The Labour Government has committed to doubling the size of the co-operative and mutuals sector. The sector, which is 250 years old this year, now faces a unique opportunity to capitalise on this vision for growth. To do so, firms must prioritise both their operational and financial resilience.
Building societies have navigated a tumultuous period
Building societies and their customers have navigated a tumultuous few years, including a pandemic, geopolitical tensions, inflationary pressures, volatile asset prices and rising interest rates. The consequences of these challenges are still playing out as the household finances of many consumers and SMEs remain under pressure. As such, banks and building societies reported that default rates and losses on secured loans to households (such as mortgages) increased in Q4 2024, and that losses were expected to continue to increase slightly in Q1 2025.
Significant regulatory pressure in 2025
Building societies also need to manage significant regulatory expectations. The FCA set out its strategy for building societies in 2025, highlighting its key priorities. These focus on ensuring firms are fully engaging and compliant with the Consumer Duty, rules around the treatment of customers in financial difficulty, operational resilience, access to banking services, financial crime or fraud, and sustainable finance.
Continuing to implement and embed all these regulatory initiatives is likely to require time and resource – and sometimes significant upheaval. In its portfolio letter, the FCA recognises that periods of change can create execution risks of weakened resilience or business interruption which need careful management.
Areas of risk for building societies
Management will also be mindful of the following areas of risk:
Transition from TFSME
While funding is mostly supported by retail deposits, building societies will be managing the transition from the Term Funding Scheme with additional incentives for SMEs (TFSME), potentially bringing a risk of a higher cost of funding.
Pressure on net interest margins
Net interest margins for the sector declined over 2024 due to lower interest rates and higher savings deposit costs. Fitch Ratings expects this trend to continue in 2025.
Managing a high fixed cost base
ONS data shows that between 2012 and 2022 the number of bank branches fell by 5,505 (44%), whereas building society branches only fell by 235 (12%) in the same period. According to the Building Societies Association (BSA), building societies account for 30% of the branch network in the UK. Management will need to weigh up the advantage of having costly physical branches against a customer base that increasingly expects digital interactions with its finance providers.
Investment spending
Transformational projects in IT infrastructure, such as projects to delivery real-time data, are essential to retain competitiveness, and maintain customer engagement and market share. This is particularly important given that Big Tech may enter at scale into retail financial markets.
Greater use of ‘embedded finance’
The FCA has highlighted that the increase of ‘banking as a service’ is growing, and can involve multiple entities (fintechs, techfins, non-financial businesses, etc). This can create challenges around the legal and practical allocation of liabilities or responsibilities around governance.
Building societies have adapted their business models
Some building societies have chosen to adapt their business models to cope with business pressures by withdrawing from certain activities or merging with other firms. The acquisition of the Co-operative Bank by Coventry Building Society (2025) and Virgin Money plc by Nationwide (2024) are examples of this.
Building societies are also targeting borrowers who aren't well served by the larger lenders. For example, older borrowers and first-time buyers. According to the BSA, examples of innovations available to first-time buyers include a no-deposit mortgage (offered by Skipton Building Society) and a six-times-income mortgage (offered by Nationwide).
During such a period of change, a focus on both operational and financial resilience are key to put building societies in the best position to take advantage of the political impetus for sector growth.
Building operational and financial resilience
Firms will be aware that the transition period for the FCA’s final rules on operational resilience ends in March 2025. Right now, building societies’ main focus should be scenario testing – and the FCA is explicit in wanting to see "increasing sophistication and maturity in firms’ testing of resilience in different scenarios’.
The regulator has asked building societies to be particularly aware of the following risks:
- Potential concentration risk
- Risk within supply chain
- Risk of technology arrangements being insufficiently resilient to cyber-attacks (including state actors using ‘living off the land’ techniques)
- Risk of having inadequate controls over data, particularly relating to payments
- Risk from malicious insiders
If businesses face a disruptive event, and management can't evidence appropriate recovery or contingency planning to rectify this in a timely way, then both the firm as well as senior managers may be held accountable by the FCA and PRA.
What can building societies do?
Using granular forecasting models to stress-test different scenarios can help provide greater clarity on areas that may lead to underperformance. It can also enable firms to put appropriate planning in place and develop financial resilience.
A focus on operational and financial resilience overlaps with wind-down and contingency planning. The process of scenario testing should also allow firms to create more robust and deliverable wind-down plans.
For more information or advice, contact Chris Laverty.
