Business is booming for building societies after the Northern Rock debacle,
with customers seeking alternatives to the banks that they believe are
taking too many risks with their hard-earned cash.
Figures from the Building Societies Association (BSA) showed a huge inflow of
savings in the last four months of last year, particularly September and
October, most of which could be attributed to the Northern Rock crisis. The
total inflow for the year was £16.1 billion - approximately twice the level
recorded in the previous year and a record for building societies.
This was no flash in the pan. Rachel Le Brocq, of the BSA, says that this year
building societies experienced the largest January savings inflow for a
decade, demonstrating that savers are continuing to turn to mutuals. “We
normally see a savings outflow in January as people use their savings to pay
off the debts they have run up over Christmas,” she says. “This year was the
largest January inflow since 1997.”
And it is not only building societies that are benefiting from a change of
heart by consumers. Mutuals in general, including insurers and friendly
societies, are also experiencing a surge of interest in their products.
Shaun Tarbuck, chief executive of the Association of Mutual Insurers (AMI),
says that there is a feeling that the public is seeking alternatives to
commercial publically limited companies (plcs).
Mr Tarbuck says that users of mutual organisations are usually older
individuals who are financially savvy, with an understanding of mutuality,
and who prefer to choose a product to match their lifestyle and ethos. One
such satisfied customer is Paul Giangrande, a haematology consultant, who
chose to take out his pension and income protection products with Wesleyan,
partly because it is a mutual organisation.
Dr Giangrande says: “There are no shareholders to pay and no fat cats to be
paid out of the money that I'm paying in. It is essentially a democratic
organisation in which members have a say. There are no tricky shareholder
groups trying to exert pressure. I can get better rates and better
treatment.”
Feedback received by both the BSA and the AMI show that Dr Giangrande's
sentiments are typical of those who become mutual members. And the AMI has
found that younger savers between 18 and thirtysomething are now joining the
mutual converts. Mr Tarbuck says: “This is a surprising growth area for us.
They are just starting to buy insurance, or even a pension, and are well
versed in social responsibility. The internet is their primary driver, which
I suppose is one of the biggest mutuals there is.”
Despite the renewed enthusiam for the mutual model, the question remains
whether these organisations are intrinsically safer or offer better value
than plcs.
The perception of most people is that mutuals provide a safe haven. The last
time that the BSA's record books were smashed by savings inflows was in
1988, when £13.6 billion was deposited into building societies. The reason?
Savers were seeking safety after the stock market crash of October 1987.
In mortgage terms, building societies typically are less reliant on volatile
wholesale money markets to fund their home loans, instead using depositors'
money. In theory this makes them less likely to suffer the same fate as
Northern Rock. They have also, on average, been more conservative than plcs
in the amount that they will lend and to whom they will lend. Take the
loan-to-value (LTV) ratios for the top half a dozen building societies. Each
is less than the industry average. Unsurprisingly, the proportion of
borrowers with mortgage arrears of three months or more is also less than
the industry average.
At Britannia, Britain's second-largest building society, the average LTV ratio
of new mortgages was only 63 per cent last year. The Council of Mortgage
Lenders (CML) says that the industry-wide LTV ratio for house purchases that
year was 80 per cent. Leeds Building Society had an average LTV ratio of 53
per cent, and only 0.7 per cent of Leeds mortgage borrowers were in arrears
of three months or more, compared with the industry average of 1.1 per cent.
Below-average default rates were typical among building societies.
However, mutual insurers have had their own headline-grabbing collapse to
rival Northern Rock in the damage it did to the industry - Equitable Life.
The AMI insists that the findings of the 2001 Myners report into why the
insurer collapsed has led to greater corporate governance within the mutual
sector and, thus, better safeguards for investors.
But both Equitable Life and Northern Rock have demonstrated that, whether the
organisation is a mutual or a public company, risk is ever-present. However,
mutuals can also be assessed on another measure: their ability to provide
long-term value to customers.
Take the much-loathed but still widely held with-profits endowment policies.
AMI figures show that investors who put aside £6,000 over the past ten years
would receive an average return 14 per cent higher with a mutual than with a
public company. The story is much the same with policies over 15, 20 and 25
years, with mutuals returning more money to policyholders.
Mutuals have also outperformed public companies with their no-frills savings
products. Moneyfacts, the financial comparison website, trawled savings,
mortgage, loan and credit-card offers to find the organisations that provide
consistently market-leading rates. Building societies dominate the
consistency tables for general savings accounts, cash Isas and standard
variable mortgage rates (SVRs).
For no-notice savings accounts, four of the five top providers over 18 months
were building societies. The three most consistent providers over 36 months
were also building societies. Three of the top four most consistent
providers of internet-based savings providers over 36 months were - yes,
you've guessed it - building societies. They also dominated the tables for
Isas and for SVR mortgages.
Where are the windfalls?
Most readers will remember the “carpetbagging” days of the 1990s, when many
consumers opened building society accounts purely for expected windfall
payments. The average cheque in 1997 was for £1,100, a huge return on an
often negligible minimum investment.
While pickings are smaller and scarcer, the Portman-Nationwide merger showed
that the occasional payout can still be had. So where should would-be
speculators start?
These days windfalls can be had only when two mutual societies merge. Where a
building society is demutualised, “charitable assignment clauses” introduced
in the 1990s to deter carpetbaggers sign away to charities the cash that
would once have gone to members.
Kevin Mountford, of Moneysupermarket.com, the comparison website, says that
these clauses have effectively killed carpetbagging as an easy punt. “We are
likely to see more consolidation, which means more mergers,” he adds. “But
actively chasing the ones that will pay is not likely to be worth the
effort. I know people who have account books with dozens of mutuals, and no
windfall to date.
“There's little point in cycling across the country, putting cash into mutuals
on the off-chance. But if one in your area has reasonable rates and there is
talk of a merger, go ahead.”
Mr Mountford adds that some societies have introduced higher minimum
investments for non-locals. For example, Scottish Building Society asks for
£1,000. He concedes, however, that savers are in a strong position at the
moment, so leaving money in most building society accounts is no longer the
cash drain it once was.
Mark Dampier, of Hargreaves Lansdown, the independent financial adviser,
agrees that chasing mergers is not easy. But he adds that the credit crunch
means that savers should spread their eggs “and some will get lucky”.
CASE STUDY
Graziella Campisano, a fundraising manager for Macmillan Cancer Support, made
the move from bank to building society last year. She first moved her
savings from Halifax to an online savings bond with Nationwide Building
Society a year ago. Then, having caught the mutuality bug, she switched her
current account from HSBC, also to Nationwide.
“I find the culture very different and I am very happy,” says Ms Campisano,
left. “I felt that with both HSBC and HBOS my needs were not paramount. I
got the feeling that they couldn't be bothered. I really believe that I am
getting better service now.”
Ms Campisano says that the switch was seamless and, though she never intended
to put all her financial eggs in one basket, she also has an Isa with
Nationwide. “For me, it ticks every box,” she says. “I feel that its social
responsibility matches mine.”
She has been heartened by the society's commitment to charity, adding: “As a
fundraising manager, Nationwide's charitable focus is very important to me.
It has given more than £5 million to Macmillan Cancer Support in the past 15
years.”
