The disappearing mutuals

Politicians like the mutual model but, one by one, building societies are consolidating. James Moore reports
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Another mutual looks set to bite the dust with the announcement of merger talks between Coventry, the UK's third largest building society, and its smaller rival, the Stroud & Swindon. The confirmation of merger discussions comes just weeks after the Chesham was swallowed by the much larger Skipton in a deal that didn't look far off a rescue, although the two sides insisted that this wasn't the case.

The harsh economic environment, which makes the sort of retail banking services – savings, loans and mortgages – offered by these societies barely profitable, combined with the ongoing difficulties in securing funding from the wholesale money markets is leading many smaller societies to give up the ghost and seek the security of larger, more strongly capitalised, groups.

Ironically, it appears that mutually owned savings and loans institutions are consigning themselves to the dustbin of history like never before, just when there is renewed interest in the mutual model, thanks in no small part to the failures of shareholder-owned rivals. It is a mark of the enthusiasm for mutuals that few analysts are willing to put their heads above the parapet to criticise them. As one banking industry source says: "What's to gain? In many ways the best of them look very much like the best banks. They just have a different ownership model."

But is that model as good as it appears? A more serious criticism that has been levelled is that mutually owned building societies do not necessarily serve consumers any better than banks. A common quip when much of the life insurance sector was mutually owned was that they were run "in the mutual interests of their directors".

Like the insurers, the building society sector has not been free of scandal, not least over the sale of risky "home income plans" in the 1980s which threatened to leave thousands of elderly people homeless, although this involved only a relatively small number of lenders and was by no means limited to mutuals. Critics have also noted privately that the mutuals' governance structure means it is quite easy for them to be run badly. Without the scrutiny and clout of professional investors, it is hard to get rid of an underperforming board of a building society. Although they do have non-executive directors, it is easy for the wool to be pulled over their eyes – as the banking crisis proved – and they rarely, if ever, kick up a fuss.

Chris Rhodes, group product and marketing director for Britain's biggest building society, the Nationwide, at least has a good answer for that one: "Some mutuals, it's true, have struggled. In some cases their boards may have over-reached themselves and taken on debts or books of business that perhaps weren't ideal. Those that refused to do that, however, have come out of the crisis in good shape.

"With the exception of the Dunfermline, while some have sought protection through a larger partner, no building society has failed. By contrast that's not something some of our banking competitors can say. That's why we would argue that the mutual model is a strong one."

He added: "Nationwide is the same size as many plcs and so we can, and do, compete with them. The difference with us is, like any building society, we are committed to our members rather than to shareholders. Every member has a vote and our members can use that vote on a range of issues, including on our remuneration policy, although mutuals aren't required to do that."

Adrian Coles, the director-general of the Building Societies Association, argues that the recent consolidation in the sector should not necessarily be seen as a bad thing and is probably inevitable given the tough market conditions. "You have to remember that, just in terms of mortgages, the market has contracted massively. In the middle of the decade it was common to see £100bn of net new lending in a year. Last year that figure was £12bn. This year it might go up a bit, but will still probably be only £15bn. Given that, we shouldn't be surprised to see societies getting together and forming stronger, larger groupings."

Hence, the Nationwide's gobbling-up of a number of small fry, Skipton's deal with Chesham and the takeover of Britannia Building Society by the Co-op Bank, not strictly a building society but still a mutually owned savings institution.

As for Coventry, it has 1.2 million members and a network of 48 branches located throughout the Midlands with assets of £18.4bn. Stroud and Swindon would add to it 265,000 members and just under £3bn in assets together with a branch network of 22 offices and 21 agencies in the South-west. Even if the two join in with the wave of deals that the sector has seen recently, following on from the demutualisation of elephants like Halifax, Abbey and several smaller players in the 1990s, there will still be quite a few building societies left. The BSA lists 52, although that is well down from 67 in 2000 and 101 in 1990.

Mr Coles argues that the remaining players remain hugely popular with consumers, in a way that the widely despised, shareholder-owned banks are not. He notes that the overall mean average percentage of complaints resolved in favour of customers by the Financial Ombudsman Service was 53 per cent for all firms. However, the overall figure for the building societies was 23.5 per cent, compared to 47.7 per cent for their main Plc bank competitors. This means that the FOS upheld societies' decisions in over three-quarters of the cases, but upheld the banks in only just over half of the complaints.

Mr Coles also points to research from GfK NOP showing that savers and borrowers with building societies were more satisfied than customers of other financial service providers. He says: "We feel that customer perception of our service levels are much stronger than banks. And the market is simply moving to a smaller number of stronger players, not a weaker sector as a whole."