Building societies have played a central role in helping people buy their own homes since the 19th century. This role was called into question in 1989, when Abbey National turned from a building society into a plc bank, signalling a wave of similar conversions involving many of the UK's largest financial institutions. Since then, building societies have been under constant scrutiny, some targeted by organis-ed 'carpetbaggers' trying to force them to become banks.
Nowadays, mortgages are widely available, the internet threatens to supplant branches and some see building societies as historical relics or as an opportunity for a windfall payout. In an era of such rapid change it is reasonable to question whether building societies will be relevant in the 21st century.
That question is answered not by appealing to history and sentiment, but by looking at what makes any business successful.
If a chairman were to describe an ideal scenario for their bank, they might list the following: no conflict of interest between customers and shareholders; a large and sustainable cost and price advantage over the competition; returns paid to owners out of pre-tax earnings in a form that many do not have to pay tax on; customers who have trust and confidence in the organisation, and who view the competition in a largely hostile way.
This is the same list that the chairman of a building society can write down as the real advantages of mutuality.
A building society's customers are its owners, and the board exists to direct it in the interests of current and future members. Societies do not have to pay dividends that for a bank equate broadly to a 35% loading on management expenses, or a 20% loading on the margin between mortgage and savings rates.
The better long-term interest rates that building societies deliver are paid from pre-tax income, and for borrowers in particular this is effectively a tax- free benefit (in the form of lower monthly mortgage payments).
Building societies are still viewed with a trust and confidence that few other financial institutions enjoy and many former building societies are losing rapidly. The difference in behaviour between banks and building societies was typified by the recent bank-inspired attempts to introduce new ATM charges. In the end the banks were forced into a climbdown.
If the advantages of mutuality are so compelling, why did former societies chose to convert?
Conversion was justified on the grounds that stock market discipline would force greater efficiency, that there would be better access to capital, that diversification would be easier and that banks could compete more effectively.
The reality has been different. Stock market accountability has proved ineffective (the major building societies on average have lower management expense ratios than the converted societies); most former societies have been repatriating capital, not raising it; building society regulation no longer restricts diversification and the ex-mutuals have nearly all failed to compete. For most, their new business share has fallen well behind the historical share that they had as building societies, and the mutuals have consistently outperformed the converters. If the benefits of conversion are as claimed, Abbey National, the first to convert, should have outperformed its former peers. Yet this did not happen.
Indeed, the inability of the converted societies to compete and the pressure to maximise returns for shareholders forced the Birmingham Midshires (part of the Halifax Group) to close more than a third of its branches a year before the expiry of its promise to keep its network after conversion.
Despite mounting evidence in support of building societies, they are still under pressure to convert for the windfall payouts.
Most of these payouts have had a significant flat-rate component, irrespective of a member's stake in a society. This provides a strong inducement for short-term speculators to agitate for conversion. Payments have not reflected member contribution or natural justice, and it might be argued that they were engineered by converting societies simply to secure majority support for conversion (in common parlance, a bribe).
As long as the perception remains that pounds 100 in a building society account entitles the owner to a pounds 500 windfall, societies will remain under pressure.
There is a strong case for government intervention to prevent an unintended flaw in building society legislation from threatening a sector that is a strong and beneficial competitive force.
Building societies have been on the defensive, but the tide may now be turning. A majority of Standard Life members have rejected potentially substantial windfalls in favour of higher long-term returns that the insurer can offer as a mutual. At the same time, banks have never been more criticised for their treatment of customers, which gives building societies a chance to demonstrate their value and relevance to consumers.
We will not do this by relying on our history and tradition; we will do it by using our inherent competitive advantage to the benefit of our members, by investing to provide the services that our members want, and by promoting ourselves with vigour and confidence.