YOUR MONEY: Windfalls will soon blow over
Introducing a new column in which financial services insiders take issue with popular views of their industry
Sunday 08 October 1995
The public has been encouraged to speculate on which societies will be next to be taken over by - or convert into - banks. Lists of "runners and riders" in the merger and takeover "stakes" have served only to encourage lottery fever among savers and borrowers, who can be forgiven for being confused about what is happening to building societies.
There is no reason to be apologetic or defensive about mutuality. The premise of the current debate about mutuality seems to be that a public limited company structure is the best form of governance; or that banks are superior to building societies. This is an absurd notion, as the BCCI, Polly Peck, Maxwell and Saatchi & Saatchi debacles clearly demonstrate.
No building societies have caused any savers or investors to suffer any losses this century. Building societies continue to be the most popular and successful form of housing finance and are a haven for secure and attractive savings accounts.
The basis of mutuality is that building society members (owners) and customers are the same. A recent evaluation of building societies by the accountants Touche Ross concluded that, as building societies do not have any conflicts with third-party equity shareholders and are not subject to short-term City pressures, they can focus on maximising the benefits to their customers. The report also concluded that societies should only merge or convert for long-term strategic business reasons, and not to give members a large one-off cash or share bonus.
In his legal judgment on the Lloyds Bank/ Cheltenham & Gloucester Building Society takeover scheme, Sir Donald Nicholls ruled that building society members had no automatic rights of ownership over a society's reserves, which had been built up mainly by past members. Encouraging building society members to sacrifice mutuality in return for a one-off bonus could be seen as tantamount to persuading members of the National Trust to vote in favour of selling the Lake District to Disney for use as a theme park. Land and property owned by the National Trust is held for the benefit of past, present and future members. And so it is with building societies.
A recent survey by What Mortgage magazine showed that 19 of the 20 cheapest lenders in the past 10 years were building societies. Most leading banks came way down the table. Building societies also give the best savings returns. Between 1986 and 1995, building society rates were consistently higher than bank rates, with an average society rate in that period of 9.49 per cent gross, compared with the average for banks of 7.99 per cent.
Building societies are generally seen as giving the customer a fair deal. In a recent national newspaper survey, 44 per cent of people agreed that "building societies always deal with you fairly". Only 8 per cent agreed that banks did the same.
These are tangible benefits offered by mutual societies. Building societies remain committed to the housing market through thick and thin. This commitment to providing housing finance extends to supporting borrowers through a policy of forbearance, which enables the majority of those in difficulty to remain in their homes when the going gets tough.
The current debate about the future of mutual societies has focused on a need for societies to better explain and promote the benefits of mutuality. Several societies, including my own, have announced their intention to reward loyal members with financial benefits.
Mutuality is relevant to the modern marketplace. If there were no mutual building societies, then the challenge and pressure to maintain the same level of competition in the market would be removed, and those customers who voted to end mutuality could suffer from a poorer level of service from the remaining institutions.
o John Wriglesworth is head of strategy and communications at Bradford & Bingley Building Society.
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