BUILDING SOCIETY OPERATIONS
ASSIGNMENT 2
QUESTION
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]