How safe are the building societies?
With the Dunfermline having to be bailed out by Nationwide, attention is turning to the mutuals. Kate Hughes reports on the state of the sector
Saturday 04 April 2009
There are 53 building societies in the UK, managing more than £395bn, serving more than 23 million investing members and over 2.9 million borrowers. As a mutual institution, anyone with a savings account or mortgage is a member with certain voting rights. It's this underlying structure that has given us faith in the past because, unlike banks, building societies are beholden to their – often local – members and not to faceless shareholders pursuing profits above all else. And, traditionally most of their funding for borrowing has come from savings, providing a low-risk place to invest your cash.
Building societies have much more stringent rules to invest by than banks, as the board of directors is beholden to its members and by the laws governing the way a mutual is run. In fact, it is illegal for a building society to raise more than 50 per cent of its funds from the wholesale markets.
All this means that building societies should be a safe bet, with transparent financial dealings. People have abandoned banks in droves for the safe haven of building society savings accounts. But cracks have appeared.
Not so safe
Five months ago, in a statement about members' meetings, Jim Willens, chief executive at Dunfermline Building Society, said: "As our members effectively own the Society [they] provide an ideal opportunity to hear first hand our members' needs and wants as well as discuss trends in the market place. In light of today's forever changing financial climate, they also allow us to reassure our members that we continue to be financially robust."
But this week Dunfermline had to be bailed out by Nationwide after revealing that historical investments in the now infamous commercial property and buy-to-let markets have led to a funding disaster.
"With Dunfermline's partial takeover by Nationwide, the number of building societies has effectively dwindled from 55 to 50 in the past year," notes Kevin Mountford, head of banking at moneysupermarket.com. "It throws into question the belief that building societies are more conservatively managed and, as such, will be around forever. With the Dunfermline, we have again seen the industry taking over the positive aspects of a failed operator while the taxpayer is left holding the rubbish.
"Sadly the consolidation we are seeing across brands isn't doing much for consumers – as highlighted by Scarborough's recently removing its savings range. Building societies have lost their competitive edge over the banks, with the top mortgage and savings deals usually being with a bank now."
So it's clear that building societies aren't as infallible as we'd thought, but now the products on offer may not top the best buy tables either. Mutuals have no external shareholders demanding dividends, so should be able to run on lower costs and offer cheaper deals and better interest rates. But research shows this is not necessarily the case any longer. Two separate reports out this week from price comparison sites Moneysupermarket.com and Moneyfacts, show that banks are currently offering better deals on average across a range of mortgages and savings products.
"The banks have come in for criticism in the past 18 months, but overall they are offering the best deals to their customers," Michelle Slade, analyst at Moneyfacts.co.uk, says. "Banks aren't known for offering best buy savings deals, but they now dominate them for fixed rate bond and cash ISAs. It appears they have upped their game in an attempt to maintain existing savers as well as attracting new customers.
"As a result of having diverse sources of income, the banks have been able to pass on more of the base rate reduction to customers through lower mortgage rates. Despite it being a sluggish mortgage market the main high street banks want to be seen as offering the most competitive deals. Building societies receive the majority of funding for mortgages from their savings book. They compete on a much smaller scale in the mortgage arena as they are unable to write off such large debts, resulting in them taking a larger margin for risk."
And now building societies are been faced with the added expense of contributing to the Financial Services Compensation Scheme – the fund that insures our savings up to £50,000 – along with the banks. In response building societies have no alternative but to factor that in to the price of their products. "Building societies will have to contribute more than £200m to the FSCS every year for the next three years," notes David Black, banking consultant for financial research company Defaqto. "That's nine per cent of their pre tax profit, which will have a significant effect on their business margins. That will have a direct effect on the products they offer."
"You tend to think of your building society as a friendly, cosy place because you part own it. But you have to think carefully about the competitiveness of the products on offer, and the risks involved," he warns.
Dunfermline was the first building society that has actually failed. Banks have had to be bailed out by the Government, but until now building societies have been able to quickly and easily merge with others because it has been possible to sell the still viable mutuals. Skipton Building Society completed its takeover of Scarborough Building Society this week. And Nationwide, which is on track to pick up the best bits of Dunfermline, assumed control of Derbyshire and Cheshire building societies last year.
There are plenty of rumours of further mergers and acquisitions, but in the event of a takeover, your status as a member doesn't change. And in terms of capital protection, your savings will be safe up to £50,000 per building society brand, or £100,000 if it's a joint account – the same level of security that a bank offers.
So if you have faith in the mutual ideal with its focus on local community support, especially if recent global economic events mean you are loathe to put your cash into a huge international bank, becoming or remaining a building society member is still compelling, says Rachel LeBrocq, from the Building Societies Association.
"Over the long term, customer savings rates have been far more consistent among building societies than banks," she says. "But although finding the best rates for your money is important, it's not the only factor people consider. Building societies are rooted in the heart of the local community. Meanwhile, the customer service records among building societies are strong compared with the banks."
In fact, independent research has found that almost three quarters of mortgage customers at building societies are extremely or very satisfied, compared to 63 per cent of customers at other mortgage providers, according to research company GfK NOP, and some 67 per cent of savers at building societies are extremely or very satisfied, compared to 53 per cent at other savings providers, so they must be doing something right.
For more information, go to the Building Societies Association website, www.bsa.org.uk
The mutuals: What happened?
Twenty years ago there were 110 building societies, but a wave of demutualisations and mergers since then has seen many former famous names disappear and the mutual movement has shrunk to just 53.
The first major society to go was Abbey National, which demutualised in June 1989 to become a bank. It later took over the National & Provincial building society, soon after Lloyds Bank had snapped up Cheltenham & Gloucester in 1995. Abbey was snapped up itself by Spanish bank Santander.
By the time the millennium arrived, that trickle of demutualising societies had become a flood. All the big names – bar the Nationwide – turned their backs on their members and embraced new shareholders. Alliance & Leicester, Halifax, Woolwich, Bristol & West, Northern Rock, Birmingham Midshires and Bradford & Bingley left the mutual movement in quick succession.
The fact that all the former building societies have floundered and many have needed to be rescued suggested that the Nationwide had made a wise choice in remaining a mutual. But alarm bells have started ringing now the trickle of building societies collapsing looks in danger of turning into a flood. Last year four societies had to be rescued. The Derbyshire and the Cheshire became part of Nationwide, while the Catholic was taken over by the Chelsea and Barnsley by the Yorkshire. This year already there have been two rescues, with the Skipton taking over the Scarborough and Dunfermline becoming part of Nationwide. The book's already open on which societies may be next ...
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