Failed Dunfermline building society was 'author of its own mistakes'

Bosses of the failed Dunfermline building society have agreed that the mutual was the "author of its own mistakes".

Giving evidence to the Scottish Affairs Select Committee, former Dunfermline chairman Jim Faulds said the building society's board were "to blame" for the situation at the lender up until October 2008 when it was asked to raise more capital.

Mr Faulds said he believed Dunfermline, which was rescued in March after attempts to merge it with another mutual failed, would have survived as a separate entity if the situation had been dealt with differently.

In the event Nationwide, the UK's largest mutual, rescued the building society's savings arm, while the Government took on its portfolio of risky loans. The taxpayer sank more than £1.6 billion into the rescue deal to cover Dunfermline's liabilities.

Meanwhile, the Bank of England took on another estimated £500 million of Dunfermline's social housing loans, which were not included in the deal.

When asked by the committee whether Dunfermline was the "author of its own mistakes", Mr Faulds said: "Yes, we are."

"Yes, we were to blame for what happened up to October 2008," he said.

"If like any business person we had our time again we would not do it again."

But Mr Faulds said communication between Dunfermline and the Financial Services Authority (FSA) had been ineffective during efforts to save the mutual and the lender felt unable to get access to "decision makers".

"We still don't know, but we think the decision maker was the Treasury," he said.

"We felt we were treated like the accused, we were denied information and we were shut out."

The FSA had told Dunfermline it needed to raise another £20 million in capital in order to join the Government's Credit Guarantee Scheme.

Graeme Dalziel, former chief executive of Dunfermline, told the committee that the capital requirements "came as a complete shock".

He said the move was taken during a period when the "financial world was collapsing around our ears".

Mr Faulds said subsequently the capital required rose, but the exact sum needed was difficult to ascertain from the authorities.

"The first time we heard the figure of £60 million was on Sunday, the day after they broke us up," he said.

"I believe that the society would still be around today if post October things had been handled differently."

He hit out at media descriptions of the mutual's loan books as containing toxic lending, saying Dunfermline had a "policy of no sub-prime".

Dunfermline's foray into commercial property loans and buy-to-let mortgages was motivated by concerns that the lender would founder when it came up against the hugely competitive products being offered by the big retail banks, he added.

The lender racked up more than £800 million of high-risk loans and assets after snapping up commercial property of more than £650 million at the height of the market that later crashed.

Mr Faulds also said the only time the FSA had sent Dunfermline a "themed letter" on its commercial lending was in 2003 and a list of risks to the mutual received in March 2008 included treating customers fairly, the firm's troubled computer systems and fraud, but did not mention its loan book.

But despite concerns about the handling of Dunfermline's fall, Mr Faulds said he did not want to pin the blame for its collapse on the FSA.

He also said he was "delighted" at the eventual outcome for the mutual.

The deal, which meant the 140-year-old Dunfermline name remained intact, upped Nationwide's branch network to 900 and boosted its share of the retail deposit market to around 11%.

Dunfermline has around 300,000 customers with retail deposits of £2.35 billion and a residential mortgage lending book of £1.02 billion.

Nationwide took the Cheshire and Derbyshire building societies under its wing last year after they racked up losses and faced increased uncertainty in tumultuous lending markets. But the rescue was not sweetened with taxpayer cash and Nationwide denied Government intervention.

The Dunfermline deal was met with with disappointment in Scotland and First Minister Alex Salmond has complained of difficulties in obtaining information from the FSA on the level of capital needed for Dunfermline to continue to trade.

The Scottish Government had been prepared to inject £25 million and a consortium of seven building societies was ready to add up to £30 million.