The FSA has published additional handbook guidance to ensure that building societies diversifying from traditional business models have the risk management systems and skills necessary to operate safely.

The regulator says it expects building societies to re-examine their risk management and business models in the areas of liquidity, wholesale funding and lending to ensure that they are aligned. Societies that demonstrate appropriate risk management and skills will have complete flexibility to run their own business within the statutory limits set out by the Building Societies Act. Those that cannot, will be steered to either introduce more appropriate risk management or to move to a simpler business model so that they only carry out activities they can safely undertake.

Recent experience has shown that some building societies diversified without having the necessary skills and systems to manage the risks they were undertaking.

The FSA says these changes will not limit a society’s freedom to diversify but sets out clearly the skills, systems and controls a building society needs in order to manage more complex business models. The more risky the diversification, the higher the levels of required management skills and controls expected from the firm.

These changes will come into effect on 1 April 2010 and building societies will have until 30 September to identify any possible mismatches between their risk management and their business model and agree with the FSA what actions, if any, are needed to address these. Timescales for the actions will also be agreed.