David Prosser: Nationwide pays for being sensible

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The Independent Online

Outlook Cuddly old Nationwide, the organisation that never ceases to extol the virtues of mutuality – putting members before profit and so on – is hopping mad about the £241m it has just had to shell out to the Financial Services Compensation Scheme. Britain's biggest building society doesn't object to paying into a compensation fund for savers who lose out when a savings provider goes bust – in fact it wants the maximum pay-out raised from £50,000 to £100,000 – but it's deeply unimpressed with the way its bill is currently calculated.

You can see its point. The levy is based on providers' size and with an 11 per cent share of the savings market, Nationwide contributes more than most to the cost of bailing out victims of collapsing Icelandic banks. If, however, contributors were billed on the basis of how likely it is that their customers will one day have to make a claim on the scheme, then Nationwide would pay much less.

The society points out, for example, that on its mortgage book, 0.6 per cent of customers are in arrears, compared to a financial services average of 2.4 per cent. It has avoided the sort of high-risk business activities that have done such damage elsewhere.

In other words, Nationwide is punished for the kind of conservatism of which regulators would like to see more. One reason it attracts savings business is that customers see it as a safe, solid institution. But the more business it gets this way, the more it has to pay the FSCS.

In fact, there is a model in existence for the kind of compensation scheme Nationwide would like to see. Over in the occupational pensions sector, companies with final-salary schemes have long been worried that the most sensible among them would carry the can for less responsible employers going under without having properly funded their plans. So much so that the compensation scheme which steps in in such circumstances is now funded with a risk-based levy.

The Pensions Regulator assesses the likelihood of employers going bust and also considers the health of their pension schemes. Those who are marked down in the tests pay more towards the cost of the industry compensation fund.

That seems a fair way to run a compensation fund and the model would be easily transplanted into the savings sector. You could assess on the basis of solvency ratios, or bad debts, or a myriad of other variables, as well as adjusting for size.

Nationwide must hope the switch is made sooner rather than later. At one stage last year, Northern Rock and National Savings & Investments, the two Government-backed savings providers, had a 70 per cent market share, thanks to the perception that their state support made them much less risky than everyone else

Nationwide wants the FSCS maximum pay-out raised to £100,000, to help address this uneven playing field. But if it is successful in that quest, its market share is likely to grow even larger, landing it, on the current funding formula, with an even bigger bill for compensating other providers' customers.