Building societies
Improving the image
R.S. Harris
Two distinct problems confront building societies — of which only the first receives major attention. This is the difficulty — or near impossibility — of attracting money by offering a competitive interest rate to investors without boosting the inflationary spiral by increasing the mortgage rate. The second — and often overlooked — question is the very nature of the societies and the manner in which they are changing. Around the mid-nineteenth century, groups of people joined together in order to provide themselves with a safe repository for their savings and from time to time lend out the accumulated capital so that one of their number might buy his own home. From these small beginnings the vast structure known as the building society movement has grown, and contained in that growth may be the seeds of its own destruction.
The first problem, i.e. mortgage rates and repayments is largely a political subject as it is yet another casualty of inflation; as inflation is a politically induced illness it can only respond to a political cure. Remedies a plenty will be offered in the forthcoming election — whether they will be tested or prove efficacious is something else again. Certainly some remedies are possible — and possible without the cumbersome apparatus of grants, subsidies and pegged rates.
As a suggestion: to regulate the supply of mortgage finance a government-backed guarantee of a loan if needed could induce the societies to run down their very plentiful reserves while maintaining the financial safeguards that are currently most prudently provided at a figure much higher than that required by law. To remove the fear of escalating repayments, monthly instalments could be fixed when the loan is first taken out. The rate of interest would vary, according to the rate required to satisfy investors. In times of inflation the fixed repayments might not even cover the interest and the debt would increase — but in an inflationary situation, so would the value of the house, so that neither the borrower nor the investor would suffer. In short, building societies could help contain inflation but only as a small part of a political framework.
As important, in the long term, is the changing nature of the societies. As important because in their existing way they have helped millions of people in this country to buy their own homes. A change from their present 'friendly society' form into mere financial institutions without any social overtones would be a retrograde and serious step.
There are, broadly speaking, three types of building societies: first, the large national societies dealing on a very wide scale and with huge sums of money; at the other end of the scale, the local societies dealing largely with local people in their own towns; and between these two lies the third type, the would-be big societies — the thrusting aggressive societies forever searching for new branches to open and new contacts to be made in their efforts to grow — whose concern appears to be growth for its own sake, a seemingly pointless desire to expand which has led to justified criticism of the movement as a whole, as hard-pressed borrowers watch money apparently ill spent by societies opening more and more branches in towns already well endowed with such offices, all offering very similar if not completely identical services and facilities.
New branch offices, in territories often far away from the home town of a society where there is no local connection or indeed any reason for being (excepting the urge to `grow'), can only be made viable by, effectively, 'buying' money. Societies compete by paying commission for the introduction of investment monies, and as it is not unreasonable to assume that such monies would have gone to some society within the movement in any event, it can be argued that, overall, commission is money thrown away. The net result may be no more than switching from one society to another.
A further means of . obtaining such finance is by the allocating of mortgage funds to such sources of introduction of investments, so that a person might obtain a mortgage for his client with a society to which he has introduced investment monies, even though that client is not himself a member of that society. As the amount of Mortgage funds is finite, this could lead to members who have been themselves investing with that society being refused mortgage facilities or placed upon the end of a long queue which the more fortunate are allowed to jump.
A bonus to societies with a multiplicity of branch offices is that, in normal or inflationary times, these offices can be revalued and the surplus thus produced artificially enhances the appearance of a particular society's annual accounts.
Indeed the Building Societies Association has been concerned with the poor image of the movement and has asked for increased donations from societies so that they might advertise to counteract this opinion. Perhaps a more useful project for the Association would be to ensure that societies reminded themselves of their original aims and then let the image cast a true reflection of a movement which had returned to its grass-root level of encouraging the smaller saver and supplying funds only to existing members wishing to buy their own homes.
Clearly no one could suggest that the entire movement reverts back to a cosy village atmosphere. The movement could, however, very usefully reform itself into only two distinct groups — firstly the large national societies who could well absorb their medium-sized breathren and secondly a large number of small local societies each closely but solely aligned to their own particular territory. An adequate choice would then be available to the public of using either one of a small number of very big national societies, with branches in all the major towns — or opting for the more personal service of a local society with its greater knowledge and acceptance of their area.
Some small changes in the Building Societies Act would give an impetus towards such return to basics.. An amendment to prevent the payment of any form of commission together with the prohibition of advances to anyone other than an existing member of a year's standing should effectively prevent the 'buying' of business. An insistence that the 'profit' from the revaluation of of office premises be shown separately from the normal operating surplus would also curb the spread of unneeded branches.
As the impetus to change is not forthcoming from within the movement, one must look to other sources to provide a curb and prevent a degeneration into an entirely, financially orientated movement obsessed by growth with the attendant loss of the social implications upon which the movement was founded, in the hope that building societies will reshape themselves to their original purpose in life. The concern with the short-term difficulties should not, it is to be hoped, shield the need for additional long term reform.
R. S. Harris is the deputy manager of a small building society.
Previous page
