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.
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
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).
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
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).
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.
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.
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.
ARGUMENTS FOR CONVERSION
7. In addition to the increased scope for diversification,
mentioned above and to some extent made less valid by the 1997
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")
or what is sometimes held to be the increased discipline of accountability
to shareholders forcing greater efficiency.
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".
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".
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.
ADVANTAGES CLAIMED FOR MUTUALS
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.
They also told us that building society accounts regularly appeared
in the lead in league tables of interest rates.
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".
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,
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
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).
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".
12. Professor Llewellyn said that the American experience
was that new companies offering better mortgage rates do not necessarily
last very long.
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".
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.
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.
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 ...".
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".
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,
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.
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".
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
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.
Councillor Serge Lourie of "Save our Building Societies"
claimed that building societies "tend to lend more sensitively"
in urban priority areas.
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.
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.
How a board and management acted was more important than whether
it was a mutual or a plc (public limited company).
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.
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".
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".
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".
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".
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".
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".
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.
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.
A similar point was made by Mr Kevin McGuinness, Group Secretary
of the Bradford & Bingley Building Society.
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".
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".
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.
WHO OWNS THE ASSETS?
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 membersvery 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.
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".
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".
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.
Dr Davis said: "existing members ... also have to think about
the future ... maybe it is a trusteeship rather than an ownership".
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.
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
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".
Mr Rodrigues said that all the research the Bradford & Bingley
Building Society had carried out suggested that windfall profits
were the primary motivation.
The BSA pointed out that some windfalls had been worth more than
£2,000 per member.
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 sharesprecisely 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
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".
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.
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".
Dr Davis said that taxing windfalls would "put some money
back into the community which is where it originally came from".
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.
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.
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.
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".
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.
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".
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".
Professor Llewellyn said: "I am not arguing that no building
society should ever convert but there are distortions in the voting
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".
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".
36. Although the assets of building societies
were built up by past generations, andif the societies
continueare 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.
PROVISIONS FOR DEMUTUALISATION
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 boardit 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);
(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.
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,
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).
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
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
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.
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.
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
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.
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".
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.
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
The BSA called for the threshold for a borrowers' conversion resolution
to be the same as for savers.
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.
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.
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'
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
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.
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".
In March 1997, the then opposition tabled an amendment to the
bill for the Building Societies Act 1997 to rectify this, but
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
BUILDING SOCIETIES' OWN MEASURES TO DETER CARPET-BAGGERS
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
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.
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".
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
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.
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 sideto offer facilities to the small saver",
increasing financial exclusion.
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".
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
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.
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".
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".
Dr Davis "felt quite uncomfortable sometimes" at the
implication that other directors "are not members' representatives".
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".
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.
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.
The Britannia suggested that the BSC should vet candidates before
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".
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.
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
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.
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.
The BSA also recommended granting full rights of membership, including
the right to vote, only after two years' membership; the Yorkshire
suggested five years.
TIMING OF CHANGES
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".
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.
We recommend that the legislation which we have proposed in
this Report should be brought in within the next Parliamentary
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
BSC's powers are expected to transfer to the Financial Services
Authority when the Financial Services and Markets Bill becomes
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
7, para 5. Back
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
p 69, para 12. Back
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
p 68, paras 7-8. Back
17 (Professor Llewellyn). Back
p 72, para 33(a); see also Q 17 (Professor Llewellyn). Back
a discussion of this point, see evidence, p 9, paras 46-9. Back
p 7, para 36(4). Back
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
p 69, para 15. Back
7, paras 19-20. Back
7, para 21. Back
7, para 22-3. Back
3, para 2.4. Back
evidence, p 77 [Nationwide], para 2.1-2. Back
p 70, para 20; see also Q 174. Back
p 71, para 21, 26; Q 203. Back
p 2, para 7(7); Q 1-2. Back
in appendix 7, para 24. Back
p 97, para 10(a). Subordinated debt is a loan which ranks lower
than another debt in order of priority for payment. Back
101, 142. Back
236, 245. Back
Frazer, Op. cit., p 10; Q 19. For the details of the Britannia
scheme, see Appendix 2, para 17. Back
p 19-20, paras 5-8. Back
p 54; see also Q 130. Back
1, penultimate para. Back
p 43-5; see also evidence, p 33, para 11. Back
evidence, p 33, para 13; Q 46. Back
Brabazon of Tara, Official Report, House of Lords, 10 July
1986, col 539. Back
p 73, para 34. Back
p 73, para 38. Back
147, 247. Back
1, penultimate para. Back
p 23, para 21(1). Back
91, para 21, and p 101, para 3. Back
236. See also Q 235. Back
99, 127, 151. Back
244, 256. Back
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
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
should remain a mutual building society working in the best interests
of its members both now and in the future." Back
p 55. Back
p 56. Mr Rodrigues pointed out that such a motion could be tabled
every year and would "eat into the members' money" (Q
p 74, para 43(d). Back
105-7, 127. Back
p 73, para 36. Back
evidence, p 75, para 48; Q 166. Back
237, 267. Back
p 68, para 11(a). Back
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
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
Report, 17 March 1997, col.
7, paras 11-12. See also BSA evidence, p 73, para 35. Back
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
p 23, para 19(3). Back
p 56; Q 99. Back
181-2, 197. Back
p 74, para 43(a). See also evidence, p 22, para 19 (Mr Waters);
Appendix 1 (Chelsea B.S.). Back
p 22, para 19(2). Back
p 75, para 49. Back
95. See also Q 97. Back
p 23, para 20. Back
2, paras 3, 35. Back
p 68, para 11b; Appendix 2, para 38. Back
2, paras 28, 39. Back
p 75, para 50. Back
p 75, para 51; p 85, para 5.10. Back