View from City Road: Losing the benefit of mutual ownership

The Cheltenham & Gloucester case that opens today in the High Court is billed as a neutral attempt to clarify a fuzzy piece of legislation about how building societies can be taken over. It is nothing of the sort.

Behind it lies an unresolved argument about whether mutual ownership makes any sense in the late 20th century. The original building societies were exactly what their names imply. People banded together to save to buy houses, dissolving their societies once they had their little bit of England. In the 19th century, many became permanent societies and took on new savers and borrowers to become specialist mortgage banks.

Many of those that survived had recognisable links with the culture of their forebears. Until quite recently, for instance, it was the practice of building societies to ration mortgages by quantity rather than price; they gave their depositors preference when it came to handing out loans. But even this distinguishing feature disappeared in the early 1980s when banks moved into the house lending market. The societies left are banks in all but name, marked out only by legal restrictions - easing year by year - on their freedom to act commercially.

The fact that societies do not pay dividends may be an advantage. The Institute for Fiscal Studies argues in a report yesterday that for many British companies high dividends restrict investment because internally generated finance is cheaper. But are these savings enough to outweigh the lack of proper accountability and disciplines on society managements? The only discipline of that sort comes from the BSC, which is not accountable to the societies' owners but to the Treasury.

Mutuality is a distinct, and in some ways attractive, form of corporate ownership. But now it may be easier to justify it for life assurance companies, and especially their pensions businesses, than for building societies. Cheap, internally generated finance could make a big difference to returns over several decades.

Building societies have much shorter horizons and ambitions, ranging from being highly efficient mortgage banks to full competitors with the clearers. In the absence of practical ideas to improve accountability, a sentimental attachment to an older way of doing things is not enough to justify their continued existence.