Banking Crisis - Treasury Contents

Memorandum from Phil Bale


  I am writing to you as an ordinary member of several mutual businesses in the United Kingdom and as a former Member of Britannia Building Society's Members' Council. I hope that this submission will assist members of your Committee when making their recommendations to the Government, with its particular focus on member owned businesses.

  Whilst the Committee will be focusing its attention primarily upon the failings in the UK banking sector, in this submission I would like to focus on the UK mutual sector. In particular, I wish to advance a number of ways in which the Government could strengthen governance arrangements in the financial mutual sector.

  I would therefore be grateful if the Treasury Committee could address the three key issues highlighted below as part of its final report:

    1.  Member Representation—National Level.

    2.  Member Representation—Member Business Level.

    3.  Building Societies—The lost generation.


Support a "Mutual Members' Association" (MMA) in the United Kingdom

  1.1 Despite the significant and growing role of mutually owned businesses across the United Kingdom, there is still no one organisation which exists to represent the interests of ordinary members.

  1.2 Shareholders in public companies have benefited from the establishment of the UK Shareholders Association in 1992. Likewise, financial mutuals have the support of their own trade associations, which include the Building Societies Association (BSA) and the Association of Mutual Insurers (AMI). However, these bodies exist to represent the interests of their member businesses, not members themselves, in the various sectors in which mutuals now operate.

  1.3 It is therefore vitally important that the Government works with members to develop such a body, so that the voice of members is better represented at a national level. The creation of a new member led (MMA) body would be extremely helpful in addressing this historical imbalance.

  1.4 If the mutual sector had an equivalent organisation to the UK Shareholders Association, then it is likely that the debate over the large scale demutualization of Building Societies in the 1990's would have been much less one sided. This could have reduced the number of Building Societies which pursued such strategies, which in turn may well have reduced the need for substantial taxpayer support for the demutualised banks.

  1.5 The role of a new national member advocate group could include:

    —  Promoting greater awareness and participation in the democratic process in mutual businesses and assisting in the development of good corporate governance in the sector.

    —  Supporting education and training on the mutual model, including working with schools and colleges.

    —  Facilitating national forums to encourage member debate and awareness of the issues facing particular types of mutuals. (The first industry wide "Mutual Forum" was held in December 2008 but no such event exists for ordinary members).

    —  Improving the scrutiny of management and highlighting poor business performance.

    —  Undertaking and commissioning new research and member surveys.

    —  Providing increased opportunities for member involvement in consultations with regulators as well as an input into government policy formation.

    —  Inclusion on the Board of Mutuo, along with employee representatives, to provide an enhanced tripartite arrangement to promote mutuality.

  1.6 It is worth highlighting at this point the potential impact of the Building Societies (Funding) and Mutual Societies (Transfers) Act. The recently announced merger between Britannia Building Society and The Co-operative Group, may well herald the start of further cross-mutual consolidation in the financial industry. This will inevitably encourage greater co-operation and in some instances, mergers between trade bodies as well.

  1.7 If members remain ineffective in monitoring the use of this new legislation, then there is a real danger that some mutuals will begin to expand into more complex (and potentially unsuccessful) business combinations, supported by a smaller number of more influential trade body groups.

  1.8 This development has the potential to undermine member understanding of their businesses and the required scrutiny of management in the sector going forward.

  1.9 I would therefore urge the Government to take decisive action to ensure that ordinary members are properly represented at all levels within the mutual sector.


Recommend the appointment at Board level of a "Member Advocate"

  2.1 There is a case for the Committee to consider the merits of legislation which would require a customer/member representative to be appointed to the Board of Directors of Building Societies (and perhaps even our banks as well).

  2.2 This representative could produce their own Member Report as part of the Annual Report & Accounts and could hold specific responsibilities for member engagement and consultation, for example over branch closures. Some Societies do already advertise and invite applications for Board candidates from their members but successful candidates do not have any special customer owner responsibilities.

  2.3 I would also recommend that this Board level "Member Advocate" was also accountable to a panel of members, similar to Britannia's Members" Council, but with clearly protected rights and responsibilities which cannot be manipulated by senior management. Such bodies do already exist at some Societies, but their powers and remit vary considerably.

  2.4 The Nationwide Building Society for example, prefers to hold "Talk Back" sessions for its members across the country as a means of listening to their grassroots membership. However, there is no reason why such road shows could not take place alongside a permanent body of members.

  2.5 The ability of a member to monitor management is of course helped considerably when they are able to do so in a formal framework, over a three or four year period, and with access to the same information as the Chief Executive. This is why such changes can only be implemented by Government as management themselves are unlikely to promote member engagement strategies which undermine their authority.

  2.6 There are a number of Building Societies which now appear to have followed strategies which have left these businesses poorly positioned to deal with the rapidly deteriorating economic climate. One can only speculate what the outcome of such practices would have been if such strategies had been allowed to continue unchallenged and unchecked by the current recession.

  2.7 The election of a customer member to the Board of a financial mutual would help to assist in promoting a challenging culture within Boardrooms.

  2.8 Furthermore, if an ordinary member who has been elected to the Board cannot understand or becomes increasingly concerned by the direction being followed by management, then that would in itself act as a useful warning to excessive risk taking.

  2.9 The Government should also move quickly to end the practice of Executive Directors sitting on Nomination Committee's, which then select the Non-Executive Directors who are supposed to monitor their own performance.


Promote a new breed of Building Society based on important social and economic principles rather than geographic spread

  3.1 The long term decline in the number of mutual mortgage providers in the UK must be addressed in the Treasury Committee's Report.

  3.2 The last new Building Society in the UK was the Ecology Building Society in the early 1980's. There are now significant barriers to entry to the market which must be addressed.

  3.3 The BSA has failed to take a lead in this important area and concentrated on the priorities of their last remaining member societies. However, now is just the time for the Government to encourage greater consumer choice through smaller, locally run and accountable mutual lending and savings providers.

  3.4 The long term consequences for competition in the mortgage market, as a result of the consolidation or complete withdrawal from the UK market, of significant numbers of participants should not be underestimated.

  3.5 Furthermore, the dominant position of the Nationwide, relative to its peers, currently exposes the entire sector to an excessive degree of risk. If the Nationwide were, for whatever reason, to loose the confidence of its members then the viability of the entire sector would be called into question. This risk would be reduced if the Nationwide's size, relative to the whole sector can be reduced over time.

  3.6 This can be achieved through the promotion of a new breed of Building Society which, like the Ecology, is focused upon important social objectives rather than any geographical spread. Such an approach would not only capture the current climate for socially responsible business but would also provide an incentive for members to invest the levels of new capital required. These capital requirements should be reviewed to ensure that they are no longer viewed as a barrier to entry for the sector.

  I do hope that you have found the points I have raised of interest to your enquiry. I shall now await, with interest, your final report but in the meantime if you have any further questions, please do get in touch. I would welcome the opportunity, in partnership with the London Centre for Corporate Governance & Ethics (LCCGE), to expand upon any points raised and to assist you more generally in any way possible.

February 2009

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