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Why mutuality matters to financial consumers

Tuesday 17th November 2015

Written by Martin Upton

On 16th November Nationwide Building Society announced that Joe Garner will be taking over from Graham Beale as Chief Executive in spring 2016. 
Garner, who is currently the Chief Executive of BT Openreach and previously head of HSBC UK, will take the helm at the largest building society in the UK, with assets in excess of £195 billion.
Of all the remaining 44 building societies in the UK, the Nationwide is the largest by far, accounting for close to 60 per cent of the size of the sector as a whole. 
It is the only building society that can compete on a national basis with the high street banks in the UK and in 2014 was the third largest mortgage lender in the country. The Nationwide is a successful business and came through the financial crisis in the late 2000s unscathed.
As a mutual organisation the Nationwide is owned by its members – its mortgage and savings customers. It has no shareholders in the same sense that companies have and therefore has no need to pay share dividends. 
This, at least theoretically, gives Nationwide and other building societies a competitive advantage over its banking competitors. This is because the funds that would otherwise have to be used to pay dividends can be diverted to improving product prices for its members through lower mortgage rates and/or higher savings rates. 
In this way the members of building societies get a kind of ‘mutuality dividend’ from their societies. This is good news for financial consumers generally as it forces the banks to respond to such competition or lose market share.
For building societies the notion of a ‘mutuality dividend’ really only dates back to the mid-1990s. This was the time that most of the largest building societies were converting from mutual organisations to banks owned by shareholders. 
The Halifax, Woolwich, Northern Rock, Bradford & Bingley and the Alliance & Leicester all went through this ‘demutualisation’ process in the 1990s and early 2000s following the lead of the Abbey National in 1989. Members of these building societies were offered free shares in the ‘new’ banks – an incentive that undoubtedly encouraged members to vote overwhelmingly in favour of conversion to banking status. 
Several other building societies agreed to be taken over by banks at this time – including the Cheltenham and Gloucester and the Bristol and West.
Faced with this wholesale transformation of the sector the Nationwide, whose then Chief Executive Brian Davis was an ardent champion of mutuality, turned aside at least one advance from a bank keen to acquire the society. 
The Nationwide also successfully fought off campaigns for conversion to banking status by society members keen to get those free shares. 
But if Nationwide was to stay a mutual then it clearly had to offer something financially material to members to reward them for their commitment to mutuality. So in February 1996 the Nationwide introduced its ‘mutuality dividend’ by cutting its main mortgage rate and by boosting savings rates – a move that reduced its annual profits by some £200 million. 
This initiative was followed by other building societies, albeit in different ways – for example the Britannia Building Society paid an annual dividend to its members rather like a bank would to its shareholders. Nationwide’s mutuality dividend was not only good for members but good for business too as it helped the society grow its market share.
Financial consumers should therefore hope that the Nationwide’s new chief executive keeps the society committed to mutuality. If it were to convert to banking status, or be taken over by a bank, there would be no building society left to compete seriously with the banks and the future of the sector as a whole would come into question.
As a postscript it is worth remembering that all the building societies that converted to banks have now ceased to exist or have lost their independent status. Abbey National Bank (or, as it was subsequently renamed, Abbey) and Alliance & Leicester Bank were acquired by Banco Santander. Woolwich Bank was bought by Barclays.
Halifax Bank merged with the Bank of Scotland to create HBOS (Halifax Bank of Scotland) before being acquired by Lloyds TSB during the 2007/08 financial crisis. 
The resultant Lloyds Banking Group then had to be supported by the government, who took a 43% share of the business. Northern Rock Bank and Bradford & Bingley Bank both had to be rescued by the government and the process of disposal of these businesses is still ongoing. 
The mortgages and savings business of Northern Rock was sold to Virgin Money in 2012 and most of the residual mortgage assets were sold earlier this month to the US investment firm Cerberus.
The history of demutualised building societies does not make for comfortable reading.
*Martin Upton is Director of the True Potential Centre for the Public Understanding of Finance (True Potential PUFin)
The establishment and activities of the Open University’s True Potential Centre for the Public Understanding of Finance have been made possible thanks to the generous support of True Potential LLP. True Potential has committed to a five-year programme of financial support for the Centre. Views expressed by True Potential PUFin academics may not reflect those of True Potential LLP.

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