Our government rightly led the way at the G20 Summit in London in calling for reform of our beleaguered financial framework. We now need to work closely with our European colleagues in turning these ambitions into something more concrete, before the worst of the financial crisis is forgotten.
One interesting idea is the role of the mutual or co-operative model of providing financial services. It is clear that structures and values are important for the way banks do business. And some of the new ways of doing business are embedded in the way building societies, credit unions and ethical investment funds do business – the USP of the mutual model is based on values and structures, particularly shared ownership.
Mutuals and particularly credit unions also play a crucial social role in providing an alternative to loan sharks and doorstep lenders, charging aggressive interest rates and intimidating customers who can’t afford to pay. A very real and growing problem in many of our more deprived communities.
Mutuals see themselves as custodians of money for a community – whether that be geographic, workplace based or through some other shared-bond. This raison d’être compared to most financial institutions makes it less likely that building societies will take big gambles with their business strategies.
That said, structures don’t necessarily protect and we shouldn’t be complacent about what mutuals can achieve. Look at the Dunfermline or West Bromwich Building Societies. Dunfermline built up huge exposure to buy to let and sub-prime mortgages and had become reliant on whole-sale lending that dried up with the credit crunch while the West Bromwich went down the route of commercial property.
But mutuals are less implicated in the crisis than banks – and certainly less than the de-mutualised banks – Northern Rock, Bradford and Bingley, Halifax, the Alliance and Leicester. It is worth noting that none of the de-mutualised building societies remain as independent institutions, a sad failure of the 1986 Big Bang.
Take this comparison from Leeds. Leeds Building Society has 700,000 members, with good membership turnout at their AGM, it’s a national franchise, but ∏ of its 70 branches are in Yorkshire. They did not go down the buy to let or sub-prime route, but instead carved out a niche in shared-ownership mortgages – profitable, but also consistent with the Societies values and mission.
Compare with the former Leeds Permanent Building Society – merged with Halifax Building Society in 1995, de-mutualised in 1997, merged with Bank of Scotland in 2001 and in 2008 was part taken over/part nationalised in an emergency bail-out following misplaced ventures into corporate property, buy to let mortgages and an over-reliance on the wholesale money markets.
The relative security of the building societies offer some ideas for how the financial services sector might be structured in the future – and there are actions government could take to support the sector.
First, government could act directly and re-mutualise Bradford and Bingley and Northern Rock or run them as community banks – locally accountable to customers and stakeholders. Second, credit unions which currently have 2% of the retail market have scope for growth. Credit unions tend to be extremely small, community based, often volunteer led. This is one of their strengths, but also a source of vulnerability. Some credit unions are trying to work together to share central admin, risk and management functions. One exciting idea that government could support would be to use spare capacity in nationalised banks. If we want credit unions to grow, then we need efficiencies through economies of scale, combined with devolved decisions on lending, employment, community engagement – a federal model of credit unions. Third, government could relax the rules on common bond from which a credit union can be formed – usually defined by geographic area or workplace. The definition is widely agreed to be too restrictive and inhibits the chances for credit unions to grow.
Structures aren’t everything – bad decisions are made in businesses of all ownership models. But, it is clear that the future of financial services should focus more on long term reward, not just quarterly profit; greater stakeholder involvement and scrutiny – whether by shareholders or members; more representative boards; and less speculative risk-taking and more adding value to businesses, families and communities. Mutuals are well placed to contribute and should be exploiting their comparative strengths – government policy can also help. And, if we think mutuals are a better model of financial services then we should be voting with our feet, because that is the way they will ultimately grow.