A few years ago a Parliamentary committee investigated the demutualisation of several building societies. It concluded that the conversion of building societies – owned by the customers – into public limited companies – owned by shareholders – had served the customers very badly.
Interest rates went down for savers, but up for borrowers. The effect could be seen in the best buy tables – the remaining building societies regularly topped the lists.
Demutualisations were also an abject failure for society as a whole. Every single demutualised building society has ceased to remain independent. Several collapsed: Halifax, Northern Rock, Alliance & Leicester and Bradford & Bingley were all rescued.
Others have been bought up. Abbey became part of Santander; the Woolwich was purchased by Barclays; Cheltenham & Gloucester was eaten by the since failed Lloyds Group; and Birmingham Midshires by Halifax – also now part of Lloyds.
So-called ‘carpetbaggers’ led the raid on these historic institutions, but the lure of quick money turned sour. Borrowers and savers lost out. A typical mortgage borrower could be £5,000 worse-off over the term of a loan because of higher interest rates following demutualisation.
The cost to the taxpayer has been much greater – serious errors made by demutualised societies Northern Rock and Halifax were partly responsible for the collapse of the UK’s banking sector. The institutions cost UK taxpayers billions of pounds.
Where are we now?
Yet, ironically, the surviving building societies are suffering badly. In recent months we have seen a string of societies forced into mergers. The latest involved the effective takeover of the Chelsea Building Society by the Yorkshire Building Society (which operates in Northern Ireland, as well as in Great Britain).
Several other building societies have amalgamated for various reasons. Some lost access to investments held in the collapsed Icelandic banks. One was hit by a severe mortgage fraud. Several were undermined by lending too much on commercial properties that fell in value. In just one case was there a merger of strength – the takeover of the Britannia Building Society by a fellow mutual, Co-operative Financial Services. In all cases, though, individual depositors were fully protected.
The real problem for the remaining 51 building societies is that their business model has been badly damaged. The volume of house sales remains low, so demand for mortgages is weak.
And it is very difficult for building societies to compete for savings. The Government is borrowing so heavily that its savings arm – National Savings & Investments – is offering highly attractive rates that other institution have difficulty in matching. UK and Irish government-rescued banks – including Ulster Bank, Bank of Ireland and Anglo Irish – have become market leaders in savings products.
Global banks that survived the recession strongly – particularly HSBC and Santander – are also competing aggressively. HSBC and its First Direct subsidiary regularly head the mortgage best buy charts, while Santander’s Abbey offers a very good credit card deal and the sister Alliance & Leicester is a best buy for unsecured loans.
Building societies also face regulatory pressures that directly discriminate against them. Banks and building societies must pay a levy into the Financial Services Compensation Scheme, which is calculated on the basis of the value of deposits held, not on the risk profile of the institution. This has meant building societies paying compensation to savers in failed banks. New rules on ‘capital adequacy’ also hit building societies hard because they cannot raise cash from shareholders.
The Building Societies Association is very unhappy. Director-General Adrian Coles, explains: “Building societies are rapidly becoming the only providers of financial services not to be directly subsidised or supported by the state. Banks, NS&I and the Post Office all have significant public sector support. The playing field is seriously distorted and we call on the Government to take action so as not to undermine the building society sector.”
Better in Northern Ireland
The good news is that despite these pressures, Northern Ireland’s two building societies are in strong condition. The largest is the Progressive Building Society, which has established a reputation for sound financial management.
Despite the severe recession, the Progressive increased its total assets from £1.5bn in 2007 to nearly £1.7bn in 2008. Its general reserves also rose, while its management expenses, as a proportion of its assets, fell. No one from the society was available to discuss its recent performance.
The City of Derry Building Society is the second smallest in the UK and is in a strong position. It admits, though, that some funds have been withdrawn to go into high interest NS&I products.
Colin Jeffrey, chief executive of the City of Derry, reports that deposits grew by six and a half per cent last year – though that, in part, reflects low mortgage lending activity. “Funds are trickling in and lending is trickling out,” he says. But at current levels of lending, “funding is not a big issue”, he says.
In fact, across all the UK, the smaller building societies are under less pressure than larger societies. They are less exposed to bad debts, commercial loans and high risk investments. Smaller societies are also sharing administrative services to reduce overheads: the City of Derry buys IT systems and compliance systems from consortia of other building societies.
While the building society sector across the UK is in difficulty, it seems that Northern Ireland has withstood the worst. The sector may be small here, but it has at least survived.
A Question of Money
Q. I had shareholdings in Northern Rock when it was nationalised. Has the valuation of these now been settled? SJ
A. Northern Rock was not so much nationalised, as rescued from complete disaster. Accountancy firm BDO Stoy Hayward has just completed its valuation of Northern Rock shares when the company was taken over by the Government. Not surprisingly, it concluded that they were worthless – so shareholders can expect no compensation. All investors should receive a letter confirming this. But this is not the end of the road. Shareholders, led by large hedge funds, intend to lodge a legal challenge.