Labour Party Conference September 2006

Rachel Snow's speech at the BSA/Mutuo event

Firstly I want to say thank you to Mutuo for helping to organising this fringe meeting and to you for coming. The debate today - on whether consumers are losing out as a result of demutualization - is timely.

It is 17 years since we saw the first demutualization in the building society sector – and - although there has not been any for six years in the building society sector, we have seen other demutualisations more recently in the insurance sector - in the shape of Standard Life – which makes a reflection and assessment of the evidence of what the true impact has been more pressing.

The BSA represents every building society in the UK – all 62 of them – so I am not qualified to talk about the mutual insurance sector.

However, looking at the building society sector - the BSA believes there is incontrovertible evidence that consumers are worse off now – with more plcs – more profit maximising companies in the market – than there were before the demutualisations.

Now, it is difficult to argue that there is a lack of competition in the market.

Today people can be overwhelmed by the sheer choice of hundreds of credit cards and thousands of mortgages. But what they have gained in sheer volume of products, they have lost in terms of organisations which are focussed only on the consumer, branch closures and organisations with a regional focus.

One of the disadvantages of demutualisation is that margins – eg the amount of money an organisation has to make – needs to increase.

BSA analysis of the accounts of plcs shows that it costs - on average - 35% more to run - because of shareholder dividends. This means that banks have to squeeze every penny of profit out of what they sell their customers. Building societies - on the other hand – this year were praised by KPMG for providing the public with excellent value for money.

On branches – between 1995 and 2000 – the final year there were BS conversions in the UK the converted organisations closed nearly a quarter of their branch networks. In contrast building societies closed just 2.4% of theirs – precisely one tenth of the rate of closure, banks closed 17% of their network. These are strong statistics but the reality is that many communities, rural and deprived urban areas have been left without with-out access to a branch.

Mutuals have stayed in their communities – often choosing to spend money on keeping branches open which would have long ago been deemed unprofitable and closed. However, this is not to say that no branch will ever be closed by a society. If the usage – the footfall - becomes so small that, in essence, other members are over subsidising the branch, unfortunately they may have no other choice than to close.

But it is not just branches which have disappeared, it is the demutualised institutions themselves which have also done a Houdini act. Seven of the ten societies which the demutualised are no longer independent. Some, have left the high street completely – others like the Woolwich are on their way out.

This is partly due to the change of culture within these organisations – and the shift in focus from the member to the shareholder is neatly illustrated by the following quotes from Woolwich

In its transfer document, designed to give members the information they need to decide whether to vote for or against conversion the Woolwich explained that

“We believe very strongly that retaining the Woolwich’s culture and values is important for ensuring that the Woolwich’s high standards of customer services are maintained and for safeguarding the future of its management and employees.”

Just over a year later, Woolwich’s chief executive John Stewart had to explain why 25% of the group’s managers had left, this is what he said

“Culture has been the biggest change at the Woolwich over the last 18 months. A building society 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.”

Value? A different type of person? In other words they needed someone who is good at exploiting customers.

This is neatly summed up by another distinguished commentator, John Plander, who has said that “the arrival of shareholder value bled the decency from the culture of banking.

But I don’t need to rely on commentators to tell me this – unlike those executives of the Woolwich who suddenly found themselves working for a bank - I moved in the opposite direction from a bank to the building society sector – and  again unlike many Woolwich executive am happily still working in the BS sector.

And I know that whenever a savings account, current account, mortgage or any other product is designed by people working in a bank, the first question they ask is how much shareholder value will this deliver – or in other words - what is the most amount of profit we can make before we are rumbled. Building society boards, by contrast, only have one consideration, what is right for our members, what will best serve their needs - at the best price.

But measuring the loss of the culture and ethos of mutuals from the market can be quite intangible. One area we know consumers have paid through the nose for is the cost of the demutualization process. Lawyers, accountants and city prs do not come cheap. The BSA estimates that the costs of BS demutualizations was in the region of £550 million pounds, add in the demutualised insurers and the figure could hit a one billion.

OK, so you could wear that up front cost if on top of your windfall, you got a better deal. But over the longer term consumers who stayed with their demutualised institutions have ended paying up more in higher rates on their mortgages and lower rates on their savings - wiping out how much they made from the demutualization. 

Now – with hindsight – we can see that one of the reasons people voted for demutualization was because they did not feel they had a relationship with their society. That societies had taken their members for granted and just expected them to vote no. The demutualisations were a big wake up call. Since then building societies have taken great steps to reconnect with their mutual heritage – and crucially – the communities they serve.

Nowadays the majority of bs members have a vote on the remuneration policy of their directors – this means each year members have their say directly on how their bs is being run. Can you imagine Barclays CEO putting his pay to the vote when he was closing 171 branches on one day – while proposing to introduce charges for withdrawing cash from ATMs – while introducing a pay scheme for senior managers which could see them, dependent on share prices – see their pay rise rapidly?

There has been a collective growth in confidence by building societies since the dark days of the demutualizations - when the attitude was very much “don the hard hat and duck.” Without campaigns run by societies we could now be paying for ATMs, we would not have transparency boxes on our credit card statements and more people would be without a local branch to advise them on savings and mortgages. And the announcement of a merger between Nationwide  and Portman building societies  means that consumers will have a super mutual, worth 150 billion campaigning on their behalf, while smaller regional societies will continue to play a pivotal role in their communities.

And mutuals, because they do not have to make a profit have been key in delivering the governments asset based welfare policies – such as the child trust fund and shared equity mortgages - based on the principle that the poorest in society should benefit from the collective growth in wealth through house prices – and that building up savings gives every child a better start in life.

If there were to be future building society demutualisations, something we think very unlikely but not impossible, it would be important that people know the long-term costs that this inter-generational plunder – after all the windfall was built up by previous generations for the benefit of future generations – are far higher than just making a quick buck. This should be done by changing the requirements on the information given to members at the time of a vote – so they know about the higher costs, the branch closures, and the change in ethos.

One of the other ways we will win that argument is by showing that building societies, mutual life assurers, mutual friendly societies are at the front of delivering products which make a real difference to millions of people’s lives – without ripping them off. Have consumers been swindled by demutualisations? In short, yes.