Building societies have an enviable reputation for offering high levels of service, a local presence and understanding, and a concentration on the personal customer. This reputation is based on their mutual status; an absence of external shareholders means that there is no need to constantly explore ways of enhancing the growth of dividends and the share price. Their corporate form makes it more likely that they will be able to deliver on regulatory initiatives such as the Financial Services Authority’s Treating Customers Fairly campaign. They are, after all, owned, collectively, by their customers.
Building societies are not risk-less, as the Dunfermline episode has shown. Any lender can lend on the wrong terms, to the wrong people, at the wrong time, and face difficulties as a result; no doubt there will be more building society mergers over the next couple of years or so. Nevertheless, their mortgage arrears are lower than the average in the mortgage lending sector as a whole, and their limited reliance on retail funding (a requirement of their governing legislation) means that any difficulties they face as a result of the closure of the wholesale funding markets over the last 18 months or so will be easier to manage than was the case at Northern Rock. There, a 75 per cent wholesale funding ratio (building societies operate with about 30 per cent wholesale funding) left it very exposed to a shortage of such finance.
Building societies do not seek special favours from the government. However, a level playing field is not too much to ask! There are three areas of concern.
The workings of the Financial Services Compensation Scheme are an area of particular contention currently. Societies feel that they are being asked to bear a disproportionate share of the cost of bailing out the failed Icelandic banks, and Bradford and Bingley. FSCS has repaid the depositors of those imprudently run institutions through a loan from the Bank of England. The remaining banks and building societies have to pay the interest on that loan. For some building societies, these payments have tipped them into loss this year, or taken up a substantial share of their profits. The payments are based on the size of the institution’s retail deposits. Thus, those institutions (such as building societies) that have based their activities mostly on relatively safe deposit taking, rather than exotic wholesale instruments, are paying a relatively large proportion of the interest costs. This seems unfair and the BSA has made representations to a wide range of audiences seeking to correct this anomaly.
Secondly, building societies would ask the government to control the activities of the nationalised banks. These are failed institutions, now owned by government. We must make sure they do not compete unfairly in the mortgage or savings markets. Some of their savings offers currently seem generous, to say the least. It is galling that institutions that failed in the market-place, now succeed in that market because of the consequences of that failure.
Finally the government should fully explore a mutual alternative for Northern Rock when it is returned to the private sector. An insistence on maximising the tax-payers’ return could mean a plc future for the failed lender, and a less good deal for the customer than if a slightly longer term view was taken. Let the government think like a mutual and take the long view!