Select Committee on Treasury Minutes of Evidence


Further memorandum submitted by the Consumers Association

CONSUMERS' ASSOCIATION COMMENTS ON INDUSTRIAL AND PROVIDENT SOCIETIES BILL

  The Industrial and Provident Societies Bill is designed to introduce measures relating to conversions of societies such as co-operative societies and credit unions. It will bring provisions into line with similar provisions relating to building societies. It does not introduce any further protection to building societies.

  For societies to convert a special resolution has to be passed with 75 per cent of those voting having voted in favour of the resolution.

  Our view is that even high hurdles in terms if voting requirements may represent only a temporary and comparatively ineffective long-term protective measure against dedicated carpetbaggers. In times where consumers' savings have been run down, and personal debts are running at record high levels, the sums of money available from conversion windfalls may start to look very tempting to members. This could be exploited by dedicated and well resourced carpetbaggers and conversion campaigners.

  We would have preferred to see a system where, in the event of a conversion, the windfall available was linked in some way to the level of commitment of a member to the society eg, length of membership and financial commitment. We think this would dissuade carpetbaggers to some degree by removing some of the incentive for members to vote for a conversion. And if a conversion went ahead, then at least the reward would be proportionate to the member's commitment to the society.

  The protective measures relating to building societies are anachronistic in that relatively new members are able to receive financial reward disproportionate to their commitment to the society. They are able to unlock the huge value built up from the commitment of previous generations of members at comparatively little expense to themselves. This puts mutuals at a huge disadvantage compared with their PLC rivals. The equivalent in the PLC structure would be if individuals were able to approach a listed bank and demand to buy shares at, say, 1945 prices rather than current market prices. This of course would not be countenanced by PLC directors (unless a specific financial option had been agreed, awarded or purchased). Yet this is the very system in which mutual directors have to operate, and remains a source of long-term vulnerability and unfairness to mutuals and future generations of consumers.

May 2002

The Mutual Advantage

CONSUMERS' ASSOCIATION RESEARCH SUMMARY OF BANKS AND BUILDING SOCIETY PRODUCTS

RESEARCH SUMMARY OF CONSUMERS' ASSOCIATION COMPARISON OF BANK AND BUILDING SOCIETY PRODUCTS AND SERVICES

  Consumers' Association has analysed five years worth of research to examine what the potential impact will be on consumers if the remaining mutually-owned building societies disappear. The research concludes that the mutually-owned building societies deliver much better value to consumers than shareholder-owned banks. The cost of the building society conversions to UK consumers could be in the region of £33 billion over the long term.

  UK consumers need a thriving building society sector to act as a competitive bulwark against the shareholder owned banks. The building societies sector has been decimated by conversions over the past few years, but remains a competitive force mainly through the efforts of the remaining bigger mutuals such as Nationwide, Yorkshire, and so on who are maintaining fierce pressure on the banks at a national level, and the smaller societies who compete at a local level.

  The mutual advantage is not a recent phenomenon. From time to time the banks will have a product in the Best Buy tables, but this is not surprising given that there are around 30,000 financial products on the market today. The important thing is that our research has shown that mutuals have consistently delivered better value to consumers. Particularly important to Nationwide members is finding that the biggest mutual has consistently delivered better value and service than banks.

  But if the Nationwide (as the biggest remaining mutual) was ever to convert there would be major repercussions for consumers. We think that competition on the "high street" would be seriously undermined and the banks would get back to the business of keeping shareholders happy without the distraction of building societies pressuring them to focus on consumers. Prior to the big conversions, banks held only around 25-30 per cent of savings and mortgages. Now that position is reversed with the banks now controlling around 78 per cent of savings and mortgages charging higher mortgage rates and paying lower savings rates over the long term. We estimate that if the Nationwide converted, savers and borrowers in the UK would pay an extra £33 billion over the next 10 years in higher mortgage costs and lost interest on savings.

  Building societies deliver better value for one simple, crucial reason. The priority of the shareholder-owned banks is to keep their shareholders happy by paying large dividends, and increasing profits. For example, we calculate that for every £100 in after tax profit the banks make, about £30-£40 of that goes to shareholders as dividends. The only way the banks can maintain and increase those dividends is to make as much profit out of consumers as they can.

  However, the building societies do not have to pay shareholders dividends as they're owned by their members. That means that all the "profit" goes back into the building society to be passed on to consumers in the form of better mortgage and savings rates. One way of looking at the mutual advantage is to compare the interest rate "margin" ie the difference between the interest rate charged on mortgages and loans, and the interest paid on savings and deposits. The typical building society interest margin is around 0.8 per cent lower than banks. This means building societies can charge lower mortgage rates and pay higher savings rates to consumers.

1.  MORTGAGES

Latest analysis, June 2001

  The average SVR of the five biggest remaining building societies for existing borrowers is 6.63 per cent (Nationwide 6.24 per cent) compared with an average of 6.93 per cent of the big banks and converted banks—see Table 1(a).

  Crucially, our analysis of Bank of England figures show that over the past year the average building society SVR has been 0.3 per cent lower than the banks, and 0.4 per cent lower on two-year fixed rates.

Cut the cost of your mortgage, Which? February 2000

  Nine of the 10 Best Buy penalty free mortgages came from building societies. Nationwide is a Best Buy in every sector we look at—fixed, capped, discounted, cashback, and penalty free mortgages.

No big deal, Which? January 1997

  An analysis of mortgage costs of the eight biggest lenders found that Nationwide customers paid around £630 less over five years than customers of the big banks on a £50,000 mortgage. Each of the three big building societies at the time (Nationwide, Halifax and Woolwich) charged less than the banks.

2.  SAVINGS PRODUCTS

MINI CASH ISAS

Latest analysis, June 2001

  Major building societies pay average 5.65 per cent (Nationwide 5.5 per cent) on deposit of £500, compared to average 5.07 per cent paid by the main banks and newly converted banks. On deposit of £1,000 building societies pay 5.61 per cent (Nationwide 5.55 per cent) compared to average banks' rate of 5.13 per cent.

Boost your savings, Which?, March 2000

  Nationwide Building Society pays 6.6 per cent on deposit of £500 and £1,000, compared with the average 5.5 per cent and 5.96 per cent paid by the main banks and newly converted banks.

Puzzled by ISAs, Which?, August 1999

  Major building societies pay average 6 per cent (Nationwide 6.5 per cent) on deposit of £500, £1,000 and £3,000, compared to average 4.94 per cent, 5.04 per cent and 5.52 per cent paid by the main banks and newly converted banks.

TESSAS

Latest analysis, June 2001

  Major building societies pay average 5.65 per cent (Nationwide 5.5 per cent) on deposits of £3,000, £6,600 and £9,000, compared to 5.16 per cent, 5.20 per cent and 5.29 per cent paid by main banks and newly converted banks.

Boost your savings, Which?, March 2000

  Major building societies pay average 6.38 per cent (Nationwide 6.6 per cent) on deposits of £3,000, £6,600 and £9,000, compared to 5.38 per cent, 5.43 per cent and 5.80 per cent paid by main banks and newly converted banks.

No Big Deal, Which?, January 1997

  An analysis of the rates paid by the biggest institutions found that the major building societies paid on average £2,763 (Nationwide £2,673) interest on £9,000 in a TESSA over five years, compared to average £2,467 paid by banks.

TESSA comes of age, Which?, January 1996

  Our analysis of the market found that building societies on average paid out £300 more interest on TESSAs than banks after five years.

SAVINGS ACCOUNTS

Loyal savers exploited, Which? February 2001

  Ten out of the 11 worst paying instant access accounts are operated by banks, paying on average interest of 0.5 per cent on a £500 deposit. Which? Best Buy—Nationwide building society—pays 5.55 per cent—10 times more interest.

  All 11 of the worst paying notice accounts are operated by banks, paying on average 2.15 per cent on £2,500 deposit. Which? Best Buy—Yorkshire building society—pays 5.75 per cent—nearly three times more interest.

Called to account, Which?, September 1998

  All six of the worst paying notice accounts are operated by banks, paying on average 0.9 per cent interest on £5,000 deposit. Which? Best Buy—Nationwide building society—pays 7.3 per cent, over eight times as much interest.

  Ten of the 13 worst paying instant access accounts are operated by banks, paying on average 1.23 per cent interest on £500 deposit. Which? Best Buy—Nationwide building society—pays 7.3 per cent, nearly six times as much interest.

  Four of the five consistently best accounts operated by small building societies.

No big deal, Which?, January 1997

  An analysis of the instant access accounts run by the biggest institutions found that on a £1,000 deposit the major building societies paid on average £267 (Nationwide £249) interest over five years, compared with £232 paid by the big banks.

  An analysis of the notice accounts run by the biggest institutions found that on a £10,000 deposit the major building societies paid on average £4,092 (Nationwide £4,156) interest over five years, compared with £3,590 paid by the big banks.

How mergers squeeze savers, Which?, February 1996

  All five Best Buy notice accounts operated by building societies.

  Four of the five Worst Buy notice accounts operated by banks.

  Average building society notice account paid out £380 more interest than average bank notice account over five years on £10,000 deposit.

3.  CURRENT ACCOUNTS AND BANKING

How does your bank rate?, Which?, October 2000

  In our survey of current account satisfaction, 65 per cent of Nationwide building society customers would definitely choose to bank with it again. On average only 34 per cent of the main shareholder-owned banks' customers said they would definitely bank with them again. The results were Royal Bank of Scotland (48 per cent), Alliance & Leicester Bank (44 per cent), HSBC (31 per cent), Lloyds TSB (26 per cent), Abbey National Bank (22 per cent), Barclays (21 per cent), Halifax Bank (16 per cent), and NatWest (15 per cent).

  On overdraft costs, Nationwide charged £26 a year for running a £500 overdraft two weeks each month. The banks on average charged £70 a year.

Currently Happy, Which?, November 1999

  In our survey of current account satisfaction, 69 per cent of Nationwide building society customers would definitely choose to bank with it again. In contrast, on average only 50 per cent of banks' customers said they would definitely bank with them again.

  On overdraft costs, Nationwide charged £3 a year for running a £100 overdraft one week each month. The banks on average charged £48 a year, 16 times as much.

  Mutual Advantage—the cost of higher bank margins.

Retail Deposits
£ millions
per cent
Banks
430,000
78
Building Societies
108,552
21
Total
509,805
  
Mortgages
  
  
Banks
385,816
78
Building Societies
106,828
19
Total
492,644
  


  The average net retail margin (interest received on residential mortgages—interest paid on deposits) for building societies in the year ending 2000 was 1.4 per cent. For newly converted banks it was 1.98 per cent, a margin advantage of 0.58 per cent for building societies. For all banks the average margin was 2.46 per cent, a margin advantage of 1.06 per cent for building societies.

  "Average" bank assets are (385,816 + 430,000/2) = £401,472 million.

  Additional amount savers and borrowers will pay/lose if 0.58 per cent higher margins applies = £401, 472 million* 0.58 per cent = £2,329 million a year, or £23 billion over 10 years.

  Additional amount savers and borrowers will pay/lose if 1.06 per cent higher margins applies = £401, 472 million* 1.06 per cent = £4,256 million a year, or £43 billion over 10 years.

  The potential range is £23-£43 billion. The mid point estimate is £33 billion.



 
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Prepared 4 September 2002