Building societies may be forced to increase the cost of borrowing for their members to fund the compensation scheme that has bailed out savers with failed Icelandic banks, the Chairman of the Building Societies Association (BSA) said today.

John Goodfellow suggested it was unfair for building societies, which have not had to rely on a Government bail-out, to shoulder the cost of the Financial Services Compensation Scheme (FSCS).

Speaking at the BSA annual lunch, he criticised “the costs forced on prudent institutions by the FSCS bailout of imprudently run institutions,” and said such costs could be passed onto mutual members.

The FSCS, which guarantees deposits of up to £50,000, is currently paying compensation to 240,000 UK savers with Icesave, the collapsed Icelandic bank, at a cost of £1.4 billion funded by a loan from the Bank of England. An additional £800 million was made available from the Treasury to finance the liabilities of deposits over £50,000.

The FSCS has also had to take out loans to cover depositers with Heritable Bank and Kaupthing Singer & Friedlander, the Icelandic banks, and Bradford & Bingley.

Building societies can collectively expect to pay about 20 per cent of the interest and capital on these loans. The interest on the Bradford & Bingley loan is expected to cost building societies £200 million per year alone. The exact liabilities for the failed Icelandic banks is not yet clear.

Mr. Goodfellow said: “Building societies will be paying about 20 per cent of the interest due, plus 20 per cent of any capital shortfall, resulting in a considerable increase in their own expenses - an increase that can have an impact on building societies’ interest rate decisions in the light of last week’s Bank base rate reduction.”

The vast majority of building societies have not yet reduced their standard variable mortgage rates in line with the base rate cut of 1.5 per cent last week. Newcastle Building Society announced today that it would be cutting its SVR by only 1 per cent. Less than 50 per cent of mutuals passed on the full cut last month, when the Bank of England reduced rates by 0.5 per cent.

Mr. Goodfellow went on to criticise the Financial Services Authority (FSA), the City watchdog, as well as the FSCS, for failing to tell banks and building societies just how much the compensation of Icelandic and Bradford & Bingley depositors would cost.

“Remarkably, societies are yet to receive anything in writing from the FSA, or FSCS, detailing their exact liabilities. Even now, we haven’t been told what the impact of the Icesave bailout will be on societies’ contributions to the FSCS.

“How does a prudently run institution cope with “unknown unknowns” - for example, will there be any further difficulties in the banking sector that will result in an even further increase in societies’ liabilities?”

Mr. Goodfellow also said that he expects to see more building society mergers. “Building societies are not without their faults,” he admitted.

This year has seen four small building societies be taken over by their larger rivals – Nationwide, the biggest building society, will merge with the Derbyshire and Cheshire societies in December; the Skipton building society is taking over the Scarborough early next year; and the Yorkshire building society will take over the Barnsley by December. Britannia building society is also in talks about a possible merger with another mutual, Co-Operative Financial Services.