Building Societies Building Societies Conversions, Flotations, Mergers and Takeovers Abbey National Converting to PLC. Lloyds Takeover of Cheltenham and Gloucester Building Society. Halifax and Leeds Building Societies Merging and Converting to PLC. Abbey National's Forced Takeover of National and Provincial Building Society. Other Conversions, Flotations, Mergers and Takeovers. From 'Housing Finance' towards 'Financial Services' Role of Directors Relevant Subject Index Pages and Site Overview INTRODUCTION Building societies are owned by their members for the benefit of both saving and borrowing members. But building societies have been merging, have been taken over by banks and have turned themselves into banks. This study looks at what is taking place, and why. It is one of a series of eight studies of co-operatives and mutual societies which were undertaken to determine causes of failure and reasons for success, to see how these enterprises were controlled and managed, to learn from the mistakes of others. What is taking place is fascinating and often unexpected (See 'Relevant Current and Associated Works'). The main report 'Co-operatives: Causes of Failure, Guidelines for Success' is based on these studies.

Its conclusions and recommendations are entirely relevant and cover fundamental and practical problems of co-ops and mutual societies, of members, of direction, management and control (See 'Relevant Current and Associated Works'). BUILDING SOCIETIES The first building societies were formed about 200 years ago when some people got together to co-operate with each other in building their own houses. Members regularly contributed to the society and built the houses together. Each completed house was allocated by lottery to a member. They carried on until each member had his own house. The society, the house-building co-operative, was then dissolved. {BUI 01} After a while building societies began to borrow money from investors to build houses more quickly and this was the start of permanent building societies, now simply called building societies. Then about 100 years ago, most UK building societies stopped building houses and concentrated on providing capital for building houses, on providing mortgages. Building societies are mutual societies, are owned by their members for the benefit of members, that is of both savers and borrowers alike.

Many people are tied for life to paying rent to, and so working for, profit-seeking landlords who are able to increase rents largely at will and who are thus absorbing any gains in income. The building society movement, however, has enabled a massive number of people in the UK to own their own homes. It has been giving people something to work for and a sense of achievement from living in a house of one's own, enabling them also to save and provide for retirement and old age. In the UK at this time are 80 building societies with 5,500 branches, having between them something like 30 million accounts (savers and borrowers) and assets of GBP 262 billion. Their net profits of GBP 1 billion amount to a net profit per account of GBP 35. UK legislation regulates what building societies may, or may not, do. When banks started to offer mortgages, building societies were enabled by legislation to compete with banks by providing personal loans and other financial services such as current accounts. But building societies have been merging, been taken over by banks and have turned themselves into banks. Their number is reducing and branches are being closed down.

So here in this study we take a close look at what is happening by means of case-studies and draw some relevant conclusions. CONVERSIONS, MERGERS AND TAKEOVERS ABBEY NATIONAL CONVERTING TO PLC Abbey National was UK's second largest building society in 1985. The society's chief executive then said that it was considering converting from a mutual building society to a shareholder owned public limited company. Its assets were more than GBP 18 billion, its reserves GBP 750 million. Abbey National at that point belonged to its savers and borrowers, that is to its members, and such a mutual society aims to serve its members. Its surplus (profit) benefits its members. On the other hand a public limited company (PLC or plc) belongs to shareholders and aims to maximise profits for the benefit of its shareholders. What is not clear is how converting could benefit either borrowers or savers, as both would be worse off all the time profits are paid out to shareholders instead of benefiting members. However, Abbey National gave members some free shares in the new company and members benefited to that extent at the time of the conversion.

Abbey National converted to a shareholder owned company in 1989 and by 1996 much had changed {BUI 16}. Service to the community had been reduced to the extent that over a thousand of Abbey National's community branches had been closed. As regards pay of directors, the chief executive had apparently bought shares in the company which were then worth GBP 1.8 million and this would not have been possible had Abbey National remained a mutual building society. Directors' pay as a proportion of overheads had been increasing rapidly. LLOYDS TAKEOVER OF CHELTENHAM AND GLOUCESTER BUILDING SOCIETY (C&G) The Cheltenham and Gloucester Building Society decided in 1995 to be taken over by a bank, by Lloyds Bank. Margaret Hughes in the Guardian {BUI 17} quoted the chief executive of the C&G as saying This is a C&G deal not a LLoyds Bank deal. We chose Lloyds, not the other way around.

Teresa Hunter and Ian Wylie, reporting a few days later on advantages and disadvantages of Lloyds bid {BUI 18}, said Some society executives will gain handsomely from the deal. The chief executive stands to benefit from share options worth four times his basic salary. Including additional benefits, his salary stood at GBP 354,462 last year. He and his immediate family will also get GBP 37,600 in cash bonuses. The chairman and his immediate family will receive cash bonuses of GBP 55,000, and eight other executives will receive share options. Customers cease to be members of a building society and become customers of a bank, thereby losing the right to elect board members, and have a say in the management of the institution by attending annual general meetings and voting on key issues. When Lloyds Bank proposed its GBP 1.8 billion takeover of the Cheltenham and Gloucester Building Society, a court ruled that voting investors of the society had to have accounts open for at least two years to qualify for the resulting cash bonus. In other words, cash bonuses can only be given to investors of two years' standing.

This ruling deprived some categories of C&G customers of bonuses they had been promised and this made it more difficult for the society's directors to get the approval of the society's members for the takeover. But the members voted decisively for the LLoyds Bank takeover. The society expected the average payment to be about GBP 2,000, with payments ranging from GBP 500 to GBP 13,500. At the time the takeover was being decided, The Building Society Commission, which regulates the movement, and the Treasury had grave misgivings about the Cheltenham and Gloucester deal. The authorities viewed the cash element of the deal as a bribe. {BUI 10} And In effect Lloyds Bank is being allowed to raid the cash of the C&G to bribe its members - both depositors and mortgage holders - into acceptance ... by means of a bribe which drives a coach and horses through the principles of mutuality. {BUI 10} Over 150 years building society savers and borrowers have built up reserves of GBP 14 billion.

Abbey National's conversion and C&G's takeover deal showed that building societies' reserves could be used and dissipated in such ways. This has led ... to large investment in societies ... which have been cited as takeover targets. {BUI 10} and reports that each time a league table or comment appears, identifying societies ripe for ending mutuality or being taken over, large speculative flows of money follow. Destabilising hot funds, searching always for the largest bonus. {BUI 09} However, ... the reserves of the building societies movement were not built for the benefit of speculators, but for the purpose of better serving members and community. {BUI 09} HALIFAX AND LEEDS BUILDING SOCIETIES MERGING AND CONVERTING TO PLC In March 1995 the Halifax Building Society was cleared by a High Court judgment to merge with the Leeds Permanent Building Society two years later and to convert to a public company, to a bank. The two building societies have 10 million members, and the capital to be distributed by way of shares to members amounts to GBP 9 billion.

If members vote for merging and converting to a PLC, that is to a bank whose shares are quoted on the stock exchange, then each member can expect to get free shares worth on average about GBP 900. The court judgment enabled the societies to give free shares to all their members including borrowers and investors of less than two years standing. Cash bonuses can only be given to investors of two years' standing. Shares can be given to all members - provided that no shares are being offered to the public at the same time. {BUI 19} A Leading Article in The Guardian recorded: One City analyst (UBS Global Research) argues that the rationale for conversion of the business is less strong than the rationale for management themselves "for whom conversion is likely to be financially rewarding". {BUI 12} By October 1996 the position was that nine million savers and borrowers would be receiving about GBP 800 worth of free shares in June 1997 when the Halifax converts. This is expected to be the biggest ever stock market floatation, at GBP 10 billion.

{BUI 20} A key point is that from the March 1995 judgment onwards shares can also be given to members of less than two years' standing, and that in this way speculators also became entitled to receive a share of the societies' accumulated reserves. ABBEY NATIONAL'S FORCED TAKEOVER OF NATIONAL AND PROVINCIAL BUILDING SOCIETY (N&P) N&P closed its doors to new accounts on Friday, 28 April 1995. Abbey National wanted to take over N&P, the directors of the two organisations were going to meet on Monday to discuss the matter. Publicity about Abbey National's offer had 'prompted a flood of deposits from investors hoping to cash in on a takeover'. Up to 15,000 people opened an account with N&P in the four days before N&P closed its doors to new qualifying accounts. {BUI 13} After Abbey National raised its offer to GBP 1.35 billion, the N&P board of directors announced on 10th July that they had agreed to be taken over and Abbey National announced that it had succeeded.

Between 1 and 1.5 million savers and borrowers with the N&P Building Society could expect to receive free Abbey National shares worth between GBP 500 and GBP 600. Two-year savers could expect to receive more in accordance with their account balances, on average about GBP 1,200. After the takeover Abbey National expects to be the second largest mortgage lender in the UK, with 15 million customers and 880 branches. But N&P's 200 community branches are to be closed. It was reported {BUI 22} that N&P's directors will gain no benefit and will not be able to take part in Abbey National's share option scheme until two years after the merger. If members approve the deal then N&P's chief executive will join the board (presumably of Abbey National). We have seen here the extent to which speculative money flows to building societies likely to convert or distribute their reserves in some way. Apparently Abbey National used N&P's reserves to persuade N&P's owners, namely its members, to hand over the society in return for share or cash payments drawn in effect mainly or completely from their own reserves, from their own capital.

The directors were left with little choice and seemingly gained little. As a result of this forced takeover, directors of other building societies must now be considering their own position. They can convert to a PLC and retain control with the likelihood of enhanced rewards for themselves. Or they can remain a mutual society by distributing ownership of reserves among their members in a way which benefits their society. Or they could wait for a commercial company to go over their heads to the members and take the society over without personal gain to its directors. OTHER CONVERSIONS, FLOTATIONS, MERGERS AND TAKEOVERS In October 1996 the Alliance and Leicester Building Society said that its 2.4 million members would each receive 250 shares worth about GBP 1,000 when it converts to a PLC in 1997. In 1997, in addition to the building societies mentioned earlier on, both the Woolwich and also the Northern Rock both plan to become banks. And the Bristol and West is to be taken over by the Bank of Ireland. Also two mutual societies, namely the Colonial Mutual and the Norwich Union, are to convert from mutual ownership and self-aid to profit-maximising on behalf of self-interested owners.

The combined total assets of all building societies which have been and are converting and which have been or are being taken over, in 1992/93 amounted to GBP 166.4 billion, about 67 per cent of the total for the whole UK building society movement. Changing from serving the public to shareholder-gain profit-maximising. Overall, giving away many GBP billions to building society members to encourage them to give away mutuality. FROM 'HOUSING FINANCE' TOWARDS 'FINANCIAL SERVICES' Banks began to compete with building societies for home loans and 1981/82 gained a considerable share of the mortgage market for new homes. But profit-maximising banks would not be able to compete profitably with mutual-help nonprofit-making building societies in providing mortgages. At that time the Council of the Building Societies Association was made up of Chief Executives of something like 30 building societies, including the ten largest. And in 1983 a working party of the Building Societies Association recommended proposals for changing the role of building societies. They were seeking wide-ranging powers to extend their operations into areas such as banking, insurance and hire-purchase.

Implementing many of their proposals would overturn 200 years of tradition. {BUI 14-15} Where such activities would involve a degree of risk they proposed to operate only through subsidiary companies. Presumably to protect parent societies from having to pay the full debts of their subsidiaries if the subsidiaries became insolvent. {BUI 23} The activities of building societies are restricted by legislation. When banks entered the mortgage market, building societies pressed for changes which enabled building societies to compete with banks for services offered so far by banks alone. Consumers benefited considerably from this. It was building societies which introduced free banking and interest-paying current accounts and forced at least some banks to reduce charges and treat their customers with more consideration. Most building societies now compete to some considerable extent with banks and insurance companies, providing loans and insurance policies. ROLE OF DIRECTORS We saw above <1> that in 1983 a working group of the Building Societies Association, made up of leading building society chiefs, put forward proposals for changing the role of building societies. Proposals for moving into areas such as banking, insurance and hire-purchase.

Their report also emphasised that member-democracy should not be exercised at the expense of a society's efficiency {BUI 14-15}. A vacancy on a building society's board of directors is filled by the directors themselves appointing the new director. Directors, the report concedes, are likely to choose from people they know, about whom they can form a judgment. 'Efficiency' may refer to profit-taking (profitability) instead of service to members. And democratic control of the building society is apparently resented and in effect bypassed when it comes to appointing directors. Why should nominees of an existing board of directors be automatically co-opted instead of standing for election? Members are in effect asked later to approve an appointment already made by the directors. I have seen mentioned that under UK building society legislation directors are not required to act on a majority vote at a general meeting, they are required merely to 'take note'. {BUI 24} This is how Sir Dennis Landau, former chief executive of the Co-operative Wholesale Society, saw such matters in 1994: `Once you get down to how building societies appoint their directors and how they are controlled, many are mutual in name only.

They are really oligarchies run by managers for the managers.' {BUI 04} And Ian Wylie, writing in the Guardian, said this: ... few societies today can claim to be organisations actually run by their members. The goals of the larger societies are now barely distinguishable from those of the banks. Dilution of ownership across vast numbers of members has left societies open to charges of unaccountability, ... {BUI 05} The working group's report also recommended that societies should be permitted to turn themselves into companies controlled by the Companies Acts. In other words, should be permitted to convert into profit-maximising companies controlled by the biggest shareholders. Ian Wylie's review included: To Rob Thomas, analyst at UBS, conversion defies logic. He says: "With mutuality you don't have the pressure of paying dividends - or stock market analysts looking over your shoulder every day. Only management stands to gain from flotation, and only the naive would believe accountability is any greater within a PLC." {BUI 05} Senior executives of building societies have at times gained some of the biggest pay rises in the UK's financial services industry.

In one year, while inflation was in single figures, the highest paid executives from the ten biggest building societies gained salary increases of, on average, 55 per cent {BUI 11}. And salaries for highest paid executives in banks were probably between 2 and 4 times those paid in building societies. RESERVES AND OWNERSHIP While banks concentrate on maximising rewards for directors and profits for shareholders, a building society provides a service to its members. Building societies, however, have retained surplus funds and over the years built up massive reserves. Over 150 years, for example, UK building societies built up GBP 14.3 billion of reserves. There is much concern that this is being dissipated by conversions and takeovers. Reserves increased to GBP 16 billion during 1994/95 and the Building Societies Commission in its annual report re-emphasised the need for societies to explore ways of distributing excess capital to members. While some societies have launched loyalty bonus schemes, others are considering paying a regular dividend, by issuing some form of share. {BUI 07} And Maria Scott, writing in the Observer, said Building societies generally pay better returns than banks. But is the difference enough?

Building society directors have paid lip-service to the ideals of mutuality for years. Even now, under siege from aggressive outsiders, none has come up with a way to release their substantial accumulated profits to members that would mark them out from High Street banks. Instead, they cut savings rates at the first opportunity. {BUI 13} A public company would, typically, pay half its post-tax profits to shareholders in dividends. If societies chose this measure, customers could expect somewhere between GBP 15 and 20 per account each year. However, building societies are not expected to follow this model and most argue that any annual dividend-style distribution would fail to impress customers. {BUI 08} Instead, they are working on schemes such as that announced by Bradford and Bingley last week that will pay sums running into hundreds of pounds but only if the investor keeps the account open for a few years. {BUI 08} CONCLUSIONS What has been and is taking place seems to be as follows: BUILDING SOCIETIES AND BANKS Banks concentrate on maximising rewards for directors and profits for shareholders. A building society is a mutual society owned by its members. Both depositors (lenders) and borrowers are members.

The mutual interest between lenders and borrowers is that profits are shared out between them. Compared with banks, the lender gets more and the borrower pays less. Building societies have been retaining some of their surpluses and over 150 years have built up massive reserves. A mutual society is run for the benefit of its members and its reserves were accumulated for the purpose of better serving its members and the community. And so building societies became big, influential and powerful. MUTUALITY AND DEMOCRATIC CONTROL: ROLE OF DIRECTORS Members of a building society have the right to attend annual general meetings to vote on key issues and elect board members. However, a vacancy on a building society's board of directors is filled by the directors themselves co-opting a new director. Directors are likely to choose from people they know. Members are in effect asked to approve an appointment already made by the directors. The number of members is very large indeed and control and accountability weakened to that extent. But compared with a bank's shareholders, a building society's members are much closer to what is taking place, both as borrowers and as lenders. So building society directors are that much more closely observed by the owners, by the members.

And it seems that under UK building society legislation directors are not required to act on a majority vote at a general meeting, they are required merely to 'take note'. We also saw expressed the feelings of senior executives that 'member-democracy should not be exercised at the expense of a society's efficiency'. Which, translating into basic English, presumably means they feel that democratic processes should not interfere with decision-taking by senior executives. So it would seem that democratic control of building societies is weak, that few societies can claim to be run by their members, that many are mutual in name only, that directors have almost complete control over policy setting and over the carrying out of policy. CONVERSION TO PLC: PAY OF DIRECTORS What stands out is that pay at the top for chief executives and directors depends on performance and it would seem that performance is assessed by criteria such as deposits, turnover, and surplus (profit) generated. But for some time now pay of directors has been what the market will bear, what shareholders will not object to in the light of dividends they receive and the increase in the value of the shares they own. And 'pay' (remuneration, emoluments, call it what you will) includes status, power, patronage, influence.

So directors of banks and of building societies are motivated to expand the enterprise they control, by diversifying into other related areas, by taking over other enterprises, by becoming more efficient. And directors of building societies are paid much less than directors of banks. Banks began to compete with building societies for home loans and 1981/82 gained a considerable share of the mortgage market for new homes. But profit-maximising banks would not be able to compete profitably with mutual-help nonprofit-making building societies in providing mortgages. And the banks must have realised this quite quickly. The activities of building societies are restricted by legislation. Building societies pressed for changes which enabled building societies to compete with banks for services offered so far by banks alone. Now they provide personal loans and other financial services such as current accounts. Most societies also provide personal loans and insurance services. Successfully providing a friendly helpful service and often better terms than are offered by banks. And we saw senior executives of building societies gain some of the biggest pay rises in the UK's financial services industry, presumably as a result of this expansion of activities, of performance. But concentrating on increasing performance, on expanding activities, has been accompanied by a loss of mutuality.

The goals of the larger societies are now barely distinguishable from those of the banks. And then Abbey National converts to a company. Mutual aid and concern cease to be objectives. Members cease to be owners so they lose the right to appoint directors, to vote at general meetings. Members cease to be members and become customers, become a source of profit for the bank's new owners. Depositors may get less, borrowing costs more. However, Abbey National gave members some free shares in the new company and members benefited to that extent at the time of the conversion. By 1996 service to the community had been reduced to the extent that over a thousand of Abbey National's community branches had been closed. Directors' pay as a proportion of overheads had been increasing rapidly. Next Lloyds Bank takes over the Cheltenham and Gloucester Building Society. This is a C&G deal not a LLoyds Bank deal. C&G chose Lloyds, not the other way around. The society expected the average payment to members to be about GBP 2,000, with payments ranging from GBP 500 to GBP 13,500.

In effect Lloyds Bank was being allowed to use C&G's reserves to persuade C&G's members, both depositors and borrowers, into accepting the deal being offered, into voting their society out of existence. And when Lloyds took over the Cheltenham and Gloucester Building Society, C&G's senior executives gained a great deal financially. Next came the Abbey National's forced takeover offer to National and Provincial Building Society (N&P). Between 1 and 1.5 million savers and borrowers with the N&P Building Society could expect to receive free Abbey National shares worth between GBP 500 and GBP 600, while two-year savers could expect to receive on average about GBP 1,200. Apparently Abbey National used N&P's reserves to persuade N&P's owners, namely its members, to hand over the society in return for share or cash payments drawn in effect mainly or completely from their own reserves, from their own capital. After the takeover Abbey National expects to be the second largest mortgage lender in the UK, with 15 million customers and 880 branches. But N&P's 200 community branches are to be closed.

And N&P's directors were left with little choice and seemingly gained little. AND NOW As a result of Abbey National's forced takeover of National and Provincial Building Society, directors of other building societies must have been considering whether to distribute ownership of reserves among their members in a way which benefits their society and maintains mutuality, or whether to convert to a PLC and retain control with the likelihood of enhanced rewards for themselves, or whether to wait for a commercial company to go over their heads to the members and take the society over without personal gains to its directors. And now we can see more aspects of what is happening. Outstanding is that Bradford and Bingley Building Society has put into effect a scheme which will pay sums running into hundreds of pounds to investors but only if the investor keeps the account open for a few years. NOTES AND REFERENCES <1> See section 'From Housing Finance towards Financial Services' REFERENCES BSA - General Factsheets Click here for a PDF version of this factsheet. 1775 The first known society was formed - Richard Ketley's, at the Golden Cross Inn, Birmingham. The earliest societies were 'terminating', and wound up when all their members had been housed. They were confined to the Midlands and the North of England.

The last terminating society in existence (First Salisbury) was dissolved in March 1980 1812 Test case of Pratt v Hutchinson, involving arrears in payment to the Greenwich Union. Until this point societies had been operating under the Friendly Societies Act of 1793. The Court ruled in the society's favour - the first formal recognition of building societies' rights. 1825 The Jubilee of the industry - over 250 societies in existence throughout the country. 1832 The Great Reform Act, which extended the franchise to owners of property worth forty shillings a year, resulted in a rapidly increased growth of the industry. 1836 The first legislation dealing specifically with the industry. The Regulation of Benefit Building Societies Act officially recognised societies for the first time. It came about partly because the Government wished to encourage building society saving - the Savings Bank rate of 4.5%, subsidised by the Treasury, having proved embarrassingly expensive. A barrister was appointed to certify societies' rules and offer advice. Later he became known as the Chief Registrar of Friendly Societies.

1838 'Model rules' concerning the operation of building societies were compiled by the Chief Registrar and issued by the Lords of Treasury. 1840s Societies began to accept savings from members who were not necessarily potential home owners. 1845 James Henry James produced a leaflet that outlined a new idea for 'permanent' building societies. 1845 The first known permanent society formed - The Metropolitan Equitable. 1847 Publication of Arthur Scratchley's famous Treatise on Benefit Building Societies which outlined the permanent principle in greater detail and provided tables for the calculation of interest and repayments, etc. 1855 The Liverpool and London Building Society Protection Associations were formed, both to safeguard the industry from increasing legislation designed to extract more tax revenue from the industry. 1860 Over 750 societies in existence in London and 2,000 in the provinces. 1869 The Building Societies' Gazette established. 1869 The Building Societies Protection Association formed in London by James Higham to act as the national body for the industry. 1870 The Royal Commission on Friendly Societies included building societies in its enquiries.

Many had retained the features of members balloting for loans, thus attracting gamblers as well as genuine house-buyers. 1874 The Commission's Report, plus amendments from the Association, resulted in the Building Societies Act. 1875 The Chief Registrar's Report on Friendly Societies now included a separate annual section on building societies. 1884 A Building Societies Act dealing with the question of arbitration was passed, enabling societies to take erring members to court rather than employing arbitrators. 1892 The spectacular collapse of the largest building society in the country - The Liberator Permanent Benefit - due to the financial activities of its founder. 1894 The Building Societies Act, which closed loopholes in the 1874 Act and guarded against the recurrence of the Liberator fiasco, as well as legislating against the so-called 'promoter' societies, such as Bowkett, Star-Bowkett, Richmond, Self-Help etc, which were founded on dubious gambling principles. 1910 1,723 societies in existence with 626,000 members and total assets of over £76m.

1926 The Building Societies Protection Association was renamed The Building Societies Association, with 310 member-societies. 1936 A split in the industry caused by the 'Code of Ethics' resulted in the Association being wound up and the formation of a new Building Societies Association, but with a splinter group called the National Federation of Building Societies. 1937 The famous case of Bradford Third Equitable v Borders which disputed the legality of collateral security and which claimed societies' responsibility for the condition of property to be mortgaged and for builders' description of new houses. The ruling was in favour of societies. 1939 The Building Societies Act, passed with the co-operation of the Association and the Government, restricted the mortgage security that building societies could accept. 1940 The Association and the National Federation were re-united. 1951 Ruling by the Association on 7.5% liquidity as a condition of membership. 1960 The Building Societies Act, ensuring liquid funds were both liquid and safe, increased the power of the Chief Registrar and restricted size of loans, particularly to corporate bodies. 1962 The Building Societies Act - a consolidation of all previous legislation.

This proved too restrictive in the 1980s. 1975 The industry is officially 200 years old. 1980 The last terminating society in existence (First Salisbury) was dissolved in March 1980. 1986 New Building Societies Act. Gave wider powers to societies in the field of housing and personal banking services. Established the Building Societies Commission as societies' regulator. 1989 Abbey National passes a resolution enabling it to convert to plc, and bank, status. This was an option given under the Building Societies Act 1986. From July 1989 the Abbey National no longer a building society. A new central trade body for mortgage lending institutions established in August. The Council of Mortgage Lenders was promoted by four trade bodies (the Association of Mortgage Lenders, the Association of British Insurers, The Building Societies Association and the Finance Houses Association), with the BSA withdrawing from most mortgage and housing matters. 1991 The Tax-Exempt Special Savings Account (TESSA) was introduced. The number of repossessions hit 75,500 for the year - the highest ever recorded figure.

1995 Cheltenham & Gloucester Building Society converted to plc, and bank, status and became part of the Lloyds Bank Group - the first example of a society using the provisions in the 1986 Act to be taken over by an existing organisation. 1997 In March the Building Societies Act 1997, which made substantive amendments to, but did not replace, the Building Societies Act 1986, was enacted. The 1997 Act introduced a more flexible operating regime for societies. It increased the powers of the Building Societies Commission in line with the new powers granted to societies and included a package of measures to increase the accountability of building societies' boards to their members. The industry's largest society, Halifax Building Society, converted to plc, and bank, status, along with four other societies. 1999 Legislation changed to increase the number of members required to propose a resolution for consideration at an annual general meeting; nominate a candidate for director; and requisition a special general meeting. The Individual Savings Account (ISA) was introduced, replacing the Tax-Exempt Special Savings Account (TESSA).

2000 Bradford & Bingley Building Society converts to plc status - the last, to date, to convert. 2001 The Financial Services and Markets Act 2000 - providing for a single legislative framework for regulation of financial services in the UK - came into force on 1 December 2001. The Financial Services Authority became societies' regulator (replacing the Building Societies Commission) and substantive amendments were made to the Building Societies Act 1986. 2004 The Consultation Document prepared by Paul Myners to inform his work on the corporate governance of mutual life offices was published in July. In December the full report is published. The general tenor of the Report is supportive of the valuable role played by financial mutuals. 2005 Britannia Building Society buys the savings and branch business of Bristol & West plc, the first remutualisation of a converted institution. The Child Trust Fund was introduced. 2007 -The Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 (the “Butterfill” Act) received Royal Assent.

The main provisions in the Act (all of which require secondary legislation before they come into force) were to: increase the current 50% non-member funding limit to a maximum of 75%; to alter priorities on dissolution and winding-up ensuring that ordinary shareholders would rank equally with ordinary creditors; enable the transfer of a building society, friendly society, industrial and provident society, mutual insurance company or an equivalent European mutual, to a subsidiary of another mutual. 2008 The Banking (Special Provisions) Act 2008 received Royal Assent in February – this was emergency legislation introduced following the collapse of Northern Rock. It enabled the government to nationalise Northern Rock and to provide temporary powers to intervene in other banking collapses. The temporary provisions lapsed twelve months later. HM Treasury and the Bank of England introduced a package of measures to provide support for banks (and building societies, although both HM Treasury and the FSA have indicated that they believe that building societies have been less affected by the credit crisis than banks) intended to promote stability and provide protection for savers and borrowers.

2009 The new Banking Act 2009 makes provision for a Special Resolution Regime for deposit-takers, under which various tools (“stabilisation options”) will be available – such as directed transfer to a private sector purchaser, transfer to a bridge bank, and transfer to temporary public ownership. There is also provision for partial transfers. Dunfermline Building Society's retail and wholesale deposits, branches, head office and originated residential mortgages were transferred to Nationwide Building Society. This followed a sale process conducted by the Bank of England under the Special Resolution Regime provisions of the Banking Act 2009. Britannia Building Society merged with the mutual Co-Operative Financial Services – the first merger between a building society and a mutual bank since such mergers were made possible under the ‘Butterfill Act’. The BSA changed its rules to admit other mutually-owned deposit takers into membership rather than restricting its activities to building societies. This enabled the BSA to represent a wider range of organisations, and a larger market share, than would otherwise be the case. The FSA recognised a new form of tier 1 permanent capital instrument for building societies – profit-participating deferred shares (PPDS).

The West Bromwich building society has announced that it has issued PPDS in exchange for existing holdings of subordinated debt, thereby upgrading its capital, and is the first society to take advantage of this new instrument . A report by Oxford University, published for the BSA, revealed a strong case for converting failed banks into mutual organisations. In light of the report, the BSA urged the Government to consider returning Northern Rock bank to the mutual sector. 2010 In March the Mutuals' Manifesto was published. This manifesto was the first of its kind and brought together the views of various trade associations and mutual organisations. It was a challenge to the UK’s political parties to show how they plan to support and nurture the mutual sector. The three main political party manifestos recognised the importance of mutuals, both within financial services and wider public services. The Labour Party notes the value of building societies and the strength and diversity that a healthy mutual sector brings to financial services. The Liberal Democrats assert “mutuals, co-operatives and social enterprises have an important role to play in the creation of a more balanced and mixed economy.

Mutuals give people a proper stake in the places they work, spreading wealth through society, and bringing innovative and imaginative business ideas to bear on meeting local needs.” The Conservative Party sees mutuality as the way forward within public services and pledge to support co-operatives and mutualisation as a way of transferring public assets and revenue streams to public sector workers; essentially employee-led co-operatives. A new specialist sourcebook for building societies was published by the FSA in March, intended to enhance the supervisory guidance available on societies’ financial and credit risk management. The BSA have concerns that, overall, the sourcebook may tend to disadvantage building societies by imposing a tougher and more prescriptive regime on them than banks or other lenders will be subject to, specifically with mortgage lending requirements. In May the Coalition Government pledged in its Coalition Agreement to promote mutuals. “We want the banking system to serve business, not the other way round. We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry.” 2011 In February Kent Reliance Building Society was restructured by transferring its business, assets and liabilities to OneSavings Bank plc.

JC Flowers, a US private equity firm, injected £50m into the new bank, which is 59.9% owned by a new mutual called Kent Reliance Provident Society, which Kent Reliance Building Society's members belong to. JC Flowers own the rest of the bank. Reclaim Fund Ltd, a wholly owned subsidiary of The Co-operative Financial Services, was authorised by the FSA in March. This was an important milestone for the Dormant Accounts Scheme, whereby money in accounts with no customer activity of 15 years or more will be made available to charitable causes. Reclaim Fund will receive dormant account monies from banks and building societies and distribute to the Big Lottery Fund for onwards distribution. In England, it will be passed to the Big Society Bank, while different arrangements will apply elsewhere in the UK. There is also an alternative scheme for institutions with assets below £7 billion. This will enable them to directly support good causes within their local communities or those that they have an affinity with, rather than via the Big Society Bank. Most BSA members are eligible for the alternative scheme, and this is a good fit with their local and regional franchises.

In November Northern Rock was sold to Virgin Money, disappointing those that wanted Northern Rock to be remutualised. 2012 In June the Bank of England announced the launch of the Funding for Lending Scheme which aims to provide funding to boost lending to the real economy. In July the FSA published The Future of Building Societies, aimed at producing the right legislative framework to enable building societies to compete fairly, free from inappropriate burdens and maintain their distinctive approach and lower risk business model. New mortgage rules were published by the FSA in October, coming into effect in April 2014. In December the Financial Services Act was passed. It provides a new regulatory framework for financial services and gives the Bank of England responsibility for protecting and enhancing financial stability. The Act, which is to come into force in April 2013, abolishes the Financial Services Authority and creates a new regulatory system of the Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority. 2013 Help to Buy, a package of measures was announced in the March budget. The measures comprise two elements, Help to Buy: equity loan and Help to Buy: mortgage guarantee.

The Help to Buy: equity loan scheme will provide an equity loan to borrowers worth up to 20% of the value of a new build home. The loan will be interest free for the first five years and repayable within 25 years or when the house is sold. The scheme is intended to run for three years to support up to 74,000 home buyers.The Help to Buy: mortgage guarantee scheme will provide a £12 bn guarantee of up to £130 bn loans on residential properties. On the 1 April the Financial Services Authority was replaced by a new regulatory system of the Prudential Regulation Authority (part of the Bank of England) and the Financial Conduct Authority. In November Nationwide became the first building society to issue new Core Capital Deferred Shares (CCDS), a mutual-friendly capital instrument .CCDS have been designed to meet the requirements of the UK and European authorities under the new Capital Requirements Directive IV capital regime, being perpetual; loss-absorbing and subordinate, whilst at the same time safeguarding mutual principles through features such as capped, discretionary return.

2014 In the March 2014 budget the Government announced that the Help to Buy: equity loan scheme would receive a further £6bn of funding and be extended to March 2020. Around 200,000 people are expected to buy with the equity loan scheme. In April new mortgage market review rules came into force. Key changes include the fact that all applicants, bar a few very specific groups, will receive mortgage advice, and that lenders will have to establish that a borrower can afford a loan at the current interest rate but also if the rate were to rise. 2015 In June the FCA issued the final rules covering the restrictions on the retail distribution of regulatory capital instruments. For building societies, this primarily covers the issuance of Core Capital Deferred Shares (CCDS) to retail investors. We agree with the FCA that retail capital instruments such as CCDS should only be sold to those investors who can understand the risk, and as a modest part of a portfolio - the rules specify a maximum of 10% of net investable assets. CCDS are totally different to a savings account, and although the return may be higher, this matches the higher level of risk undertaken.

In October BSA & Loughborough University's School of Business and Economics launch first Masters for customer-owned financial firms. The building society movement/E J Cleary London: Elek Books, 1965 Building societies: their origins and history/Seymour J Price London: Franey & Co, 1958 Building Society History Personal Finance News History of Building Societies The beginning of the building society can be traced back to the First Industrial Revolution in the 18th Century. For a while building societies were simply set up by local organisations. Members would pool funds for building houses and purchasing land, therefore the building societies were usually closed down once every member of the organisation had been housed and had purchased the land they wanted. However, eventually, building societies started being used by members depositing their money as investment, without any desire to borrow to buy a home. With this, building societies no longer were closed down, or "terminated". Building societies from then on became more permanent as we know them today. History Timeline 1775 -- The first known society was formed - Richard Ketley's, at the Golden Cross Inn, Birmingham.

1812 -- Building societies were operating under the Friendly Societies Act of 1793 at this point. This changed with the test case of Pratt v Hutchinson, involving arrears in payment to the Greenwich Union. With this came the first formal recognition of building societies' rights. 1825 -- The Jubilee of the industry. There were over 250 building societies at this time. 1832 -- The Great Reform Act was introduced. The number of building societies increased greatly. 1836 -- The Regulation of Benefit Building Societies Act became the first legislation that officially recognised societies for the first time. 1838 -- The Lords of the Treasure issued model rules to be followed by building societies. The rules for building societies were compiled by the Chief Registrar. 1840s -- Members who were not home owners but wished to start saving were beginning to be accepted by many building societies. 1854 -- The idea for permanent building societies was suggested by James Henry James. 1845 -- The first permanent building society is formed. The building societies is called the Metropolitan Equitable. 1847 -- Arthur Scratchley publishes the famous Treatise on Benefit Building Societies.

1855 -- The Liverpool and London Building Society Protection Associations are formed. 1860 -- Over 2000 building societies in England. 1869 -- The Building Societies' Gazette is created. 1869 -- James Higham forms the Building Societies Protection Association which acts as the national body for all building societies.. 1870 -- Building societies are included in the enquiries of the Royal Commission. Also in 1870, building societies start to attract gamblers because members of building societies can ballot for loans. 1874 -- The first Building Societies Act is introduced. 1875 -- Building societies are included in the Chief Registrar's Report on Friendly Societies. 1884 -- Building societies are allowed to take members to court if the need arises. 1892 -- The Liberator Permanent Benefit, the largest building society in the country, due to the financial activities of its founder, collapses. 1894 -- Loopholes found in the 1874 act of building societies are closed with the Building Societies Act.

It legislated against societies such as Bowkett, Star-Bowkett, Richmond, Self-Help and others, otherwise known as 'promoter' acts since they were founded on gambling principles. The Act was also created to stop the mess with Liberator from happening again. 1910 -- The number of building societies in England is a massive 1723. 1926 -- The Building Societies Protection Association changes its name to The Building Societies Association. 1936 -- A new Building Societies Association is formed due to the previous Association splitting because of the 'Code of Ethics'. However, a splinter group was formed with the new Association called the National Federation of Building Societies. 1939 -- With co-operation of the Association and the Government, the Building Societies Act is formed which restricted the mortgage security that building societies could accept. 1940 -- The Building Societies Association joins up again with the Nation Federation of Building Societies. 1960 -- The power of the Chief Registrar and the restricted size of loans is increased by the building societies Act. 1962 -- A new Building Societies Act is introduced.

1980 -- First Salisbury, the only terminating building society left, is dissolved in March. 1986 -- New Building Societies Act. Gave wider powers to societies in the field of housing and personal banking services. Established the Building. 1989 -- Abbey National passes a resolution enabling it to convert to plc. A new central trade body is formed in August for mortgage lending institutions. 1991 -- With repossessions of houses hit 75500 that year, the Tax-Exempt Special Savings Account is introduced for building societies. 1995 -- Cheltenham & Gloucester Building Society is taken over by the Lloyds Bank Group. 1997 -- The Building Societies Act of 1997 is introduced. It replaces the Building Societies Act of 1986. The Building Societies Act of 1997 gave more power to the Building Societies Commission, which made the entire building society industry far more flexible. Accountability of building societies' boards to their members was also increased. 1999 -- The Tax-Exempt Special Savings Account is replaced by the Individual Savings Account.

With more change to the legislation for building societies, building societies are required to have more members present at an annual general meeting to be able to propose a resolution, amongst other building society functions. 2000 -- Bradford & Bingley Building Society converts to plc status. It is the last building society in England to convert. 2001 -- The Building Societies Commission is replaced as regulator of building societies by the Financial Services Authority because of the Financial Services and Markets Act of 2000 being introduced. 2004 -- The Consultation Document is published by Myners. 2005 -- The savings and branch business of Bristol & West plc are bought by the Britannia Building Society. 2007 -- The Building Societies and Mutual Societies Act of 2007 is introduced which allowed the transfers of building societies (and other mutual societies) to the subsidiary of another mutual society. The Building Societies and Mutual Societies Act of 2007 also increased the non-member funding limit to 75% for building societies (and other societies). 2008 -- The Banking (Special Provisions) Act of 2008 is introduced.

Banks and building societies were given support if affected by the credit crisis. It was done to promote stability. 2009 -- The Banking Act of 2009 was introduced. A building society is a mutual institution owned and run by its members Due to low running costs, they may offer competitive interest rates Money deposited with the society is protected by the FSCS They can be converted to a PLC if voted for by 75% of members A building society is a mutual institution, which means that it doesn't hold PLC (Public Limited Company) status. Instead, it's owned and run by its members, rather than being listed on the stock market and belonging to shareholders. According to MP Andrea Leadsom in November 2014, over 19 million people in the UK had an account with a building society and the institutions had helped 3.1 million people to buy a home. Originally the main business of building societies was savings accounts and mortgages , but a number of institutions offer a larger range of products, including loans , current accounts and credit cards . Profits are invested back into the building society so it may be able to offer competitive rates on savings and mortgages.

How to join a building society Joining a building society is usually as simple as borrowing or investing with the building society. Just go into branch, visit the website or phone up to ask about your chosen products and open an account. There may be criteria that you need to fulfil before becoming a member, such as: Being over 18 years old Being the first-named account holder Investing or borrowing a certain amount Having your say as a building society member Although most customers will simply take out accounts with their building society and treat them like any other bank account, what makes a building society different is that you do actually have a right to a say in the running of the society - after all, you do partially own it. Note that although you have these rights you don't have to get involved, and many members choose not to. Members' rights As a building society member, you have the right to vote in the election of any directors, receive certain information including resolutions and attend the annual general meetings (AGMs). Did you know...?

The Financial Services Compensation Scheme (FSCS) offers protection for a customer’s money when it's invested in a building society If you're a joint account holder, the first name on the account will be entitled to all the member's rights and the secondary account holder will have fewer rights, so make sure that the order of names is correct. As a member you'll have the right to nominate candidates for the position of director and to stand for election yourself. However, all directors must be approved by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).† Any customers of a subsidiary of the building society won't have members' rights. Annual general meeting (AGM) AGMs are held once a year, often in April, to present the annual accounts and director's reports to the members, as well as elect new directors if necessary. Prior to the AGM, members are able to request a resolution to be discussed, but they must be qualified to do so, such as having enough support from other long-standing members (each society has its own rules). The resolution must be submitted to the building society before the end of the financial year for it to have a chance of being put forward.

If you're not able to attend an AGM, you can still vote by appointing a proxy to do so on your behalf. It could also be possible to vote online or by post. Note that only the board can put forward a resolution to change a society to a company, also known as demutualisation . Special general meeting (SGM) Smaller building societies may even offer special rates for local customers so it may be worth popping in to see whether you could get a good deal SGMs happen at the request of members in order to put forward a valid resolution, but they must have the backing of 500 or more members who have been with the building society for two or more years. They may also be required to pay a deposit. In rare circumstances, members may be able to appeal to the FCA or PRA for a SGM to be held. Demutualisation Demutualisation is when a non-profit, member-owned organisation like a building society is converted to a PLC, which is a shareholder-owned institution.

Note that a building society gives one vote per member, whereas a PLC gives one vote per share, so larger shareholders will have a greater influence on the outcome of votes, which may not be in the members' best interest. If you're both a saver and a borrower with a particular building society you'll still only have one vote, unless a conversion or merger is being voted on in which case you'll be given two. A history of building society demutualisation Demutualisation began in the 1980s when new regulations meant that building societies were able to offer the same banking services as retail banks. The switch from mutual to PLC was incentivised by promising members front-ended cash payouts and free shares. This meant that some building societies merged with existing banks or became independent banks in their own right. The first to turn itself into a bank in this way was Abbey National. Such demutualisation was only possible if more than 75% of society members voted for it. Understandably, this led to a drop in the number of building societies. It's also worth noting that every demutualised building society to date has either been taken over or collapsed.

For example, Bradford & Bingley building society was demutualised in 2000 after a vote by its members who were promised a larger number of shares in the newly formed Bradford & Bingley PLC. The new bank was then nationalised in 2008 during the credit crunch, meaning that the government took control of its mortgages and loans, while Santander bought up the savings division. Advantages of building societies Despite the turbulent recent history of demutualisation, there are a few things that mean building societies can still be an attractive and competitive option for consumers. See also: Peer-to-peer lending Lower running costs On average, a building society is cheaper to run than a bank as it's owned by its members. This could mean that the savings are passed on to the members in the form of competitive interest rates. Regional presence Building societies which employ staff from the local area can feel more personal for customers and therefore may be seen to have a higher level of customer service than banks. They also tend to have outreach programmes to support the local community and profits are often reinvested back into the local economy.

Smaller building societies may even offer special rates for local customers, so it may be worth popping in to see whether you could get a good deal. According to the Building Societies Association (BSA), building societies have fewer new complaints than banks, as well as a better complaints handling practice. Compared to banks, they also have a lower number of closed complaints where the Ombudsman ruled in favour of the consumer. Protection Building societies are regulated by the FCA, which aims to ensure that they act in the best interest of their members and treat consumers fairly. See also...

Question: Which building society was the first to relinquish mutuality?
Answer: Abbey National