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 ...
Budget 2015: George Osborne is set to get tough with further cuts in public spending
Bargain Hunter: Our exclusive deal cuts the cost of buying foreign currency by 20 per cent
Simon Read: 'Taylor Swift tickets purchased on Viagogo were cancelled hours before the concert'
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
Bank-beating exchange rates on your international payments
- 1 BBC told new political editor must be 'impartial' with Nick Robinson reportedly stepping down
- 2 Number of young homeless people in Britain is 'more than three times the official figures'
- 3 The map showing the most dangerous tourist destinations in Europe, according to the Foreign Office
- 4 The biggest first date turnoff has been revealed
- 5 German man found living with 300 rats in tiny apartment
More Britons believe that multiculturalism makes the country worse - not better, says poll
Nathan Collier: Montana man inspired by same-sex marriage ruling requests right to wed two wives
Greece crisis: IMF was pushed around by Angela Merkel and Nicholas Sarkozy – and now it is being humiliated
'I wish the BBC would stop calling it Islamic State' – David Cameron unleashes frustration at broadcaster
Forget little green men – aliens will look like humans, says Cambridge University evolution expert
Girl, 7, stares down hate preacher at Ohio festival with pro-LGBT rainbow flag gesture
iJobs Money & Business
£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...
£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...
£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....
£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...
Day In a Page
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.