changes for banking regulation following the near-collapse of the financial system.
According to recent leaks there will be proposals to limit how much banks and building societies can lend home buyers – restricting mortgages to just three times a buyer's annual salary and a suggested ban on 100% mortgages.
My head of mortgage underwriting at Saffron is outraged by these speculations, and quite rightly so in my opinion. Using the blunt tool of income multiple is an unreliable and quite frankly out dated method of assessment of someone’s ability to make mortgage repayments.
What of course must be taken into account is other financial commitments, as being human beings we do not all have the same circumstances.
One fairly well paid individual on say £60,000 a year could have no debts, a good chunk of savings behind them and limited other committed expenditure and it could be quite legitimate based on affordability to lend this person more than three times their annual salary. Another on the same income could have above average unsecured debt, maintenance from a previous relationship, an expensive car leasing premium and significant traveling costs to get to work all making affordability somewhat tighter.
There is a requirement on all lenders to be responsible, and using affordability calculators is just one way that we discharge that responsibility. I think the FSA should be ensuring that all lenders take their responsibility seriously rather than dictating the rules, which in my opinion does the opposite.
With a number of large mortgage lenders now in full or part government ownership and the regulator setting the rules for borrowing, we are in danger of losing the need to be responsible at all. We will all simply do as we are told and comply.
In my view a lot of the “bad loans” as often referred to by the media, were originated by specialist lenders with only one goal in mind, to sell the loans onto another party for a profit. It is this part of the market known by many as “create and trade” that has driven the problematic wedge through the banking sector, as the mortgage seller had no intention of having a long term relationship with the borrower and therefore relaxed criteria beyond common sense levels.
For the rest of us, who lend to people to buy their home, give them membership status of our societies, value their opinion and provide them the rights to have a say in how we run the business, it seem unreasonable that we will be forced to throw common sense, creativity and responsibility out of the window and simply do what the government or FSA says.
The worst affected as always will be the consumer. Yes we all want the financial services industry to do a better job, yes we want to be lent only what we can afford to repay, but if you stop and think for a moment, is one size fits all really what will do that?

Why can't the media be accurate?

Following a meeting out of the office yesterday, I found myself home somewhat earlier that usual. I was therefore able to catch the 6-30 local news and settled down to watch BBC Look East.

There was an interesting piece on the Stansted Airport expansion plans, which is right in our heartland, so is a key local issues for Essex residents and this was followed by an item about mortgage fraud, which of course had me glued.

I was simply apoplectic with what I heard and saw on this article and have today written to the BBC with my views. A copy of my note is below:

Dear Sir

I was amazed and dismayed by the inaccuracy of a report on last nights Look East news, regarding the investigation into a potential fraud ring surrounding Ipswich properties and Bradford and Bingley.

Firstly the item talked about the "Building Society" and the mechanics of how the fraud may have worked and secondly the reporter whilst stood outside a Bradford and Bingley Branch said "it is the tax payer who has had to bail out the Building Society.

In this difficult financial time, brand confusion is not simply inaccurate, but actually potential sector damaging. I would like to point out a few facts:

1. Bradford and Bingley has been a shareholder owned bank since 2000
2. No Building Society has ever been "bailed out" by the tax payer
3. The Financial Services Compensation Scheme actually funded the liabilities for Bradford and Bingley when it collapsed and that is paid for by remaining deposit taking institutions, one of which I run.

As a proud CEO of a mutual Building Society I find this type of careless reporting unacceptable. Building Societies on the whole run much less risky business models than banks, particularly those that have required peer group or government rescue and therefore, for obvious reasons the distinction between the 2 sectors is of paramount importance.

I am happy to comment further on this matter and I would be grateful to receive your comments in response to this e-mail.

Yours faithfully

Andy Golding
Chief Executive
Saffron Building Society

Don't eat the marshmallow yet...

A book by Joachim de Posada which has already sold over 2 million copies caught my eye this week. It is likely to go on selling as it teaches the "sweet" secret of success.

The book begins with a Stanford study in which a young child was put inside a room with a marshmallow. The teacher told the student if she didn't eat the marshmallow for 15 minutes, she'd get another one.

Then the teacher left the room.

Upon returning the teacher discovered that MOST of the kids ate the marshmallow. BUT those who didn't - when tracked over many years, turned out more successful than everyone else.

Wonder why?

Well, it wasn't because they were smarter, prettier, had better genes or were more skilled. It was due to one thing: The ability to delay gratification a bit longer than anyone else.

Each morning, when you get up, do you 'eat the marshmallow' - metaphorically speaking? Do you do the easy thing first?

Or do you do that which will bring greater prosperity your way?

Each month, when you receive payment for work performed, do you pay yourself first and put at least 10% of all you earn away?

Or do you eat the marshmallow and pay everyone but yourself, first, so there's never anything left for yourself?

In the evening, do you eat the marshmallow by watching hour after hour of television - or talking on the phone with friends to gossip about the day?

Or do you save the marshmallow by reading, writing or working a plan to get ahead and stay ahead?

When it comes to learning something new, do you invest in products that will help you increase your economic situation, or do you eat the marshmallow by blowing your money on food and entertainment.

The UK population, government and banks have in recent years been wolfing down the marshmallow at uncontrollable speed; it may just now be time to wait. The economy will sort itself out, and quantitative easing may help. My real concern is that upping the production of marshmallows (or printing money as QE is often likened to) may have the effect of devaluing marshmallows – or in real term the pound sterling.

Interest rates down, carbon footprint – not sure!

Today was a rather strange day, following a phone conversation I have with ITN’s Chris Choi yesterday afternoon. He wanted to get a view on falling interest rates from someone in the savings and lending industry and I gladly agreed to help.

I was already due in London today for meetings in the West End, so offered to go to the ITN studios or even use the Building Society Association or Council of Mortgage Lenders offices, both of which are in Holborn in central London; but Chris said he was fed up with faceless corporate backdrops and suggested that the crew came to our branch in Stratford, East London, to give the interview a more realistic feel. We agreed to meet there at 9-30am today.

For some time now I have been trying to reduce my carbon footprint and therefore endeavour to make use of public transport when ever practical. So at 6-30am today I set off in my car (oops) to Milton Keynes train station which is about 14 miles from home and boarded a Virgin train to London Euston. The train was pretty full, so I am sure that was more energy efficient that making the whole journey by car.

However when I arrive at Euston, my problem begins. I am a bit claustrophobic and haven’t been able to use the tube since 1989, when I had to run for the surface feeling somewhat panicked. I have tried a few times, but get the same reaction. Therefore needing to get to Stratford would involve either several bus changes or the inevitable black cab. Feeling a little guilty, but also not wanting to be late for the important ITN interview, I hailed a cab and requested he take me to Stratford. The request was met with some sucking of air through teeth and a few moans about the roads round there due to the building of the Olympic village, but we set off promptly in an Easterly direction. I arrived at our Stratford offices in plenty of time, time in fact for my nervousness levels to rise nicely in preparation for a hard hitting haul over the interest rate coals by an expert journalist.

The staff in the branch had made a special effort, some new mugs to serve the crew coffee and even some biscuits, they had polished everything in the branch that could be and seemed almost as nervous as me. As it happened the ITN team were really nice and we had a good debate about the state of economy before commencing the interview. They probably shot a good twenty minutes of insider intelligent insights (at least I think they were) on why reducing rates today is a bad idea, and how it will hurt savers even more, whilst doing not much at all to encourage banks and building societies to lend more, let alone create sudden market demand that seem to have all but vanished. (My wife recorded the lunch time news and I only ended up with about 20 seconds, but hey!)

Relatively pleased with my performance, I bid the Stratford branch staff farewell and set about getting to Carnaby Street for my next meeting. Determined not to use a cab and not able to use a tube, I walked to Stratford station and took the Docklands Light Railway to Canary Wharf. From there I walked the Canary Riverside and took the commuter ferry to Embankment Pier, I walked up to the front of Charing Cross train station and hopped on a bus in the direction of Oxford Circus, jumped off in Regent Street and walked to my meeting in Carnaby Street.

So I have in one day experienced every possible mode of transport to get into and around in London, except the tube. So was this method more environmentally friendly than simply driving straight into London, or making use of another cab to get from Stratford to the West End.

The DLR train was practically empty, I counted 6 other passengers on the huge river ferry and I had the whole top deck of the bus to myself. It did however give me time to contemplate the reaction to a potential move in base rate and at 12.01pm my blackberry chimed with news of the 0.5% cut. I am glad the Bank of England have announced plans to commence quantitative easing, but as I told ITN, I still don’t think the further cut in base rate was required.

Midas lost his touch...

Following the announcement of Northern Rocks results yesterday (£1.4 Billion Loss), my Sales & Marketing Director John Eastgate brought me in a copy of a news clipping from the day he got married. 4th April 1996.

Rock of Gold was the headline and the story was all about the potential £1,000 windfalls that savers and borrowers could receive following its announcement the previous day that it planned to become a bank.

I was particularly drawn to a section in the article that read: “Many analysts believe it is too small to survive independently, But Chairman Robert Dickinson said his board would not consider any approaches – even though a takeover could mean bigger windfalls. In fact Northern Rock, based in Newcastle upon Tyne, said it could take over others and the spotlight immediately fell on the Newcastle Building Society.”

Ironic really, Northern Rock has always had an air of arrogance about it, and it was in my view, in part that arrogance that led it to run out of funding and eventually be forced to seek a rescue partner in the form of the UK Government/tax payer.

Newcastle Building Society Still stands firm as Mutual Building Society over 12 years later, whilst the Rock and every other building society that became a bank have to all intents and purposes gone:

Report and accounts for Northern Rock:

http://companyinfo.northernrock.co.uk/downloads/2008_annual_report.pdf

Who is Bob and how can he help me?

Saving money is a long standing and arguably very sensible habit, but sometimes the most sensible of things can be a bit boring!

Over the years all sorts of methods have been invented; from jam jars to piggy banks and we have all used them in different ways. About 18 months ago My FD Jon Hall and I were on the till in our Great Dunmow branch, an activity that senior management here are encouraged to do from time to time, as it gives us a great opportunity to meet our customers and find out how well, or not the society is doing in our members minds. A lady came in that day with about half a dozen different account passbooks, each one with sticker identifying what that particular savings pot was for. One for holidays, one for kids, one for emergency bills, one for clothes ….. you get the idea. I asked her why she did this; she simply wanted to allocate various savings to various goals and keep them separate in an easily manageable way.

This got us thinking and as we already had some consumer research on savings underway, this concept was thrown into the pot. The research which ran over a series of events, including a facebook style online community of over 300 people, all pointed us in one direction. It is easier to save money when you have a specific goal in mind.

Goals were the key, but other things shone through that would help. The use of modern technology to make managing the goals more straight forward, the ability to personalise your savings accounts to match goals, it should be fun and include some hints, tips and motivation. These insights and a whole bunch of other feedback led us to create Bob.

Bob fronts our new goal based savings tool, which anyone can use for free from our website. He and his helpers with assist with amongst other things, budgeting, creation and management of your personal goals and providing that little extra motivation to stretch yourself to achieve those goals as soon as you want to.

We also provide a series of savings “pots” that name each of your goals and keep the funds for each one separate, but all viewable in one place, through our internet savings account.

Bob and his team will continue to evolve as we get more ideas and feedback, feel free to join him on that journey.

So saving may be traditional and sensible, but at Saffron we also think it is pretty cool! I think the current recession has taught the UK something about the buy today pay tomorrow culture and maybe, just maybe, we will get back to some of those sensible habits and with Bob to help, maybe we can have some fun doing it too.

To see Bob, visit www.moneytree.saffronbs.co.uk/savingsmanager

Government banking bail out finally explained!

This week I came across an old story, which reminded me of all the information I have read about both the US and UK schemes designed to get the economy moving again:

Once upon a time a man appeared in a village and announced to the
villagers that he would buy monkeys for $10 each. The villagers, seeing
that there were many monkeys around, went out to the forest and started
catching them.

The man bought thousands at $10 and, as supply started to diminish, the
villagers stopped their effort. He next announced that he would now buy
monkeys at $20 each. This renewed the efforts of the villagers and they
started catching monkeys again.

Soon the supply diminished even further and people started going back to
their farms. The offer increased to $25 each and the supply of monkeys
became so scarce it was an effort to even find a monkey, let alone catch
it!

The man now announced that he would buy monkeys at $50 each. However, since he had to go to the city on some business, his assistant would buy on his behalf. In the absence of the man, the assistant told the
villagers: "Look at all these monkeys in the big cage that the man has
already collected. I will sell them to you at $35 and when the man
returns from the city, you can sell them to him for $50 each."
The villagers rounded up all their savings and bought all the monkeys
for 700 billion dollars. They never saw the man or his assistant again, only lots and lots of monkeys!!!!

172 Big Macs for every man, woman and child in the UK!

A strange title I’m sure you would agree, but reviewing the papers today on the RBS losses got me thinking about how much money £24 billion, which is their declared loss, actually is.

Most of us would struggle to comprehend a number so astronomically huge and in fact try and ask someone to write down 24 billion as a number and I bet most people would think about for a while. Here goes: 24,000,000,000. Lots of zeros aren’t there. How can it be possible that a bank with a market capitalisation (value of issued shares) of around £50 billion can lose half that value in one year? It would be like Saffron Building Society which has capital of £50 million, making a £24 million loss. Just incomprehensible; and don’t worry we are making healthy profits.

So I got to thinking what does such a big number mean to each of us in the UK. Well according to the 2007 census and an updated mid 2008 estimation, there are 60,943,912 men, women and children in the UK. So the loss equates to £393.80 for each of us, or put another way 79 trips to the cinema each or 984 pints of milk each.

My major concern is how much future taxes will have to go up to pay for all the bail out schemes that the government have put in place, I hope Brown and Darling know what they are doing!!!

World goes mad for "Crazy John's" ISA

Yes and I do mean the world. The product has been out there for nearly 2 weeks now, but since the product got a mention on BBC2’s working lunch today and got emailed out to the database by Martin Lewis of moneysavingexpert.com as a best buy, our call centre and website have been under constant bombardment from savers keen to take advantage.

We had always planned a limited availability of the product, but these high profile appearances have kind of accelerated that. So much so that we have had to confirm that next Monday will be the last day for applications from outside our own geographic area.

But what about my “global” comment? Well we have a stats engine which gives us a very detailed set of information about our website and where it is being clicked from both in terms of the search engine and source, but also the country and I was amazed to see that today we had interest in the product from pretty much all corners of the globe, including Canada, the USA, Russia, China, Brazil and even Tanzania. Unfortunately only UK residents are eligible for an ISA account, so I hope not too many people will be disappointed.

The thing that amazes me is that whilst the product is very well priced, the interest at the end of one year is just under £140 if you pay the maximum £300 each month. If you used your full ISA allowance in one go in our 2 year fixed ISA the annual interest would be just under £120, but I guess 20 quid is 20 quid……

"Crazy John's" ISA

When my Sales & Marketing Director John Eastgate ran into my office and said he wanted to launch a regular saver ISA product, I was delighted. As a 160 year old savings institution; helping people to build up a lump sum for a future goal is what we are all about. However when he told me wanted to pay 7% interest, I nearly fell off my chair….. and that was when Bank Base Rate was at the dizzy heights of 1.5%, before the February cut.

We have always ensured that we have competitive ISA products, believing that any product where no tax is deductible from the interest should be encouraged, but 7%? Have you gone crazy, or words to that effect followed his request, but John explained to me how he wanted the product to work and that encouraging people to put a little bit away each month, particularly when motivations to save may not be as strong as they have been in past, was the right thing for a mutual building society to be doing.

So having done the maths and establishing that the real cost of providing such a product is nearer to 3.7% than 7%, I agreed to support him in his quest. His next hurdle would be the Finance Director, Jon Hall, who is great at managing the purse strings. Keen to hear how the conversation had gone, I emailed around asking if the executive team had yet seen Crazy John’s ISA and the name sort of stuck. Now most emails inside the society on this subject are headed up with some sort of reference to “Crazy John”. I don’t think he minds too much, but I bet he is looking forward to the end of ISA season.

The theory though was cemented for me a couple of days ago when a journalist from BBC online contacted me. His opening gambit – 7% ISA, have you gone crazy? Of course I adopted the role previously played by John, talking about the real cost to us and our desire to encourage people to keep on saving.

So in summary, we haven’t gone crazy here at Saffron Building Society, I don’t think anyway, and of course we do have other attractive ISA’s available for those with lump sums or transfers, but anyone in the market for a bit of motivation to squirrel away some money each month, couldn’t do much better than join the “Crazy John” gang for a while!

Is it me or is it Saffron?

I have recently watched some interesting clips on the BBC news website about some of the reporting done in the lead up to and during the “credit crunch”. One particular clip was centred on Robert Peston the BBC’s Business Editor discussing with MP’s earlier this month, his reporting of the Northern Rock difficulties in 2007, that some have said lead to the collapse of the Bank.

For once I found myself actually siding with the journalist, as to be fair Robert did not suggest that Northern Rock customers queue up and withdraw their cash, he simply reported the fact that the Bank had had to seek emergency assistance from the Bank of England. The rumour machine and our own fear did the rest.

We are in danger of becoming a nation where no one will be prepared to express a view or say what they know for fear of recrimination. It is true there have been some high profile cases of celebrities saying or doing things that they probably wish they hadn’t. Jonathan Ross and Jeremy Clarkson spring to mind, to which I should add that I disagree with what they did/said. However I increasingly see examples of people checking themselves or holding back, in case they say something inappropriate.

Indeed at my own board meeting earlier today we had a debate about whether we should put a disclaimer on this blog, stating that the views and opinions are my own and not necessarily those of Saffron Building Society. We decided against it, in favour of good old fashioned common sense.

I do not think the media should be gagged, in fact I don’t think anyone should, we have a right after all to freedom of speech. However I do think they have a duty to show both sides of the coin, not just the bad news that invariably grabs the most attention or is the most sensationalist story.

If that is something that comes from the review of the media’s reporting of the economic problems, then great, we should be brave enough to take the rough with the smooth, but please a bit of smooth occasionally would be great….

One centre for people with epilepsy and special needs, an enormous corridor, nine building society staff and Billy!

What an amazing day I had yesterday. I along with a few staff from Saffron Building Society, dedicated some time to help the St. Elizabeth's Centre, a national centre providing positive living and learning for people with Epilepsy and special needs, with a rather orange problem.

The central corridor at the centre has for the past few years been a rather psychedelic shade of bright orange, certainly not the most soothing of colours. The society, as part of our community programme was only too pleased to help when the centre asked if we could step in. We spent the day painting coat after coat of magnolia over the orange to clean up and refresh the area, ready for the staff and students to add decorations and personal touches.

I had seen photographs of the offending corridor, but when I arrived first thing in the morning, I have to admit to wondering if we had bitten off more we could chew. The sheer size of the wall space to be masked, cut in and painted, was to say the least a bit daunting. But the Saffron team pulled out all the stops and got the job finished to a high standard, which St. Elizabeth’s were delighted with.

We did have a little extra help during the day from some of the students, although as you can see from the photo, Billy who is a resident at the centre seemed more interested in painting me than the walls.

My staff did a cracking job which left me with a sense of pride and accomplishment, exactly the sort of activity that a regional mutual should be getting involved with. My thanks to Christian, Michael, Sue, Melanie, Chris, Ian, Linda, Heather and Richard for such an amazing effort.

Once my painting duties were over, I quickly had to remember what I actually do for a living. I rushed back to our head office in Saffron Walden, changed out of my paint covered scruff’s and donned a suit and tie, for a meeting of our Audit Committee with our external auditors to finalise our 2008 report and accounts for sign off at a board meeting later this week. I have to admit to chuckling to myself, sat in such a formal meeting and realising that my hands were still covered in magnolia paint....

What price trust?

Over the weekend we had a number of people come into our branches with new deposits from the struggling Lloyds Banking Group. These new deposits were handed over with comments like “you guys are trusted” and “we know you, you are local”.

The bank shocked the City on Friday when it reported an unexpected £10 billion loss in HBOS, the lender it rescued last month after Government intervention, making it worth far less than thought when it was acquired.

Shares in Lloyds Banking Group fell 12 per cent this morning, after a 32 per cent plunge on Friday, as concerns mounted about them being forced to seek a fresh capital injection from the Government.

Politicians say the revelation will make it inevitable that the bank will be forced to seek a fresh capital injection from the state, or even be nationalised, leaving taxpayers facing billions of pounds of extra losses on their rescue of the banks.

This got me thinking about the capital model that banks use to support their business activities. All companies need capital; we need it to support the building society in terms of the mortgage lending we have done. The FSA require us to hold capital that would be used to pay for things such as credit losses in the event of bad mortgage debts. Banks are the same, but their capital is provided through their share value, whereas a building society actually has to have the physical cash.
Capital is really only needed to support organisations in bad times, but the trouble with a bank is that when times are bad their share price plummets and their effective capital is diminished.

I think we could see a few phoenixes emerge from these economic circumstances. They will be the new banks of the future. They will be different from the banks we know in lots of ways. Firstly they will be owned by their customers, rather than shareholders; they will have prudent limits imposed upon them to prevent them growing too fast; they will have to cut their cloth according to their size; they will have to already hold the cash they require to support future business aspirations; they will have to make a profit, but not too much at the expense of customer value and they will be run by boards accountable directly to their customers.

Sounds familiar, sound like a Building Society, which is probably why the Building Societies Association have just published data which confirms that Building Societies are on top for service, value and trust.

http://www.bsa.org.uk/mediacentre/press/service_value_and_trust.htm

If rate cuts aren't working then why make them?

Mervyn King the Governor of the Bank of England has admitted that rate cuts are not working to re-start the economy.

The theory is that lower borrowing rates will help businesses and individuals by freeing up cash that would otherwise be servicing interest on borrowings. Sounds sensible, but even if the average tracker mortgage borrower does feel a bit more flush there is not much evidence to suggest that this spare cash is finding its way into the UK's till.

People are worried about job security, they are worried about getting a mortgage, they are worried about their credit card companies and banks calling in their overdrafts and credit limits, upon which they have probably over relied in recent years. With all this in the back of one's mind, it is no surprise at all that we are not all running round the shops on spending sprees or planning our next exotic holiday or house move.

I really think that the government will have to resign themselves to the fact that this will take time. We the general public will have to regain the confidence that has been lost.

I don't think it is beneficial in the long term for people to get used to unrealistically low borrowing costs, and I also think savers are getting a pretty raw deal at the moment, so let’s not have such low rates if it doesn't have the desired effect. A fair deal for all would be a better place in my view and with base rate at say 3.5% that would probably be achieved.

So if rates are not going to get us out of recession, what is? Well I think it is positive attitudes and thinking, which is why I was drawn to the story today about Claire Robertson, the manager of a Dorset Woolworths which closed when the firm collapsed who is to re-open the shop she worked for under the new name Wellworths.

Good on ya Claire!!!!

A world of blame...

My journey from Towcester in Northamptonshire to our head office in Saffron Walden took me four and quarter hours this morning. Whilst travelling past Milton Keynes on the A5 dual carriageway the road went from slushy to completely snow-covered in the space of about 10 minutes. The snow flakes were like tennis balls.

This additional travelling time afforded me some moments to reflect on all sorts of things, the first driven by someone on the radio blaming the authorities for all the travelling difficulties people had been faced with this week. Funny because I didn’t think the authorities controlled the weather.

So I got to thinking about all the blame that the media help us to seek to apportion:

• "House prices have fallen and the economy is ruined because of the banks", is one I’ve heard. I could argue that culpability lays in a number of areas, such as government, lenders, borrowers, supermarkets, manufacturers, house builders, town planners and global impact; but that’s probably one for another day.
• At my youngest son's school this week, someone fell over on ice in the car park and the school have to consider the risks of being sued for allowing this to happen.
• I heard another news story about the AA blaming councils for car accidents in the snow as they had not gritted the roads sufficiently - which makes me laugh as this morning I was overtaken on a snow-covered dual carriageway by a van that must have been doing 70 plus mph. If he has an accident in my view the only one to blame will be himself.

I think the media and experts should allow us to take responsibility for our own lives. If we buy a house there is no guarantee that it will go up in value. If we choose to drive in the snow we should take care to protect ourselves and other road users. If we do bump into an open drawer at work, we should not enlist the help of an “ambulance chasing” claims management company to see how much we can get out of our employer.

As a species we are genetically disposed to calculate and take risk. As cavemen every journey away from the cave was fraught with danger. More people are seeking ways to take risk than ever, otherwise bungee jumping would never have been invented.

So for me, I don’t blame the authorities for snow, they couldn’t change it; but that leaves me with a need to blame someone else for something else. So I will, the Bank of England’s Monetary Policy Committee for reducing base rates again yesterday, adding further pressure to savers reliant on interest for their income. I blame them because fiscal policy takes time to work, we have had more than enough reductions already that have not been allowed to take their course and…. they had a choice!

Building Societies and the bail out of the collapsed banks

I still think very few people are aware that following the failure of Bradford and Bingley and the Icelandic Banks that it is the remaining UK deposit takers that fund the bail out, not the government as so many of the press have reported.

For example when B&B transferred its savings book to Abbey Santander, the retail funds required for the £18 billion worth of balances held by customers were simply not there. So a call was made on the Financial Services Compensation Scheme (FSCS) for all the balances covered up to the £35,000 limit as it was at the time. This was estimated to be £14 billion. The remaining (uncovered) £4 billion was funded by the treasury and therefore ultimately the tax payer.

The FSCS is funded by levies from the UK deposit takers, so we all have to pay. The irony is that the failed institutions relied heavily on wholesale funding markets which ultimately, significantly contributed to their demise, but the Building Society sector is heavily retail funded. Saffron Building Society in fact holds more retails savings balances than it lends in mortgages. Due to this the sector is now having to bear a greater percentage cost of the levy than the banks. This seems an unreasonable penalty for prudent policies.

Whilst for us the amount involved will not reduce our annual profits below acceptable levels, it will cost us in excess of £1 million from 2008 profits, with further amounts payable in future years.

Therefore I have today written to all of our local MP’s asking them to support an early day motion read recently by Ann Cryer MP.

Motion 426, Financial Services Compensation Scheme Levy on Building Societies, raises some very important concerns of both Saffron Building Society and the entire building society sector. I have provided a copy of the text of the reading below.

I don’t want this to sound like sour grapes, but building societies typically run more traditional and less complex business models than banks. We are naturally risk averse and prudent in looking after our member’s money and because of this our levies are disproportionately high……

I would love to hear your comments and whether you agree with the motion or not.

http://edmi.parliament.uk/EDMi/EDMDetails.aspx?EDMID=37446&SESSION=899
That this House notes the disproportionate impact on building societies of the Financial Services Compensation Scheme (FSCS) levy, resulting from the failure of Bradford and Bingley plc, the Icelandic banks and London Scottish Bank; recognises that building societies' share of the levy, approximately £200 million per annum in each of the next three years, is equivalent to about 15 per cent. of the sector's pre-tax profit for 2007-08 financial year ends; notes that building societies' share of the levy for years beyond 2011 is uncertain, but could well be higher than £200 million per annum; acknowledges that the impact on building societies contrasts starkly with the banking sector, where the FSCS levy is typically well below five per cent. of pre-tax profits over a similar accounting period; further notes that the current allocation of the FSCS levy works to the detriment of building societies' members, their savers and borrowers; acknowledges that no building society has ever made a call on the FSCS or its predecessor schemes; and calls on the Government to introduce a more equitable scheme for funding the insurance of deposits of failed banks.

No financial news to start February....

Whilst bad weather can create problems for many, including the 6 million estimated people who took the day off work yesterday; it was at least a welcome break from recession and finance news, with all the major media focusing on the snow that gripped the UK.

IT seems that the further dumpings expected, on the whole did not happen and aside from exercising caution on the ice, most people ventured off to work as normal this morning.

Yesterday I mentioned that I was going to Sandringham to meet the Queen and I must tell you that she was genuinely lovely. She made the effort to speak to everybody present at the event and despite the snowy conditions at the Sandrigham Estate, still stayed at the vistor centre for over an hour.

The drive home gave me some time to reflect on how regimented her life must be, body guards, maximum security and endless public engagments. Certainly one for me to keep in perspective when stuck in traffic or worse still moaning about snow making it hard to get to work.

Snow and the Queen

Well travelling today has been a nightmare for many, fortunately I have been working from home this morning, however I am about to journey to Sandringham to meet Her Majesty the Queen.
My wife Helen and I are representing the building society at a function at Sandringham in aid of Campaign Care 94, a charity that we sponsor in a small way, due to our agency representation in the Sandringham area.
We are both really looking forward to it, except for the fact that further snow is forecast and I don't want to be late for such an important meeting.
We have had to accept a couple of branches of ours not opening today, Stratford and Brentwood, and my Executive team are watching the weather carefully to see if we need to close others early. Many of our staff come from rural locations and I don't like the thought of them stranded on their journeys home.

I have decided to be selective on what I read

I am on the board of the Council of Mortgage Lenders and yesterday was our bi-monthly Executive Committee meeting. The agenda as always was littered with a raft of issues for debate, concerning lending, customers, arrears and possessions and government schemes designed to boost the housing market and get things moving again.

As I listened to the debate I couldn't help but feel that both the industry and government were perhaps slightly arrogant to think that if mortgage lenders simply open up the credit flood gates again, everything will be OK. Actually markets are won and lost on confidence and right now we the general public have been repeatedly told not to have any, so it is little surprise that we are spending less and putting off major transactions like moving home.

On the train on my way out of London I was particularly drawn to 2 articles in the Times. The front page headline read The Deepest Recession, a story all about the International Monetary Fund forecasts of our shrinking economy during this year; and a story on page 24 entitled Trust Me The Experts Here Don't Know Either. This came from a survey of 2,000 captains of industry, economists and heads of government at a World Economic Forum in Davos.

I reflected on the headline and have to agree that I share the views of the writer that captains of industry, economists and heads of government are usually wrong about the future.

How should we be feeling while the country wallows in the mire of recession? What can we do? Well I don't know, we all have our own way of dealing with things, but what I do know is that none of us can change what is outside of our control - neither can we change what we have already done; all we can change is what we do from this second onwards.

As Chief Executive of Saffron, it’s my job to listen to all of the experts and make the best judgement calls that I can – looking at the financial macrocosm and steering the building society through the storms. As an individual, however, it comes down to being sensible. All any of us can do is our best and, when we do, we Brits have a funny way of sorting things out.

For me though one thing is certain - I will pick and choose what I read or listen to from the media and only take note when it is something I can change!

Development can be a slow process

I am typing this entry into my blackberry memo pad, in my car, in the dark and parked on the MI motorway 2 miles north of junction 15A. I have been parked here now for nearly 3 hours.

Today had gone so well too; I have been in Leicester on an Achievers Academy event and had a really good day with the delegates. The academy is an initiative that we run with 6 other Building Societies; Teachers, The Hanley, The Ipswich, Leek United, The Loughborough and Market Harborough. It has been running for a couple of years now and each society puts on 2 delegates, who are hungry for development and have potential; we then put them through a series of pretty tough exercises to hone their skills. Coupled with this each CEO mentors delegates from other societies. This year I am working with Clare and Carole from Leek United.

The idea is to work with them between events and offer advice and coaching to help channel and stretch their development. It is great fun and very rewarding. Yesterday was a presentation skills training course in advance of a formal event next week, where all the delegates will have to present to a "dragons den" of CEO's - nasty!

I firmly believe that our people are what differentiates our service and therefore development for those who want it is critically important. Saffron Building Society is only as good as the staff our customers deal with and my colleagues at the other societies are firmly in this camp too.

I am hoping the M1 may open soon; it is now nearly 9pm and I have run out of sweets and have my legs crossed…

We are now officially in recession - but recessions are not new and they do end!

The media have already started to "state the obvious" today, confirming to us the general public a fact we have probably know for some months now. The UK is officially in recession!

But what does it mean? What should we do? What has happened in the past?

I was in our Ware office this morning and came across some historic documentation, some it dating back to the 1800's about the dealings of the Building Society. I was drawn to a quote from the directors’ report in the 1970 report and accounts, which lead me to look at what was said in other recessionary years. The following quotes are from just such reports, including one from me, which will be in our 2008 report that will be going out to members shortly:

1970 - "The year has been one of uncertainty nationally and it is difficult to forecast the future trend of interest rates. However, it has become clear that Building Societies are now regarded as a secure investment for savings and the movement generally is receiving a record inflow of investment money."

1991 - "The difficulties within the economy that prevailed throughout 1990 intensified during 1991. Although Bank base rates reduced seven times during the year thereby allowing mortgage rates to fall by almost 4%, the damage inflicted to the housing market was all too evident. Falling House prices were recorded in many parts of the Country."

2008 - "In my opinion it has been an extremely difficult year for consumers, where not only did we all have to come to terms with rising inflation driven predominantly by food and energy prices, but we have also had to contend with an uncomfortable level of uncertainty about such things previously regarded as sacrosanct. I am talking of course about the banking and finance industry that has faced a period of unprecedented negativity. The phrase “you can bank on it” may not have quite the same meaning to us all going forward. Against a backdrop of financial meltdown, quite literally for some institutions, it is appropriate that I recount some of the key financial issues facing us all and how Saffron Building Society has coped and will continue to do so in arguably the most uncharted financial waters in documented history."

Recessions will always happen; it is unreasonable to assume that constant growth and economic buoyancy will continue ad infinitum. But if we all hold our nerve, save more, borrow less and spend wisely, this recession will, like all those that have come before, become history and the media will have to find some other source of bad news in an attempt to dampen our spirits.

It's official. Building Societies give better service than banks.

I was really pleased today to get a report from the Building Society Association about some recent market research they had commissioned on customer service in banks and building societies.

Building Societies really scored well against the banks as the graphs below show. Saffron's own research with members showed customer satisfaction to be high. It is good that overall the Building Society sector is valued for it's fair treatment, trust, advice and overall service to customers.

I believe that serving only one master i.e the customer, gives Building Societies an edge over shareholder businesses.

Where will it all end?

There is a lot going on in economic terms at the moment. Inflation data out today shows CPI down to 3.1%, which I guess is no surprise really - fuel prices have cooled off and it felt as though everything was discounted this Christmas.

The government has announced a whole new series of measures including asset protection schemes, an extension of the credit guarantee scheme, a Bank of England asset purchase scheme or "Toxic Bank" - where will it all end? What I do know is that at some time in the future it will all have to be paid for. Interest rates will have to go up and so will income tax.

So to Saffron's response to the latest base rate cut. Base rate has hit an unprecedented low, and partly for that reason, Saffron are not moving standard variable rate this time. The cost of borrowing has come down dramatically in recent months and we feel the current rate reflects appropriate pricing for risk, funding costs and our size as a relatively small lender. Our tracker loans on the whole will reduce, but I have concerns about the long-term effect of artificially cheap mortgage payments on the UK consumer.

Cynically one could argue that low rates in the US are what started the whole "credit crunch" in the first place. Back in 2004 US rates were at 1% and borrowers took out very cheap mortgages (including sub-prime) and by late 2006 with rates back up to 5.25% many could not afford to pay and the process of "jingle mail" (voluntary repossessions) started. The rest is well documented history.

I worry that the UK borrower could experience the same repayment shock when rates go back up to 5% or more - and they will; it is only a matter of time.

To prevent borrowers from being hit by unexpected high rates, Saffron have decided to offer some of our borrowers the brief opportunity to switch and fix at competitive rates. This gives real long term value for money and protection, as well as putting our members in control of their mortgage payments. Saffron are offering the product transfer with no fees, exit charges or other strings attached – making it easy is all part of doing right by our members, after all.

On our savings range, we have passed on no reduction to our 55 plus accounts and our Children's Ladybird account to do what we can to look after accounts which are more sensitive to interest. Saffron are also developing some new products for our loyal branch customers - watch this space....

Who's eating who?

Well the news is full today of the Britain's 2nd biggest Building Society Britannia and its planned merger with the Co-op. Whilst, I have my own personal views on this merger, I couldn't help drawing comparisons with another story I saw on the BBC News website today regarding the evolution of the dung beetle. Apparently it has grown longer legs, sharper teeth and no longer eats dung. Instead it now eats the millipedes that it used to compete with for the dung!

I am not sure which of the Co-op or Britannia are the dung beetle in my mind, however I am sad that such a large and respected society will be exiting the sector.

The saving grace for me, is that Britannia will remain as a customer owned business and still a large part of the mutual movement.

The Human Side of an Economic Downturn

There's been a lot of negative coverage of banks in the last year or so, and we are all familiar with the sight of bankers leaving their offices in Canary Wharf or on Wall Street, with the contents of their desks in a cardboard box. I would guess that for many of you, the sight of "rich bankers" losing their jobs has not been one that you have over-sympathised with, however there is a consequence for the smaller business, such as Saffron. We are a regional building society, and have been largely shielded from the direct effects of the world wide slow down, however we can't shield ourselves forever and we have had to bow to the inevitable.

With the financial services industry as it is: interest rates at an all time low and the cost of bailing out the Icelandic banks and Bradford & Bingley to be paid for, we were forced into taking some action to manage our costs and to my great regret, a small number of roles and individuals, have been placed at risk of redundancy, pending the completion of a formal consultation process. The New Year has seen a number of companies in different industries announce similar moves, however that doesn't make this news any easier to take for the individuals concerned.

Such decisions are never easy, however as CEO and as a member of the Board, I have to stand up and be accountable for them. The Board's primary role is to look after our members and customers and in order to do this we must fit our cost base to the opportunity presented by a given market. So it is not surprising that like many firms we are taking action to cut our cloth accordingly.



That said, we will do all we can to minimise the impact on our people - but this doesn't stop us feeling for those affected and the thousands like them across the UK.

Borrowers 3 - Savers Nil

Well, as I guess most of us expected, the MPC cut rates today by 0.50%.
My own view is that they have not yet allowed time for previous cuts to have an effect and that this one was not necessary. Mortgage rates are pretty much at an all time low for existing borrowers and I am concerned that people will get used to artificially deflated mortgage repayments and then struggle to cope with payments increases when rates go back up to more normal levels of around 5%. My advice to anyone (and I am doing this) is to leave their payments unchanged and enjoy being able to repay your mortgage a bit quicker.

My other concern is for savers, particularly retired savers who rely on interest for their income. For those of us not yet retired, it is really only important for interest to be above the rate of inflation (which I think it is likely to be in the near future) but if you are on a fixed income it is the absolute amount that matters.

My thoughts now need to be on how we handle this rate cut, I want to limit damage to our loyal savers where possible, so I need to think hard....

Be sure your blogs will find you out......

We have a tradition here at Saffron (which I think is common in most companies) that I completely forgot about about. Tuesday this week was my first day back from the break, and pretty hectic, Wednesday I was in London all day at meetings and Thursday was consumed with MPC announcements and planning how to deal with that, but I should have bought cakes for all the staff for my recent 40th.

A number of staff read this blog and promptly reminded me that it was nice that I had advertised my recent birthday, but where was their cake?

So Friday is cake day here at Saffron - oops!

Happy birthday to me and Saffron

Today was my first day back at work following the Christmas and New Year break. This year, my break was slightly extended with a long weekend away with my wife, to celebrate my 40th year (or should that be commiserate?!)

Speaking of birthdays, Saffron Building Society as it enters 2009 will also celebrate a rather special birthday. 160 years of helping local savers and borrowers, keeping their money safe and secure by running a straight forward, profitable business.

Standing the test of time

It is fair to say that no matter who you talk to everybody is concerned about the UK economy in 2009 and whilst I would agree that things are not great, it is easy to forget that there have been other major financial crises in the last 160 years. I myself remember, the recessions of the 70s, 80s and 90s with the three day working week, crippling inflation rates and the dot.comm bubble bursting. Saffron came through all of these unscathed and unlike me avoided the flares in the 70s, the mullet hair style in the 80s and listening to the Spice Girls in the 90s.

So, whilst consumer sentiment is low at the current time and in my view not helped in a big way by bad news media reporting, history tells us that every downside will eventually recover.

In this 160th year, my goal is to continue to run a simple and stable business so Saffron can come through this recession just as it has done before. And, to do my best to treat both our savers and mortgage borrowers as fairly as possible in a reducing interest rate environment.

Speaking of which, I await, with baited breath, this Thursday’s Monetary Policy Committee meeting and their 12.00 noon announcement.