7 September 2015: The proposed Bank Surcharge would not only cost Nationwide £300million that could be used for the benefit of members, it also fails to recognise that building societies are very different from banks
There have been considerable objections raised about the impact of the Bank Levy and new Bank Tax Surcharge, which were announced by the Chancellor in his summer Budget in July. The proposal is that the Levy on lenders’ global assets will be gradually reduced and that a new Surcharge will be introduced on UK financial intuitions’ annual profits over £25 million. The debate looks set to continue this week as MPs discuss its feasibility in the House of Commons on Tuesday (8 September). It is an important debate with some important implications for building societies.
The proposed Tax Surcharge materially increases the impact on building societies like Nationwide. The Bank Levy was designed to gain recompense from banks for the damage they caused to the economy during the financial crisis and the new Bank Surcharge is intended to raise more money from the banks, making the system more sustainable, stable and fair.
The proposals in the summer budget to introduce the Surcharge represent a missed opportunity to recognise the difference and contribution mutuals have made compared with banks.
Our argument is simple: We are not a bank; we are different and should be treated as such. Mutuals, like Nationwide, are more risk-adverse, have a different legal construct and serve a social purpose by providing a safe home for savers and while providing finance for home ownership. We have a strong track record in helping the economy, not damaging it.
The proposals create a disproportionate effect – reducing the impact on some UK headquartered international banks while increasing the burden on building societies. For Nationwide alone it will escalate the cost for the Society and its members. Under the Bank Levy, last year Nationwide paid £28 million. When the Surcharge takes hold in 2016 alongside the Levy, the cost to the Society and its members will be an additional £100 million. Over the next five years the Surcharge will cost Nationwide an estimated additional £300 million which, in context, is the amount of capital required to support £10 billion of lending to the UK’s homebuyers.
The new tax system represents a failure to recognise the role that mutuals like Nationwide have played during the financial crisis
The new tax system represents a failure to recognise the role that mutuals like Nationwide have played during the financial crisis. From the outset of the crisis, with the failure of Northern Rock plc we provided a safe haven for savers. We continued to perform and lend to the real economy and in the four years to March 2015, accounted for 46% of all mortgage lending. In fact, the building society sector as a whole accounted for 83% of all mortgage lending over the same period. On the rare occasions where other building societies struggled, we and other societies stepped in to preserve stability and protect members.
The proposals do not recognise our different purpose to the banks. We serve a social purpose and are grounded in the needs of the community. Building societies were created to raise funds from savers to provide loans for homebuyers. You could say we were one of the first crowd funders. While Nationwide has diversified to offer people even more vital services like current accounts and personal loans, making us a real alternative and challenger to the established banks, we are still underpinned by the member-focused values laid down when we were founded in 1846.
We have a different legal construct and low risk nature compared with the banks. Mutuals are governed by the Building Societies Act which means our philosophy is enshrined in law. We are required to have three quarters of our assets secured on UK residential property and at least half of our funding from retail deposits, whilst banks have no such restrictions. It is the same story with investment banking and market speculation – potentially risky activities in which building societies are not permitted to take part. The profits Nationwide generates are held as retained earnings or capital to maintain a strong balance sheet, to meet prudential requirements and to invest in new products and services. We are not driven by the need to make super-profits to keep shareholders happy.
So our argument is simple and one of principle, not of cost. We are not a bank. The banks were the reason for the creation of the levy system in 2011. The rationale for the Bank Surcharge does not apply to building societies. There is the opportunity to recognise the difference and foster diversity. I urge the Chancellor to re-think the Bank Surcharge and in particular how it is applied to building societies. Tomorrow's debate is a real opportunity to promote greater diversity, sustainability, fairness and choice.