Building society

The Abbey National was the first society to demutualise in July 1989.

In the 1980s, changes to British banking laws allowed building societies to offer banking services equivalent to normal banks. The management of a number of societies still felt that they were unable to compete with the banks, and a new Building Societies Act was passed in 1986 in response to their concerns. This permitted societies to 'demutualise'. If more than 75% of members voted in favour, the building society would then become a limited company like any other. Members' mutual rights were exchanged for shares in this new company. A number of the larger societies made such proposals to their members and all were accepted. Some listed on the London Stock Exchange, while others were acquired by larger financial groups.

The process began with the demutualisation of the Abbey National Building Society in 1989. Then, from 1995 to late 1999, eight societies demutualised accounting for two-thirds of building societies assets as at 1994. Five of these societies became joint stock banks (plc), one merged with another and the other four were taken over by plcs (in two cases after the mutual had previously converted to a plc).

As Tayler (2003) mentions, demutualisation moves succeeded immediately because neither Conservative nor Labour party UK governments created a framework which put obstacles in the way of demutualisation. Political acquiescence in demutualisation was clearest in the case of the position on 'carpetbaggers', that is those who joined societies by lodging minimum amounts of £100 or so in the hope of profiting from a distribution of surplus after demutualisation. The deregulating Building Societies Act 1986 contained an anti-carpetbagger provision in the form of a two-year rule. This prescribed a qualifying period of two years before savers could participate in a residual claim. But, before the 1989 Abbey National Building Society demutualisation, the courts found against the two-year rule after legal action brought by Abbey National itself to circumvent the intent of the legislators. After this the legislation did prevent a cash distribution to members of less than two years standing, but the same result was obtained by permitting the issue of 'free' shares in the acquiring plc, saleable for cash. The Thatcher Conservative government declined to introduce amending legislation to make good the defect in the 'two-year rule'.

Building societies, like mutual life insurers, arose as people clubbed together to address a common need interest; in the case of the building societies, this was housing and members were originally both savers and borrowers. But it very quickly became clear that 'outsider' savers were needed whose motive was profit through interest on deposits. Thus permanent building societies quickly became mortgage banks and in such institutions there always existed a conflict of interest between borrowers and savers. It was the task of the movement to reconcile that conflict of interest so as to enable savers to conclude that their interests and those of borrowers were to some extent complementary rather than conflictive. Conflict of interest between savers and borrowers was never fully reconciled in the building societies but upon deregulation that reconciliation became something of a lost cause. The management of building societies apparently could expend considerable time and resources (which belonged the organisation) planning their effective capture—of as much of the assets as they could. If so, this is arguably insider dealing on a grand scale with the benefit of inside specialist knowledge of the business and resources of the firm not shared with outsiders like politicians and members (and, perhaps, regulators). Once the opportunity to claim was presented by management the savers in particular could be relied upon to seize it. There were sufficient hard up borrowers to take the inducement offered them by management (in spite of few simple sums sufficing to demonstrate that they were probably going to end up effectively paying back the inducement). (Tayler 2003)

Managements promoting demutualisation also thereby met managerial objectives because the end of mutuality brought joint stock company (plc) style remuneration committee pay standards and share options. Share options for management of converting societies appear to be a powerful factor in management calculation. Rasmusen (1988) refers to this in the following terms: " ... perks do not rise in proportion to [mutual] bank size. If a mutual is large, or is expected to grow if it can raise capital by a conversion, its managers derive more value from a conversion but do not suffer much loss of perks than if the bank were small. Their benefit is in the right to purchase the new stock, which are valuable because the new issues are consistently underpriced [referring to USA mutual bank conversions]. Moreover, by no means are all mutual managers incompetent, and conversions allows the bank to expand more easily and to grant executive stock options that are valuable to skilled managers".

Instead of deploying their margin advantage as a defence of mutuality, around 1980 building societies began setting mortgage rates with reference to market clearing levels. In sum they began behaving more like banks, seeking to maximise profit instead of the advantages of a mutual organisation. Thus, according to the Bank of England's Boxall and Gallagher (1997), "... there was virtually no difference between banks and building society 'listed' interest rates for home finance mortgage lending between 1984 and 1997. This behaviour resulted in a return on assets for building societies which was at least as high as Plc banks and, in the absence of distribution, led to rapid accumulation of reserves". As Boxall and Gallagher (1997) also observe; "... accumulation of reserves in the early-1990s, beyond regulatory and future growth requirements, is difficult to reconcile with conventional theories of mutual behaviour".

Llewellyn (1996) draws a rather more direct and cynical conclusion:

By adopting a policy of building up reserves by maintaining an excess margin, building societies simultaneously allowed banks to compete and may have undermined the long run viability of mutuality. A more cynical approach is that some societies may have adopted an excess-margin strategy simply to enhance their value for conversion.

Some of these managements ended up in dispute with their own members. Of the first major conversion of the Abbey in 1989, Kay (1991) observed:

[T]he paradox of the Abbey members who campaigned against flotation [conversion to a Plc bank] of their building society. They were fighting to preserve a degree of accountability to the membership which the management of the Society patently did not feel. For incumbent management, the contrary views of some of their members were not matters to be weighed in the balance and taken account of in formulation of policy. They were a nuisance to be dealt with by the costly use of public relations advisers and legal processes.

In the end, after a number of large demutualisations, and pressure from carpetbaggers moving from one building society to another to cream off the windfalls, most of the societies whose management wished to keep them mutual modified their rules of membership in the late 1990s. The method usually adopted were membership rules to ensure that anyone newly joining a society would, for the first few years, be unable to get any profit out of a demutualisation. With the chance of a quick profit removed, the wave of demutualisations came to an end in 2000.

One academic study (Heffernan, 2003) found that demutualised societies' pricing behaviour on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates.[9]

The Building Societies (Funding) and Mutual Societies (Transfers) Act 2007, known as the Butterfill Act, was passed in 2007 giving building societies greater powers to merge with other companies. These powers have been used by the Britannia in 2009 and Kent Reliance in 2011 leading to their demutualisation.

Prior to 31 December 2010, deposits with building societies of up to £50,000 per individual, per institution, were normally protected by the Financial Services Compensation Scheme (FSCS), but Nationwide and Yorkshire Building Societies negotiated a temporary change to the terms of the FSCS to protect members of the societies they acquired in late 2008/early 2009. The amended terms allowed former members of multiple societies which merge into one to maintain multiple entitlements to FSCS protection until 30 September 2009 (later extended to 30 December 2010), so (for example) a member with £50,000 in each of Nationwide, Cheshire and Derbyshire at the time of the respective mergers would retain £150,000 of FSCS protection for their funds in the merged Nationwide.[10] On 31 December 2010 the general FSCS limit for retail deposits was increased to £85,000 for banks and building societies and the transitional arrangements in respect of building society mergers came to an end.

The remaining building societies are:

(Total group assets of building societies) (data from last available annual reports as of Dec 2016)

Source: Building Societies Association[8] updated for subsequent mergers

	Name	Group assets[11]	Other trading names	Number of		No. of staff	Provides current account?
				branches	agencies
1	Nationwide Building Society	£232,800m	The Mortgage Works	620		c.18,400
2	Coventry Building Society[† 1]	£49,500m		68	18	2,234
3	Yorkshire Building Society	£43,100m	Chelsea Building Society.	132	99	3,300
4	Skipton Building Society	£23,200m		88		1,772
5	Leeds Building Society	£18,500m		55		1400
6	Principality Building Society	£9,300m		53	18	1,119
7	West Bromwich Building Society	£5,737m		37		753
8	Nottingham Building Society	£3,900m		48		678
9	Newcastle Building Society	£3,800m		27	1	951
10	Cumberland Building Society	£2,130m		34		502	[† 2]
11	Progressive Building Society[† 1]	£1,794m		12	36	178
12	National Counties Building Society	£1,569m	Family Building Society	1		143
13	Cambridge Building Society	£1,194m		14		192
14	Saffron Building Society	£1,115m		11	7	181
15	Monmouthshire Building Society	£1,073m		11	14	145
16	Leek United Building Society	£1,039m		12	2	164
17	Furness Building Society	£883m		9	13	177
18	Newbury Building Society	£869m		10		147
19	Hinckley & Rugby Building Society	£740m		8	4	116
20	Ipswich Building Society[† 1]	£584m		9	2	123
21	Darlington Building Society	£532m		10		113
22	Market Harborough Building Society	£427m		6		118
23	The Melton Building Society[† 1]	£419m		3		88
24	Marsden Building Society	£416m		8		79
25	Scottish Building Society	£389m		6	61	71
26	Hanley Economic Building Society	£378m		7		73
27	Tipton & Coseley Building Society[† 1]	£372m		4		83
28	Dudley Building Society	£354m		5		91
29	Mansfield Building Society[† 1]	£329m		4		73
30	Harpenden Building Society[† 1]	£317m		6		64
31	Vernon Building Society	£300m		6		68
32	Bath Building Society	£299m		2	6	67
33	Loughborough Building Society[† 1]	£296m		3	1	55
34	Manchester Building Society	£277m			3	50
35	Stafford Railway Building Society[† 1]	£271m		1		31
36	Swansea Building Society	£268m		4		36
37	Teachers Building Society	£253m		1		39
38	Buckinghamshire Building Society[† 1]	£225m		1		39
39	Chorley & District Building Society[† 1]	£220m		3		50
40	Beverley Building Society[† 1]	£191m		1		22
41	Ecology Building Society[† 1]	£173m		1		25
42	Earl Shilton Building Society[† 1]	£128m		2		27
43	Penrith Building Society[† 1]	£106m		1		21

Ten building societies of the United Kingdom demutualised between 1989 and 2000, either becoming a bank or being acquired by a larger bank.[12][13] By 2008, every building society that floated on the stock market in the wave of demutualisations of the 1980s and 1990s had either been sold to a conventional bank, or been nationalised.[13]

The following is an incomplete list of building societies in the United Kingdom that no longer exist independently, since they either merged with or were taken over by other organisations.[17] They may still have an active presence on the high street (or online) as a trading name or as a distinct brand. This is typically because brands will often build up specific reputations and attract certain clientele, and this can continue to be marketed successfully.

In Australia, building societies evolved along British lines. Following the end of World War II, the terminating model was revived to fund returning servicemen's need for new houses. Hundreds were created with government seed capital, whereby the capital was returned to the government and the terminating societies retained the interest accumulated. Once all the seed funds were loaned, each terminating society could reapply for more seed capital to the point where they could re-lend their own funds and thus became a permanent society. Terminating loans were still available and used inside the permanent businesses by staff up until the 1980s because their existence was not widely known after the early 1960s. Because of strict regulations on banks, building societies flourished until the deregulation of the Australian financial industry in the 1980s. Eventually many of the smaller building societies disappeared, while some of the largest (such as St. George) officially attained the status of banks. Recent conversions have included Heritage Bank which converted from building society to bank in 2011, Hume in 2014, while Wide Bay Building Society became Auswide Bank and IMB followed suit in 2015, and Greater Building Society became Greater Bank in 2016. Building societies converting to banks are no longer required to demutualise.

A particular difference between Australian building societies and those elsewhere, is that Australian building societies are required to incorporate as limited companies.

Current building societies are

• Bass & Equitable Building Society (Tasmania)
• Maitland Mutual Building Society (Maitland)
• Newcastle Permanent Building Society (Newcastle)

The Building Societies Act of 1962, allowed for the registration of building societies in Eswatini. For a long time the country only had one building society. A second was registered in late 2019.

• Swaziland Building Society: Registered in the 60s, this is the first and oldest building society in Eswatini. It has branches in almost every town and city within the Kingdom and has been known to be conservative. There have been many rumours of this institution wishing to demutualise to the extent that an amendment to the Building Societies Act was passed in 2019 permitting building societies to demutualise and apply for banking licences.[19]

• Status Capital Building Society: Status Capital Building Society was registered as the country's second building society and granted a licence in 2019 by the Financial Services Regulatory Authority after approval and recommendation from the Minister of Finance.[20]

The Republic of Ireland had around 40 building societies at the mid-20th century peak.[21] Many of these were very small and, as the Irish commercial banks began to originate residential mortgages, the small building societies ceased to be competitive. Most merged or dissolved or, in the case of First Active plc, converted into conventional banks. The last remaining building societies, EBS Building Society and Irish Nationwide Building Society, demutualised and were transferred or acquired into Bank subsidiaries in 2011 following the effects of the Irish financial crisis.

Leeds Building Society Ireland and Nationwide UK (Ireland) were Irish branches of a building societies based in the United Kingdom; both have since ceased all Irish operations.

• Ballygall Building Society, 1977
• City and Provincial Building Society, 1978
• Dublin Model Building Society, 1984
• Dublin Savings Building Society, 1977
• Four Provinces Building Society, 1978
• Independent Building Society, 1977
• Irish Savings Building Society, 1984
• National Provincial Building Society, 1977
• Progressive Building Society, 1977
• West of Ireland Building Society, 1977

In Jamaica, three building societies compete with commercial banks and credit unions for most consumer financial services:[23]

• Jamaica National Building Society
• Victoria Mutual Building Society
• Scotia Jamaica Building Society

In New Zealand, building societies are registered with the Registrar of Building Societies under the Building Societies Act 1965.[24] Registration as a building society is merely a process of establishing the entity as a corporation. It is largely a formality, and easily achieved, as the capital requirement is minimal (20 members must be issued shares of not less than NZ$1,000 each, for a total minimum foundation share capital of NZ$200,000).[25]

As regards prudential supervision, a divide exists between building societies that operate in New Zealand, on the one hand, and those that (although formally registered in New Zealand) operate offshore:

• Building societies that accept deposits from members of the public in New Zealand are regulated as "non-bank deposit takers" under the Non-bank Deposit Takers Act 2013.[26] Such building societies must (unless they qualify for a particular exemption) comply with the prudential regulations. The Reserve Bank of New Zealand monitors compliance with the prudential regulations, but does not prudentially supervise individual building societies for financial soundness. Most such building societies are supervised for compliance with the terms of their debt securities by trustees appointed under securities legislation, and those trustees have various reporting requirements to the Reserve Bank.
• Building societies that accept deposits only from offshore customers are not regulated under the Non-bank Deposit Takers Act 2013 or New Zealand's financial markets legislation. Consequently, they are not prudentially monitored by the Reserve Bank or by the Financial Markets Authority. The Reserve Bank cautions on its website that it does not monitor transactions undertaken by New Zealand registered building societies operating in overseas markets.[27] The Department of Internal Affairs is ultimately responsible for all entities that do not expressly fall into other categories for anti money laundering purposes.

Building societies' registration details and filed documents are available in the Register of Building Societies held at the New Zealand Companies Office.

Over the years, a number of building societies were established.

Some, including Countrywide Building Society and United Building Society, became banks in the 1980s and 1990s. Heartland Building Society (created in 2011 through a merger of Canterbury Building Society, Southern Cross Building Society, and two other financial institutions) became Heartland Bank on 17 December 2012.

Remaining building societies include:

• Pacific Eagle Capital (formerly General Equity Building Society)
• Heretaunga Building Society
• Kiwi Deposit Building Society (in the process of dissolution since 2013)[28]
• Manawatu Permanent Building Society
• Nelson Building Society
• Southland Building Society, which in October 2008 became a registered bank known as SBS Bank. However, it remains a building society and retains its mutual structure. Hastings Building Society merged with SBS Bank in October 2010, but with the Hastings Building Society brand continuing to operate as a building society under the name of HBS Bank. In November 2015, HBS Bank brand was discontinued.
• Wairarapa Building Society.

In Zimbabwe, Central Africa Building Society (CABS) is the leading building society offering a diverse range of financial products and services that include transaction and savings accounts, mobile banking, mortgage loans, money market investments, term deposits and pay-roll loans.

Because most building societies were not direct members of the UK clearing system, it was common for them to use a roll number to identify accounts rather than to allocate a six-digit sort-code and eight-digit account number to the BACS standards.

More recently, building societies have tended to obtain sort-code and account number allocations within the clearing system, and hence the use of roll numbers has diminished. When using BACS, one needs to enter roll numbers for the reference field and the building society's generic sort code and account number would be entered in the standard BACS fields.[29]