The return of mutual banking

20th July 2012

The deal will give the Co-op significant clout in high-street banking, as it currently has just 2% of accounts, says the Guardian. But with branches being rebranded TSB, the name of the Trustee Savings Bank, the mutual taken over by Lloyds in the 1990s, does move may signal the return of banking as it used to be?

After all, a plethora of scandals surround traditional players. There's the Barclays Libor rate-rigging, HSBC over money laundering and RBS and its serious computer breakdown leading to millions of angry customers.

The chancellor, George Osborne, said: "The sale of hundreds of Lloyds branches to the Co-operative creates a new challenger bank and promotes mutuals."

And it's not just ethical banks , but mutual building societies that are reporting an increase in business in the wake of scandals engulfing the UK banking industry, as they are seen as representing value for money, honesty and customer service. They rely on members rather than shareholders, and it's the members that own the business. So they are not considered profit-hungrey machines.

The Building Societies Association says members have seen a 30% rise in customer inquires since Barclays was fined for fixing the London interbank lending rate, which underpins trillions of pounds' worth of loans.

Meanwhile, Nationwide saw a 26% increase in the number of customers opening and transferring their main account to its services in the week after the scandal broke, while the Ecology Building Society saw the number of interested Britons visiting its website increase by 266% after the scandal compared with the same period last year.

"The shareholder model of chasing ever-higher dividends and share prices, and linking bonuses to those ever-higher share prices, has led us into the current scandals, and people are voting with their feet," said Adrian Coles, the director-general of the Building Societies Association. "…customers are turning to put their faith in institutions that legally and constitutionally are focused on the customer, not the shareholder."

So bank-to-mutual switching is happening up and down the country, it seems. Will you be one of the crowd?

Britain now has 47 building societies, from the biggest – Nationwide and the Yorkshire – to small, local societies that have only a few thousand members. "They understand their customers and know the local housing market," says Mr Coles. "You need that wide variety. The banking sector could learn a lot from us – it's far too dominated by five big players."

So was demutualisation back in the 90s an "act of economic vandalism?" Vince Cable, the Business Secretary, certainly seems to think so on Liberal Democrat Voice. He said it resulted in "a virtuous circle of more mortgage lending, leading to more housebuilding" while commercial banks "abandoned locally based relationship banking in the decade before the recent financial crisis".

Patrick Collinson in the Guardian comments on the failure of demutualisation: "Take the Cheltenham & Gloucester. For 145 years it ran, rather successfully, as a mutual building society. Then over 17 years, roughly coinciding with the credit boom and bust, it was gobbled up by Lloyds for £1.8bn, which, after (rather unhappily) acquiring Halifax, merged it into a supersize mortgage lender. Now it's returning to its mutual roots, albeit under the control of the Co-op Bank.

Investment bankers pocketed huge fees for raiding societies. National & Provincial went first, then Alliance & Leicester and Bristol & West, then Halifax, in 1997. Northern Rock was next, with the Woolwich and Birmingham Midshires in tow before the last major demutualisation, Bradford & Bingley in 2000.

Since the great "demutualisation disaster", says Collinson, only one of the former societies – Woolwich – has not require a taxpayer handout in some form or another.

So what happens now? Could the demutualisation of the 1990s be reversed? People are voting with their feet, and we have a mutual champion making headlines in Co-op. But is there a need for participatory democracy in the financial industry with a return to mutuals?


More on Mindful Money

Does the Co-Op – Lloyds deal point to a future of ethical banking?

The semantics of sin

M&S Money – banking on your account

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1 thought on “The return of mutual banking”

  1. David Lilley says:

    I’m afraid I disagree. It was an excellent budget.

    It was tinkering, yes. but we have no money.

    All the tinkering was in the right direction and that is all that counts.

    There was no support for the housing market. A 20% discount on new homes for first time buyers is bad news for the housing market. It robs the housing market of first time buyers and sends them to the new homes market that provides new homes, construction industry employment and growth without additional borrowing. The money is big-time but it is in the form of guarantees and at the base rate of 0.5% and not at the going mortgage rate that includes a fourfold spread. Additional homes will increase the supply of homes and depress the housing market. Simple supply and demand, the only known principle in economics proper.

    Employers do what it says on the tin, they employ. Employer’s NIC is tax on employment, a jobs tax. Eliminating employers NIC for SMEs will boost employment. Even the enemy in the camp, the head of the OBR, concludes that 600,000 jobs will be created in the next 12 moinths.

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