BSOG 1.2 Principal purpose of a building society and funding and lending limits

A building society can only be or remain established under the 1986 Act if its purpose, or principal purpose, is making loans which are secured on residential property and funded substantially by the society's members (the principal purpose test) (section 5 of the 1986 Act).

If an established building society no longer meets the principal purpose test, the Authoritymay:

1. (1)

   direct it to submit a restructuring plan designed to ensure that the society will meet the principal purpose test by a certain date and that it will continue to meet that test in the future (section 36 of the 1986 Act);

2. (2)

   direct it to submit to its members for their approval at a meeting the requisite resolutions for a transfer of the societys business to a company (section 36 of the 1986 Act); or

3. (3)

   petition the High Court for the societys winding-up (section 37 of the 1986 Act).

Building societies are subject to lending and funding limits, which help to determine their compliance with the principal purpose test (sections 6 and 7 of the 1986 Act).

When the Authorityassesses a building society's compliance with the principal purpose test, it takes into account:

1. (1)

   whether the society is meeting, and is expected to continue to meet, its lending and funding limits (sections 6 and 7 of the 1986 Act);

2. (2)

   the actual and projected proportion of the societys gross income that is, or is expected to be, derived from activities that are related to the making of loans secured on residential property. (Income from the societys property related insurance and valuation services might be regarded as related to the making of loans secured on residential property, but income from the society's motor insurance business (if any) would not); and

3. (3)

   all other relevant quantitative and qualitative factors.

The Authorityexpects societies to draw up their corporate and other business plans so as to provide reasonable assurance that they will comply with the principal purpose test and their other obligations under the 1986 Act.

In particular, societies should ensure that any programme of securitisation does not threaten compliance either with the principal purpose, or with the lending or funding nature limits. Sections 6(3) and 7(3) of the 1986 Act respectively make clear that only items included in total assets or total liabilities in a societys accounts count towards the nature limits. The adoption of International Accounting Standards by some societies changed the accounting treatment of securitised assets for those societies from 1 January 2005. The Building Societies Act 1986 (Modification of the Lending Limit and Funding Limit Calculations) Order 2004 (S.I. 2004/3200) amended the 1986 Act so that securitised assets and related liabilities may continue to be excluded from nature limit calculations, regardless of how they are included in the accounts of a society. Therefore societies which use International Accounting Standards to prepare their accounts will not be disadvantaged in relation to the nature limits.