Last checked at 12 Jun 2009 07:33
FSA statement on profit participating deferred shares
Following today's announcement by West Bromwich Building Society about its use of profit participating deferred shares (PPDS) this statement sets out how PPDS will be treated for capital purposes by the Financial Services Authority (FSA).
The FSA, working with HM Treasury, has developed a more loss-absorbing capital instrument for building societies. This offers building societies more flexibility in terms of their core tier 1 capital. As in the case of West Bromwich Building Society, societies may offer their existing investors the opportunity to convert into PPDS. PPDS may also be offered to new investors.
PPDS will take the legal form of a deferred share similar to the PIBS currently issued by societies, but instead of paying a fixed coupon it may pay up to a fixed percentage of profits as a dividend on a fully discretionary basis.
Dividends may only be paid where a society makes a profit. If the society makes a loss, the share allocated to the PPDS is, first, set off against any positive balance on the PPDS reserve account (into which undistributed profits are allocated) and, secondly, applied to reduce the principal value of the PPDS. If the principal value has been reduced and is less than the initial principal value of the PPDS, the PPDS' share of profit must first be applied to building up the principal value until it has been restored to its original amount before dividends on the PPDS can be declared. Dividends on the PPDS are not cumulative.
The PPDS will not be protected deposits for the purposes of the Financial Services Compensation Scheme.
The FSA has determined that in principle PPDS are capable of core tier 1 treatment. The exchange of subordinated debt, which is classified as Tier 2 capital, for a core tier 1 instrument will improve the resilience of the firm to a severe stress. The increased loss absorbency of the PPDS will improve the quality of building society capital and its going concern loss absorbency The PPDS demonstrably absorb losses on a going concern basis by their write down feature.
Building societies have been affected by the adverse economic and financial market conditions in different ways. Prior to this the only source of core tier 1 available to building societies under the FSA's rules was reserves grown from internally generated profits. Now building societies, like banks, have the option of raising core tier 1 capital from external sources.
West Bromwich Building Society has today announced that it will be converting its subordinated debt into PPDS. Other building societies should consider whether PPDS could be useful for their own capital management.
NOTES FOR EDITORS
The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.
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