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Did demutualisation fuel the UK crisis?

I was recently asked to make a comment on the UK Building Societies sector.

Like American credit unions, most building societies exist in the interests of their members as mutual organisations.

They balance customer interests with their portfolio of business, and try to manage all on an even keel.

Unlike most other financial institutions, the building societies generally have an executive team with an extremely long tenure – the average building society keeps its CEO in position for around 15 years or more – compared to just under six years for a typical FTSE 100 company.

In fact, this article from the FT sums up the sector well and, to paraphrase its content:

The building society segment employs 50,000 people while the whole UK financial services sector, according to the UK Treasury, employs 1 million.

Building societies tend to think longer-term than banks and aim for high levels of job satisfaction.  An example is the Hanley Economic building society, a north Staffordshire-based mutual with six branches and about £350 million in assets.

Hanley’s average length of service is 16 years, which means they have a great deal of experience and provide plenty of opportunities for individuals to develop into different roles.  In their 2010 staff survey a key strength identified was the variety in roles across the business. The multi-skilling of individuals has helped to manage varying levels of business without having to reduce or increase our headcount.

In particular they recruit attitude and behaviour to support excellent customer service and provide the skills where required. An example is that all of our branch managers have been internally promoted.

The Co-operative Financial Services is another example of an employer that thinks longer term and more about staff development.

Since its merger with Britannia building society in 2009, CFS has carried out an organisation redesign and introduced a new leadership structure and operating model. Despite these changes, employee turnover in 2009 was 10 per cent, which CFS says is lower than other large financial services that operate large call centres.

Many mutuals also offer more family-friendly and flexible approaches to careers – another contrast with the long working hours culture many bankers are reputed to work. For example, a third of staff at Nationwide, the UK’s biggest building society with 19,000 staff, work less than 35 hours a week.

It has also introduced a flexible retirement policy, giving employees the automatic right to work until they are 75 on the same terms and conditions as staff working past 60, including private health and life cover.

Its other family-friendly policies include two weeks off on full pay for fathers expecting new babies or adopting children; employment breaks for up to a year for staff with longer than 12 months service; and job sharing.

“The message is that we have a real commitment to work-life balance,” says the society, which has seen that commitment recognised by a number of awards, including, in 2009, the prestigious Investors in People Gold Status award for its people, communication, training and development policies – given to less than 1 per cent of companies in the scheme.

So why have I bothered to post all this background about Building Societies?

Because I realised the other day that its all the converted Building Societies that contributed the most to Britain’s disastrous position today, not ignoring the contribution of the Fred Goodwin and the RBS crew.

Back in the 1980s, there was a big spate of carpet bagging – joining building socieites as a member purely to force the society to demutualise and, in so doing, raking in the spoils of share or cash allocations given to members.

The reason it came about is due to deregulation under Margaret Thatcher of the sector with the introduction of the Building Societies Act in 1986.

The Act allowed Buidling Societies to demutualise and become joint stock banks competing in the wider field of finance.  As per the law of unintended consequences, it also allowed members of the mutuals to force a demutualisation if enough members voted in favour, and many did vote in favour for the rewards of short-term cash bonuses and stock allocations.

As a result, following the Act, many of the larger societies converted into joint stock banking companies beginning with Abbey National in 1989, which was soon followed by the Halifax, the largest society in the sector.

Seeing the rewards on offer to members, others followed – Cheltenham & Gloucester, the Woolwich, Bristol & West, National & Provincial and more – and a cascade affect occurred as speculative carpetbaggers opened savings accounts purely to force the mutual to demutualise, in order to gain a windfall in cash or shares.

People were purely opening accounts with some societies in order to force a vote and gain a quick buck.

The domino tide of demutualisation only stopped when the remaining societies, such as the Nationwide, placed clauses in their rules about how long an account must be held and any profits from demutualisation being given to charity as a defence against the carpetbaggers.

At this point, the process stopped, but the damage was done.

Just take a look at a few key names and you will see why:

  • Halifax Building Society
  • Northern Rock
  • Bradford & Bingley
  • Alliance & Leicester

We all know the story of Northern Rock today – if you don’t, click here – but the others:

  • Halifax created the multibillion pound commercial property headache for Bank of Scotland, who acquired them in 2001, and subsequently for Lloyds;
  • Bradford & Bingley created a massive toxic buy-to-let mortgage portfolio and had to be rescued by the government who sold the branches to Santander;
  • Alliance & Leicester followed in Northern Rock’s shoes, and were forced to sell to Santander in 2008 too.

Some would say that what this shows is that demutualisation led to a share price focus that spawned a sales culture at the expense of customer and staff interests.

Of course, they might say that but I couldn’t possibly comment, as others might say that it was more a reflection of a bunch of sleepy, small financial businesses that could not compete in the cut-throat proprietary markets and hence got swallowed by their larger predators who, in so doing, were infected by their sleepy, small town operations.

You make your own mind up.

From the BSA’s website:

Abbey National

Floated 12 July 1989, acquired by Banco Santander  in November 2004. Abbey rebranded to Santander on 11 January 2010.

Alliance & Leicester

Floated 21 April 1997, acquired by Banco Santander in October 2008. Alliance & Leicester rebranded as Santander in November 2010.

Birmingham Midshires

Taken over by Halifax, April 1999.  Now a division of Lloyds Banking Group.

Bradford & Bingley

Floated 4 December 2000. Mortgage book  nationalised September 2008. Retail savings transferred to  Abbey (Banco Santander) September 2008. Abbey rebranded to Santander on 11 January 2010.  In October 2010 Northern Rock (Asset Management) plc and Bradford & Bingley were integrated under a single holding company, UK Asset Resolution (UKAR). UKAR’s has implemented a business plan that aims to wind down the institutions in a way that maximises taxpayer value for money and repays combined debt to the taxpayer of around £50bn. 

Bristol & West

Taken over by Bank of Ireland, 28 July 1997. Bristol & West transferred its branch network and savings business to Britannia Building Society on 21 September 2005. In January 2009 Bristol & West Mortgages ceased acceptng new customers. Britannia became part of The Co-operative Financial Services (CFS) on 1 August 2009. CFS changed their name to the Co-operative Banking Group in September 2011.

Cheltenham & Gloucester

Taken over by Lloyds Bank, 1 August 1995.  Now exists only as a trading name of the Lloyds Banking Group.        


Floated 2 June 1997, merged with Bank of Scotland to form HBOS in 2001.  In September 2008 Lloyds Bank agreed to take over HBOS. It became part of Lloyds Banking Group on 16 January 2009.

National & Provincial

Taken over by Abbey National, 5 August 1996 (ceased trading under this name).

Northern Rock

Floated 1 October 1997. On 22 February 2008, by an order made under the Banking (Special Provisions) Act 2008, the shares of Northern Rock plc were transferred into temporary public ownership.  On 1 January 2010 Northern Rock was split into two separate entities: Northern Rock plc, a new savings and mortgage bank authorised as a mortgage lender by the FSA; and Northern Rock (Asset Management) plc. On 17 November 2011 the Chancellor announced the sale of Northern Rock plc to Virgin Money and the sale was completed on 1 January 2012. Virgin Money plan to rebrand all Northern Rock branches as Virgin Money during 2012.  The Government has no plans to sell Northern Rock Asset Management. In October 2010 Northern Rock (Asset Management) plc and Bradford & Bingley were integrated under a single holding company, UK Asset Resolution (UKAR). UKAR’s has implemented a business plan that aims to wind down the institutions in a way that maximises taxpayer value for money and repays combined debt to the taxpayer of around £50bn.


Floated 7 July 1997, taken over by Barclays Bank in October 2000.  Now exists only as a trading name of Barclays.

These institutions are no longer building societies and should not be referred to as such.








About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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