The Co-operative Bank has been through the mill this year, but passing on majority control to US hedge funds could have hardly been what its customers were expecting. The move has raised concerns that one of the UK's two large mutuals will inevitably lose its ethical stance. But where else can disgruntled customers turn?
It's been a calamitous time for the Co-op, having to abandon plans to take over 632 branches from Lloyds and suffering a humiliating, six-notch, credit-rating downgrade by Moody's. The original plan was for the Co-operative Group to float its banking arm on the stock market and take a 70 per cent stake, but the result of months of discussion has left it with only 30 per cent after handing the majority of the equity to a group of investors led by two US hedge funds. The restructuring is likely to take place later this year and is seen as a huge blow to customers looking for an alternative to the main high street banks.
Chief executive Euan Sutherland has tried to placate concerned customers saying: "This bank will remain the Co-operative Bank. We are embedding the co-operative principles in the constitution of the bank to guarantee this."
If history is anything to go by, however, you'd be forgiven for presuming that privatising a mutual bank will see the focus shift away from "better banking" to making money for investors. There is an argument that private investors will do well to protect the bank's existing ethical brand, but the bottom line is that they want to make their money back as soon as possible.
Sadly, there are only a handful of pro-actively ethical alternatives. Charity Bank, Triodos and Ecology Building Society are the main contenders in the UK, although none offer current accounts. The focus with all three here is on some form of social return. Triodos and Charity Bank are transparent about who they lend to and you can track projects that your money is helping to fund. Charity Bank is a registered charity itself so it can concentrate fully on its social goals rather than profit for shareholders. Ecology only lends on properties and projects that benefit the environment. The problem remains that it is almost impossible to compete with the biggest banks.
"There is little choice for the British public when it comes to their day-to-day banking and the Government needs to intervene to stop the big-bank monopoly on the payments system that stops new and ethical entrants to the market," says Laura Willoughby of campaign group Move Your Money. "Banks like Triodos that offer current accounts in other European countries are priced out of the market. The Government needs to take action soon so customers have a choice about the type of bank they give their business."
Mutual lending is another alternative. Ethical Consumer magazine has listed Coventry, Leeds and Cumberland building societies as its top three ethical choices, followed closely by Metro Bank – a new entrant into the market – Nationwide and Norwich & Peterborough BS.
Mutual lenders gain ethical points because they are restricted in terms of the industries they can invest in and profits are ploughed back into the business to the benefit of customers rather than shareholders.
In theory, this means they are more conservative by nature, although we shouldn't forget they are still commercial organisations and many suffered in the credit crunch.
The good news is that banks such as Santander and HSBC dominate the best-buy tables, but ethical alternatives often get the top spots for consistency. Appealing current accounts come from Nationwide (offering free European travel cover) and Norwich & Peterborough BS (fee-free spending abroad), while for savings, the Coventry Online Saver pays 1.60 per cent and Triodos Bank pays 2.30 per cent on its five-year ethical savings bond.
When mutuals do put out a best buy, they aren't usually around for long and may be restricted to certain areas of the country as a way of coping with high demand.
"Mutuals offering savings deals strive to offer the most-competitive rates in the market to attract business, as these are so popular they may not be available for long as they get fully subscribed very quickly," says Rachel Springall of Moneyfacts.co.uk. "Mortgage deals from mutuals can have both a competitive rate of interest and an attractive package, but again these may not stay around for long so borrowers would be wise to snap up best-buy deals as soon as they can".
Credit unions are another potentially attractive option. These are not-for-profit co-operatives owned by members who share a common bond such as location or occupation. A few offer current accounts and many have savings vehicles with free life insurance, but they usually attract more attention for low-interest loans because they are allowed to charge no more than 2 per cent interest per month (APR of 26.8 per cent).
The biggest concern is whether credit unions are the safest place for your money, however, as many of the smallest have proved financially unsustainable. Last year, six credit unions were closed and so far in 2013 a further eight have also collapsed.
There are positive signs for the future, namely that the industry has been given a £38m boost by the Government to modernise and expand. In Brighton and Hove, for example, the council has recently invested £100,000 to help East Sussex Credit Union improve technology and raise its profile by enabling members to join and manage their accounts online. And, as with a traditional bank or building society, credit-union members are covered by the Financial Services Compensation Scheme which means that the first £85,000 of your savings is protected.
Timeline: Banking on bad news
August 2009 Co-operative Financial Services and Britannia Building Society merge.
July 2011 Restructuring sees chief executive Neville Richardson quit and hand responsibility to the bank’s finance director, Barry Tootell.
March 2013 Announces pre-tax loss of £674m for 2012 and puts the general insurance arm up for sale. May 2013 Bank downgraded to “junk” status by Moody’s and Mr Tootell resigns. He is replaced by HSBC executive Niall Booker and Euan Sutherland becomes chief executive of Co-operative Group.
June 2013 Co-op unveils plan to go public to plug a £1.5bn black hole in its balance sheet.
August 2013 Group reports heavy losses, losing £559m in first half, having written off nearly £500m of bad loans at Co-op Bank.
October 2013 Parent group left with 30 per cent stake in the bank after bowing to pressure from bondholders led by US hedge funds Silver Point Capital and Aurelius Capital Management.Reuse content