The Butterfill Act – the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007, to give it its proper name – has already had a huge impact on the mutual sector. It broke down the barriers that prevented different types of mutuals from merging, enabling CFS and the Britannia Building Society to come together.
But, says Paul Hudson, chief executive of the multi-award winning Cirencester Friendly Society, its origins and purpose have been widely misunderstood. While it ostensibly aimed to allow mutuals to merge, much of the drive for it stemmed from the desire to transfer some continuing operations from one type of mutual to another.
Specifically, Hudson says, at least one friendly society was keen to transfer a tax exempt book to another institution, without jeopardising the tax exempt status. The way to achieve this was cleared by Sir John Butterfill’s legislation. “There can be a number of reasons for wanting to do things, which are not always for the obvious reasons,” Hudson explains.
Yet, even if a transfer of existing business was the main motivation for the change in law, it does not mean that further cross-mutual mergers will not take place. “It will be very interesting,” says Hudson. But, he warns, mergers must not happen simply for their own sake. “Mergers have to have very clear objectives. You have to be clear about what you want to achieve.”
Hudson explains: “If there are synergies which can offer savings and benefits for members, then it makes sense.” But without these they are misguided – as the history of failed mergers demonstrates, says Hudson.
Yet while Hudson is unaware of any mergers between building societies and friendly societies currently being discussed, it would be wrong to rule them out in the future.
He points to a common heritage, the fact that both were historically regulated by the Registrar of Friendly Societies and that he had personally worked for the Nottingham Friendly Society, which actually operated its own building society. Moreover, traditionally many friendly societies provided mortgages.
In addition, some friendly societies – including Cirencester – have developed partnerships with housing associations. “You can achieve things without a merger,” explains Hudson. But he adds a warning. “Some building societies have lost their way.” But, he adds, “There is no reason why you can’t meld together the different things.”
Hudson denies that the differences in investment horizons creates a block to the two types of business coming together. While it is true that friendly societies are looking to long term investment horizons, Hudson points out that mortgage terms are often 25 years. “I don’t see that as being incompatible,” he adds.
More significant is the attitude of regulators, which Hudson believes discriminates against mutuals and their members. He points to the fact that fines by the Financial Services Authority on mutuals for failures in service standards have to be met by contributions from the members themselves – the people who suffered the poor service. Hudson believes this illustrates that for the FSA mutuals are a different and unwelcome business model that they have difficulty in dealing with.
The rising regulatory burden will drive mergers, predicts Hudson, but these are more likely to be within the friendly society sector, rather than with other types of mutuals. “You will see that because of the increasing costs of regulation, friendly societies becoming less competitive, less able to offer the right products for customers and so mergers will occur. It’s a difficult time for mutuals.
“There are now 45 friendly societies – half the number there were 25 years ago. There will inevitably be a run-off in friendly societies if they cease to innovate. It’s tragic, because they were the innovators. Then they lost their way.”
One of the most important recent innovations that has helped the friendly society sector partially reflects initiatives by societies, but also action by government. Child trust funds in part emerged because of the type of products offered by friendly societies – such as the Tunbridge Wells Equitable Friendly Society, which now trades as the Children’s Mutual, and the Family Assurance Friendly Society, which trades as Family Investments. The type of investments pioneered by friendly societies became an endowment for adulthood bestowed by the Treasury and which, in many cases, are regularly topped-up by relatives.
“Child trust funds have become a great success for friendly societies,” says Hudson. “It proves that given the opportunity to do things, they can do things.” In fact, the best buy tables are dominated by mutuals, with building societies offering the best rates on the cash child trust funds, while many of the funds offered by friendly societies are invested in equities.
For the Cirencester itself, new products are being planned, in particular to broaden the appeal of its income protection products. The society also wants to offer more products sourced from elsewhere and branded by the Cirencester. “We want to get back to our core message and do what we do best, which is to provide security and protection for our members,” says Hudson. “We realise you have to develop.”