Mutual societies are going, just when we need them most

As Mr Blair lauds middle-class values, the building societies are being turned into banks
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The Independent Culture
IT IS rather like being shot on the last day of the war. Some of the remaining self-help institutions created by our forbears in the 19th century and earlier - building societies owned by their members, insurers owned by their policy-holders - are being destroyed just as the state begins to withdraw from providing for all our social needs. Turn from the news that the Labour Government has drawn up plans for a slimmed- down welfare state, in which an increasing number of people rely on private insurance instead of state hand-outs, and go to the City pages. There you will find that Equitable Life, the oldest life assurance business in the world, a mutual organisation, is in danger of being taken over, abandoning its co-operative status.

At the same time that Mr Blair lauds middle-class values, arguing last week that "slowly but surely, the old establishment is being replaced by a new, larger, more meritocratic middle class", the building societies, founded more than a century ago by the very same sort of people, are being turned from mutual organisations into shareholder-owned banks. How tragic it is that what was once the proud Halifax Building Society, the biggest and best example of its kind, is now a struggling proprietary company, rapidly losing market share. And few of the building societies that have clung to the old principles can be sure of retaining their independence. They all have members who want to "de-mutualise" and grab for themselves the cash reserves that were built up over many decades.

Until the final quarter of the 19th century, welfare provision was largely the result of self-help initiatives. The golden age of this kind of activity extended from 1780 for almost a hundred years. It was a period when voluntary organisations of various kinds were created, from friendly societies providing sickness and burial benefits, to infant-school societies. The Halifax Building Society, for instance, was founded in 1852. I am a non-executive director of a friendly society that opened for business in 1881, Tunbridge Wells Equitable. Then, from the 1870s until 1945, there was created what might be called a residual welfare state. This was a system of safety nets that relieved destitution and chronic ill health and provided basis services. Successive governments had already decided to create new agencies of the state and of local government - that is, new bureaucracies - rather than strengthen what already existed, a plethora of voluntary bodies. Thus the Labour Government of 1945-51, which introduced full welfare provision, made little use, for instance of the co-operative movement or the friendly societies. Voluntary hospitals were nationalised.

Move on 50 years and we find that deregulation is now thinning the ranks of the mutual organisations still operating in the financial markets. It began in the Eighties with the building societies. Ambitious managers began to tire of the straightforward task of receiving deposits and transforming them into loans for house-buyers. They wanted to expand into other forms of banking on the mistaken notion that customers wanted and would benefit from a wider range of services. The barriers were pulled down.

Then the societies in the vanguard of this advance discovered that they required more capital - which could be obtained only if they turned themselves into public limited companies. Members became shareholders and found that their holdings were worth a lot of money. A great taboo had been shattered. It was as though the members of a cricket club had suddenly decided to sell their playing-fields and pocket the proceeds - and to hell with cricket. Mutual society members saw that the reserves built up through many generations, sums forgone by past members, could be extracted and placed in their own pockets by the mechanism of a flotation or a takeover. As a result, many of the great building societies and mutual insurance companies have joined the stock exchange - Abbey National, Alliance & Leicester, Woolwich, Norwich Union.

Likewise, the Trustee Savings Bank has been absorbed by Lloyds.

At this moment, when even a Labour Government warns that the days of unlimited state provision is ending, does it matter that this system, under which groups of people got together to organise the provision of financial services, is on its last legs? It once provided life assurance, sickness benefit, pensions and home loans at cost price, without having to make profits in order to reward the suppliers of capital.

The case for not being concerned rests on the extraordinary developments and elaboration of the financial services market. It is an enormous industry with a strong, profitable home market and substantial international business. Increasingly it comprises very large players and niche suppliers, both of which are doing well; as ever it is the medium-sized enterprises that find progress difficult.

However, mutual organisations have significant advantages. In the first place, because they do not have to pay dividends their costs are lower than those of proprietary companies. In other words, a well run mutual company should provide you with a better return than a well run shareholder- owned company.

This is strikingly evident in the home loans market. The remaining building societies give their savers a better rate than they could obtain from mortgage banks, while at the same providing house-buyers with cheaper loans. The same phenomenon is apparent if you examine the league tables of life assurance providers.

Second, mutuals do not try to rip you off. I am afraid that the complex system of financial regulation created over the past 10 years has had a perverse result. It encourages bad behaviour. This is because financial institutions owned by shareholders have lost all sense of the spirit of the rules. They will not break the law, nor will they blatantly disregard regulations; but where they can take the consumer for a ride, nowadays they often will.

Of course, mutual organisations are subject to the same financial regulations. But because the customers are the owners - they are members - there is absolutely no temptation to take advantage of them.

In such settings, the notion of crudely profiting out of your customers is absent. That is why I believe that these 19th-century creations must survive to fight another day. They are what is needed in the 21st century.