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House of Commons

Wednesday 22 July 1998

The House met at half-past Nine o'clock


[Madam Speaker in the Chair]

Mutual Societies

Motion made, and Question proposed, That this House do now adjourn.--[Mr. Robert Ainsworth.]

9.34 am

Mr. Andrew Love (Edmonton): I am fortunate to have secured this debate literally on the eve of the announcement of the conversion ballot for the Nationwide building society, the largest mutual organisation in the country. It is therefore an appropriate time for Parliament to take stock of the current position, and to look to the future of mutual societies.

It is difficult to underestimate the contribution that mutual organisations have made since the formation of the first friendly society more than 200 years ago. Whether we look at the self-help welfare state that was created by the friendly societies in the inter-war period, the home ownership revolution brought about by building societies or the empowerment of full-income consumers by co-operatives, we can see that the self-help and mutual movement has had a dramatic impact on the lives of ordinary people in this country. It continues to do so.

The movement also influences Government--most recently, in the search for the elusive third way between the unfettered capitalism of the 1980s and the straight socialism of the past. I believe that mutuality is synonymous with the third way.

That fact was underlined in a recent article in the New Statesman, by a commentator who dubbed the so-called third way "mutualism". Ministers have vied to define its objectives. The Green Paper entitled "New Ambitions for our Country: A New Contract for Welfare" explicitly supports that policy when it states:

That statement relates partly to the failure of the financial services industry to act as a guardian of our savings and our pensions. It is also grounded in the belief in both the limitations of state provision and the unacceptability of privatising the welfare state. Thus mutual organisations are the sensible third way forward.

In a recent speech, the Minister for Welfare Reform suggested the development of approved welfare providers whose central requirement would be that they were owned and controlled by their members--that is, that they be mutual in both character and definition. The Government clearly support the principle and practice of mutuality, yet many mutuals face sustained attack, partly because of their success. How can that be? I believe that it relates to the failure of the Building Societies Act 1997 to provide any safeguards for societies against the activities of

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carpetbaggers and the impact that that that has on their businesses. As a result, their very mutuality is, or will be, perceived as a hindrance to their future success.

Before considering that issue, I must comment on the value of mutual organisations in the financial services marketplace. The consumer benefits from access to the services and products that mutual organisations provide. Societies offer choice to the consumer, and they are popular. Although the remaining societies constitute only 27 per cent. of the mortgage market, they have lent more to customers in the past year than the big banks combined.

Survey after survey confirms that building societies come top in terms of customer service and friendliness. They provide diversity through their different structures and different objectives. Mutuals are able to take a longer-term perspective, as they are not driven by the need to boost their share prices continually, or to maximise dividends to their shareholders.

Many societies are regionally and even locally based, which brings them closer to their customers, and many play a significant role in the local community. There is a building society head office in each of the 12 regions of the United Kingdom, where they are an important source of local employment, living standards and decision making. Building societies provide stability in the market--not for them the false attractions of property speculation or secondary banking.

History shows that banks with excess capital are tempted into unwise investments. As a result, no savings have been lost in building societies this century. Thus building societies are truly prudential organisations, but, most importantly, they provide competition to the banks and other institutions in the financial services sector.

Building societies have a margin advantage, which allows them to offer cheaper mortgages, or savings accounts that pay more on average. The difference between the interest that they receive on mortgages and that which they pay out on savings ranges from 1.2 to1.7 per cent. The equivalent margin for their demutualised rivals ranges from 1.9 to 2.5 per cent.--a considerable advantage. That was commented on recently by none other than the chairman of the Building Societies Commission, who explained:

However, mortgage lending is generally considered to be low-risk and, as a result, low-return--not a natural market for profit-maximising companies. In a recent survey, the Consumers Association compared a range of core products--savings accounts, TESSAs, mortgages and overdrafts--and found that consumers would have been nearly £1,600 better off over a five-year period with a building society than with a bank.

Building societies also act as a competitive restraint on the banks. Without them, banks would charge customers even more for their mortgages, and pay even less to their savers. The question posed in this debate is: how do we preserve for future generations the right to those cheaper mortgages and higher savings rates? That is particularly relevant as the building society sector has been undergoing rapid change in the past few years, culminating in the conversion of five of the largest societies last year. Although that still leaves 70 societies with more than £130 billion in assets, the recent windfall

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gains to members have created a climate that threatens the very mutuality that allows members to vote themselves that benefit.

It is clear that societies, which must survive in a cut-throat, competitive market, cannot continue to be diverted from their core business activities to defend their mutual status. If those attacks continue--even if unsuccessfully--societies will probably be faced with the unpalatable choice of continuing to defend their position against increasing odds or accepting that it would be better for their business and for their other stakeholders to convert on their own terms. That would reduce the number of societies to below the level that would make for a sustainable mutual sector, and would inevitably lead to its elimination from the financial services market.

Many of us would argue that there is a systemic interest in maintaining mutuality, not because it is an inherently superior form of organisation, but because there is a need for a mixed ownership structure in the financial services sector for the reasons that I have already outlined. If that is accepted, mutuality becomes a public policy issue, and the Government and Parliament must take an interest in ensuring that consumers do not lose as a result of the continued conversions. How can that be done while protecting both member control and democracy, which are the unique selling points of mutual organisations?

Societies are looking for fairness, not favours--the creation of a legal framework that will allow them to compete on a level playing field in the financial services sector. The Minister has already shown the way by raising the threshold for conversion to 50 per cent., but fundamental decisions about the future of a mutual society--the most important decision that a member can take--should require a significant level of support before demutualisation. After all, converted societies can be subject to takeover only if 75 per cent. of shareholders vote to confirm that action.

As recent events have shown, the rules on the election of candidates to boards of directors are set at a level that can easily be exploited by a small band of eccentric or dissident individuals. The democracy of a mutual organisation should be protected against frivolous candidatures, in the same way as Members of Parliament are protected in general elections.

To be nominated a Member of Parliament requires 10 electors in an average constituency of 67,000 electors, which is one for every 6,700. Nationwide, the largest mutual, has just under 5 million members; the Bradford and Bingley has 2.2 million members. To be nominated a member of Nationwide requires only one nomination for every 100,000 members; and to be nominated a member of the Bradford and Bingley requires only one nomination for every 44,000 members.

Are not building societies being significantly disadvantaged by allowing their equivalent to the Monster Raving Loony party to continue to disrupt their activities? To put it another way, is it unreasonable to set the threshold for candidates around a level that the nation finds acceptable for its democratic elections?

Membership of a society should be for those who have an interest in its activities, not for those who are only interested in asset-stripping the society for their own benefit. During the past year, 1.3 million new members

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have joined Nationwide. They could undermine the majority of longer-standing members who voted overwhelmingly to maintain the society's mutual status at last year's annual meeting. To gain ownership rights in a society, an applicant should have been a member for a minimum period. That returns societies to their original ideal of requiring their new customers to save with the society before gaining membership or its benefits.

In addition, the protections of a society's legal status are being eroded in the current campaign. The resolution submitted to the annual general meeting of Nationwide by a proponent of demutualisation means in practice that the decision to convert can now be approved as a result of a straightforward majority of those voting. It is difficult to see how the society could resist the moral pressure, despite the fact that the strict legal requirements have not been met.

Is it reasonable to make societies go through the disruption and uncertainty that is inherent in the frivolous campaigns now being mounted? They have the ability to stand every year with impunity and with little financial outlay, yet the cost to societies in terms of mounting a reasonable defence and in terms of disruption to their business in enormous. I understand that last year's campaign for Nationwide cost some £2 million, and it will cost even more this year. It is not unreasonable to suggest that the framework of regulation should provide stability, and ensure that societies cannot be held to ransom by a small and unrepresentative group of people who have no commitment to the objectives of the mutual organisations of which they are members.

Mutual societies have been with us for more than 200 years, and have more than 100 years of expertise in the savings and mortgage markets. If they and their expertise are not to be undermined, action will be necessary to deal with the difficulties and disruption that threaten their future existence.

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