BUILDING SOCIETY OPERATIONS

ASSIGNMENT 2

      QUESTION 1

 PART A

The general functions of the Building Societies Commission are the following:

·        To promote the protection of shareholders and depositors

·        To promote stability

·        To secure the principal purpose is maintained

·        To administer the system of regulation

·        To advice and make recommendations to the Treasury

 

PART B

Some of the main powers of the Building Societies Commission are the following:

·        To give (conditional/unconditional), refuse or revoke authorization.

·        If a building society breaks any limits as posed by the Acts regarding its balance sheet structure, the BSC has the right to act accordingly

·        To determine the society’s powers

·        To make prohibition orders

·        To control a society’s certain types of advertising or prevent advertising altogether

 

PART C

Prudential Notes are guidelines issued by the BSC on key areas of activity. They are not legally binding but ignoring them, may lead to the breach of the criteria for prudent management. Another role of prudential notes is to address some issues for discussion between societies and the Commission, help the Commission to act reasonably and give to the board and auditors a direction towards the standards of the Commission.

Some recent Prudential notes are:

PN  1998/7 on Large Exposures

PN 1998/4 on Financial Risk Management

 

PART D

Following the fraud that existed over many years, societies were required during the 1980s to submit information on internal systems relating to records and transaction, reports and inspection. Annual review meetings are an integral part of the supervisory process and their purpose is to facilitate a two-way exchange of information. Areas covered are:

·        Performance in key areas (e.g. lending)

·        Funding and Treasury management

·        Capital

·        Corporate plan

·        New initiatives

·        Board, management and organizational issues

·        Systems and audit

·        Corporate plan and future strategy

 

[304 words]

QUESTION 2

 

PART A

Capital is necessary for any deposit taking institution in order to:

·        Act as a buffer against unforeseen losses

·        Maintain investors’ confidence

·        Comply with the law

Generally financial institutions, due to their role in maturity transformation, they accept funds in short-terms and lend in long-terms. This is regarded to be too risky, so capital is what can provide them some cover in unexpected events.

 

PART B

The BSC has two measures of the capital requirement of a building society:

·        Minimum acceptable level, below which a society would be at risk.

·        The minimum desirable level, the capital requirement that should be used when planning and budgeting.

 

Factors to take into account are:

·        Liquidity structure

·        Risks arising from lending and funding in large markets

·        Vulnerability to external shocks

·        Pressure to reduce interest spreads

 

PART C

Capital, for capital adequacy purposes, includes:

·        General reserves (retained profits)

·        Subordinated debt

·        Permanent Interest Bearing Shares (PIBS)

Share balances are not included in capital for capital adequacy measurement purposes because they vary daily.

The BSC established an initial framework through its prudential note on Capital Adequacy, issue in 1987.

The BSC has responsibility for implementing two EU Directives relevant to capital adequacy:

·        The Own Funds Directive; and

·        The Solvency Ratio Directive.

The EU’s 8% solvency ratio is regarded as a minimum standard. Generally, the higher the risk involved in the activity, the higher the level of capital required.

 

PACT D

If a society fails to maintain adequate capital, the financial consequences could be a failure to have a sufficient buffer against trading losses. This could have the effect of shareholders and depositors suffering losses, though these would be mitigated to some extent by a claim on the Building Societies Investors Protection Scheme.

Before such an eventuality would arise, the society would be under pressure from its external auditors and the BSC to take appropriate action to redress the situation.

[329 words]

 

QUESTION 3

 

PART A

The provisions relating to meetings that must be considered in the rules of a building society are the following:

·        Matters relating to calling and holding meetings

·        Right to members to call meetings

·        How notices relating to resolution are to be given

·        Procedure of meetings

·        Form of notices for meetings and how served

·        Voting Rights, and the right to demand a poll

 

PART B

The matters that must be considered at an Annual General Meeting of a building society are the following:

·        Annual accounts of the society

·        Directors’ report

·        Auditors’ report

·        Appointment and re-appointment of auditors

·        Election and re-election of directors

 

PART C

The rules of a society must permit members the right to propose and circulate resolutions to be considered at a society’s AGM if:

·        It is not a borrowing members’ resolution

·        The resolution is supported by the minimum number of members.

·        The member must have a shareholding no latter than a specific date to be considered as qualifying member. Members intending to move a resolution may support their cause with a written statement. The society can refuse to accept a resolution if it would affect public confidence, has been considered before or is considered to be defamatory or frivolous.

 

[218 words]

QUESTION 4

 

PART A

 

Building Societies Act 1986 and as amended by the 1997 Act, provide a special provision for having adequate systems in place to measure and manage risk mainly through the seven criteria of prudent management.

One of the criteria states that management must be conducted with prudence and integrity. This is definitely against what Stephen suggests, which is based mostly on luck.

Furthermore a Society must maintain adequate systems for control to manage risk. In the event of a breach of any criteria, the Commission has the right to interfere, place conditions or even revoke the society’s license.

Definitely it is the directors’ responsibility to determine whether Stephen’s suggestion is under an acceptable degree of risk or not.

 

PART B

Stephen may have some standing under the Building Societies Act only if his proposition is under the limits imposed by the Acts. It is true that Building Societies need to compete with a large financial services industry, where competition is getting higher and higher. Societies need to follow a very strategic plan in order to remain competitive. But on the other hand, this doesn’t mean that they should put everything at risk. Societies must always comply with legislation and have adequate systems in place to manage their risks. The position of a treasurer always involves risks and if something went wrong, it would affect the bottom like of the society. His director should decide if Stephen’s proposal is under an acceptable degree of risk.

[247 words]

QUESTION 5

 

PART A

Under the criteria for prudent management, a building society must have a requisite number of fit and proper persons to provide directions and management. Mr. Bowler is unlikely to meet the criteria so he needs to be removed. The Act permits the Society to remove a director as a result of:

·        Voluntary resignation

·        Ceasing to hold a qualifying shareholding

·        Submitting a request of resignation accompanied by a board resolution

·        Six months absence

·        Personal bankruptcy

·        Mental incapacity

·        Holding a directorship with another building society

In the case of Mr.Birchgate, there are various options like:

·        A request for resignation

·        Allow the members to put forward a resolution

·        Not been re-elected or cease to act as a director

·        Retire by rotation at some stage within the next three years.

Such a removal should be handled carefully so as not to affect the standing of the Society.

 

 

PART B

Financial Services Industry is becoming more competitive. This means that it is very difficult for a building society, especially a small one, to survive. Whereas lots of building societies have converted to limited companies and the larger ones try to compete with retail banks, small building societies should follow another strategy if they want to avoid takeovers, mergers and conversions. The best strategy to follow is to try to remain strong regional players. Small societies are those, which are heavily dependent on their ‘home’ area. They usually have a strong brand in their region but they are unknown outside their own area. Most small societies have been able to compete relatively aggressively in their own areas. As a result, most small societies have concentrated on maintaining balance-sheet strength at the expense of growth and margins.

Small societies have the advantage of lower operating costs and more reputation in the area they operate. As a result, they are able to offer more competitive products to their customers (e.g. higher interest rates on deposits and lowers interest rates on mortgages). In addition to that, because the members and depositors are much less than those of larger societies or retail banks, they can offer a more personalised approach, according to the needs of each member individually. So small building societies can survive in the future only if they take advantage of their nature and remain strong in their regions.

 

[396 words]

 

[TOTAL:  1504 words]