Leading Article: Mortgage-holder bonus means the feeling is mutual

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The Independent Online
It's the weekend - time to stop worrying about work for a day or two and anguish about money instead. The salary, the pension, the mortgage, the life insurance, the gas bill, the phone bill; sheath after sheath of horrible forms, bills and contracts glare somewhere in the kitchen, hidden behind a copy of Delia. The personal finance columns nag from the pages of every newspaper. Have you got the right policy? Are you with the right bank? Did you join the right pension scheme?

Nowhere are these sorts of questions more pertinent this week than about your mortgage, or lack of one. Nationwide Building Society, the UK's third largest lender, cut its mortgage rates dramatically in the opening salvos of a price war. Meanwhile, the Halifax, the Alliance and Leicester and the Woolwich building societies are promising customers windfalls worth about pounds 1,000 when they turn into banks next year. The company you are mortgaged to seems to matter more than ever. The Nationwide's cut in its mortgage rate to 6.99 per cent, the lowest variable rate for 30 years, is fighting talk indeed. Mortgage rates at other lenders are still about 7.5 per cent. If the differentials remain, the Nationwide customer with a pounds 50,000 mortgage could be up to pounds 20 a month better off than mortgage holders elsewhere.

No wonder customers are confused. Mortgage lenders seem to be tripping over themselves to throw cash at us. This is hardly the behaviour we expect from the very same building societies that clamped down on arrears and bad debts, triggering repossessions during the recession of the early years of the decade. But times have changed. And strange things are afoot in the world of financial services.

This explosion of generosity stems from a transformation in the character of the societies and their industry. Building societies are turning into banks at an astonishing rate. For at least a century, mutual societies - otherwise known as building societies - have been helping people to save and borrow to buy their homes. Instead of a company owned by its shareholders, mutual societies are owned by their members, who are predominantly their customers. These societies are perhaps the original stakeholder companies; profits are ploughed back into the business. Every customer has a direct stake in the profits as well as the quality of service the company provides.

Yet just as stakeholding is becoming fashionable in managerial and political circles, the mutual society appears to have become passe. Once the Halifax, Alliance and Leicester and the Woolwich have joined the Abbey National and others as banks, only 25 per cent of mortgages will be left in the hands of building societies.

This rush to turn building societies into banks is driven by several factors. The old owners of the society, the account holders, become shareholders and can make a tidy sum by selling their shares. Managers get a chance to set up lucrative share option schemes. The company can raise more capital to expand into new business areas, more quickly, to compete with banks. The change should also provide the spur for managers to introduce more efficient working practices and organisation, something they may well not have gotten around to in the cosy world of the old mutual society. Annual general meetings of building society members, complete with tea and Garibaldi biscuits, rarely provided a grilling for lax managers. Shareholders and the City may not be so forgiving. At least, that is the theory.

Two groups stand a risk of losing out in this new world of shareholder- owned companies - employees and customers. Some employees may well lose out because job losses are likely. Mortgage holders may lose because a large proportion of the profits must be paid back to shareholders. That means less money is available to fund better deals for customers. In contrast, building societies have the potential to hand all their profits back to customers. In recent years, they have failed to do so. Bruised by the recession, they have built their reserves up far in excess of their need. But now they are in a strong position to start fighting back with a mortgage price war.

Hence the Nationwide's move. It is planning to hand back about pounds 200m of its annual profits - perhaps about half the society's expected profits for this year - in the form of low mortgage rates and higher savings rates. Britannia plans to give its members cash sums instead. Catch a bank doing this? Their shareholders would lynch them.

Nationwide's mortgage rate cut is good news for its own customers, and also for others, if the price war escalates. More importantly, the rate cut signals the belated resuscitation of the mutual society - to the advantage of the consumer and the economy as a whole.

As stakeholder economists such as John Kay have been at pains to point out, the advantages of different kinds of company structure and ownership are not just ethical - they are economic.Building societies, like banks, are primarily commercial organisations. Yet even within a commercial framework, they have the potential to provide more attractive services for many customers because of the nature of their structure. In an industry with so much at stake - your home and your financial future - it is easy to see the attraction of owning a part of the company that deals with your money.

The significance of this contest between the mutual societies and the building societies-cum-banks extends well beyond the mortgage market. Just as the mortgage market is benefiting from competition between different forms of company, so too would the economy as a whole. An economy entirely populated by shareholder-owned companies would not be healthy. Multiple forms of ownership are vital to retaining wide ranges of choices for consumers, and creative pressures on companies to develop in different directions. It is true that national ownership of industries, after a 50-year experiment, has largely been ditched as a failure. But the mutual societies have 300 years of success behind them. Alongside employee-owned companies, they can promote different kinds of organisation and choices for consumers. In particular, by avoiding shareholder pressure, building societies have the chance to be the most competitive and dynamic operators in the world of personal finance. Mortgage holders should be grateful that some building societies started to de-mutualise and shook up the whole industry. But they should be even more relieved that others have started fighting back.

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