Bank of England proposes scrapping building societies sourcebook

The Bank of England (BoE) is consulting on scrapping the Building Societies Sourcebook (BSOCS), which outlines the rules governing building societies.

Speaking at the Building Societies Association (BSA) annual conference in Birmingham on May 8, BoE executive director for UK deposit takers supervision Charlotte Gerken said removing all 75 pages of prescriptive rules would allow the UK’s building societies to be more flexible in how they met the Prudential Regulation Authorityʼs (PRA) supervisory expectations.

The BSOCS was originally introduced to address risk failings identified during the 2008 financial crisis. However, Gerken said the PRA now assessed “risk management in the sector as having improved to the extent that detailed supervisory expectations have served their purpose”.

A range of options had been considered, she added, however the regulator believed that axing the sourcebook was considered the proportionate thing to do. “We judge that setting detailed expectations only for building societies, which are already subject to legislative restrictions in the Building Societies Act (1986), would be a disproportionate approach,” she said.   

Ruth Doubleday, Head of Prudential Risk at the Building Societies Association (BSA), said the announcement was a “landmark”.

“It’s rare and challenging for the regulators to remove existing regulation, even when it is outdated, and in the case of the sourcebook, badly calibrated, anti-competitive and has various unintended consequences. Today’s announcement is therefore a major landmark, which we applaud.”

Doubleday said the decision was not de-regulation but simply recognised that “the world has changed and risk management has moved on” and acknowledged “It also acknowledges “the strength and resilience of the building society sector”.

“For too long building societies have been seriously constrained by the fixed rate lending limits in the sourcebook, despite almost all consumers valuing the certainty of payments, with more than 95% choosing a fixed rate mortgage. Other lenders have no such limits. The removal of the sourcebook will enable building societies to increase their lending and help more people to own their own home,” she said.

SMCR

The PRA was “confident” that it had sufficient regulatory and supervisory tools to assess the safety and soundness of building societies, she Gerken. For example, the Senior Managers Regime did not exist when the sourcebook was introduced.

“If a society’s risk management and governance needs to be improved, we take steps to ensure its board and senior managers address these issues. Our consultation reinforces the principle of senior management responsibility, and we expect boards and senior management to maintain and enhance their risk management practices,” Gerken added.

The consultation will close on August 8.

Government agenda

In November 2024, HM Treasury asked the PRA and the Financial Conduct Authority (FCA) to identify how they could help the government achieve its objective of doubling the size of the UK’s mutual sector, which includes building societies. Both regulators will produce detailed plans setting out options for boosting financial mutuals by the end of 2025.

Gerken said the PRA’s Strong and Simple framework, and specifically the small domestic deposit takers (SDDT) criteria, would further ease the regulatory burden for building societies. The regulator estimates 35 of the UK’s 42 building societies would meet SDDT criteria.

“The BSAʼs members who have chosen to become SDDTs should be seeing the effects and the simplifications weʼve already delivered. These include a significant reduction in volume for liquidity reporting requirements,” Gerken said.

“Weʼve removed the requirements of these firms, which are mainly retail funded, to report the net stable funding ratio. And weʼve deleted four of the five reporting templates in the additional liquidity monitoring metrics return. Weʼve also removed the requirement for SDDTs with no listed securities to make pillar three disclosures.”