Demutualisation was one of the worst cases of corporate misdeeds and intergenerational theft of the modern era. Building Society boards, city investors and carpetbaggers all came, saw and they cashed in. Billions of pounds worth of assets, accumulated by generations of building society members, were sold for the price of a windfall; the value of which was (on average) clawed back by the demutualised societies within four years from their customers.
Between 1989 and 2001, ten building societies demutualised. Of these, six now form part of entities in receipt of government support and three have been subject to takeovers by major banks. None survive as a stand-alone independent entity.
1986 – The Conservative Party pass the Building Societies Act – which facilitates the waves of demutualisation that are to later take place. Opposed by the Labour Party and Co-operative Partybecause ‘it could mean that the building societies movement as we know it will disappear from the scene,’
1989 – Abbey National becomes the first society to demutualise
1991 – As momentum builds behind demutualisation, Scottish Mutual becomes the first mutual insurer in the UK to demutualise.
1995 – Cheltenham and Gloucester taken over by Lloyds PLC
1996 – National and Provincial taken over by the demutualised Abbey. A second mutual insurer, Clerical Medical, demutualises
1997 – Halifax, Northern Rock, Woolwich and Alliance and Leicester all demutualise. Bristol and West is taken over by the Bank of Ireland. Norwich Union and Scottish Amicable (mutual insurers) also become PLCs.
-Attempts are made to demutualise the Co-operative Wholesale Society (now the Co-operative Group). The bid collapses amid allegations of illegal activity.
-Deputy Prime Minister Michael Heseltine, in an article for the Mail on Sunday states that demutualisation was an ‘extraordinary and exciting change’ in tune with the ‘central tenets of Conservative philosophy....this outcome flows directly from the (Conservative) Government's policies, its determination to deregulate business and promote competition.’
1998 – Nationwide Building Society narrowly avoids demutualisation after its Board fight to keep it mutual status with a defence of mutual principles.
1999 – Birmingham Midshires taken over by Halifax PLC
2000 – Bradford and Bingley demutualises after an aggressive campaign by carpetbaggers and against the wishes of its board. Woolwich PLC is taken over by Barclays.
2001 – Nationwide fights off a second demutualisation attempt. Halifax merges with Bank of Scotland to become HBOS.
2004 – Abbey National is acquired by Santander
2005 – Bristol and West is acquired by Nationwide – the first remutualisation
2006 – Standard Life, Europe’s largest mutual insurer, demutualises
2007 – Northern Rock’s risky lending strategy and reliance on the wholesale funding markets results in a run on the bank. The Government has to step in to guarantee deposits and is eventually forced to nationalise the business.
2008 – The full force of the Financial Crisis hits. Alliance and Leicester is bought by Santander to stem its collapse. Bradford and Bingley’s strategy of aggressively positioning itself in the buy to let and self certification markets results in its failure and full nationalisation. HBOS merges with Lloyds to avoid insolvency.
Of the ten building societies that demutualised, within 12 years not a single one remained as a stand-alone bank. Six are now part of entities in receipt of government support, three have been take over by other major banks, and opne has been remutualised.
2009 – Watch this space!
Who’s to blame?
The Conservative Party – The 1986 Building Societies Act allowed building societies to demutualise for the first time. It was opposed by the Labour Party, with Oonagh McDonagh stating that ‘the Bill contains proposals which in the long term could mean that the building societies movement as we know it will disappear from the scene. Its loss is something that we could well live to regret.’
For Michael Heseltine, the Conservative Deputy Prime Minister, demutualisation was an ‘extraordinary and exciting change’ in tune with the ‘central tenets of Conservative philosophy....this outcome flows directly from the (Conservative) Government's policies, its determination to deregulate business and promote competition.’
Managers of Former Building Societies – Demutualisations were largely led by the managers of former building societies, well aware that a change of status would allow them to cash in. In total, boards of the businesses were responsible for over £550 million being spent in support of the demutualisation campaigns. In effect, the campaigns offered members an upfront payment without making them aware of the long term consequences. According to evidence given by which to a Parliamentary Enquiry – ‘the evidence that was presented in front of members was not objective – it was designed to ensure a conversion took place.’
And then they cashed in. Following demutualisation:
- The salaries and bonuses of directors increased substantially. Just in one year, Halifax’s directors gained by 38.5%, Northern Rock’s by 32.4% , Bradford and Bingley’s by 40.2% and Alliance and Leicester’s by 26.8%
- A considerable number of share options were to be paid out to managers and directors. When Cheltenham & Goucester Building Society was taken over by Lloyds, the Chief Executive received share options worth four times his basic salary, and he and his immediate family were to be granted £37,600 in cash bonuses.
- Overall, when everything is taken into account, between 1993 and 2000, the total remuneration of chief executives in demutualised firms grew by 293%, compared with 65% for mutual societies in the same period.
Carpetbaggers – The substantial windfalls seen in the early demutualisations led to expectations of further windfalls at existing mutuals. A movement of investors developed – dubbed carpetbaggers - who speculatively opened accounts at building societies and other financial mutuals. This was done in the hope that the acquisition of membership rights would in future entitle them to windfall distributions.
While greed fuelled the initial search for cash payments – (which for some building societies averaged as much as £2500) - on average it took the demutualised PLCs four years to claw back from their customers the money they had paid out in windfalls, in terms of higher mortgage and lower savings rates.