Introduction

The Building Societies Association represents mutual lenders and deposit takers in the UK including all 46 UK building societies. Mutual lenders and deposit takers have total assets of over £375 billion and, together with their subsidiaries, hold residential mortgages of £245 billion, 20% of the total outstanding in the UK. They hold more than £250 billion of retail deposits, accounting for 22% of all such deposits in the UK. Mutual deposit takers account for 31% of cash ISA balances. They employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches.

Executive summary

Management expenses are budgeted to rise by over 12% with little explanation as to why the costs are so high.  Our members continue to strive to cut costs but such efficiency drives are not apparent at the FSCS.

The labelling of some of the budgeted costs is misleading.  Activities which appear to us to be ongoing operating expenses come under investments or new/ exceptional headings.

General

We would have liked to comment in more detail on this consultation but have not been able to in the very short response time given (less than a month).  The FSA is issuing an unprecedented number of consultations on vitally important areas, most of which have similarly compressed timetables. 

Question: Do you have any comments on the proposed 2013/14 FSCS management expenses levy limit figure?

The budgeted management expenses levy limit for 2013/14 is £94.4 million and consists of:

• FSCS management expenses of £74.4 million[1] (2012/13[2] budget: £66.4 million)
• a contingency reserve of £20 million[3].

Management expenses are made up of specific costs attributable to a class[4] and base costs (overheads). 

Commentary

• Management expenses

We note that management expenses are budgeted to rise by over 12%.  We are not convinced that such a large increase is merited; in fact, we are not convinced any increase is merited.  The FSCS should take a leaf out of our sector’s books and reduce its expenditure.  Building societies have reduced their management expense ratio by more than a third over the past fifteen years. 

The areas that concern us most are “change investments” and “exceptional/ new activities”. 

• Change investments

Expenditure here is wide-ranging and not always an “investment”.  For example, part of 2013/14’s budgeted £16 million comprises £3.6 million for a consumer awareness campaign.  This is not an investment – an asset – but apparently ongoing expenditure.  £2.9 million was budgeted for consumer awareness in 2012/13.  We acknowledge the importance of consumer awareness of the existence of the “safety net” (though not necessarily of the FSCS per se) in engendering confidence in the financial system and, in turn, promoting financial stability.  But we are concerned about the timing of the proposed campaign ie before the impact of FSA’s new requirements (from August 2012) for leaflets and notices in branches and on websites have been evaluated. 

So it is not clear how FSCS will determine the extent to which any future increase in awareness is attributable to its advertising campaign - as opposed to FSA’s new requirements.  The lesson from FSCS’s previous campaign is that media advertising is not very effective in getting the message across: point-of-sale notices are likely to be more effective.

Another seemingly ongoing area of expenditure under the change investment category is “re-engineering” the FSCS business process:  £6.3 million budgeted in 2013/14, the same as the previous year[5].   In 2010/ 11, investment in IT systems totalled £18 million.  It would be helpful to have better explanation of why the earlier systems changes have proved inadequate. 

A provision of £2 million has been made for “re-procuring” outsource partners (in the absence of further explanation, we assume this to be engagement fees etc).  This is staggeringly high against budgeted outsourcing costs of £11.2 million.  If the FSCS is using the same “partners” again, why is there a need to pay any fees?

£3.4 million has been put aside for “smaller projects and contingencies”, up from £3 million in the 2012/13 budget.  £3 million is a lot of money just to have ready to dip into during the year.  Our members and others, who may not have the luxury of such sums, have to pay for this.  Given no explanation is forthcoming for such expenditure, we suggest the FSCS does what our members do when faced with unexpected projects –trim costs elsewhere.

• Exceptional/ new activities

This is another area where costs appear to have escalated.  For 2013/14 £14.8 million is sought, compared to £8.6 million in 2012/13 (but forecast as £5.7 million according to CP 13/4).  The headings appear arbitrary and could easily have been listed in the ongoing expenditure category (or indeed under change investments).   For example, external standby charges feature in this category yet also made an appearance in 2012/13’s consultation – suggesting ongoing expenditure rather than new or exceptional spending.

Unlike in 2012/13 when the costs of the various components were broken down, all that is available in this consultation is the sum of the total costs.  One of the components covers investigating new streams of work; surely that happens every year and is therefore not new per se?

New this year is a category for contributions to the FSCS pension scheme deficit.  We know this is ongoing although it has not been mentioned in previous consultations[6].  Levy payers deserve to know how much this will cost them.  Notes to the FSCS’s 2011/12 annual report suggest the costs for this year could again be £538,000.  Confirmation would be helpful

• Contingency reserve

£20 million is to “provide a reasonable sum available without further consultation to meet needs that may arise within tight timeframes…”  This large sum represents 21% of the total budget and seems far more than “reasonable”.  Our members are not in a position to have such a reserve.  We would like to know how such a sum was calculated and how it is monitored.

• “Other expense” – legacy banking failures

We note that only the interest part of the legacy banking failures category has been removed from the MELL.  As the “other expense” category (£1 million) is related, we do not understand why this has been left in the MELL.