Building Societies Association
It is ten years since Cheltenham & Gloucester Building Society was taken over by (the then) Lloyds Bank PLC in August 1995. With the first demutualisation taking place with Abbey National in 1989, post ’95 saw a wave of flotations, with eight more building societies taking the decision to become a plc.
At the time many had their pens poised to write an obituary of the building society sector. Certainly these demutualisations precipitated a great deal of introspection by the remaining societies. However, over the last five years the sector has looked to the future with a renewed sense of confidence. This is perhaps typified by the first UK remutualisation by Britannia Building Society, which announced in May that they are bringing the saving customers of Bristol and West back into the mutual fold.
At the end of financial year 2004, building societies had about 2.75 million borrowers, 2.6% more than a year earlier. During the financial year building societies made 811,000 loans in total, compared to 736,000 in 2003; total lending amounted to over £59 billion, compared to £50 billion in 2003. Figures published by the BSA early in 2005 show that building societies enjoyed a very successful year in the savings market in calendar 2004, attracting £9.4 billion in net receipts (that is, after taking account of withdrawals from accounts), the highest since 1997, and well up on the £5.2 billion figure for 2003.
So why did the demutualisations happen? The early 1980s saw a general intensification of competition, due to the loss of the building society mortgage monopoly and the end of one of the only state sanctioned cartels – the BSA’s recommended rate system. The era also saw a spate of privatisations, which set the tone.
This was backed up politically by the philosophical mood change brought about by Margaret Thatcher, from collective forms of ownership to individuals. For the first time people from all walks of life became shareholders. Finally, the Building Societies Act in 1986 provided the mechanism for demutualisation.
The new banks argued that windfalls benefited customers; when Abbey National demutualised members received £130, by the time Halifax and others demutualised in 1997, the average payout was higher. The total value of the payouts in 1997 equated to £36 billion in shares and cash. Of course executives received higher levels of remuneration. But plcs also had access to capital (although none of the post Abbey demutulisations were used to raise capital). Initially, banks had wider powers although this advantage was removed with the Building Societies Act 1997.
However, these demutulisations had serious side-effects. For instance, branch closures. Between 1995 and 2000, main banks saw a 10.3% reduction in their branch network, building societies saw a 2.4% reduction, but converted building societies reduced their network by 24.1%.
Of course once members become shareholders, they expect a return. On average management expenses plus dividend payments are 30-35% higher than management expenses alone in the converted institutions, which is the cost increase of demutualisation. Dividend payments equal around 35-55% of overall profits, which are not reinvested in the business. Margins inevitably became wider to fund these payments, much to the detriment of customers.
There was also a change in culture in the new banks. Compare these two statements; “we believe very strongly that retaining the Woolwich’s culture and values is important for ensuring that the Woolwich’s high standards of customer service are maintained and for safeguarding the future of its management and employees” and “culture has been the biggest change at the Woolwich over the last year to 18 months. A building society culture is wonderful in terms of customer care, but it isn’t particularly good at identifying where the value is in the business. We need a different type of person in the future.”
The first is taken from the Woolwich Building Society Transfer Document in 1997, the second is from an FT interview in 1998 with John Stewart, the then Group Chief Executive, commenting on the departure of 25% of the group’s senior managers during and since the conversion process. The difference in sentiment is clear to see.
So where did all this leave building societies? Initially, they had to fend off further attempts by carpetbaggers to release what was perceived as “free money” which in reality had been built up by past generations for future generations. Most societies introduced charitable assignment schemes and new legislation was brought in to remove most constraints, enabling societies to compete.
But perhaps more importantly, as a result of the demutualisation process, the remaining societies had to redefine what mutuality meant to them, and their members. This meant not only explaining the differences between plcs and societies, but also demonstrating this by their mutual pricing, engaging with members and instigating member friendly practices – in short – creating a truly mutual culture.
This process has been to the benefit of the building society sector, including their members. Today, they are regularly in the best buy tables, bringing good value products to the market and keeping the banks on their toes. Societies have also been at the forefront of campaigning on consumer issues such as free ATMs and introducing “summary boxes”. And, as the figures quoted at the start of this article show, the sector, far from being in its final death throes, is not only thriving but also facing its future with confidence. In contrast, Abbey has had to seek a takeover by an overseas bank, Woolwich Plc has disappeared (“Woolwich” now being merely a brand name used by its owner, Barclays, to sell certain savings and mortgage products) and, as noted earlier, Bristol & West’s savings business is now being remutualised. These building societies that resisted the fashionable trend to demutualisation in the 1990s now look as though they made the correct, long-term decision.
A version of this article appeared in Mortgage Finance Gazette.
