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  March 2000  
  Demutualisation of building societies and other mutuals  
'The Mutuals are finished;- it's only a matter of time before they disappear'.  That's the view of many City pundits in the aftermath of the demutualisation like the Norwich Union. At the same time, an attempt was made to sell-off the Co-op.  This failed but a similar '.attack on the AA did succeed.  A pattern developed.  No sooner was one mutual devoured than other possible targets were being sighted in the feeding frenzy for windfall  the spotlight.  But in both cases, their members wisely opted for the long term benefits of mutuality and voted against conversion.  But it was in the financial services sector thatthe greatest damage was done. 

Does demutualisation matter?  It's as old as mutuality itself.  In Victorian times, people would club together to build a group of houses.  As each house would be completed, it would be allocated to a member.  When everyone had got a house, the society was wound up. These were called terminating building societies.  Permanent building societies, on the other hand, were not wound up but continued to lend money for house purchase.


  Mutual Insurer    
Converted to PLC
The Trustee savings banks and the friendly societies were also set up at the same time.  Latter cannot be demutualised as the law stands at present. These mutuals became rock solid features of family finance and it was not until the Thatcher government changed the law that any change could take place.  Suddenly the goal posts were moved.  The carpet-bagging which followed was really a  continuation of the "Tell Sid" gold rush which followed the privatisation of the public utilities. It  was another 'money for nothing' bonanza. No-one cared about the consequences, it was a  matter of 'just give us the money Now. 

Mutuality is not virtuous in itself.  It depends who benefits. Some mutual organisations act  against the public interest.  The main purpose of BUPA is to enable people to jump the queue for hospital treatment.  Mutualism is a fuzzier concept than socialism.  Socialism is about the redistribution of wealth in society; mutualism is about the redistribution of risk for its members  only.However there has always been a strong link between socialism and mutual aid. Self help and mutual aid are the two main cornerstones of the trade union movement. Mutuals  should be independent of both the state and private financial power. 

 John Lewis



bid defeated

 They can be bulwarks against over-powerful government and the abuse of market power by big business.  In theory,  because they are democratically controlled, they should enable ordinary people to have a say in the way their money is used.  When building societies become banks, power passes to the financiers. Opponents of mutuality argue that the idea of member control is a myth and that the so-called mutuals were really run by self perpetuating managerial cliques for their own advantage.  There is a lot of truth in that.  Many people did not even know that they were members until the demutualisation votes took place.  Also building societies had often .treated their members very badly.  During the negative equity crisis of the late 1980s, families with children were put out on the street and their homes sold for fire-sale prices. This wanton cruelty was also a criminal waste of the Societies' capital assets.  So when the votes came for demutualisation, no-one missed their passing.  People just took the money and ran.
Can demutualisation be stopped?  Is it right to try?  After all, it's the members own money. Here one must distinguish between long term savers and carpetbaggers..  The long term savers have helped to build up the society.  Carpet-baggers are just parasitic asset strippers. Had John Lewis demutualised, even new employees would have been eligible for £100,000 windfall.  This is indefensible. Demutualisation can be a form of 'inter-generational theft'.  The present generation is able to cash in on the thrift of their grandparents and at the same time rob their children of the advantages of mutuality.  Most of the original founders chose to invest in these Societies because they were mutual.  Private sector alternatives like the Prudential were available at the time.  Demutualisation is a bit like overturning a will.  The John Lewis Partnership conversion could only have taken place by rewriting Spedan Lewis's will.  
  New Labour is in favour of mutuality.  At micro-financial level, it supports credit unions and other community investment initiatives.  To combat social exclusion it proposes to set up tenant management organisations, community crèches, breakfast clubs et cetera..  But all these are small beer compared with the existing mutual sector.  Paradoxically, New Labour does not appear to be interested in protecting the established mutual organisations like friendly societies, building societies and co-ops.  Since they have been in power more and more Building Societies have been swallowed up.  The view seems to be that it's not their concern and that the public gets as good a deal or better when conversion takes place.  
Not true.  All recent evidence shows that both savers and borrowers get a worse deal from the demutualised companies.  That is if you can find a branch that's still open!  A report issued by the Building Societies Association in the December 1999 showed that the new been closing branches wholesale and that deprived areas have been particularly badly hit.  In the period 1995-98, they closed 44 branches in deprived areas and opened 22.  In contrast, the mutuals have been opening more branches; 32 closed against 51 opened.  When the branches close ,it's not long before local businesses do too. Demutualisation has increased financial exclusion.  
Last summer, the Treasury decided to set up a Select Committee Demutualisation.  While the Committee was deliberating, the carpet-baggers attacked the second largest mutual building society; the Bradford and Bingley.  They won.  Prior to that, no demutualisation had taken place where it had not been approved by the Board.  Often these directors had stood to make personal fortunes from conversions so, apart from a few idealistic ones, most took the money. The Bradford and Bingley board claimed that they wanted to remain mutual.  The fact that they had taken none of the usual measures against carpet-bagging entitles one to be sceptical. But the vote in favour was hardly resounding.  Only 30.7% of the total membership voted in favour and 18.6% against.  Over 50% did not vote at all. This includes 19% who were minors.  Savers voted for: borrowers voted against.  Under the Building Societies Acts at least 50% of borrowers and 75% of savers must support conversion on a 50% turnout in each category.  
When the Select Committee reported at the end of July, it recommended that there should be parity between borrowers and lenders i.e. both should need 75% for conversion.  It recommended that only members of two years standing should be entitled to windfalls. This was the original intention of the Building Societies Act 1986 but sloppy drafting had allowed two successful court cases to be brought which later overturned the provision.  It also recommended that the new Financial Services Authority should oversee future conversion proposals in order to ensure that members are provided with a balanced view of the pros and cons.  The call by the Building Societies Association to raise the threshold necessary to call meetings or put resolutions was considered but no recommendation was made.  The concept of mutuals as holding monies in trust was rejected outright.
The Treasury threw out all the Committee's proposals.  But subsequently, the meetings threshold has been raised.  It rejected parity between borrowers and lenders on the grounds that the lenders should have more say because it was their money which was at stake.  But the primary purpose of mutual building societies is to provide funds for housing not to be savings banks.  It opposed restoring the 'two year rule' because it could mean that some charities might suffer.  Nowadays some societies make new savers sign away possible windfalls to charity. Last December, the tiny Leek Building Society voted overwhelmingly not to convert.  Leek (pop 20.000) is in Staffordshire.  Local loyalties were very strong.  17000 people signed a petition and there was a parade through the streets.  Murray International Finance (with Tory John Redwood on its board) were routed.  It was a case of small is beautiful.  But at the time of writing, the Chelsea, Portman and Skipton Societies were still fighting for their lives.  The legislative and regulatory framework of the mutual sector does need reform.  
The idea of mutuals as trusts should be re-visited  In the European Union, 'associations' are often seen as holding assets in trust.  This is probably a by-product of the Catholic social traditions.  In France, it is illegal for the directors of 'associations' to personally benefit from conversions because they are regarded as trustees.  The 1999 Annual Conference of the Co-op Party called for that to be made the law in the UK too.  But mutuals need to become more democratic too.  Civil organisations are notoriously prone to take-over by small cliques of activists or managers.  Look what happened with the trade unions.!  The mutual sector is likely to become more important as the State withdraws from large areas of social provision.  It is too important to be left to drift.  Reform is needed now.

 This article was published in THE CHARTIST March 2000

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