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Britain's building societies are up in arms over the huge bills they face for bailing out banks that collapsed last year, and are urging their members to get involved by writing to their MP and the chancellor.
The societies say they are being unfairly stung for vast sums - an estimated £250m over three years in the case of Nationwide - to bail out the failed Icelandic banks and Bradford & Bingley. This has meant some difficult decisions on the rates they pay their savers and charge their mortgage-holders. So if you are wondering why your mortgage rate has not gone down by very much, considering all the interest rate cuts we have seen, then this is probably part of the explanation.
Guardian Money can reveal that societies look like being asked to cough up as much as £30 for each member they have. For example, the tiny Ecology building society, which has 9,000 members and specialises in offering "green" savings accounts and environmentally-friendly mortgages, faces an estimated bill of £270,000 - with around £160,000 payable this year. It says its profitability is being "adversely affected", adding that while it can afford this bill, it removes capital needed to support future lending.
Many Money readers will remember that Icesave and Kaupthing Edge, both UK divisions of Icelandic banks with thousands of savers, collapsed in the autumn, while Bradford & Bingley had to be nationalised. However, it is banks and building societies who are picking up the hefty bail-out tab, not the taxpayer. The government has made loans totalling almost £20bn to the Financial Services Compensation Scheme (FSCS) in recent months so it could make payouts to customers of Icesave and the like, and is charging interest on these.
For the first three years, the scheme's bank and building society members must pay interest on these loans on commercial terms. (What happens after that is far from clear.) All the evidence is that this interest bill is going to be seriously huge. What has really annoyed the building societies is that the amounts they have to pay into the scheme are not linked to risk; they are based on how much savings cash they hold on behalf of their customers - which tends to be higher for mutual organisations.
Their trade body, the Building Societies Association, says this is "unfair" because it means its members "are having to make good the failures of institutions that were run far less prudently than they have been". David Hill, chief executive of the 200,000-member-strong Stroud & Swindon building society, puts it even more bluntly, saying it is a case of "the good bailing out the bad," with prudently-run organisations and their members picking up the tab for companies that engaged in more dubious business practices. He adds: "We think our bill is going to be in the order of £6m [for the three-year period]".
This is one of the reasons, say the societies, why some of their standard variable mortgage rates (SVRs) appear to be so high when one considers that the Bank of England base rate now stands at 1.5%. For example, Stroud & Swindon's SVR is currently 6.79%.
It is estimated that Nationwide, Britain's biggest society, will initially have to cough up around £55m, followed by around £100m for 2009-10, and another £100m for 2010-11. This money will have to come out of Nationwide's reserves because, unlike banks, building societies do not have shareholders they can fall back on. In other words, these costs are effectively being borne by the society's 15 million members.
Tony Prestedge at Nationwide says the precise figures for what it will pay over the next three years are not yet finalised. "At this stage we have nothing more than indicative numbers. However, Nationwide does confirm it expects a substantial FSCS levy, given its position as the second-largest deposit-taker in the UK."
At the Ecology, chief executive Paul Ellis says the society has no objection to contributing to the scheme that bails out savers, but adds: "We do think the level of payment should be based on the risk we pose to the system. This is the bill we face at the moment. What happens if we get another couple of institutions going down?"
Ecology saver Val Spouge contacted Money to say she was "astonished" about the way the compensation scheme levy was impacting on the society. "I think it is highly reprehensible that a society with impeccable ethics should be penalised to aid those whose reckless behaviour has caused the present financial mess. I hope you will give publicity to this and perhaps assist in persuading the chancellor to change this scheme," says Spouge, who is retired and lives in Braintree, Essex.
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