The Rock and the hard cash

Steve Lodge questions the future of building societies after the Northern Rock's unexpected demutualisation
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THE not-quite-high-street-name Northern Rock building society has become the latest building society to join the windfall game. Last week it announced plans to give an average of pounds 1,000 of free shares to up to a million or more of its savers and borrowers as it goes to the stock market to become a bank worth around pounds 1bn.

The Bristol & West could be on the brink of following suit with a windfall, possibly as a result of being taken over.

Could this be the end of building societies? Last week's move will be heralded as another nail in the coffin of the building society tradition - a half of the biggest names have now jumped on the plc bandwagon. And Northern Rock was seen as one of the more traditional. For savers who opened accounts in the hope of a windfall, the conversion will be cause for delight.

Here are the answers to the main questions on the Northern Rock deal and what is going on elsewhere:

Who gets what?

Up to a million Northern Rock savers and its 270,000 borrowers are being offered free shares worth an average of perhaps pounds 1,000 if the society gets to the stock market as a bank, planned for autumn 1997. Northern Rock customers who are both savers and borrowers stand to get two sets of free shares. The society will not say whether people with higher balances will get more shares, so it is not clear if by withdrawing any of your savings between now and conversion you will reduce your entitlement. If the handout follows previous announcements, there will be basic distribution of shares worth perhaps pounds 500 and then an additional distribution related to the size of your account/mortgage and/or how long you have been a customer.

The vast majority of savings accounts are eligible for shares, including the society's popular postal accounts. Its helpline (0345 448866) should be able to give confirmation.

To qualify for free shares as a saver you must have had at least pounds 50 in qualifying accounts (in total, not necessarily in each account) on 2 April 1996, at least pounds 100 on 31 December 1996 and at least pounds 1 on the date the society converts into a bank.

People with more than one savings account will not get more than one set of shares, unless they are mortgage borrowers as well. The estates of people who die before they get their shares should retain the right to the shares. People with Tessas maturing before the society converts still qualify for the shares if they retain the necessary balance in an account with the society, even if they move their Tessa elsewhere.

To qualify as a mortgage borrower, you will need to have had at least pounds 1 of outstanding mortgage debt on 2 April and at least pounds 1 outstanding on 31 December 1996 and on conversion.

Who misses out?

A total of perhaps as many as 100,000 customers with, for example, Northern Rock's offshore business in Guernsey, Rock Asset Management PEPs, Legal & General PEPs bought through the society, and borrowers with personal loans rather than mortgages will not benefit.

Those under the age of 18 on the voting date will miss out, as will the second-named person on joint accounts.

Savers should not close accounts (Tessas that mature are an exception), although existing borrowers can remortgage without affecting their eligibility. Holders of the society's Current Account and Current Account Gold can go overdrawn and still qualify so long as they have the required positive balances on the three dates.

What will happen next?

The detailed proposals, including criteria for the share handout, will be published early next year. Savers and borrowers will vote on the proposals next spring, with a view to the society joining the stock market and savers and borrowers getting their shares in autumn 1997. The society wrote to customers last week, enclosing a leaflet entitled Proposal to Convert to Plc Status: Your Questions Answered.

How does this deal compare with others?

Relatively few customers of the society are excluded by Northern Rock's windfall proposals. The vast majority of its accounts qualify, including, unusually, cheque-based current accounts. Nor has the society sought to exclude carpetbaggers by setting an early cut-off date - the first qualifying date was 2 April, the day before the announcement.

One unusual feature of the proposals is the setting up of a charitable foundation, called the Northern Rock Foundation, which will take 5 per cent of the society's future annual profits (equivalent to pounds 7m in 1995) tosupport charitable causes mainly in the North East.

To some customers, this might seem a worthy adjunct to the deal. However the society admitted it is aimed at deterring third parties who might otherwise be prepared to pay savers and borrowers more for their ownership rights. And by reducing future profitability, it threatens to dampen the performance of the society's shares on the stock market.

Who's next?

Bristol & West is the favourite. The society, long seen as vulnerable to takeover, could announce that it is being bought as early as this week. Savers looking to piggyback on any windfall will however need pounds 2,500 to open an account with the best chance of a handout share.

Are building societies dead?

Northern Rock's move was a surprise - it was seen as too small to become an independent quoted bank and one of the more committed to remaining a mutual society. If it goes, won't others follow suit?

Certainly the numbers of announcements and scale of the current shake- up gives the impression of a rout among building societies. The Halifax, Leeds, Woolwich, Alliance & Leicester, Cheltenham & Gloucester, National & Provincial and now Northern Rock have jumped on the demutualisation bandwagon, with the Bristol & West seemingly in hot pursuit.

It is virtually certain more mutuals will go over the next few years - the question is when, not if. In the meantime, remaining societies will be under heavy pressure to justify their existences with better rates to savers and borrowers or other benefits.

Last week's Woolwich fiasco is unlikely to have enhanced the image of society bosses, and can only increase savers' cynicism. Windfall hunters might want to get in touch with Members for Conversion, a pressure group which has produced a free Carpetbaggers Guide, giving information on which accounts to open for the best chance of a windfall. Send an A5 SAE to Michael Hardern, Members for Conversion, 3 Rathbone Street, London W1P 1AE.