Select Committee on Treasury Ninth Report

Building societies

5. Building societies began to be set up in the 18th century, and the original ones were terminating societies, meaning that they were wound up when all the members had succeeded in their purpose of building or buying a house with the money the society had lent them. Permanent building societies grew up later, and were until recently the main source of loans for house buying, by means of mortgages, as well as being responsible for a large proportion of savings by individuals, often those who had no dealings with banks.[8] For many years, building societies were governed by legislation essentially unchanged since the 1890s, but a new Building Societies Act was passed in 1986. This established the Building Societies Commission (BSC)[9] to take over the regulation of building societies from the Chief Registrar of Friendly Societies, and slightly widened the powers of societies to undertake activities other than their main ones (making loans secured on residential property funded substantially by their members).[10] It also, for the first time, gave societies the option to decide to demutualise (mergers had previously been allowed). At the time, the advantage claimed for this provision were that societies which wished to do so could thereby diversify into a wider range of financial services.[11] One building society, the Abbey National, converted into a bank in 1989, but there were no further conversions until 1995, since when there have been eight (involving nine societies).[12] The Building Societies Association (BSA) said that the eight conversions since 1995 involved seven of the then ten largest societies, and resulted in the removal of two thirds of the total assets which were in the sector in 1994.[13]

6. There are now 70 building societies, accounting for (between 1997 and March 1999) 18 per cent of the stock of UK personal liquid savings, and almost 25 per cent of the stock of UK residential mortgage loans to individuals. Societies' share of new net lending is 40 per cent.[14] A further Building Societies Act in 1997 widened the scope of societies' other activities (the principal excluded areas are taking positions in the derivatives, commodities and foreign exchange markets), so long as at least 75 per cent of business assets are held in residential mortgages and at least 50 per cent of funds come from members who are individuals. In practice the current figures for building societies taken as a whole are 95 per cent and 75 per cent respectively.[15]


7. In addition to the increased scope for diversification, mentioned above and to some extent made less valid by the 1997 Act,[16] other possible reasons why it might be in the interest of a building society to convert include the possibility of raising more capital through issuing shares (although the BSA say that "many of the converted institutions have announced or implemented plans to return capital to shareholders")[17] or what is sometimes held to be the increased discipline of accountability to shareholders forcing greater efficiency.[18] Dr Brian Davis, Chief Executive of the Nationwide Building Society, said that because "we are competing with people who do have that particular pressure [the disciplines of the City] we are very efficient. The mix works quite well".[19] Another possible argument for conversion, put forward by Professor David Llewellyn, Professor of Money and Banking at Loughborough University, is to enable diversification into areas "where the nature of the risk is inappropriate for a mutual".[20]

8. The current spur to demutualisation is, however, the consequent distribution of shares or cash, the "windfall", to which we return in paragraph 27. The prospect of windfall payments has encouraged investors to invest the minimum qualifying amount (usually £100) in a number of different societies in the hope that at least some of them will demutualise and that they will gain the benefits. Some of these "carpet-baggers" have also actively encouraged demutualisation either by putting forward resolutions calling on their board to demutualise, or by nominating directors in favour of demutualisation. We therefore need to examine whether mutuals have advantages which would be lost by demutualisation, and whether this consideration negates the short-term gain for individual investors.


Margin advantage

9. The main reason that we were given why building societies would give better value for money to their customers than banks was the absence of a separate body of shareholders who would expect to receive dividends payable out of profits. A building society can therefore, it is argued, have a smaller differential between the interest paid on its investments and that charged on mortgages than a bank with similar operating costs. The Building Societies Association calculated this interest margin for several large building societies and for the corresponding sector of activities of recently converted banks, and found that all but one of the building societies had a smaller margin than any of the banks.[21] They also told us that building society accounts regularly appeared in the lead in league tables of interest rates.[22] Mr Frazer, however, said "you can have banks which offer just as good rates as building societies and in fact if you look at the league tables for the best rates on deposits and the best rates on mortgages it is often quoted banks or the subsidiaries of quoted insurance companies that offer the best rates".[23]

10. The BSC point out that the margin advantage caused by the absence of shareholders requiring dividends is only one factor in determining whether a building society can offer better rates than a bank. Banks are more diversified, have other income streams from which savings accounts or mortgages can be cross-subsidised, they may be more efficiently run, and "newer entrants to the personal banking market may either concentrate on the most profitable segments, or seek to build market share with a pricing strategy which is not intended to be sustained in the longer term, or both".[24]

11. Professor Llewellyn qualified his assertion that building societies are more competitive by saying this was true "when building societies operate as mutuals, which they have not always done in the past", in other words by "using their margin advantage to price strategically rather than to build up reserves".[25] The BSC also said that building societies had sometimes, such as in the early 1990s, used their margin advantage not to provide better rates but simply to accumulate a higher level of reserves. However, their average net interest margin had decreased from 1.75 per cent in 1996 to 1.42 per cent at the end of 1998, with the main beneficiaries being mortgage holders rather than savers, though some had paid loyalty bonuses to both savers and borrowers (see paragraph 24).[26] The BSC also referred to, and endorsed, a study by SBC Warburg Dillon Read in 1997 which argued that the larger building societies "could in principle maintain their current pricing strategy for 30 years or in some cases indefinitely".[27]

12. Professor Llewellyn said that the American experience was that new companies offering better mortgage rates do not necessarily last very long.[28] The Consumers' Association echoed this: "New entrants are welcome, but there is a question mark over their long-term commitment to the market. While some have competitive prices, this may only be a temporary phenomenon while they attempt to build market share".[29] The Leeds and Holbeck Building Society drew attention to the competitive "Egg" account by the Prudential, which itself had announced that it expected to make a loss in 1999, something which the BSC would not allow a building society to do.[30] Mr David Anderson, Deputy Chairman of the BSA, pointed out that, unlike others, building societies were obliged to compete in the savings market and mortgage market "even when margins are thin", and he said that societies were therefore important systemically for maintaining competition for all types of organisations in those sectors.[31]

13. Mr Ken Houghton, of the Building Societies Members' Association, agreed that building societies had not always been responsive to their members: "I can remember the first so-called carpet-bagger, his first press notice which said mutuality had had its chance and building societies had not taken advantage of it. Unfortunately there is a lot we had to agree with in that. We do not agree with the solution ...".[32] Mr Christopher Rodrigues, Group Chief Executive of the Bradford & Bingley Building Society, said that the mutual form had advantages, "providing you run the business as what we like to call a commercial mutual. We cannot be fuddy-duddy".[33]

14. Those opposing demutualisation say that the amount gained by the issue of shares at the time of demutualisation will be nullified by the lower interest rates, or higher mortgage rates, offered thereafter.[34] Dr Davis calculated a typical period after which demutualisation would be seen to be a disadvantage was four years for a mortgage payer, but a "very much longer period of time" for a saver investing the minimum £100.[35]

15. Ms Hewitt described the margin advantage as the "most tangible benefit" of building societies, and thought that "perhaps in the past the building societies have not always focused upon [it] sufficiently".[36]

Other claimed advantages of mutuality

16. The BSA also drew attention to the value of building societies in dealing with what is termed "financial exclusion", in providing financial services to those of modest means who are unlikely to have access to other outlets. This role goes back to the origin of building societies. They provide a free service, with a pass-book, enabling customers "to be clear on their financial position" and allowing cheques to be paid in. "Without the provision of the basic building society savings account, a much greater proportion of the population would be financially excluded".[37] They also mentioned the strong commitment of building societies to localities and to maintaining a branch network, and the more frequent occurrence of customer satisfaction (rather than purely financial measurements) as a criterion for performance-related pay for managers.[38] Councillor Serge Lourie of "Save our Building Societies" claimed that building societies "tend to lend more sensitively" in urban priority areas.[39] Mr Houghton said that building societies "are more sensitive ... we believe they should be more member responsive", although this behaviour had not always emerged until the societies were under pressure from members.[40]

17. Mr Rodrigues also drew attention to the work of building societies in support for local communities, but said that he hoped to continue initiatives of this kind when the Bradford & Bingley became a company.[41] How a board and management acted was more important than whether it was a mutual or a plc (public limited company).[42] The BSA sponsored research at the University of Newcastle, which found that continuing societies opened more branches whereas societies which had announced conversion closed them.[43] Ms Hewitt drew attention to the origins of building societies in local, co-operative, communities, where members could pool their savings and establish a credit record; she thought the "best line of defence" of building societies against conversion or takeover was "to persuade their members of the virtues of remaining as a mutual organisation ... returning to their roots and showing their members the benefit that they can give to the community as a whole as well as to individuals specifically".[44]

Systemic considerations

18. In addition to the effect on an individual society of demutualisation, Professor Llewellyn argued "on pure efficiency grounds and on systemic balance grounds that there is a very strong advantage in having a mixed system". He went on to argue that the recent demutualisations might have already reduced the size of the building society sector to below the "critical mass" required to offer the previous "intensity of competition" with banks: "there is now a very serious danger that that critical mass has been lost, to everyone's long-term disadvantage".[45] The BSC, in its annual report for 1996-97, said "the disappearance of building societies from the market will in the longer term tend to penalise all borrowers and savers, even if, in the short term, competition from former societies and new entrants to the market keeps prices keen".[46] The Building Societies Association, in written evidence, wrote: "If nothing is done now, there is a significant risk that large numbers of investors in building societies with only a short term connection will destroy the sector for their own ends. If this happens, a Government enquiry will probably be launched in five years' time seeking to examine the reasons why the providers of the most competitive basic financial products in the country were allowed to disappear".

19. It appears from our evidence that at least some of the advantages claimed for building societies, especially those involving closer links with the community and close attention to customer care, could be replicated in non-mutual organisations, and that some building societies have not always shown these characteristics. Nevertheless, the existence of a sector with potential for lower overheads, and therefore better rates for savers and borrowers, is both a valuable spur to competition and a very important part of the UK housing finance market.


20. When a company builds up reserves rather than paying dividends, this will generally be reflected by a rise in the share price, and therefore shareholders will be able, if they wish, to take the benefit by selling their shares. The reserves of a building society have no effect on the value of its members' shares, however, and in the absence of a dividend or bonus payout (an option to which we return in paragraph 24), the only way in which its members can receive a share of the reserves is by demutualisation.

21. We received conflicting evidence on reserves. Professor Llewellyn said: "A lot of the pressure to demutualise has largely been brought upon the industry by its own past behaviour in the sense that it has used its margin advantage to build up reserves unnecessarily and sooner or later ... the members are going to ask for their money back".[47] The Treasury pointed out that access to capital, for example by the issue of subordinated debt and the equivalent of preference shares, had not always been available, and said that consequently "in practice mutuals can be more generously capitalised than their proprietary equivalents".[48]

22. However, Mr Rodrigues said: "To be a thriving, prosperous mutual you need your reserves, because the regulators demand that"; only by "running the business down" could mutuals "disburse the reserves at a materially greater rate than most of us do now".[49] Mr Anderson said that "most societies who ... feel they have excess capital have taken steps to redistribute that to members in the form of better rates over the medium term as opposed to paying back in one go". He thought that increased capital levels in the 1990s had resulted from perceptions that the new powers granted by the 1986 Act would require greater capital and from convergence of capital requirements within Europe.[50]

23. However, the reserves are not the only source of the distributions which are made upon demutualisation. Ms Hewitt said: "the windfall gains that have resulted to the members of former mutuals upon conversion or takeover do result not only from the built up reserves that have come over time, but also the value that the market place puts upon the organisation when faced with the prospect of it taking that new form and perhaps being able to do other things". She estimated that the "free reserves" constituted a "relatively small element" of the distribution payments.[51] A similar point was made by Mr Kevin McGuinness, Group Secretary of the Bradford & Bingley Building Society.[52]

24. Mr Frazer suggested that one way that societies could stave off criticism of high reserves and limit pressure for demutualisation was to pay a loyalty bonus, as the Britannia does, and which he described as "actually to all intents and purposes exactly like a [company] dividend".[53] However, most building societies had not followed this route. Mr Anderson said "We saw a scheme like that adding complexity and cost rather than the simplicity of offering lower rates to borrowers and higher rates to savers. It is a straightforward choice in how you spend the advantage of a mutual and whether or not that goes in the form of a loyalty bonus or it goes to everyone in the form of lower rates [for mortgages] or higher rates for savers".[54] Though the distribution of profit to customers by means of loyalty incentives may be equivalent in cost terms to improving rates, we recommend that building societies which wish to remain mutual should introduce loyalty incentives because they provide a more visible demonstration of the advantages which a mutual organisation can provide.


25. Mr Malcolm Waters, QC, a barrister specialising in building society law, told us that "the lawyer's answer" was that the assets of a building society are owned by the current members, in that they are the people who would share in the assets if the society were to be wound up. This is not, of course, a realistic expectation for most members—very few societies are dissolved. But Mr Waters went on to say that it was "simplistic" to describe a building society as the property of its present members, as "in no sense can the holder of a share in a building society be regarded as having 'bought' a stake in the Society's reserves". He also pointed out that the buying of a shareholding in a mutual is different from one in a company, in that its value does not vary with the success of the business (unless it becomes insolvent) or with the level of a society's reserves. He concluded that the introduction of the possibility of demutualisation, rather than being a consequence of the members' ownership rights, is the principal cause of members coming to believe that they own the society.[55]

26. The Bradford & Bingley Building Society said "the responsibility of the Board of a mutual building society is not just the short-term interest of today's members but their long-term interests and those of the generations who succeed them".[56] The Chelsea Building Society said: "the current generation of members are being empowered by current defective legislation to take for themselves the reserves of building societies built up over 150 years at the expense of future generations".[57] The "Save our Building Societies" witnesses, in written evidence, considered that the purposes of building societies were suitable for charitable status, whereby current members would not be entitled to reserves.[58] Dr Davis said: "existing members ... also have to think about the future ... maybe it is a trusteeship rather than an ownership".[59] If a charity is wound up, the proceeds are given to a similar charity, not divided up among those running it at the time. Indeed, this is precisely what French law prescribes for mutual organisations.[60] We return to these arguments in paragraph 36 below.


27. When presenting the conversion provisions which were to be incorporated in the 1986 Act, the then Government said: "The Government are concerned that adequate safeguards should exist to secure that conversions happen for reasons of commercial development and are not decided by the prospect of possible short-term gains."[61]

28. However, Professor Llewellyn said "It was always argued that conversion was for commercial reasons and quite clearly that is not the case: it is mainly motivated, quite understandably, by people trying to get the reserves out of the society".[62] Mr Rodrigues said that all the research the Bradford & Bingley Building Society had carried out suggested that windfall profits were the primary motivation.[63] The BSA pointed out that some windfalls had been worth more than £2,000 per member.[64]

29. The BSA said, in relation to the Bradford & Bingley vote (see paragraph 38), "for the first time the reasons articulated for conversion have not related to access to capital, new products, increased accountability or the philosophical features of mutuality and plcs; rather, members voted to obtain a distribution of cash or shares—precisely the factor Parliament sought to address in 1986. The likely provision of a cash lump sum makes member votes on the future of building societies the only electoral process in the western world heavily influenced by the prospect of receiving cash in return for voting in a particular manner."[65] Mr Adrian Coles, Director General of the BSA, said that members "can get their hands on the money without playing a significant role in the affairs of the society".[66]

30. Mr Frazer suggested a 50 per cent tax on windfalls, which at present are often tax free either because they fall below the threshold for capital gains tax or could be included in a Personal Equity Plan.[67] This suggestion was supported by Councillor Lourie, who thought a 100 per cent tax would "make it a level playing field so that people could be making a decision on the benefits of the actual case rather than being given some money".[68] Dr Davis said that taxing windfalls would "put some money back into the community which is where it originally came from".[69]

31. We believe that building society charity schemes, as described in paragraph 50, may be a way of securing the benefits of windfalls for the community.

Directors' interests

32. Mr Steve McDowell of Money Marketing, which had been conducting a campaign to save mutual building societies, pointed out to us that building society directors faced a potential conflict of interest in that a decision to demutualise might also result in substantial increases in pay.[70] However, Mr Rodrigues and Ms Hewitt both pointed out that any changes to board remuneration or the introduction of share options had to be authorised by the members by a separate vote at the time of demutualisation.[71]


33. Given the advantages claimed for the mutual sector, the recent rapid decline in its size, and the considerable increase in powers for building societies to diversify within their existing structures, granted in the 1997 Act, one possible reaction would be to repeal the power granted in the 1986 Act to demutualise. This was advocated by the Chelsea Building Society: "The only course of action is to remove, by primary legislation, the facility to convert to a PLC or become part of a PLC".[72] Mr Waters suggested that, if such a step were desired, one option would be to limit the power to convert to cases where it was necessary to safeguard investors (a "rescue") or where it was directed by the regulators.[73]

34. The majority of our witnesses, however, accepted that the right of members to determine the future shape of their organisation was inherent in the nature of mutuality. The Treasury memorandum stated: "It would be paternalistic to protect mutuals against their own members' decisions", and "Ultimately it must be for the building society's members to decide what is in the society's best interests".[74] As Ms Hewitt put it, "we are not ... going to be able to protect mutuals and the principle of mutuality by defending organisations against their own members when it is the fact of being a membership organisation with rights for those members that is at the heart of the structure of mutuals themselves".[75] Professor Llewellyn said: "I am not arguing that no building society should ever convert but there are distortions in the voting procedure".[76] Mr Rodrigues said "We believe that the democratic process lies at the heart of mutuality". Not letting members vote on conversion would "go against everything which a building society stands for" ... "You do not shut down the democratic process because one thing went wrong in 148 years but you do look at making sure that the hurdles are appropriate and that opportunism cannot rule the day easily".[77]

35. Ms Hewitt pointed out that what can be done is "to strengthen the rights of members and to ensure that the irrevocable decision to convert from a building society to a plc is not taken lightly and is not forced upon a large group of members by an active and vociferous minority". She pointed out, however, that most conversion votes which had succeeded had had high turnouts and "very substantial" majorities, and that therefore changes to majorities and turnout requirements "may not make any difference if an overwhelming majority of members decide that what they want to do is demutualise".[78]

36. Although the assets of building societies were built up by past generations, and—if the societies continue—are available for future generations, we do not believe that this fact can be elevated to the principle that these assets are held in trust. A mutual organisation is under the control of its current members, and they have, and should continue to have, the power to vote to demutualise. However, to ensure that the decision is taken in the interests of the society, there need to be safeguards in this decision-making process, and we need to examine whether they are adequate and, in particular, whether the provisions of the 1986 Act are working as intended.


37. The principal conditions laid down by the 1986 Act for demutualisation by a building society were as follows:

    (a)  demutualisation could take place only on the recommendation of the board—it could not arise from a decision by the members;

    (b)  conversion needed to be supported by a vote of investing members obtaining a 75 per cent majority in favour (of those voting), and a minimum turnout of 20 per cent (raised to 50 per cent in December 1997, after most of the votes had taken place);[79]

    (c)  conversion needed also to be supported by a simple majority of borrowing members, but with no turnout requirement;

    (d)  the Building Societies Commission had to approve the "transfer statement" and the transfer resolutions, and could veto the conversion on a narrow range of grounds, namely if information material to the decision was not made available, if the vote is considered unrepresentative of those entitled to vote, if a material statutory provision or rule of the society was not observed, or if there is substantial risk that the converted society will not gain authorisation to operate as a bank;

    (e)  incentives by way of shares issued to existing members in priority to others could be offered only to those who had been members for two years.[80]

This last condition has been interpreted by the courts in a different way from that intended at the time, a point to which we return in paragraph 44.

Members' resolutions and majorities required

38. All the demutualisations which have so far been completed arose from recommendations by the board rather than demands from the members; but members of several societies have put forward resolutions calling for the board to start the process of demutualisation. As ordinary resolutions, these require only a simple majority of votes. The only one so far carried was at this year's AGM of the Bradford & Bingley Building Society, where a motion was passed by 62 per cent to 38 per cent. The board (which opposed demutualisation) had also tabled its own motion in favour of continued mutual status,[81] which was defeated by the same proportions. However, the board also separated the votes on this resolution into those by savers (who voted by 65 per cent to 35 per cent in favour of demutualisation, on a turnout of 65 per cent) and borrowers (who voted by 60 per cent to 40 per cent in favour of staying mutual, on a turnout of 47 per cent).[82] Hence, if these votes had been on an actual conversion resolution, the levels required by the Act would not have been reached. However, the board decided that, in the light of these results, it ought to change its previous views and take steps to demutualise, as failure to do so would have invited "widespread condemnation" and led to further resolutions or the calling of special general meetings.[83]

39. So the requirement for the initiative to be taken by the board and the higher voting threshold required have been circumvented (in what Dr Davis referred to as a "back door way")[84] by the tabling of members' resolutions. In the face of that, 17 societies this year changed their rules so that a members' resolution advocating demutualisation would require a 75 per cent majority of those voting.[85] The Coventry Building Society also tried to change its rules in this way, but narrowly failed to reach the necessary majority (also 75 per cent) to do so.[86] Bradford & Bingley told us that they did not consider that it was sensible to attempt to change its rules in a year when there was also going to be a vote on demutualisation, but advocated the law being changed to bring "the requirements for the conversion resolution closer to the requirements for an actual conversion vote".[87]

40. A motion in favour of conversion proposed at the 1998 AGM of the Nationwide Building Society was narrowly defeated, by 49.2 per cent in favour to 50.8 per cent against.[88] Dr Davis ascribed the closer result than in previous years to a large number of new members but "if you take the carpet-baggers out the underlying grass roots seem to have appreciated that [a mutual] is what they would like us to remain".[89]

41. We recommend that the law should be changed so that members' resolutions advocating conversion should require the same majorities and thresholds (for savers and borrowers separately) as for transfer resolutions proposed by the board.

Borrowers' rights

42. Several witnesses called for borrowers' powers to be increased in relation to those of savers. Mr Frazer pointed out: "building societies were originally set up to allow people to own their own homes and borrowers have the greatest financial commitment to building societies. They usually have far greater amounts of money involved and they also have much less opportunity to move their account from one building society to another."[90] The BSA called for the threshold for a borrowers' conversion resolution to be the same as for savers.[91]

43. Ms Hewitt considered that the thinking behind the 1986 provisions had been that it was the savers who were contributing their money to the organisation and were therefore the owners. She was willing, however, to reconsider the issue.[92] The BSA pointed out that the 1997 Act had given borrowers the right to vote on general issues affecting the society rather than only on conversion resolutions as previously.[93] We recommend that the law should be changed so that borrowers' resolutions on conversion are subject to the same requirements for the majority (75 per cent) and turnout (50 per cent) as savers' resolutions.

The two year rule

44. Section 100(8) of the 1986 Act reads as follows:

"Where, in connection with any transfer, rights are to be conferred on members of the society to acquire shares in priority to other subscribers, the right shall be restricted to those of its members who held shares in the society throughout the period of two years which expired with the qualifying day; and it is unlawful for any right in relation to shares to be conferred in contravention of this subsection."

45. This provision was intended at the time to ensure that, where shares were offered as part of the conversion process, they should go only to members of two years' standing or more. However, in two court cases, the subsection has been interpreted as allowing shares to be offered to all members and borrowers but not to the public (as happened at the Abbey National) (as they were not then being offered "in priority to other subscribers") or to all members and some others so long as members of two years' standing are treated more favourably (as has happened in most other conversions).[94]

46. The Act also provided that cash payments could be made, but only in the case of takeover by an existing company, and again only to members of two years' standing, a provision which has been upheld by the courts.[95]

47. It is clear, not only from what was said at the time, but also from the corresponding provision about cash payments, that the drafting of section 100(8) about the issuing of shares has not had the intended effect. Ms Hewitt admitted that "the drafting turned out to be defective".[96] In March 1997, the then opposition tabled an amendment to the bill for the Building Societies Act 1997 to rectify this, but were unsuccessful.[97]

48. We recommend that the law should be changed so that windfall distributions of cash or shares should be available only to savers or borrowers of at least two years' standing as originally intended.


49. The incentive of possible windfall payments has caused many people to make a small investment in several building societies in the hope that at least some of them will demutualise. The BSA said that this was particularly notable in 1996 and 1997, and caused disruption in the normal service of a society to its customers. Several societies have introduced measures to discourage such "carpet-bagging".[98]

50. One such measure, introduced first by the Nationwide in November 1997 and since followed by another eight societies, is to require new members to assign any future windfall payment or shares to a charitable trust.[99] Mr Waters described such schemes as "complex, and therefore expensive to prepare and administer", and said that it was "absurd that a financial institution should feel driven to resort to these kinds of legal gymnastics in order to be able to carry on a deposit-taking business in a sensible manner".[100] The Bradford & Bingley had rejected the idea as it "was reluctant to create two tiers of mutual members, some with different rights and privileges to others", and would also offer "little immediate protection".[101] Dr Davis said that the Nationwide's decision was taken primarily "because we could not run the business at the time with the number of carpet-baggers who were coming in", and it had also enabled them to reduce their minimum investment to a pound. It was not designed to influence people voting.[102]

51. Other societies have introduced a high initial deposit, of £5,000 in one case. As the BSA pointed out, this measure takes "a society away from its main reason for existence on the savings side—to offer facilities to the small saver", increasing financial exclusion.[103]

52. A third method adopted by some societies is to restrict new membership to local investors, which Mr Waters said "may impose an undesirable restriction on the growth of societies' businesses outside their core area and therefore inhibit competition".[104]

53. These measures are designed mainly to prevent carpetbaggers disrupting branch offices; it is not clear whether they have made any difference to the outcome on conversion votes, although (as mentioned in paragraph 40) the Nationwide Building Society ascribed some significance to their presence.

54. We oppose the policy, which some societies have felt compelled to impose, of a large minimum deposit to deter carpet-baggers, because it excludes genuine small savers, and we conclude that this requirement should be dropped. We consider that the charity schemes represent a more positive way of discouraging carpet-bagging.


55. The guiding principle of mutual organisations is that they are owned and controlled by the members, although, as with companies, the day-to-day running is carried out by a board of directors, with members' participation restricted to electing the directors and voting on motions at general meetings.

56. The legislation provides maximum numbers of members (varying according to the total assets of the society) which building society rules can require for nominating directors, proposing motions at general meetings, and calling special general meetings. For the largest societies these figures are currently 50, 50 and 100 respectively, and the BSA recommended that they should be increased tenfold, a move which they advocated in particular because this could be done by regulation rather than Act of Parliament.[105] Ms Hewitt, while inviting us to take a view on this proposal, pointed out that increasing the number of members required to take any action meant "you run the risk of diminishing the accountability of the organisation to its members".[106]

57. We recognise that increasing the number of members required to propose motions or candidates or call meetings is an attractive option in that it could be done in secondary legislation, and we believe that it would be an improvement on the current situation; however, we believe that as it would also diminish accountability our recommendations in paragraphs 41, 43 and 48 (which would require an Act of Parliament) are preferable.

Candidates for the board

58. Mr Houghton believed that more "ordinary members" of building societies should be encouraged to stand as directors, but that this should be made more difficult for "people with a specific agenda such as demutualisation".[107] Dr Davis "felt quite uncomfortable sometimes" at the implication that other directors "are not members' representatives".[108]

59. Mr Frazer said: "One of the problems of building societies is that they tend to be self-perpetuating organisations where the board chooses the next people ... I do not think PLCs are very democratic either".[109] If some "rank and file" members were on the board by right, they would represent their interests "rather than some other interests ... that is probably quite a good thing". He pointed to the continental European structure of supervisory boards, with membership drawn from representatives of different groups such as staff and customers.[110]

60. Section 45(3) of the 1986 Act requires that the directors of building societies must be "fit and proper" persons to be directors, but there is no mechanism for the board or the BSC to prevent an unfit person from standing for election.[111] The Britannia suggested that the BSC should vet candidates before the election.[112] Mr Frazer suggested, however, that "management has to be fit and proper but I would have thought you could perhaps have a few unfit people on the board without doing too much harm as long as the board as a whole was fit".[113]

61. A change made by the 1997 Act was to require a poll for board elections even when the number of candidates is equal to the number of places.[114] The Britannia Building Society spent £2 million on ballot papers for a contested election of directors, only to find, when a candidate (Mr Michael Hardern) withdrew at the last minute, that they had to spend another £1 million on a revised ballot paper.[115] The BSA suggested that in these circumstances societies should not have to send out revised papers, and that candidates who withdrew should be banned for three years from standing again.[116] The Britannia are also expelling those who nominated Mr Hardern from the society by closing their accounts. They explained that this was to protect members from the cost of a possible recurrence.[117] The BSA also recommended granting full rights of membership, including the right to vote, only after two years' membership; the Yorkshire suggested five years.[118]


62. Several of our witnesses, with an eye to the pressure on the Parliamentary timetable, divided their proposals for change into those requiring primary legislation (an Act of Parliament) and those which could be dealt with by secondary legislation under existing powers.

63. The only suggestions made to us for legislation under secondary powers were for the increases in the numbers of members required to propose motions or directors or call meetings (paragraph 56). All our recommendations would require primary legislation, and we asked Ms Hewitt about the possible timing if the Government were to accept them. She confirmed that legislation before the next election would be "very difficult".[119] Given the current pressures to demutualise shown at this year's building society AGMs and the large number of demutualisations within the last four years, we do not believe that this timetable is acceptable. One possibility we put to Ms Hewitt was attaching the necessary provisions to some other bill; she did not believe that the Finance Bill would be suitable.[120] We recommend that the legislation which we have proposed in this Report should be brought in within the next Parliamentary session.

8  In 1975, the building society sector held 74% of the market in net advances for house purchase, and the monetary sector (including banks) just 2%. Most of the balance was advanced by local authorities (HC Library Research Paper 1997/20, p 10). Back

9  The BSC's powers are expected to transfer to the Financial Services Authority when the Financial Services and Markets Bill becomes law. Back

10  Appendix 7, para 3. The powers of the Commission are due to be transferred to the Financial Services Authority under the Financial Services and Markets Bill currently before Parliament. Back

11  Appendix 7, para 5. Back

12  Cheltenham and Gloucester (1995: takeover by Lloyds Bank), National and Provincial (1996: takeover by Abbey National), Alliance and Leicester (1997: conversion), Woolwich (1997: conversion), Halifax (1997: conversion, although the new company was already a Halifax subsidiary) (Halifax had incorporated Leeds Permanent in 1995), Bristol and West (1997: takeover by Bank of Ireland), Northern Rock (1997: conversion) and Birmingham Midshires (1999: takeover by Halifax). For details, see Appendix 7, para 15. Back

13  Evidence, p 69, para 12. Back

14  Appendix 7, paras 2, 21. The figures supplied by the BSA for 1998 are slightly lower: 17%, 23% and 33% (Evidence, p 67, para 5, p 70, para 17). The largest societies, by total assets, are the Nationwide, the Bradford & Bingley, the Britannia, the Yorkshire, the Portman and the Coventry (Butler's Building Society Guide, 1999, Garban plc.). Back

15  Evidence, p 68, paras 7-8. Back

16  Q 17 (Professor Llewellyn). Back

17  Evidence, p 72, para 33(a); see also Q 17 (Professor Llewellyn). Back

18  For a discussion of this point, see evidence, p 9, paras 46-9. Back

19  Q 170. Back

20  Evidence, p 7, para 36(4). Back

21  Evidence, p 69, para 14 and Table 2. Former banks had margins (for their comparable business) between 1.70% (Northern Rock) and 2.43% (Halifax) in 1998 whereas building societies had margins between 1.22% (Yorkshire) and 1.47% (Chelsea) except for Nationwide (year to April 1999), at 1.72%. Back

22  Evidence, p 69, para 15. Back

23  Q 19. Back

24  Appendix 7, paras 19-20. Back

25  Q 4. Back

26  Appendix 7, para 21. Back

27  Appendix 7, para 22-3. Back

28  Q 32. Back

29  Appendix 9. Back

30  Appendix 3, para 2.4. Back

31  Q 170. Back

32  Q 87. Back

33  Q 130. Back

34  E.g. evidence, p 77 [Nationwide], para 2.1-2. Back

35  Q 179. Back

36  Q 242. Back

37  Evidence, p 70, para 20; see also Q 174. Back

38  Evidence, p 71, para 21, 26; Q 203. Back

39  Q 83. Back

40  Q 87. Back

41  Q 131-3. Back

42  Q 140. Back

43  Q 176. Back

44  Q 242. Back

45  Evidence, p 2, para 7(7); Q 1-2. Back

46  Quoted in appendix 7, para 24. Back

47  Q 6. Back

48  Evidence, p 97, para 10(a). Subordinated debt is a loan which ranks lower than another debt in order of priority for payment. Back

49  Q 101, 142. Back

50  Q 178. Back

51  Q 236, 245. Back

52  Q 145. Back

53  P. Frazer, Op. cit., p 10; Q 19. For the details of the Britannia scheme, see Appendix 2, para 17. Back

54  Q 184. Back

55  Evidence, p 19-20, paras 5-8. Back

56  Evidence, p 54; see also Q 130. Back

57  Appendix 1, penultimate para. Back

58  Evidence p 43-5; see also evidence, p 33, para 11. Back

59  Q 190. Back

60  See evidence, p 33, para 13; Q 46. Back

61  Lord Brabazon of Tara, Official Report, House of Lords, 10 July 1986, col 539. Back

62  Q 7. Back

63  Q 100. Back

64  Evidence, p 73, para 34. Back

65  Evidence, p 73, para 38. Back

66  Q 173. Back

67  Q 7. Back

68  Q 95. Back

69  Q 192. Back

70  Q 95-6. Back

71  Q 147, 247. Back

72  Appendix 1, penultimate para. Back

73  Evidence, p 23, para 21(1). Back

74  Evidence, 91, para 21, and p 101, para 3. Back

75  Q 236. See also Q 235. Back

76  Q 9. Back

77  Q 99, 127, 151. Back

78  Q 244, 256. Back

79  The change of turnout requirement was specified in the Building Societies (Transfer Resolution) Order 1997, (S.I., 1997, No. 2714). Mr Coles described this is a "minor amendment", as typical turnout figures had been about 70% (Q 195). Requirements when a society is to be sold to an existing company rather than a new one are more exacting: 75% of shareholding members voting must be in favour, but those voting in favour must also represent either at least 50% of those qualified to vote or at least 90% by value of the shareholdings of those entitled to vote (Building Societies Act 1986, Schedule 2, paragraph 30(3)). Back

80  In the case of a takeover by an existing company, a cash distribution is possible to those who have been members for two years or more. Back

81  "BBBS should remain a mutual building society working in the best interests of its members both now and in the future." Back

82  Evidence, p 55. Back

83  Evidence, p 56. Mr Rodrigues pointed out that such a motion could be tabled every year and would "eat into the members' money" (Q 108). Back

84  Q 198. Back

85  Evidence, p 74, para 43(d). Back

86  Appendix 4. Back

87  Q 105-7, 127. Back

88  Evidence, p 73, para 36. Back

89  Q 180. Back

90  Q 7. Back

91  BSA, evidence, p 75, para 48; Q 166. Back

92  Q 237, 267. Back

93  Evidence, p 68, para 11(a). Back

94  Abbey National Building Society v. Building Societies Commission (1989) 5 BCC 259; Building Societies Commission v. Halifax Building Society (1997) Ch 255. See Appendix 7, para 10. Back

95  Cheltenham and Gloucester Building Society v Building Societies Commission (1995) Ch 185; see Appendix 7 para 10. Cash is also payable to those ineligible to vote by reason of a shareholding of less than £100 or being under 18. Back

96  Q 241. Back

97  Official Report, 17 March 1997, col. 627-48. Back

98  Appendix 7, paras 11-12. See also BSA evidence, p 73, para 35. Back

99  Evidence, p 74, para 43(c); see also Appendix 2, para 24 (Britannia); evidence, p 85, para 4.13 (Yorkshire); Appendix 3, para 4.1 (Leeds & Holbeck); Appendix 4 (Coventry). Back

100  Evidence, p 23, para 19(3). Back

101  Evidence, p 56; Q 99. Back

102  Q 181-2, 197. Back

103  Evidence, p 74, para 43(a). See also evidence, p 22, para 19 (Mr Waters); Appendix 1 (Chelsea B.S.). Back

104  Evidence, p 22, para 19(2). Back

105  Evidence, p 75, para 49. Back

106  Q 268. Back

107  Q 95. See also Q 97. Back

108  Q 209. Back

109  Q 27. Back

110  Q 28. Back

111  Evidence, p 23, para 20. Back

112  Appendix 2, paras 3, 35. Back

113  Q 30. Back

114  Evidence, p 68, para 11b; Appendix 2, para 38. Back

115  Appendix 2, paras 28, 39. Back

116  Evidence, p 75, para 50. Back

117  Appendix 11. Back

118  Evidence, p 75, para 51; p 85, para 5.10. Back

119  Q 257-8. Back

120  Q 238. Back

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Prepared 27 July 1999