A gamble at the society casino

Who wins and who loses depends on whether mutuals merge or convert. Richard Thomson explains
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THE great building societies gold rush has begun. Prospectors are shuffling their money around the industry, trying to pick the next societies that will merge or convert to bank status in order to pick up the inevitable wind-fall payouts that will result. There is good money to be made by guessing right. But the choices are not as simple as they once seemed.

Since the court judgement allowing the Halifax-Leeds merger and conversion to go ahead, the question of which building society customers qualify for what benefits has become clouded. In the Halifax deal, all borrowers (with loans over £100) are entitled to the £600 payout. So are investors who hold share accounts - and those with £1,000 to £50,000 will get even more, on a sliding scale yet to be announced. These accounts need to have been opened no longer ago than last November.

But the deal excludes all deposit accounts - those which do not confer "membership", like the cheque and cardcash accounts - from the benefits bonanaza. This cuts out a substantial proportion of accounts in both societies. The Halifax, for instance, has 3 million deposit accounts.

Contrast this with the Lloyds takeover of the Cheltenham & Gloucester. The courts disallowed the C&G from giving anything to its borrowers, because the payout is coming in cash. The Halifax has got away with it only because it is offering the benefits in the form of shares of the new bank.

Unlike the Halifax deal, however, the C&G is paying holders of both share and deposit accounts a £500 bonus, plus an extra amount depending on the size of their balances.

Yet there is another bizarre anomaly here. The courts have ruled that although share accounts will only qualify if they were set up two years ago, there is no such time limit on deposit accounts. So those who actually own the society are the most disadvantaged.

The reason for these anomalies is the loose drafting of the 1986 Building Societies Act. It was most concerned to prevent the big, destabilising outflows and inflows of cash that might occur when a big takeover was in the offing, in which large cash bonuses would be offered to depositors. Hence the two-year limit on share accounts. But the legislators did not include deposit accounts.

When they came to draft the section of the Act covering conversion to bank status, they appear to have forgotten about the problem of deposit flows. So as long as the benefits come in the form of shares rather than cash, there is no time limit on when accounts were opened.

Which all spells confusion for the investor. It means you have to be clear what kind of deal you think is likely - a takeover or a conversion - before committing your funds to a society. In the event of a takeover, where the bonuses will be in cash, you will not get anything as a borrower. The canny move is to open a deposit account, but not necessarily a share account, since, if the deal happens within two years, you will not be eligible for any benefits.

In the event of two societies merging with no plan to convert to banking status, the C&G rules would apply - nothing for borrowers or recent shareholders, unless a planned conversion and share issue was announced at the same time.

In the case of a conversion, however, if the Halifax deal is any guide, the one thing you do not want to be is a depositor. You want to be a borrower or a shareholder, and it matters little how recently you may have opened your account or taken out the loan.

So which societies to go for? Both the Bradford & Bingley (seventh largest society) and the Woolwich (third largest) are thought to be keen on finding partners with which to merge. So, too, is the Alliance and Leicester, which not so long ago sought a merger with the Leeds.

Among those with more ambitious aims to convert to bank status are probably National & Provincial (the ninth largest society) and Birmingham Midshires (13th largest).

The trouble is that the thinking of the societies on these matters is fluid at present. The decision of the Halifax, by far the largest society, to turn itself into a bank is almost certainly affecting the way its smaller brethren view the issue. Societies that only a few months ago were committed to remaining mutuals are now having second thoughts.

This makes it hard for the private investor to formulate a coherent strategy of opening accounts at a range of societies to make the most of future windfalls. The most rational option may be to hold off for a few months and listen to statements from senior building society executives. Do they sound as if they want merely to merge with another society, or go the whole hog and convert?

But even this may not prove a reliable guide - until the Halifax announced its conversion plans, it was insisting that it wanted to remain a mutual.