Review will not stem the tide of mergers


What does yesterday's Building Societies Review unveiled by the Government mean for society customers? And how did we get to the stage where sleepy old societies seem to be stampeding towards merging, either with other societies or with banks?

The short answer to the first question is that building society customers will receive more letters telling them they are the owners of the society and should participate more.

Whether this will result in an increase in customer accountability, as the Government hopes, is another matter.

The answer to the second question lies in deregulation. Borders between different types of financial institutions have been blurring since the 1960s. Successive governments have decided a healthy economy needs more competition, and this includes building societies.

This has led to the proposed takeover of Cheltenham & Gloucester by Lloyds Bank, and the proposed merger of Halifax and Leeds, with subsequent conversion to a bank.

Time was when building societies offered only mortgages or high-paying savings accounts.

Then came deregulation in the 1980s, and building societies were allowed to offer current accounts. This opened the floodgates for competition with the high street banks.

This process of blurring the edges between banks and mutual building societies, which are theoretically run and owned by their customers, accelerated when banks started offering mortgages. But the crunch really came with the Building Societies Act 1986, which allowed societies to convert to plcs.

First to go was Abbey National, at the end of the 1980s. People expected other societies to follow suit, but this did not happen. Then last year Cheltenham & Gloucester decided to sell up to Lloyds Bank.

C&G avoids cross-selling financial products such as life policies, preferring to concentrate on cheap mortgages. Its management decided that the future lay with more customers and raising its own funds as cheaply as possible. This meant selling.

The fund-raising aspect has absolutely nothing to do with customers but is fundamental to the current spate of mergers and conversions, as well as to the Government's review.

Traditionally societies have raised the funds they lend as mortgages by attracting deposits, which means offering high rates of interest to savers. This is why societies have been popular with people seeking a safe way to save.

But banks can raise money through the international money markets much more cheaply. And they can then lend this money out in the form of mortgages - often at much better rates. This is why banks have often been in the lead in offering fixed-rate mortgages.

Societies have recently won from the Government the ability to raise funds from the money markets. But only up to 40 per cent of their funds could come from this source.

Yesterday's review proposes that societies could raise up to half their funds this way.

However, societies like C&G argue that they need far more from the money markets if they are to compete in the cut-throat mortgage market. Analysts also suggest that the 50 per cent limit will not prevent more societies from converting to bank status.

Societies have enjoyed other concessions over the past few years, such as the kind of products they can offer. Life products were the most important breakthrough. As the housing market remains stagnant, being able to cross- sell other products is now a matter of survival.

The current review will allow societies to own general insurance companies, although the legislation required for this particular aspect will probably take a year or so to come through.

When C&G said it would sell to Lloyds the City had visions of the entire building society sector being bought by the banks. The Government took fright at the idea that widows and orphans' deposits would suddenly be plundered by City slickers, and made noises about preventing "a duck shoot."

But they need not have worried. C&G had to have its proposed payout to members cleared by the courts last year, and the courts duly produced a bomb-shell; mortgage borrowers could not be paid the £500 apeice which Lloyds was offering. This blow threatened to scupper the whole deal. Why should mortgage borrowers vote yes if they are being paid nothing, just because of the vagaries of the Building Societies Act 1986?

We will soon know their decision. Postal voting begins next month. One thing will not change. The review says that societies will still have to get at least 75 per cent of their business from mortgages. City analysts doubt that the Government's reforms will be enough to stem the tide of societies merging and becoming banks.

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