The Financial Services Authority (FSA) said that in all probability EU rules would not allow building societies to raise funds with the help of a suggested new financial instrument.

In the beginning of this year the mutual sector embraced the introduction of MODS (mutual ordinary deferred shares) which were created to let building societies raise their funds with the aim to prevent them from floating on the stock market in case of an economic crisis.

The owners of building societies are their members, but not their shareholders. Being made to float would in reality convert them to plc status. MODS were designed to help them prevent this from happening.

However, the FSA says that there are fears that MODS violate European rules and, consequently, might not qualify as the main tier one equity building societies need.

Although building societies must hold tier one equity to fulfill regulatory standards, unlike banks, they are not given the chance to issue shares.

The mutual sector and the FSA tried to resolve the issue in 2009 by introducing "profit participating deferred shares" (PPDS) that appeared crucial for the deliverance of the West Bromwich Building Society.

It was hoped that PPDS would be accepted by other societies but they have not turned out to be effective.

Failure to come up with an acceptable way for societies to boost capital could place the mutual sector in jeopardy.

In conformity with European law financial tools which are recognized as tier one capital cannot have fixed coupons (payments to investors) which might lead one to think that the issuer will continue paying no matter what the state of its finances is.

Sharma from the FSA told there was a possibility that the FSA could make an attempt to lobby for changes in European laws, try to improve the PPDSs used by West Bromwich or could come up with a new option.


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