There has been much speculation and comment in recent months about the future of the building society sector. Perhaps with the recent merger activity it’s not too much of a surprise that all and sundry wish to have their say, predicting who will be next, and when.
But while many are forecasting the ‘demise’ of the building society, the truth is that the sector is in good health. Mergers certainly don’t represent a shrinking or weakening sector – the number of societies may be falling but the assets and members remain the same.
In 2006 we saw three mergers; the Mercantile and Leeds, the Lambeth and Portman and the Universal and Newcastle. More recently, members of the Portman Building Society voted overwhelmingly to merge with the Nationwide; a merger that, subject to confirmation by the Financial Services Authority, will take place at the end of August this year.
Before the aforementioned mergers, there had been none since 2003. In fact, there have been far fewer mergers than many experts thought after the wave of demutualisations in the 1990s.
Looking back
Building societies faced great difficulties in the 1990s. With the dual threat of director-led conversions and so-called carpetbaggers, the remaining societies had to fight hard to retain their mutual status. It became clear that societies had not been engaging with their members as much as they should have. Things had to change.
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The sector is much more stable now than it was during the spate of demutualisations. Today all 60 members of the Building Societies Association (BSA) are committed to their mutual status and thanks to the campaigns run during the height of carpetbagger activity, far more people are now aware of the benefits of mutuality. Even the challenges to the Board, which were once a regular occurrence, have now receded.
Looking back at news coverage around the time of the demutualisations phrases like ‘another nail in the coffin of the building societies’ and ‘the battle for mutuality’ were often used by the press. What is clear is that, in many ways, societies are stronger and more distinctive than they were then. The demutualisations served as a wake-up call for societies in terms of corporate governance and in understanding their mutual status and how this can best be used to members’ advantage.
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The longevity of the sector over the last 150 years, teaches us that societies can rise to almost any set of challenges, not least the recession of the early 90s, the threat of carpetbaggers, mortgage regulation, narrowing margins and diversification. In contrast, there are many other more recently established institutions that do not have the experience of running a business in tough times. In addition the building society sector is continually able to reinvent itself to address the new corporate climate, such as the movement away from plc-type performance indicators and tackling the real threat posed by climate change.
Where we are now
Today there are 60 building societies in the UK, and the sector has seen double-digit growth in assets which are now in excess of £310 billion.
Building societies hold residential mortgages of almost £210 billion, approximately 18 per cent of the total outstanding in the UK. Societies also hold almost £200 billion of retail deposits, accounting for over 19 per cent of all such deposits in the UK; for cash ISA balances this figure is 37 per cent.
As well as seeing strong growth over the last few years, building societies have developed the relationships they have with their members. A recent report from the BSA shows that building societies are engaging with their members more now than they ever have. In the last 10 years societies have spent considerable time, effort and money to increase the level of member participation in the affairs of the society, especially voting, which is a fundamental part of the democratic process.
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Many now give an amount of money – from 10p up to £1, per annual general meeting (AGM) vote cast – to charity. A number of societies have member panels, forums and councils. Members of these meet throughout the year with the society and are often involved in every aspect of the business such as ‘Treating Customers Fairly’, AGM packs, internet operations, the branch network and involvement in local communities.
Going forward
Looking ahead, further consolidation of the sector cannot be ruled out; in fact it is likely that there will be further mergers. Who it will be and when, the BSA does not know – and certainly would not speculate on. We don’t believe that mergers represent a weakening of the sector; unlike the demutualisations of the 1990s, both the assets and members of the merging societies remain the same.
While much attention has been paid to a so-called shrinking sector in recent times, it mustn’t be overlooked that we have also seen the remutualisation of a former building society – the Bristol and West – when Britannia Building Society purchased the savings book and branches from the Bank of Ireland. Neville Richardson, group chief executive of Britannia, speaking of the acquisition, says: “When Britannia acquired the savings business and branch network of Bristol & West, it was a rare strategic opportunity which provided significant opportunities for the society’s members – an enhanced branch network, 700,000 more members and 700 new staff with new ideas and new product knowledge. It also brought an additional £4 billion of retail deposits enabling us to grow the member business by about a third.”
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More recently two societies have purchased small banks – the National Counties acquired the Hampshire Trust plc and the Manchester Building Society the Whiteaway Laidlaw Bank Limited. In October 2006, Yorkshire Building Society announced its acquisition of the savings business of MBNA. Perhaps not such a shrinking sector after all?
On talking to the societies themselves, the recent merger activity does not faze them.
David Fisher, chief executive of the Mansfield Building Society says: “Mergers and acquisitions have always been with us, there is nothing new in that. Smaller providers have a continuing role to play, whether it be niche, geographical, traditional or evolving channels – there is a place and demand for their products and services.
It is important to be increasingly innovative, to have courage, tenacity and an appetite to address the business, regulatory and changing demographics. Opportunities will be discovered and small players will remain in the market – if they can illustrate member value and firm commitment.”
Paul Winter, chief executive of Ipswich Building Society, echoes this point. “With increasing similarity of product offerings it is more difficult for any financial services business to differentiate itself. It is in this area that local building societies have a distinct advantage; by virtue of their close relationship with their members they can offer a level of personal service that large national and international players can only dream about.”
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Legislative change?
A potential change to building society legislation will allow societies greater flexibility in the future as to how they raise funds. Sir John Butterfill, the Conservative MP for Bournemouth West, tabled the Private Member’s Bill with support of the BSA and, if successful in its passage through the Houses of Parliament, would give the Treasury the power to move the non-member funding ratio into secondary legislation, and for the non-member funding ratio to be increased to 75 per cent from the current 50 per cent.
This removal of the constraint means building societies will be in a position to meet whatever changes emerge in the market in the next few years, rather than being constrained by outdated regulation. The Bill has successfully completed all its stages in the House of Commons and now proceeds to the Lords for scrutiny.
Building societies are, and will remain, an important part of the financial services industry and will continue to flourish by offering good value to their members. There may be further mergers ahead but that far from spells doom for the sector.
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