Report looks at collapse of Dunfermline Building Society

30 July 2009

The Financial Services Authority (FSA) did not issue clear warnings to Dunfermline Building Society (DBS) about the dangers of commercial lending or provide adequate supervision in the run up to the Society’s collapse, conclude MPs in a Scottish Affairs Committee report published today.

The Scottish Affairs Committee, in its report examining the circumstances and implications of DBS’s downfall, says that despite the FSA’s failings, the building society is ultimately responsible for its own collapse.

Jim Faulds, Chairman of DBS from April 2007 to March 2009, told the Committee:

“the responsibility for the plight that Dunfermline found itself in is solely the responsibility of the board of the society.”

The board at DBS failed to communicate to its members the risks which accompany a move into commercial lending and decisions by DBS management led the company into difficulties.

Members of the building society would have been unclear from information in the Annual Report and Members Review that higher returns for commercial lending would be accompanied by higher risks.

It was also unclear that the loss of £9m on a major IT project was due to management failure – it was written off as ‘excellent progress’ in the Members Review.

However, the FSA gave no more than a general warning to DBS about the risks of commercial lending and it never featured as a real concern in written correspondence to DBS before 2008.

The Committee does not form a conclusion on the communication between the Tripartite Authorities (the FSA, the Bank of England and HM Treasury) and DBS, but says it expects the FSA to conduct a critical examination of lessons for the future. For DBS, it is too late.

It is vital that the Tripartite Authorities undertake a review of the Special Resolution Regime, the mechanism under which core parts of DBS were transferred to Nationwide Building Society. That review should include an examination of the Tripartite Authorities’ interaction and decision-making processes.

The Committee also expects that following the FSA’s consultation on additional guidance for building societies, the results will make explicit the risks involved in moving away from traditional lending patterns.

The Chairman of the Committee, Mohammad Sarwar MP, said:

“One of the primary concerns for any building society must be effective and transparent communication with its members. This clearly was not the case at Dunfermline Building Society and the anxiety and stress visited upon members as a result of misguided decision-making at board level and what was, at best, miscommunication in its annual report is of serious concern.

“It is also apparent that the FSA failed in its duty adequately to warn Dunfermline of the dangerous path it was taking. It is highly regrettable that the first use of the Special Resolution Regime left the very institution at the heart of negotiations apparently in the dark about the standards which it was expected to meet.

“The Scottish banking sector has been dealt a huge blow by the collapse of Dunfermline. We can only hope that stark lessons are learnt for the future and that history does not repeat itself.”

Image: Danny Lawson/PA

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