Waking up to mutual benefits

Adrian Coles, from the BSA, tells Lucy Tobin building societies are benefiting from banks' troubles

"The shareholder model of chasing ever-higher dividends and share prices, and linking bonuses to those ever-higher share prices, has led us into the current scandals, and people are voting with their feet," says Adrian Coles, the director-general of the Building Societies Association, as he speaks out for the first time on the Barclays Libor fixing scandal.

"For the last four to five years, as the banks have been mired in scandal after scandal, there's been a growing voice saying 'there must be another way to do this', and rediscovering mutuals. The last fortnight has bought that sentiment to a peak. Customers are turning to put their faith in institutions that legally and constitutionally are focused on the customer, not the shareholder."

Mr Coles, whose background is as an economist, was on holiday in the Indian Ocean when news of the Barclays scandal broke. Quick to avoid any connotations with lavish bankers, he apologises: "My wife loves a beach holiday…"

But he had no need to fly home to an emergency summit of members. "I was shocked by what I was reading, and sent an email to my colleagues saying, 'This is breathtaking, can the banks go any lower?'," he says. "But none of our lot give any quotes to the Libor setting committee.

"No building society has headquarters in the City, or even in greater London. It makes them a bit more immune to the herd instinct of rip-off culture that exists among some banks. If you're based in Swindon, as Nationwide is, or the North, like Yorkshire Building Society, you do have a more down-to-earth realisation of what life's really like."

Bank-to-mutual switching is happening up and down the country as Britons think twice about doing business with the banks. Hitherto-boring building societies are enjoying a spell in the sun, capitalising on the Libor fixing furore – and before that, NatWest's computer chaos and banks' reluctance to lend – to lure hordes of new customers.

Britain now has 47 building societies , from the biggest – Nationwide and the Yorkshire – to small, local societies that have only a few thousand members. "They understand their customers and know the local housing market," says Mr Coles. "You need that wide variety. The banking sector could learn a lot from us – it's far too dominated by five big players."

Clearly the mutuals are leaping on the banks' distress, and the BSA boss – perhaps inspired by his holiday –isn't immune to joking at their expense. "In the run-up to 2007, far too many thought the boom years would go on forever," he says. "Some institutions and bank chief executives went swimming and were so confident the tide would always stay in that they didn't bother putting on their trunks. When it didn't, we saw a whole load of liabilities and shrivelled assets we didn't want to see."

Joking apart, banking customers are certainly acting seriously in their response to the crisis, with the latest batch of Barclays-inspired bank switching just another notch in the mutuals' belt. Long before it came to light, gross mortgage lending by building societies and other mutual lenders rose 54 per cent to £2.8bn in May 2012 compared with £1.8bn a year earlier. In the first five months of 2012, mutuals' lending was up 40 per cent. By comparison, gross lending from banks during those same five months was up just 4 per cent.

About two-thirds of the cheapest-rate mortgages are now offered by building societies, and over the past year about half of 10 most-generous savings accounts rates have been offered by them too.

Those kinds of numbers at both ends of the lending and borrowing spectrums might raise eyebrows – and fears of a Northern Rock-style collapse. Mr Coles bats away concern. "Let's be clear – our mortgage lending is up hugely, but on a very low base," he says. "Net mortgage lending – new lending minus repayment on existing loans – from all banks and building societies stood at about £100bn every year from 2003 to 2007. Over the last three years, it's been about £9bn. But mutuals are very cautious on lending decisions, generally have far lower defaults, and are much less affected by the rise in wholesale lending costs due to Europe."

That's partly because building societies tend to think local. "They're almost wholly domestic institutions — one or two had very small lending to Ireland and Spain, but not to Greek or Spanish wholesale markets," says Mr Coles. "All the back-to-basics industry changes being talked about for the banks are what building societies have been doing for a century and a half. Away from the theatre of the City and Westminster, there are real people out there who need to move house or buy their first property. Building societies are rising to that challenge, while the banks are not."

It's not just the mutual themselves and their chief cheerleader Mr Coles waxing lyrical about their benefits over the banks. Vince Cable, the Business Secretary, last month lamented that the demutualisation of building societies in the 1990s was "one of the great acts of economic vandalism in modern times", saying that it resulted in "a virtuous circle of more mortgage lending, leading to more housebuilding" while commercial banks "abandoned locally based relationship banking in the decade before the recent financial crisis".

So what now? It is difficult to see how the wholesale demutualisation of the 1990s could be reversed. "It's a shame the government missed a trick with Northern Rock ," Mr Coles muses. "But it looks as though the 632 Lloyds bank branches could finally go to the mutually owned Co-op, and Yorkshire bought Egg last year. We're not going to return to a mortgage market dominated by the mutual, but it's very likely we'll see more ground clawed back."

Remounting his soap box, Mr Coles has a last rant at the banks. "Size is no guarantee of success – RBS was the largest bank in the world, it almost went bankrupt," he says. "Halifax was the largest mortgage lender in the UK, and had to be rescued. Northern Rock was the fastest-growing mortgage lender, and Bradford & Bingley the biggest buy-to-let lender – both had to be rescued.

"There's something to be said for some of the smaller building societies, chugging along, not doing anything stupid, not getting much attention, but solid, reliable — and quietly doing a good job for their members and the country."

Influx: A 30 per cent surge in business

The Building Societies Association says members have seen a 30 per cent rise in customer inquires in the days since Barclays was fined almost £300m for fixing the London interbank lending rate, which underpins trillions of pounds' worth of loans. Nationwide, the world's largest building society, saw a 26 per cent increase in the number of customers opening and transferring their main account to its services in the week after the scandal broke. The Co-op Bank, which is mutually owned, had a 25 per cent uplift in online current-account applications last week while Ecology Building Society saw the number of interested Britons visiting its website increase by 266 per cent last week compared with the same period last year.

Ecology, which has an ethical strategy of improving the environment, has seen its assets rise 38 per cent to £103.5m between 2007, before the credit crunch, and last year. "In 2011, our savings inflow was double what we expected as people sought an institution they could trust with their money," says a spokesman. "This year we're seeing people move their money because they can no longer stomach the behaviour of the mainstream banks."