Building societies - introduction
“A mutual is owned by, and run for the benefit of, its members – it has no external shareholders to pay in the form of dividends, and as such does not usually seek to maximize and make large profits or capital gains.” – Wikipedia
What are building societies?
Building societies are mutual institutions offering savings accounts and mortgages, and occasionally current accounts. This is all they provide. They are simple beasts compared to banks, and their mutual nature means that they are owned by their members, and are not listed on stock exchanges and owned by shareholders.
They’re similar to co-operatives, but, from Wikipedia: ‘unlike a true cooperative, members usually do not contribute to the capital of the company by direct investment, but derive their right to profits and votes through their customer relationship.’
Plaque commemorating the formation of the world’s first building society, in the Golden Cross pub in Birmingham.
History
The first building society was formed in 1775, by Richard Ketley, proprietor of a pub called the Golden Cross, in Snow Hill, Birmingham. At the time, publicans encouraged meetings of working men in their pubs in order to sell more beer! Lots of trades unions and friendly societies were formed in pubs. This society was quickly followed by others in Birmingham, then Dudley, Rowley Regis and other places in the Midlands, North and Scotland. Members of early societies like this paid money into a pot, and when there was enough, one member’s name was drawn by lot and the money was used to build them a house. This house was used as security for attracting more loans until everyone in the group was housed, after which the society had served its purpose and was disbanded. These early societies were consequently called ‘terminating’ societies.
By 1825 there were over 250 building societies all over the UK. In the middle of the 19th century, model rules were developed, societies started to accept savings from people not looking to build a home, the first permanent (i.e. not terminating) societies were formed, and by the turn of the century there were almost 2000 UK societies with over 600,000 members.
The industry grew steadily until the 1980s when it was hit by a wave of exremely damaging ‘demutualisations’.
The Newcastle Building Society opened a branch inside Yarm library, North Yorkshire, to prevent its closure.
Demutualisation
Many building societies were ‘demutualised’, starting in the 1980s, after deregulation that allowed mutual societies to become banks with shareholders, or to be merged with existing banks. Incentives were offered to members in the form of cash payments or shares. The first mutual society to be demutualised was Abbey National, followed by famous names such as Alliance and Leicester, Northern Rock and Bradford and Bingley. They have all since failed.
Vince Cable called the demutualisation of building societies ‘one of the greatest acts of economic vandalism in modern times’. It has resulted in the loss of hundreds of small building societies, converted or swallowed up by the corporate sector. This is the opposite direction to the one we should be moving in if we don’t want banks and financial institutions that are ‘too big to fail’, although of course the motivation behind deregulation was ideological rather than economic.
The largest and smallest building societies in the UK.
In 1986, the Building Societies Act liberalised the sector, allowing building societies to enter new areas, such as insurance, estate agency and unit trusts. They needed to raise capital quickly to be able to do this, and many decided to demutualise and to float on the stock market to raise the capital. This wasn’t done lightly, and there were huge battles between members. When those battles were won by demutualisers, with the help of financial incentives to members, they soon found that being a middle player in the cut-throat banking sector was much more of a struggle than being a mutual in a more patient, stable sector. Not one of the demutualised building societies exists as an independent entity today.
Savings & Loan Associations operate in the same way as building societes in the US, and are famously championed by James Stewart’s George Bailey in It’s a Wonderful Life. It’s uncanny how relevant the battles being fought in that film are today. They suffered similar damage due to demutualisations in the late 20th century.
It’s a Wonderful Life: George Bailey argues against demutualisation.
Building societies now have ‘charitable assignments’, which mean that new members agree to assign to charity any windfall that they may be due if the society is demutualised. This is a big disincentive to demutualisation.
Today, in the UK, the mutual sector is healthy and growing. Around 20 million people have building society accounts, building societies have helped over 3 million people to buy a home, and they currently provide one in every three mortgages in the UK.
1980 saw the birth of the newest building society – the Ecology Building Society, with a unique focus on the environment.
The sign on the Penrith Building Society says it all: ‘Every man his own landlord’ (well, all apart from the fact that they left out half the population).
What are the benefits of building societies?
Profits are only distributed to staff and to members of the society, they are not creamed off for shareholders. For this reason, they are often able to offer competitive rates for savings accounts and mortgages.
They are democratic institutions – i.e. one member, one vote, rather than one share, one vote, as with PLCs. So your influence in the society does not depend on how much money you have.
They are ethical places to put your money. From Positive Money: ‘building societies are prohibited by law from engaging in commodities or foreign exchange trading. So if you give your money to Nationwide or Coventry Building Society, they won’t use it to push up the price of food to the point where people in developing countries starve. That’s a nice thought!’
Many ex-building societies were swallowed by the corporate sector or became plcs themselves after demutualisation, such as the Halifax, Abbey National, Alliance & Leicester, Bradford & Bingley etc. (and the Co-operative Bank is no longer a co-op). Check the BSA’s list before switching.
At least 75% of their investments, by law, must go to mortgages on residential property, so none of the toxic investments that cause economic crashes. This isn’t an imposition on building societies, by the way – it’s what they want.
Building societies have a much greater community presence, with more local branches, providing more jobs locally, and greater convenience and face-to-face customer service for members. This is reflected in the lower number of complaints and greater satisfaction with building societies compared to banks.
And finally, they are much more community-friendly. They don’t have to serve external shareholders, it’s not all about the bottom line, and they often have community outreach programmes and community funds. Two interesting examples – when Lloyds closed their branch in Glastonbury, it left the town without a branch of any financial institution. The community invited the Nationwide into the town and they duly obliged. And in the north-east, a local library was about to be closed, but the Newcastle Building Society put a branch in the library to prevent the closure.
George Bailey again, this time explaining the nature of mutualism and avoiding a run on his mutual savings and loans bank.
What can I do?
Switch your savings, mortgage and (with some societies) current account to a building society. Lots of people organise their mortgages through a broker, and if that’s the case, you can stipulate that you’d like to use a building society. If they don’t understand your ethical reasons for doing so, you’ll then have the opportunity to educate them.
Current accounts are expensive for financial institutions to operate, but for current accounts, you have two options – the Nationwide, or if you live in Cumbria, the Cumberland.
Nationwide were invited into glastonbury by locals after Lloyds closed the last bank branch in town.
If you go to the website of the Building Societies Association, the trade body for building societies, you’ll find a list of all the building societies in the UK, with contact details. You’ll be able to choose one in or close to your town if you want to support your local society. You could possibly have a Nationwide current account as well as savings / mortgage with your local society.
Just pop into your local branch or call them, and they’ll explain what to do to switch. With current accounts, they’ll be able to switch all your standing orders and direct debits painlessly too. And if you really want to talk to a real human, you’ll be glad you decided to go with a building society.
The newest building society – the Ecology, founded in 1980.
Once you’re a member of a building society, you become a part-owner, and so you have the right to become involved in the running of the society (although of course you don’t have to if you don’t want to). You’ll have the right to nominate and vote for directors, or to stand for election yourself (as long as you get enough support from other members), and to attend the AGM.
Thanks to Hilary McVitty of the Building Societies Association for information.
The views expressed here are those of the author and not necessarily lowimpact.org's
2 Comments
I have been with the Co-op bank since I discovered them via advertising in the Big Issue. They are now no longer co-operative and I am in the process of changing to a current account with Triodos because of their good environmental policies. I assume you do not include them as they are a corporation and not co-operative or mutual. I have briefly considered a Nationwide current account, but do not think environmental concerns are of any major focus. A co-op’s aims are economic, social and cultural and the environment is not mentioned. I would like to have a current account that is both co-operative and with a big focus on investing in both ethical and environment lending, but I don’t think that is possible so I have prioritised the environment in this case. Is this a fair judgement call or could I be better informed?
It’s a difficult one, I think. For me, if we don’t take the economy out of the hands of multinational corporations, nothing else is possible. They will chase their bottom line by continuing to give money and jobs to politicians, and send their lobbyists (about 15 professional, well-paid lobbyists for every politician in Europe and N America) to advise politicians on how best to maximise returns for the corporate sector, so that they continue to get the money and the jobs.
The corporate sector have ‘corporate social responsibility’ as a tool to persuade the public that the corporate route can be sustainable, but of course it can’t – it’s a scramble for growth, profit and market share.
I’m not including Triodos in this – although they’re not a co-op, they’re also not a vampire corporation – but I haven’t looked too closely into their set-up.