Financial mutuals feel the pain

Skipton Building Society’s decision to raise its mortgage lending rate is a sign of how badly hit some financial mutuals are in the current, continuing, crisis. Skipton has...

This is a substantial hike, particularly in a period when the Bank of England base rate is a mere 0.5 per cent. The move has already been attacked by several financial commentators, who point out that a family with what was a monthly mortgage repayment of £400 may now have to fork out an additional £200 a month. That is likely to put many households into hardship.

The Which? consumer group has led the criticisms, arguing that it is immoral for a lender to increase a rate that borrowers in many cases cannot escape because of the terms of their contracts. Moreover, it is a step that Skipton previously promised not to take. Which? has called for such contract changes to be made illegal.

However, it is important to understand the pressures afflicting the Skipton and the rest of the building society sector. Quite simply, it is proving impossible for some building societies to raise sufficient amounts of money from savers to fund lending. The savings rates have to rise, leading to Skipton lifting its SVR. 

Skipton Group Chief Executive David Cutter explains: “We have approximately 750,000 investing members to our 100,000 borrowers. UK savers have been the forgotten victims of the credit crunch. But their money is now in hot demand as banks — in particular those that have been nationalised or part nationalised — continue to reduce their reliance on the wholesale markets. This, coupled with the rates payable by the Government’s NS&I, has driven up the cost of retail funding to an unprecedented level relative to mortgage rates.”

A quick glance at the interest rates paid on savings products explains why building societies are in the trouble they are in. The best fixed rate savings products currently on offer, as listed by the Moneyfacts comparison website, are FirstSave, paying 3.65 per cent, followed by the State Bank of India, paying 3.50 per cent, and the Bank of Cyprus, paying 3.40 per cent. There is no building society in the top seven paying savings institutions, nor is there any that is genuinely UK. (The Post Office is in the list, but it merely badges and sells products from the Bank of Ireland.)

Building societies are also not especially attractive on fixed rate ISAs (individual savings accounts), where the highest rate is offered by Aldermore, a newly launched British bank that pays 3.60 per cent. But, also attractive, National Savings & Investments pay 2.50 per cent on its ISAs.

Traditionally, you would never see the Government’s savings arm paying competitive rates of interest. With the guarantee of a government behind it, NS&I would normally pay much less than the market rate, knowing that people flock to it for reasons of security. But these are not normal times. And other institutions have had to respond by upping their own rates to provide a better return than does NS&I. The Skipton’s move is a reflection of this.

Other building societies are predicted to follow the Skipton lead. Whether they do so will depend on whether they are in the same difficulties in attracting savings that the Skipton is in — several probably are. The Building Societies Association has repeatedly warned that the high rates of interest paid by NS&I and the state-rescued banks has badly squeezed the building societies.

Despite this, building societies have over the medium-term performed better than banks in terms of their consistency in offering attractive savings products. Some banks have been very cynical and offered high rates in the short term, assuming that sufficient numbers of savers will, from inertia, not move their money when the rates drop.

“Our survey shows that 71.5 per cent of building societies offer consistently good rates of interest to savers,” says Louise Holmes, an analyst at Moneyfacts. She added: “Our results show, yet again, that building societies still reign supreme in the consistency stakes.” 

Some of the best performers, say Moneyfacts, are smaller societies, such as Bath. Despite this, the perception is that building societies have been disproportionately hit by the recession. As the Treasury spokesman said, quoted in this column in the last issue: “The mutual model has been put under pressure.”

To some extent this view is valid — some historic societies have gone down and have been rescued within the sector. But we have not had the type of disaster that has afflicted RBS or Halifax — and many of the worst problems hit the demutualised societies. The business model that most clearly failed to work was the one adopted by those societies that converted into PLCs. 

And the societies that went under tended to be those that tried, within the constraints of being a building society, to emulate the demutualised societies by going into commercial property lending, approving excessive loans to value, entering the buy-to-let market and engaging in debt securitisation transactions.

An alternative perspective on the crisis has just been aired in the unlikely pages of The Economist. It points out that across the last decade, co-operative banks have gained market share in Europe, with one in five citizens a customer of a banking co-op and with a far higher level of client satisfaction than with banking PLCs. The article quotes Mark Weil, Head of European Financial Services at Oliver Wyman management consultants, as saying: “Overall the mutuals didn’t have a worse crisis than the commercial banks.” He added that where they did make losses it was “not necessarily because of the mutual structure”.

In fact, the big difference between the mutual and the PLC sectors is that the type of support given to the banking PLCs was simply not made available to mutuals in trouble in the UK. And the new rules for minimum capital, designed to prevent a repetition of the crisis, directly discriminate against mutuals. Banks are expected to raise additional risk capital from shareholders to meet minimum capital requirements, which building societies cannot do.

It is very sad that as we probably head towards the end of the longest ever period of Labour government, one of its legacies will be a continuing crisis for the financial mutual sector. For all the words offered up by the Treasury during the financial crisis about the mutual model having strengths and benefits that were not there in the mainstream banking sector, the real truth is that financial mutuals were failed by government in their greatest time of need.

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