building society

A building society is a financial institution, owned by its members, that offers banking and other financial services, especially mortgage lending.

The term building society first arose in the 19th century, in the United Kingdom, from co-operative savings groups. In the UK today building societies actively compete with banks for most personal banking services, especially mortgage lending and deposit accounts. At the start of 2008, there were 59 building societies in the UK, with total assets exceeding £360 billion^[1]. Every building society in the UK is a member of the Building Societies Association. The number of societies in the UK fell by four during 2008 due to a series of mergers brought about, to a large extent, by the consequences of the financial crisis of 2007-2009, and further mergers took place in 2009.

History

The original Building Society was formed in Birmingham in 1774. Most of the original societies were fully terminating, where they would be dissolved when all members had a house: the last of them was wound up in 1980. In the 1830s and 1840s a new development took place with the Permanent Building Society, where the society continued on a rolling basis, continually taking in new members as earlier ones completed purchases, such as Leek United Building Society. The main legislative framework for the Building Society was the Building Society Act of 1874, with subsequent amending legislation in 1894, 1939 (see Coney Hall), and 1960.

In their heyday, there were hundreds of building societies: just about every town in the country had a building society named after that town. Over succeeding decades the number of societies has decreased, as various societies merged to form larger ones, often renaming in the process, and other societies opted for demutualisation followed by - in the great majority of cases - eventual takeover by a listed bank. Most of the existing larger building societies are the end result of the mergers of many smaller societies.

1980s and 1990s

In the 1980s, British banking laws were changed to allow building societies to offer banking services equivalent to normal banks. The management of a number of societies still felt that they were unable to compete with the banks, and a new Building Society Act was passed in 1986 in response to their concerns. This permitted societies to 'demutualise'. If more than 75% of members voted in favour, the building society would then become a limited company like any other. Members' mutual rights were exchanged for shares in this new company. A number of the larger societies made such proposals to their members and all were accepted. Some became independent companies quoted on the London Stock Exchange, others were acquired by larger financial groups.

A movement arose whereby investors would open a savings account with a mutual building society, thereby getting voting rights in the society, and pressurise for a vote on demutualisation, with the intent of getting a windfall payment as a result. A number of societies' members and managers were very unhappy about such investors, who were termed carpetbaggers, maintaining that as mutual societies, they could supply better and cheaper home loans than the banks and demutualised societies, as they only had to make a profit to cover their operational costs, and had no need to generate an additional profit to return to shareholders.

In the end, after a number of large demutualisations, and pressure from carpetbaggers moving from one building society to another to cream off the windfalls, most of the remaining societies modified their rules of membership in the late 1990s. The method usually adopted were membership rules to ensure that anyone newly joining a society would, for the first few years, be unable to get any profit out of a demutualisation. With the chance of a quick profit removed, the wave of demutualisations came to an end in 2000.

One academic study (Heffernan, 2003) found that demutualised societies' pricing behaviour on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates.^[2]

Deposits with building societies of up to £50,000 per individual, per institution, are normally protected by the Financial Services Compensation Scheme (FSCS), but Nationwide and Yorkshire Building Societies negotiated a temporary change to the terms of the FSCS to protect members of the societies they are acquiring in late 2008/early 2009. The amended terms allow former members of multiple societies which merge into one to maintain multiple entitlements to FSCS protection until 30 September 2009 (later extended to 30 December 2010), so (for example) a member with £50,000 in each of Nationwide, Cheshire and Derbyshire at the time of the respective mergers would retain £150,000 of FSCS protection for their funds in the merged Nationwide.^[3]

List of building societies

United Kingdom

Current

The remaining building societies are:

(Total group assets of building societies) Source: Building Societies Association^[1] updated for subsequent mergers and the administration of Dunfermline Building Society

* These societies do not form part of a corporate business group, although they may own other businesses.

Demutualised

Ten building societies of the United Kingdom demutualised between 1989 and 2000, either becoming a bank or being acquired by a larger bank.^[9][10] By 2008, every building society that floated on the stock market in the wave of demutualisations of the 1980s and 1990s has either been sold to a conventional bank, or been nationalised.^[10]

No longer exist

The following is an incomplete list of building societies in the United Kingdom that no longer exist, since they either merged with or were taken over by other building societies or mutuals.^[11].

Other countries

• Australia: In Australia, building societies evolved along British lines. Because of strict regulations on banks, building societies flourished until the deregulation of the Australian financial industry in the 1980s. Eventually many of the smaller building societies disappeared, while some of the largest (such as St. George) officially attained the status of banks.

• Austria: In Austria there are four building societies: Allgemeine Bausparkasse (ABV), Raiffeisen-Bausparkasse, Bausparkasse Wüstenrot AG and Bausparkasse der Sparkassen (savings bank).

• Finland: In Finland the Mortgage Society of Finland, a permanent building society, was founded in 1860. Since 2002 mortgage loans are handled by Suomen AsuntoHypoPankki, the licensed bank owned by the society.

• Germany: In Germany there are 11 Bausparkassen der Sparkassen (savings bank) named Landesbausparkassen (LBS) and 15 Bausparkassen of the private banks, for example Schwäbisch Hall, Wüstenrot, Deutsche Bank Bauspar AG etc.

• Ireland: In Ireland, the two building societies are as follows; EBS Building Society, and Irish Nationwide Building Society.

• Jamaica: In Jamaica, four building societies compete with commercial banks and credits unions for most consumer financial services.

• United States: In the United States, savings and loan associations have a similar organisation and purpose.

• New Zealand: In New Zealand, a number of building societies have been established. However the New Zealand finance company crash of 2006-2008 and the flow on from the credit crisis have lead to the consolidation, collapse and restructuring of many, notably Southland Building Society who moved in October 2008 to become a registered bank.

Operational differences from banks

Roll numbers

Because most building societies were not direct members of the UK clearing system, it was common for them to use a roll number to identify accounts rather than to allocate a six-digit sort-code and eight-digit account number to the BACS standards.

More recently, building societies have tended to obtain sort-code and account number allocations within the clearing system, and hence the use of roll numbers has diminished. Nationwide is the most notable society to have discontinued the use of roll numbers completely.^[15] When using BACS, roll numbers are entered into the Reference field whilst the building society's generic sort-code and account number would be entered in the standard BACS fields.^[16]

See also

• Cooperative banking
• Mutual organisation
• Mutualism
• Demutualisation
• Banking in the United Kingdom

References

Wikisource has the text of the 1911 Encyclopædia Britannica article Building Societies.

External links

• Building Societies Association
• The History of Building Societies from the Building Societies Association website.

• Pollock, Ian (2008-09-29). "Not such a good idea after all?". news.bbc.co.uk. BBC News. http://news.bbc.co.uk/1/hi/business/7641925.stm. 

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v • d • e Building Societies of Scotland Century Building Society • Dunfermline Building Society • Scottish Building Society

v • d • e Building Societies in the Republic of Ireland Full EBS Building Society • Irish Nationwide Building Society Subsidary Nationwide UK (Ireland) (owned by members of Nationwide in the UK, does not have members of its own) Demutualised First National Building Society • ICS Building Society (now part of Bank of Ireland)

v • d • e Building Societies of New Zealand Nelson Building Society • CBS Canterbury • S B S