Dec 2011 – Lots going on for mutuals
Adrian Coles, director-general of the Building Societies Association, explains why the mutual sector has so much going for it
Among the depression induced by what seems like an inexorable onslaught of new regulation, the flat-lining of the mortgage market, low margins, and the costs of the Financial Services Compensation Scheme bailout of Bradford & Bingley bank (among many other matters of current concern), it is easy to overlook the core advantages enjoyed by the mutual sector, compared to plcs, in addressing customer requirements.
It’s time for mutuals to raise their noses from the market and regulatory grindstone and recognise how well placed they are to react to the needs of a market that has changed hugely since the run on the Northern Rock bank, now over four years ago.
In fact, mutuals’ very structure resonates with the needs of the time. Far less exposed to, and participants in, the global financial markets, owned by their customers, a less fickle group than the fund managers that own bank equities, and concentrating on customer service, rather than shareholder and managerial return, mutuals are the alternative providers of financial services for which many are searching.
Mutuals’ structure encourages the long-term outlook that providers of long-term products such as savings, mortgages and insurance should be exhibiting; indeed it is rather odd that we have reached a situation in which the majority of 25-year mortgages, life-long pensions, 10, 20 and 30 year life insurance policies, and longer term deposit savings are provided by institutions that, judging by their behaviour in the run-up to 2007-8 appear to have a horizon bounded by the publication date of the next quarterly earnings figures.
Some allege that mutuals are not up to the job because they cannot innovate at the speed now expected by the market. However, recent activity belies that charge (and anyway much innovation in the financial markets in recent years has been of doubtful value). In the credit union sector, for example, 28 unions have, since 2007, launched current account services. In another example, building societies are almost the sole providers of the new Junior ISAs. There are 19 societies, at the time of writing, offering the JISA, one mutually owned bank, and one other bank (which is not a high street name in this country).
On the housing side building societies are leading the way on shared equity, and shared ownership lending, with the BSA and Nationwide Building Society working together to develop a new website that will ultimately enable lenders, developers and housing association partners in these markets to work more closely together than has been possible until now. There remains a huge housing need in the UK, and although it will take a long time for the new mortgage market to emerge from the ashes of the market that almost burnt itself to death in 2008, the need for a group of institutions that have housing and housing finance as a core activity is as great as ever.
Another criticism of mutuals is that they cannot raise capital at a time when it is needed. Relying on retained earning at a time of low margins and increased regulatory requirements on capital places, it is alleged, mutuals in a weak position. However, this ignores two points. Alternative business models cannot guarantee to raise new capital from the markets when it is required – as is evidenced by the large tax-payer holdings in Lloyds Banking Group and RBS.
Those institutions that demutualised in the late 1980s and 1990s, and which very often highlighted access to capital as one reason for their departure from the mutual sector, also found that their new structure did not help them in a crisis – as Andrew Bailey, deputy chief executive designate of the new Prudential Regulatory Authority made clear once again as recently as 24 November 2011: “The crisis revealed deep flaws in the business model of demutualised building societies. Not one of them survives today as an independent entity.”
On the other hand no general taxpayer investment in continuing mutuals was required at any time during the crisis. Across the sector, there was generally sufficient capital to enable stronger institutions to support the weaker ones. Mutuals generally continue to hold levels of capital in excess of those required to meet regulators’ requirements
A second point is also important. It is now accepted that regulatory provision must be made for mutual-friendly forms of capital, equally with plc forms. The draft European Capital Requirements Regulation published by the European Commission now explicitly recognises new mutual capital instruments.
In the world of Occupy Wall Street, (and St Paul’s Churchyard) many are looking for a different type of financial institution than that with which they became familiar in the decade up to 2007. With the state very keen (although for some time probably unable) to exit the banking market, with (parts of) the plc sector disgraced and in some respects accepting reform only reluctantly, the time for mutuals is here……and now!