Memorandum from Phil Bale
RE: SUBMISSION TO THE TREASURY COMMITTEE'S
INVESTIGATION ON THE BANKING CRISISMEMBER EMPOWERMENT IN
THE UK MUTUAL SECTOR
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 RepresentationNational Level.
2. Member RepresentationMember Business
3. Building SocietiesThe lost generation.
1. NATIONAL MEMBER
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
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
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.
2. MEMBER BUSINESS
Recommend the appointment at Board level of a
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
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.
3. BUILDING SOCIETIES:
Promote a new breed of Building Society based
on important social and economic principles rather than geographic
3.1 The long term decline in the number of mutual
mortgage providers in the UK must be addressed in the Treasury
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
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.