In April 2016, the PRA published Consultation Paper 12/16: Supervising building societies’ treasury and lending activities (CP12/16). In CP12/16 the PRA set out proposed changes to Supervisory Statement 20/15: Supervising building societies’ treasury and lending activities (SS20/15).

SS20/15 sets out the PRA’s expectations in respect of building societies’ compliance with the requirements of the Building Societies Act 1986 and the PRA Rulebook. The PRA believes that the pre-specification of its expectations will be helpful to building societies, by indicating the key issues that should be considered by a building society and explaining where the PRA is likely to focus its attention in its discussions with building societies on lending and treasury plans.

SS20/15 describes the key lending and treasury risks to which building societies are exposed, and sets out a framework illustrating different potential models (‘approaches’) for managing and controlling these risks. The PRA expects each building society to adopt the approaches (lending and treasury) that are most appropriate to its own business model and risk management capabilities, recognising that the small scale of some building societies may preclude having a separate risk management function – and therefore limit the types of activities that they can undertake safely.

The deadline for comments on CP12/16 was 4 July 2016.

The PRA has now published Policy Statement 34/16: Supervising building societies’ treasury and lending activities (PS34/16) and an updated version of SS20/15.

Among other things, in PS34/16 the PRA notes that:

  • in feedback to CP12/16, respondents argued that the banking sector, and challenger banks in particular, should also be in scope of SS20/15. However, the PRA does not consider that the responses received make a convincing case for the scope of SS20/15 to be widened, not least because SS20/15 refers to specific restrictions on building societies’ activities, set out in primary legislation (the Building Societies Act 1986) that does not apply to other firms;
  • it has taken the opportunity to review its indicative limits, and Appendix 2 of updated SS20/15 has been amended to make clear that the sub-categories of self-build, lending into/in retirement, shared ownership and shared equity are included within the overall prime owner occupier indicative limit;
  • the table of indicative limits in Appendix 2 of SS20/15 has been updated to show, separately, lending to borrowers with four or more buy-to-let properties;
  • the section on self-build (paragraphs 3.26 to 3.31 of updated SS20/15) has been amended to acknowledge the differences in risk profile across the range of self-build types, from self-construction to ‘custom build’;
  • the section on lifetime mortgages (paragraphs 3.35 to 3.47 of updated SS20/15) has been redrafted to segment the types of lending, based in different characteristics;
  • the wording in paragraph 4.33 of updated SS20/15 has been amended to make it clear that ‘High Quality Liquid Assets’ terminology relates just to the regulatory measure of liquidity;
  • the section on wholesale funding risks in SS20/15 has been modified and expanded to add clarity; and
  • a new annex has been included to SS20/15 which lists the key theoretical components of a fully-fledged pricing system.

The PRA also states that the previous existing flexibility for a society to operate outside the guidance in SS20/15 is carried forward. Full implementation details are included in chapter 7 of SS20/15. The guidance in SS20/15 takes effect from 1 January 2017.

View Supervising building societies’ treasury and lending activities – PS34/16, 1 December 2016