Building societies have been around for a long time now and they account for a significant amount of mortgage lending in this country. Many of us will have the traditional view of what a society is in our heads and have a variety of preconceived ideas; either good or bad. Most will see the small branch with the specific regional link, looking after the savings, mortgages and other financial needs of that community. A very homely image.
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However, in the ever-changing mortgage market with its cut-throat ethos and demanding attitude, how will this sector of finance cope? Is there room for a kind of ‘warm and fuzzy’ approach to lending; one which seems almost quaint in how we perceive it?
Shaking things up
For Iain Cornish, chief executive of Yorkshire Building Society for four years and the newly elected chairman of the Building Societies Association (BSA), it is time to shake things up a little. “
What building societies have got going for them, which other lenders don’t have, is that there is a high level of consumer trust. It is very important in the current competitive marketplace for the sector to be promoting itself more and one of the things I want to work on, from a BSA perspective, is to make more people aware of this trust and promote what building societies can do."
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As Cornish laments: “We have a fantastic image among our customers but we haven’t done enough with it.” But what can be done to change this? The building society model has been around for over 200 years and it seems to have worked so far. Obviously the idiom ‘if it ain’t broke, don’t fix it’ comes to mind, but there are challenges out there which are having to be tackled by anyone in the lending market; and in today’s climate, you cannot afford to rest on your laurels.
Cornish believes societies are already facing these challenges head on. “One of the things which has happened in the last 10 years is that as the level of competition in the market has increased and the margins have been squeezed out of prime mortgages, all lenders have had to diversify. However, diversity presents a good opportunity for building societies as they have a wide range of skills across the financial sector.”
This can be seen in the actions of many societies, whether they have expanded into distribution, as seen in Skipton Building Society’s links with Pink Home Loans, or moved into less traditional forms of lending, such as buy-to-let or non-conforming.
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Breaking with tradition?
However, much of this thinking could be considered at odds with the traditional image of what a society does and this has had to be circumvented in a variety of ways. The most common has been the subsidiary, which has allowed societies to branch out into new areas without risking the core business.
It has also allowed it to break with, what Cornish admits, is the tricky subject of how building societies originate business. Societies have flourished in the past through establishing local and regional links and making the customer feel like they are investing in the community. Today’s mortgage market is much more reliant on the intermediary and societies have had to make an awkward transition.
“More and more, the intermediary market and the direct market are becoming distinct and, increasingly, we are seeing the setting up of intermediary focused subsidiaries. The relationship between the intermediary and the customer is very important for the broker and we are having to adapt to this as it doesn’t sit well with the traditional building society model of direct customer links, especially through branches. But subsidiaries help us to manage this and still give intermediaries and customers what they expect from approaching a society.”
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Cornish points to his society’s own subsidiary, Accord Mortgages, which he believes has established itself in the market as a lender which combines the ethos of a society with the focus of an intermediary based proposition. However, it isn’t just Yorkshire BS doing this – Coventry, Norwich & Peterborough and, most recently, Stroud and Swindon, have all created or announced plans for broker-focused subsidiaries.
Cornish also thinks there will be more, due to the difficulty of maintaining an equal balance if it is kept in-house: “Having a subsidiary just means, in organisational terms, that it is more focused on the intermediary. If it is combined within the society, there is always the risk that you will find the focus stays on what is best for the main business and doesn’t do the job it is supposed to.”
This mitosis within the sector does point to a different role for societies in the future mortgage market. However, while the focus on subsidiaries may expand the reach of individual societies beyond their regional base, Cornish believes the identity of each society will remain the same.
Mergers off the table?
He also believes the number of societies will also remain the same – and that means mergers are certainly off the table.
“Mergers are popular with the media but when we get together, we just don’t talk about them,” chuckles Cornish. “It’s all about how we can give greater value to the customer, which doesn’t allow time for a chat about mergers.”
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One merger which will be focusing attention, not just within the societies, is the union of the Nationwide and Portman Building Societies later this year. The coming together of the largest and third largest society raised a few eyebrows and led to talk of mergers galore within the sector, as well as the emergence of one or two ‘super-mutuals’ to challenge the dominance of HBOS.
While its sheer size might give it the power to compete with the multi-national plcs, would the Nationwide/Portman entity be just too big to work along traditional society lines? Cornish insists he isn't worried:
“The Nationwide and Portman merger won’t have a big effect on the BSA. Nationwide will hold over half the assets of the sector so what it does will be important. However, it was already much bigger than anyone else before. Yes, it is the largest society but it doesn’t have to mean it will dictate what the BSA and building societies in general will do.”
In fact, Cornish believes the new society will be the perfect vehicle for his drive to promote the advantages of mutuality.
“We are fortunate that Nationwide is an example of what is good about building societies, in terms of its mutuality and the good reputation it has among the public. It has a brand strength and identity that are quite unique within the market so we can all build on that.”
Making more noise
But how will Cornish and the BSA do it? His tenure only lasts a year and with the intense level of competition, continuing issues over affordability and the potential implementation of the Financial Mutuals Bill, which would give greater scope to societies when it comes to funding, he has plenty on his plate already.
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For Cornish, it is all about making more noise and not relying on the Council of Mortgage Lenders (CML), which many societies are also part of, to do it for them.
“We have been more active in the past on savings issues and as most building societies also belong to the CML, most of the lobbying on the mortgage side has come through them. So we are looking at various ways of strengthening the BSA’s voice in the mortgage market. We will have similar areas to look at so much will still go through the CML but we want to establish our own voice.”
And why not? Building societies have been part of the financial arena for a long time now and while there may be challenges ahead, societies are changing to meet them.
“The outlook for building societies is very positive. The challenges that they face are no different to other players in the financial services market but I think the opportunities collectively outweigh the threats,” Cornish says. “Going forward, we will have to define what we want and then deliver it in a cost-effective way. However, I wouldn’t want to swap the starting place we have, in terms of the trust in our image, for anything.”
