Left standing

05 July 2011
Paul Walsh, chief executive of CUNA Mutual Group, says mutuals have been successful in weathering the financial crisis.

Scroll down to read the full article from
Mortgage Strategy, 16th May 2011.

With the financial crisis leaving banks’ reputation in tatters, the time was ripe for building societies to jump in and make a difference. But some argue they have just watched as opportunities have sailed by.
Former government minister and UK business ambassador Lord Digby Jones began his speech at the Building Societies Association annual conference this month with a glowing tribute to the sector.

When he was young his grandmother took him into a Halifax branch and opened a current account with a half a crown, he recalled. Later in his life, he took out a mortgage with Halifax and felt part of the furniture as a loyal member. But these halcyon days didn’t last and in 1997 Halifax was demutualised.

In the 1990s demutualisation was all the rage with no less than 10 mutuals leaving the sector in a 15-year period. This same list now reads as a roll call of bailed out banks, with Northern Rock, Bradford and Bingley, Birmingham Midshires and Halifax all under some form of state ownership. Demutualisation is rarely discussed anymore indeed, there are even open calls for a re-mutualisation of Northern Rock.

Such a climate creates a huge opportunity for building societies and at the BSA conference talk was focussed on whether mutuals had done enough in recent years. With new entrants such as Tesco and Metro Bank on the horizon and banks slowly recovering, have societies let the moment to capitalise on the banking sector’s tattered reputation sail by?

Tony Yorke, media and communications specialist at Think Strategically, says building societies have definitely missed an opportunity.

“Societies are wonderful animals but their biggest strength can also be their biggest weakness,” he says. “They always put their members’ interests at the heart of decision making and this makes them slow moving.

“They are like a giant oil tanker that takes forever to move the ship. It means that more fluid organisations such as banks can seize opportunities with both hands while societies don’t. In the past two years they have been even slower because of the financial crisis and the concern about doing anything to damage their members. Unfortunately that means that they have failed to grab opportunities.”

In one event at the conference former chairman David Webster asked whether mutuals had missed an opportunity in recent years. Newly appointed BSA chairman Peter Griffiths accepted this may have been the case through a lack of product innovation.

“The sector is relatively slow to innovate products, which may be a controversial point,” he says. “We are going to be forced to manoeuvre but we are not able to do it on our own. We need government support for true innovation.”

Despite 2008’s bailouts, in 2009 banks increased their share of gross mortgage lending considerably to 82.5% from 76% in 2008. Societies’ share dropped from 14.8% in 2008 to 12.9% in 2009, BSA figures show.

For 2010 the trade body changed its reporting procedures to include all mutuals instead of just building societies, thus including the likes of Co-operative Financial Services. Even with this enlarged collection, mutuals still only recorded a 15% share of gross lending in 2010 and a 15.5% share so far in 2011.

Even without taking into account the statistical change the BSA made last year, net lending has been in freefall from 2009 when it dropped by 63%. Then it fell again in 2010 by 74.3% and for 2011 so far it’s fallen by a whopping 288.8%.

By contrast banks’ net lending took a battering in 2008 with a 104.3% drop but it has since recovered strongly with increases of 369.1% in 2009, 254% in 2010 and 577.8% in 2011.

Of course, gross mortgage volumes collapsed during this period. The BSA recorded gross lending of just £18.5bn in 2009 by mutuals compared with £37.5bn in 2008 and £51.7bn in 2007. Following the inclusion of all mutual organisations gross lending rose fractionally to £20.4bn in 2010.

But the reason societies are taking a lower share of the mortgage market can largely be explained by the collapse in retail deposits. With funding tight, banks flooded into the retail market and societies’ deposits plunged sharply.

In 2009 mutuals’ retail savings fell by -£1.8bn, giving them a collective market share of -6.5%. In the same year banks grew their retail deposits by £26.4bn, giving them a dominating market share of 95.5% with the remainder soaked up by National Savings & Investments, which had an 11% market share.

Compare this with 2008 when societies increased their retail deposits by £17.9bn, giving the sector a market share of 31% while banks increased theirs by £28bn with a market share of just under 50%.

In 2010, with societies and mutuals combined, the sector clawed back some ground with retail savings falling by £18m over the year giving it a market share of -0.1%. And for the year to date in 2011 it’s seen a change in retail savings of £382m giving it a 4.6% market share. So things are looking up but there’s no denying that the sector has had a tough time over the past three years.

Gary Styles, sales and marketing director at Hometrack, says societies have struggled in a competitive savings market.

“They have lost a lot of ground in the retail funding sector and this has affected their ability to offer mortgages,” he says. “The slippage was most pronounced in 2009 and it has stabilised a little since.

“Another problem is that there are new retail players looking at coming into the market which has made it doubly difficult for societies. With interest rates so low it is difficult to create different products to attract customers. In normal times they have a strong record on retail deposits and the banks will start to look elsewhere for funding as rates rise, so they could recover.”

Tony Ward, chief executive of Home Funding, says the bigger banks could be deliberately trying to grab a larger market share for the long term.

“They may see this as an opportunity to consolidate retail customers and although it is costing them money to provide cheap deals they will hope to supplement this with cross-sales,” he says. “They may be taking these customers away from building societies in the long run but if you live by price then you die by price, so customers could return.”

In the year after the banking collapse when banks were subject to constant criticism from the media, politicians and the public, societies saw their market share drop across both savings and mortgages. But conversely mutuals’ stock among consumers seems to have risen. They dominated a recent Moneywise poll of the most trusted mortgage lenders.

The shortlist for Moneywise’s Customer Service Awards mortgage provider category was Britannia Building Society, Cheltenham & Gloucester, Coventry Building Society, First Direct, HSBC and Nationwide.

And in a poll by Which? in August last year mutuals including Co-operative Bank, the Yorkshire, Nationwide and Coventry were in the top 10 of financial providers while high street banks in the main did poorly.

“Time and again, the big high street banks are found to be lacking when it comes to good customer service,” says Peter Vicary-Smith, chief executive of Which?

“People who are unhappy with their bank must vote with their feet and move to a better provider.”

Political support is widespread with some 100 MPs signing an Early Day Motion calling for the remutualisation of Northern Rock when it comes out of state ownership.

The campaign also has the backing of Leeds and Yorkshire building societies, with the latter hinting at a possible bid.

In his speech at the BSA conference outgoing chairman Webster told delegates that mutuals have been catching the eye of politicians for some time.

“I have been pleased to see this year that the Early Day Motion in the House of Commons calling for the remutualisation of Northern Rock is being supported by MPs from a wide range of political parties, including the three largest,” he says.

Webster highlights the coalition agreement committing the government to foster diversity and promote mutuals.

Such an environment has meant Nationwide, after a close vote in 1999 and a decade of rumour, is no longer linked with demutualisation.

Speaking at the BSA conference Andrew Bailey, executive director of the Prudential Regulatory Authority, slammed demutualisations as a failed experiment.

“I think demutualisation, as it developed, was a failed and costly experiment,” he says. “It is a striking fact that no demutualised building society exists today as an independent entity under private ownership, and as we know a number lost their independence in expensive ways which damaged the stability of the financial system.”

But is the idea that societies are intrinsically more trustworthy than banks a myth? To paint banks as universally bad and societies as whiter than white is clearly wrong the sector has a rogues gallery of those that have had to be bailed out in one form or another.

The sector’s claim to have survived without government help is strained when considering the case of Dunfermline whose sale was managed by the FSA, Treasury and Bank of England. Its retail and wholesale deposits, branches, head office and originated residential mortgages and social housing portfolio were transferred to Nationwide in March 2009. The remainder of Dunfermline’s business was placed in special administration and is being wound down over time.

As the dominant mutual Nationwide also acquired Cheshire and Derbyshire building societies in 2008 and 2009.

Since 2008 the Co-operative has merged with Britannia Building Society, Coventry has taken over Stroud & Swindon, and Skipton has taken over both Chesham and Scarborough.

Consolidation has not stopped there with the Yorkshire taking over Barnsley then merging with Chelsea and just last month rescuing Norwich and Peterborough.

N&P was embroiled in a mis-selling scandal concerning the sale of structured products and this resulted in an FSA fine of £1.4m plus customer payouts of £51m.

In his speech Bailey says at times it has been painful dealing with the mutual sector, highlighting in particular the demise of Dunfermline.

He says demutualisation changed the ethos of those who remained in the sector and forced some to take more risks.

“From 1997 the peak of demutualisation the bulk of outstanding mortgages lay outside the mutual sector, for the first time,” he says. “This, perhaps inevitably, prompted a response from the remaining societies, which took the form of more aggressive pricing of mortgage lending rates and deposit account rates, thus squeezing net interest margins and rates of return which societies were happy to badge as mutual pricing.

“It was a change in the ethos of societies. It would have been good competition if it had been sustainable.”

It’s not just the adoption of unsustainable business models that’s drawn criticism from regulators but also the current state of many building societies’ compliance systems. At the conference Sheila Nicoll, director of conduct policy at the FSA, issued a warning to building societies over their systems.

“Recent discoveries that compliance reports have not been taken as seriously as they ought to be by boards serve as an early warning of the need for a credible second line of defence,” she told delegates.

“Boards need to be sure that what is happening on the ground is what they want and expect to be happening.”

She warned that FSA fines and reputational damage would follow unless the sector got itself up to scratch.

So if societies have needed rescuing and been guilty of bad behaviour too, then surely they are as undeserving as banks of political support and public trust.

Unsurprisingly, Webster does not think so and as he said at the conference, opportunities for building societies still exist.

“The disgrace within which our competitors are now held, many of whom owe their existence to taxpayer subsidy because they were unable to stand on their own two feet, gives mutuals the opportunity of a lifetime to gain people’s trust and to prove that they are relevant, indeed essential, to the age in which we live,” he says.

“Many external commentators agree with that view. Our job now is to ensure that increasing numbers are persuaded to that view. I believe that we are pushing at an open door.”

A spokeswoman for the Yorkshire says societies are the most trusted institutions.

“With the exception of Dunfermline the sector has protected itself well and Yorkshire has been a part of that consolidation,” she says. “Consumers are mistrusting of banks and looking for alternatives and there is also a desire to promote mutuals from the government.”

Paul Walsh, chief executive of CUNA Mutual Group, says mutuals have been successful in weathering the financial crisis.

“Societies have suffered as a consequence of the banks,” he says. “They have been caught in the tsunami following the banking collapse. Since the crisis societies have had to focus on rebuilding capital and retaining members rather than growing, and it has been successful at that.”

And Ray Boulger, senior technical manager at John Charcol, says it is a diverse sector and different societies have had different experiences.

“Some such as Coventry have lent throughout the crisis while others such as Yorkshire and Skipton have come back into the market again recently,” he says.

“But others such as West Bromwich are doing almost no lending.”

Another hot topic for debate at the conference was the effect of new entrants moving into the mortgage and savings markets.

Metro Bank launched last year with an anti-bank ethos causing one delegate to dub it a bank that behaves as a building society.

Home & Savings Bank and Tesco Bank also look set for summer launches and Sainsbury’s, Asda and John Lewis could move into the savings market too.

Neil Tomlinson, consulting partner and head of banking at Deloitte, says mutuals will have a fight on their hands to compete with supermarkets.

“Supermarkets can analyse what is in your shopping basket,” he says. “They could be able to assess and underwrite insurance policies simply from the goods in your basket.

“If you think about store loyalty cards, the distribution and the convenience they bring, supermarkets have a big opportunity and will start to make an impact if they get their act together.”

With these new banks in place there will be intense competition in mortgage and savings in the coming years that could squeeze societies.

But Griffiths doesn’t think societies have missed the boat and in his speech told conference delegates that the financial services is not set for a new banking era.

“What is being hailed as a new banking era is in fact a return to traditional values and an ethos that has been rooted in the building society sector for over 200 years,” he says.

“Being owned by your members and accountable to them promotes quality customer service as a desirable objective rather than a way to generate profits to deliver dividends to shareholders.”

The focus on customer service, membership and local knowledge may be a noble cause but is it enough to attract customers?

David Hollingworth, head of communications at London & Country, says the price of products is more important than trust.

“People only put so much priority on trusted brands,” he says. “What they are most interested in is getting the best deal and if that is a small building society or big bank it doesn’t matter.

“Borrowers do think societies are more cuddly than some of the bigger banks but they certainly don’t want to exclude anyone from their mortgage search.”

Moreover, the banking sector is trying to rebuild trust and confidence in it, whether as individual firms or as a sector.

A British Bankers’ Association spokesman says trust is just one factor when it comes to choosing a mortgage provider.

“Unless a society has competitive deals, it is unlikely to win customers from banks,” he says. “But banks know service matters which is why our members have been undertaking so much work recently to restore confidence in the banking sector and rebuild relationships with their customers.”

The recovery of the banking sector and the certainty of aggressive new entrants mean societies will have their work cut out in the years ahead. When they needed funding banks swooped into the retail deposit market and left societies bloodied. And new entrants flooding into the market will increase competition further.

In the face of the banking crisis combined with public and political disgust at banks, societies may have missed the boat to make their mark in the past few years.

Market crying out for mutuals

   Adrian Coles Director-General Building Societies Association

The banking sector, broadly defined to include all mortgage lenders and deposit-takers, is emerging from its greatest ever recession. The securitisation market is a fraction of its former size, many mortgage lenders have disappeared, lending activity on some measures has fallen by 90%, and major lenders have been nationalised, closed down or been the recipient of significant taxpayer investment.

Connected to all this, but not caused by the crisis, has been a reversal of the historic trend towards owner-occupation. The proportion of owner-occupied households peaked in 2003 at 70.9%, and had fallen steadily to 67.4% by 2009/10.

In the light of all this, what do mutuals have to offer? They have a business model that in general did not require taxpayer investment to survive and saw a recovery in financial strength during 2010. Their attitude to risk sees mortgage arrears proportionately around two-thirds of the industry average and the attitude to service results in a wide range of measures of customer satisfaction exceeding those in the plc sector.

They also offer member engagement policies that give most customers a vote on directors’ pay. Imagine what impact such an innovation might have in the banking sector. Finally, and most importantly, they provide a wide range of attractive mortgage and savings products.
Over the past few years mutuals have consolidated in two senses. First we have seen a number of mergers some of these have involved stronger mutuals taking over weaker institutions, others have been long-term strategic alliances.

Second, the sector has consolidated in the sense of slowing down, taking into consideration the huge changes taking place, strengthening their key financial ratios such as capital, costs, and profitability and revaluating what customers need and what mutuals can offer.

This was a sensible reaction to recent events. Some have suggested that mutuals might have missed a historic opportunity, given the weakness and failures in the plc sector. But given the magnitude of the issues arising in recent years, a slow and measured analysis followed by action seems the most appropriate approach.

This was the theme of the recent BSA annual conference. One session entitled ’Mutuals Making Things Happen’ offered plenty of evidence to support that title.

The event was marked by a general feeling that for mutuals the worst was over and that the market was crying out for the service, products and approach to business that they can offer.

Societies must seize opportunity to provide an alternative to banks

  Chris Rhodes Group Product and Marketing Director Nationwide

The past three years have been a challenging time for the financial services industry. While the mutual sector was not to blame for the financial crisis, it has not been immune to its effects. But now it has an opportunity to offer an alternative to consumers and it is one we must take.

The mutual model is founded on a simple concept taking deposits from savers to lend money to home buyers and this has proven successful over many years.

With no shareholders to pay dividends to, benefits are delivered directly back to members and consequently societies have been able to offer competitive products providing long-term value.

But mutuals cannot simply rely on their history and to succeed we must put the customer at the heart of everything we do.

To do this we must develop innovative products that fulfil our members’ aspirations and have a programme of engagement with them. This will allow the membership to communicate with the directors and boards of their societies and help shape the products and services being offered.

Providing long-term value is something that should remain at the heart of societies. Societies have traditionally scored highly on customer service and it is important that we continue to listen to members.

It is clear that mutual organisations can and do offer an alternative to the banks with a focus on delivering benefits back to their members. There is a great future for mutuality in British banking but only if the organisations are well run, efficient and constantly focussed on creating value for their members.

Successful mutuals can combine the integrity of a traditional set of values with a modern relevance, dynamism and appetite for putting customers at the heart of all they do.

We now have an opportunity to showcase a vibrant group of societies that are able to demonstrate the advantages of being owned by their members and which have a bright future.

Are we likely to see a reverse wave of demutualisation in the years ahead? I don’t think so, but only time will tell.

But what we do know is that mutual organisations are committed to keeping the concept of mutuality alive.

Mutuals bring diversity to the markets in which they operate and the sector will be an area to watch with interest in the coming years.