Introduction

The Building Societies Association represents mutual lenders and deposit takers in the UK including all 45 UK building societies. Building societies have total assets of nearly £330 billion and, together with their subsidiaries, hold residential mortgages of over £230 billion, 18% of the total outstanding in the UK. They hold over £230 billion of retail deposits, accounting for 19% of all such deposits in the UK. Building societies account for about 28% of all cash ISA balances. They employ approximately 39,000 full and part-time staff and operate through approximately 1,600 branches.

Executive summary

We welcome the overall reduction in the budgeted MELL for 2014/15 and would like to think it is the start of a more cost-effective regime.  But the separately published FSCS plan and budget for 2014/15[1] shows that the budget for total management expenses levy limit for 2014/15 is in fact 26% higher than the forecast for 2013/14.  Sadly, this suggests greater spending without efficiency gains. 

Q1: Do you have any comments on the proposed FSCS MELL for 2014/15?

The FCA and PRA propose to set the total management expense levy limit for the FSCS for 2014/15 at £80 million. This is a 14.4% reduction on the 2013/14 budget, on first sight a very welcome move.  But the overall figure is in fact 26% higher than the forecast levy limit for 2013/14.  

The management expense element of the MELL for 2014/15 is £74.7 million (£74.4 million budgeted in 2013/14).  The 2014/15 budget for this element is 17.6% higher than the £63.5 million forecast for 2013/14.  The non-levied contingency reserve for 2014/15 is £5.3 million compared to the previous year's budget of £20 million.  The latter is particularly pleasing as we argued for a lower contingency reserve in our response to last year’s consultation on the MELL.   

The 2014/15’s budgeted reduction in the MELL has, however, come only from a lower contingency reserve, which is not levied, rather than cost savings.  We would have liked to have seen overheads reduced significantly in other areas, particularly on IT spend. 

In last year's response to the MELL consultation[2], we challenged the seemingly ongoing change investment in re-engineering the FSCS business processes.  We pressed for an explanation as to why earlier systems changes had proved inadequate.  This has not been forthcoming.  IT costs are not detailed in this year’s consultation, a grave oversight.  Such spending – apparently without efficiency gains - has to be justified.

We note there is less detail in this consultation compared to last year.  While financing and major recoveries are explained - "FSCS's pursuit of opportunities to recover the costs of compensation, including from the major banking failures of 2008/09 and other failures such as Keydata ..." - strategic change programmes are defined vaguely.    They are "investments in changes to FSCS processes, operations and systems".  This lack of clarity matters as strategic changes have actually risen in cost, up £400K to £16.3 million from £15.9 million.  Put another way, the "strategic change portfolio" comprises 20.4% of the budgeted levy for 2014/15.  Although the consultation does say that the imminent FSCS plan and budget will provide more detail, we consider it should be explained in the MELL consultation.  It is hard to comment authoritatively with what detail there is contained in a separate, later document.