Big, but not big enough

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The Independent Online
A billion pounds, despite inflation, is still quite a lot of money. You might imagine that a business worth upwards of that would feel itself large enough to remain an independent entity. If that business is a building society, it ain't necessarily so.

The agreed bid for National & Provincial from Abbey National carries an obvious message: it is clearly only a matter of time before the other large building societies either float themselves on the Stock Exchange or are taken over. For the smaller societies there is probably not a lot of choice. Unless they are so small as not to matter, they will find themselves taken over.

For the larger ones there is the option of floating independently, but of course plc status carries the risk of a subsequent takeover through a bid. National & Provincial was on the border line. It was perhaps just big enough, but maybe not.

Whatever the choice of the individual societies it is quite clear that the age of the building society movement, as many old hands still call it, is drawing to a close. It has had a natural life-span of 150 years and during that time has brought about a transformation of home ownership. The function of providing home loans of course continues but the form of organisation - a mutual society, owned by the people who use its services - will die.

To express what is happening in those terms might seem like an exercise in nostalgia and in a way it is. The plain fact of commercial life is that industries, and companies within them, grow and decline. A few people do mourn the demise of the transatlantic liners, and more the virtual disappearance of the British motor-cycle industry, but most people would accept the inevitability of economic change.

No company or industry has a right to carry on for ever.

So anyone seeking to defend the retention of the mutual structure of the building societies has both to make a case why it would be desirable to do so, and to suggest how it might be done. Defending mutuality is easy on emotional grounds - the principle of self-help has obvious attractions - but in reality the original concept of people saving through a society (thereby helping others buy their homes) and then using those savings as a deposit for a loan, has become so diluted as to be meaningless. There are, however, several practical reasons why it would be desirable to retain it.

The first is that it ought to be possible for mutually-owned businesses to take a longer-term view than those owned by shareholders. It is not just that they are better protected from takeovers, or that they can afford to focus less strongly on immediate profits.

More importantly, they ought to be able to make almost a moral judgement about the services they provide rather than a purely commercial one. For example, one of the most profitable types of financial service is lending at high interest rates to people who are not sufficiently creditworthy or insufficiently sophisticated to borrow more cheaply. It is profitable because the rates charged cover the quite high default rate.

But it is also, to put it mildly, unsatisfactory that relatively poor people should have to pay interest rates of 25 per cent and upwards to obtain credit. The truly moral, mutually-owned society would simply not do this business at all.

Of course the trouble is that wholly respectable, well-run societies do have this sort of business. The societies feel themselves to be under such pressure nowadays to behave like shareholder-owned businesses that they regard this as normal. If people want to buy the service, why should they not provide it? At least it is better than going to a loan shark.

Yet 25 years ago building societies would not have done this business. They still required people to have a savings account before they granted a mortgage. While it is easy to see why this somewhat nannying approach has been dropped, it is surely possible to regret that there are some financial institutions that do not retain this ethos.

Can it be rebuilt? There is a commercial case for trying to recreate the low-cost building society that lends only to people who have saved with it, simply because such a society could offer a better deal both to borrowers and lenders (because it would have a much lower default rate) than the more overtly "commercial" societies. But such a society could only be rebuilt within a mutual structure.

First we have to keep something of what we have got. That will be pretty difficult. The proposition "would you like us to retain mutual ownership or would you like pounds 500?" does lead to a rather obvious conclusion. There is really only one way of countering this. Instead of bribing members to sell, the societies should bribe members to stay. They should pay dividends. In theory anyone with a savings account benefits from the fact that there are no shareholders to pay by receiving slightly higher interest than would otherwise be the case. But the advantage is invisible. If, instead, the societies made membership more than a formality by paying dividends, then anyone offered a lump sum to agree to a takeover would have to set that in the balance against the loss of the dividend flow.

The details would be complicated. Obviously there would have to be a qualification period before a member received dividends. These would have to be in some proportion of deposits, but obviously would exclude wholesale funds. There would be the case of borrowers: should they receive dividends, too? But such difficulties could be resolved once there was the will to set up the new system.

If dividends had been introduced 10 years ago they might have forestalled the whole move to plc status. As it is, they will be too late for many societies. But a core could be preserved, which, if nothing else, would keep the newly-floated (and the newly-taken-over!) on their toes.

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