Personal Finance: Societies on a tightrope

IT REMAINS to be seen whether the seemingly relentless march towards big-business style by the building societies will be tempered by last week's government report on their future.

The Government likes the idea of societies staying as mutuals owned by the members, but it also recognises that some of the restraints will have to go to allow them to compete.

The solution is to allow greater freedom and try to mitigate this by handing firmer reins to members.

The new freedoms include allowing societies to lend to small businesses, and letting them own insurance companies and raise more in the money markets.

Restraints will still apply. Loans to one-man businesses and partnerships will be restricted to a tiny percentage of their lending.

After the breakdown in relations between banks and small-business customers, who blamed banks for some of their ill fortune through the recession, you might think building societies were thanking their lucky stars that this was a forbidden area.

They know how hard it is to deal with defaulting mortgage borrowers, where at least there is a property to salvage. Lending to small businesses is a riskier business of which they have no experience.

They will be allowed to get involved only in household-related insurance - contents, building and mortgage payment protection. So it will be difficult to take over ready-made businesses as most will have motor and other insurance mixed in.

Everyone resents having insurance rammed down their throats as a condition of obtaining a tempting mortgage offer. The Government will at last put forward rules banning compulsory insurance-plus-mortgage packages. But most lenders have already abandoned this unpopular practice due to increasing resistance from home-buyers.

The Government wants to make societies more accountable to members. For instance, two seats on the board could be reserved for independent members and societies could be made to tell members about non-confidential bids.

But as annual meetings come round just once a year, it seems impractical to imagine that much real power can be transferred to the 'shareholders'.

Where it might just bite is if societies were given wider powers to distribute assets by paying a dividend, and offering discounts on services.

Mergers between societies may lead to a greater flutter of cash to mimic the Lloyds/ Cheltenham & Gloucester deal, in order to head off possible takeovers by outsiders.

But if society-by-society takeovers are to be more rewarding, the feared hot-money flows searching for the next takeover target will happen anyway.

The Government has been trying to make societies more competitive while retaining their slightly old-fashioned, safe co-operative aura. I fear it cannot do both, and may be able to do neither.

WHEN it comes to pensions, the most adventurous become, quite understandably, cautious.

This explains the success of with-profits funds, which add bonuses that can never be stripped out. These funds, which rely on the discretion of insurance company actuaries, will soon be edged out by a new breed, which rely on futures and options to provide guarantees.

NML's Safety First Fund, launched last week following a rule change on 1 July, uses income to buy guarantees that ensure the fund can drop no more than 5 per cent in a year. Gains are locked in and, while some up-side is sacrificed to buy the protection, there is no ceiling.

While individuals may not quite get to grips with the use of derivatives, they should - as does not seem the case with with-profits funds - be able to understand and appreciate the end result.