Recent regulatory rule changes around issuing unlisted deferred shares, known as ‘core capital deferred shares’ to retail investors could be just the boost smaller building societies need to fund their growth, according to several industry stakeholders.
A month ago the Financial Conduct Authority published final rules covering the restrictions on the retail distribution of regulatory capital instruments, which came into force at the start of July.
For building societies, the relevant parts were to do with CCDS, with an anomaly removed that had effectively prevented them from offering unlisted deferred shares, constraining their ability to raise capital.
This was in contrast to banks’ ability to tap shareholders or credit unions’ ability to raise capital from members and crowdfunding platforms which can engage in direct-offer promotions of non-readily realisable securities.
The Building Societies Association welcomed the move, but agreed with the FCA that CCDS should only be sold to those investors who understand the risk and as a modest part of a portfolio - the rules specify a maximum of 10 per cent of net investable assets.
Robin Fieth, chief executive of the BSA, said: “I do not expect to see a queue forming to issue these instruments immediately, however this is a crucial addition to the capital tool-kit for customer-owned organisations like building societies.”
The Ecology Building Society is one of several smaller societies looking to take advantage and is currently working to establish a marketing process for such instruments.
Chief executive Paul Ellis told FTAdviser that this is a route to capital for smaller societies, particularly for those only looking for a few million pounds. “We will look to do a limited issue to retail investors, we’re keen to do this properly, so will go to institutions first.”
Ashraf Piranie, finance director at the Nottingham Building Society, explained that while they are well-capitalised, there are around £25m worth of ‘permanent interest bearing shares’ on the balance book.
These fixed-interest securities become perpetual subordinated bonds if their issuer demutualises and were used by building societies in the way public limited companies use preference shares.
Up until the 2008 financial crisis they were counted as capital, but with the introduction of Basel III rules across the EU, capital had to be loss absorbing and they are now gradually being phased out.
Mr Piranie explained that those who still own PIBS can replace them with CCDS, which will be crucial for societies which over the last few years have only been able to raise money organically through their own profits.
Keith Barber, director of business development at the Family Building Society, agreed that the changes will be of great benefit to those less well capitalised societies. “However, on this I don’t agree with sale to retail investors, as I think there’s a potential for mis-buying amongst unsophisticated investors.”