FEAR OF FINANCE

The Government is under pressure to write new rules into the proposed new Building Societies Act to take effect next year. Even then it may be too late to prevent the remaining mutual societies disappearing in a frenzy of bids, mergers and conversions to banking status. Birmingham Midshires and West Bromwich are the latest two this week in a fast-dwindling band to attract bid speculation.

Two issues stand out. The status of borrowers and investors who have been members for less than two years remains a grey area. The 1986 Act restricted investor membership to individuals with a minimum of pounds 100 on deposit in a qualifying account. It also outlawed cash incentives to anyone who had been a member for less than two years, but left a loophole allowing societies to offer shares in lieu of cash to persuade members to vote for a change of status.

Abbey National has gone down this route in offering a cash option to long-term members of N&P but only shares to members of less than two years standing, but Lloyds Bank decided not to offer short-term members anything when it took over Cheltenham & Gloucester.

Woolwich arbitrarily disqualified investors who had opened accounts just days prior to it announcing plans to convert to a bank, and many societies have equally arbitrarily raised the pounds 100 threshold for opening membership accounts to pounds 500, pounds 1,000 or even pounds 5,000.

The pro-mutual lobby now wants the Government to disqualify anyone who has been a member for less than two years from receiving any shares as well as cash, but the definition is inevitably an arbitrary one that will catch as many genuine investors as it does speculators.

Current rules also guarantee societies that have converted into banks five years' protection from hostile takeovers. The analogy is with the golden shares the Government has retained in most newly privatised industries to give them a breathing space to adjust to the pressures of the market.

But there is nothing to prevent protected predators that have converted and gained exemption from being bid for themselves from using their new status to bid for rival mutuals and dangling the carrot of a conversion bonus.

This gives societies committed to conversion, such as Halifax and Alliance & Leicester an irresistible advantage in snapping up minnows over rival mutuals like Nationwide, which can only offer a maximum of 5 per cent of the assets as an incentive in a straight merger of mutuals.

The remaining mutuals are therefore pressing the Government to build in rules to outlaw the status of "protected predators," either by revoking their protection or preferably by preventing them bidding while they cannot be bid for.

In theory this sounds like irresistible logic. It echoes the rules that prevented the consolidation in the electricity industry for five years. But outlawing protected predators by itself might well increase the pressure on societies that have given notice of intention to convert to make their hostile bids in the run-up to rather than after converting.

That would achieve the precise opposite of the intention of protecting small mutuals which the lobbyists are seeking to achieve. Plenty of thought needs to be given to this issue before legislation is drafted.