A retrospective over the last 20 years

This article first appeared in Financial Adviser

If a week is a long time in politics, then 20 years is a very long time in financial services.

To research this article I went back to the BSA 1987 yearbook. The first article, on how the “pace of change puts pressure on societies” was written by none other than Adrian Coles, then Head of External Affairs. Back then, there were 148 societies with total assets of £141,473 billion

I began my article by lauding what a record year 1986 was for building societies; when gross advances rose to £36.6 billion and the total number of loans was over 1.2 million. It was also the year that the Building Societies Act was passed in parliament and Building Societies Commission was created to regulate the sector.

Then, as now, talk of interest rates was high on the agenda. Building society interest rates fluctuated within a “fairly narrow band” during the year with the mortgage rate never falling below 11% nor rising above 12.25%.

It was the beginning of the Thatcher revolution in personal share ownership. From June onwards, building societies’ net receipts into savings were hit as the one company after another floated. That month, net receipts fell to £177 million as the final payment for British Telecom Shares bit; in September 1986 societies actually saw a record net outflow of £671 million as a result of the “phenomenally successful” Trustee Savings Banks flotation.

Money poured back into accounts in October 1986 as unsuccessful applicants for TSB shares returned their money to their building society savings accounts only for those same accounts to be raided in November for the British Gas privatisation, with no more than £160 million finding its way into society accounts. Receipts recovered in December as unsuccessful applicants reinvested their funds. It is difficult to imagine the headache this activity caused, not least because most accounts would have been branch based and societies relied far more heavily on inflows to fund lending.

Towards the end of 1986 Nationwide and Anglia Building Societies announced their intention to merge in 1987. In terms of assets, this was the largest ever merger to be undertaken by two building societies. There were 6 mergers in 1986.

If building societies were finding it hard to manage the inflows and outflows of the new share owning democracy, they had little idea how much impact it was going to have on the sector in the long-run. Arguably it was the appetite for share ownership sweeping the nation which paved the way for the philosophical mood-change in the Thatcher era. This move, from collective forms of ownership (eg mutuals) to individual forms of ownership (plc), sowed the seeds of demutualisation.

The loss of so many large building societies (10 over the period) was to rock the sector to its core during the late 1980s and mid 1990s. Of course share ownership was not the only cause.

The later part of the 1980s saw a general intensification of competition. This came on top of the loss of the building society mortgage monopoly in the early 1980s, when banks entered the mortgage market and the end of the BSA “cartel”. To modern ears it is quite unbelievable but members of the BSA would set the nation’s mortgage rate - the Recommended Rate System – every month, which would be followed by all societies.

While the privatisations of the Thatcher government set the example for others to follow, the Building Societies of Act 1986 also provided mechanism for demutualisation.

There were great benefits to becoming a plc, argued the demutualising societies. They would have greater access to the capital they needed, be better able to participate in restructuring and initially, have wider powers then banks.

The real winners however, were the directors of the demutualised institutions. An academic study from the Kent Business School, conducted in 2005 showed that there is a significant difference in the determinants of executive compensation in converted and mutual societies. They concluded, somewhat cautiously, that “overall, the possibility that the flotation of the mutual societies was inspired by the private interests of executives cannot be ruled out.”

The losers were those who received their “free” cash payments, in other words the consumers, who saw their communities left without branches (demutualised institutions reduced their branch network by nearly 25% in five years). Increasingly more profit had to be extracted from them as on average plcs pay 35-55% of profits as dividends, which are not re-invested in the business, unlike building societies.

By the early 2000 there were commentators sharpening their nibs ready to write the obituary of the building society sector. Fast forward to 2007, we have come a long way since 1986 and arguably, the sector is in better shape than it has been for a long time.

Today there are 60 building societies in the United Kingdom. Building societies now have total assets in excess of £305 billion and hold residential mortgages of over £200 billion, approximately 18% of the total outstanding in the UK. Societies hold over £190 billion of retail deposits, accounting for about 19% of all such deposits in the UK and account for over 37% of all cash ISA balances. In a neat symmetry with 1986, Nationwide announced it was to merge with Portman Building Society last year. Again, Nationwide will be involved in the largest merger in the sector 20 years on.

In many ways societies are stronger and more distinctive than they were two decades ago. The demutualisations served as a wake-up call in terms of corporate governance terms, in understanding their mutual status and how this can best be used to members' advantage. Today we see societies with narrower margins, better service and a much greater responsiveness to members.

The longevity of the sector over the last 150 years, teaches us that societies can rise to almost any set of challenges, not least the recession of the early 90s, the threat of carpetbaggers, mortgage regulation, narrowing margins and diversification. In contrast, there are many newer institutions that do not have the experience of running a business in tough times. In addition the building society sector is continually able to reinvent itself to address the new corporate climate, such as the emphasis on CSR, the movement away from plc-type performance indicators and tackling the real threat posed by climate change.

As for 2027 I can confidently predict three things: there will still be a thriving building society sector, Financial Adviser will still be one of the most respected and well read industry publications and finally, I will no longer be writing articles on the pace of change putting pressure on societies!