SPECIAL FEATURE: A capital idea
At this year’s Labour Party conference in Brighton, shadow treasury financial secretary Chris Leslie told a fringe meeting that the party “has a strong commitment to mutuality… we have a thirst in wanting to help the sector.”
Which was music to my ears. Leslie pointed out that building societies and other mutuals should have better access to capital because, unlike limited companies, mutuals cannot ask shareholders for an injection of new capital whenever they need it. The only way a mutual can generate additional capital is from retained profit.
Leslie went on to say: “We have to find ways so that mutual can be more flexible in getting access to capital. It’s been crucial to the private sector but the very nature and design of mutuals has meant it has gone in a contorted direction.”
Why is access to capital such a big deal? Because for every pound that a financial institution lends, it has to set aside an appropriate amount of regulatory capital, with the precise amount being dependant on the risk weighting of the assets being generated. The problem this creates is that, although a lender may have plenty of liquidity and strong demand for its products and be both profitable and prudent, it inevitably hits a point where its lending activities become constrained by its capital.
It’s why a number of building societies, Saffron included, have reached a point, despite having had a very successful year, when they’ve have to put a temporary halt on any further lending so they don’t exceed their capital limits.
Now you may argue that’s fair enough. After all, capital constraints have been imposed on financial institutions to ensure we don’t have a repeat of the type of runaway lending that led to the credit crunch. Which makes good sense, but why impose the same capital constraints on a low risk building society with a proven track record of prudent lending, as a larger financial institution that is involved in riskier lending which represents a far greater threat to its financial stability?
You may also argue that building societies can’t have their cake and eat it. If they want to throw off the shackles of mutuality and raise additional capital, then they should convert to a plc, as several societies have done in the past.
But doesn’t that miss the point of mutuality?
Our objective is not to generate big profits for shareholders but to support our members, by giving them a means to buy a home and a safe haven for their hard-earned money.
Mutuality, as a way of doing business, is resonating with an increasing number of consumers, who are tired of the ‘fat cat’ profiteering mentality of big business.
Mutuality is not exploitative, it’s supportive. It’s a sustainable way of doing business that doesn’t generate profits at the expense of others. Increasingly, it’s the way many consumers want financial institutions to behave.
Mutuality may be an old concept but it isn’t old fashioned. It encompasses many of the values to which forward looking companies aspire (The John Lewis Partnership has more in common with a mutual than it does with a plc).
So perhaps Chris Leslie is right, government should give mutuals more support and free them from the constraints which prevent them from helping more customers.
For once, a politician may be on to a good idea.