Your Money: C&G is back to the basics

CHELTENHAM & Glou cester Building Society has upset a lot of people by its move last week to shy away from all investments.

For the past three years it has been offering interest- only loans and leaving borrowers to decide how they will repay the loan.

But now it is going even further and breaking free from the tie with Legal & General. It is not replacing the insurer with another, and it is not setting itself up as an independent adviser. It is backing away from giving any form of investment advice at all - although it will still be happy to sell buildings and contents insurance.

If borrowers want an interest-only loan rather than a repayment mortgage then they can cross their fingers and hope for a windfall inheritance if they want to, or they will have to go about setting up their own savings scheme of some sort. They will also have to decide if they want life insurance cover and set that up as well if they do not opt for an endowment that includes an element of life insurance.

C&G could help borrowers to find an independent adviser by directing them to a hotline number - (0483) 461461, set up to promote independent advisers - which gives callers the names of six local advisers.

Other building societies were frankly shocked at C&G's audacity. Some speculated that the society, which has recently embarked on a television advertising campaign, is planning a spectacular merger or wants to be taken over by a bigger financial services outfit. Others said the society had been so shaken by getting involved in home income plans for the elderly which went wrong that it wants to back away from anything risky outside the traditional building society beat.

So many societies rely so heavily on commission from endowments to boost profits that they could not understand the move at face value.

Birmingham Midshires said its customers wanted one-stop shopping, and drawing the line under the loan was tantamount to leaving them in the lurch.

Others, which share with C&G a reliance on mortgage business from financial advisers, were more understanding. They realised that the society was not earning commission on some 60 per cent of its mortgages anyway.

On top of this, C&G's clients tend to be older and more sophisticated than average, and are likely to have endowments already or pensions earmarked for loan repayment.

The Financial Services Act, thankfully, forbids societies to persuade people to cash in their existing arrangements and start all over again. So here again there is little for the society to earn.

A move away from endowments is already under way and is likely to accelerate when salesmen have to show in cash terms how much of the premiums will go in charges and expenses. This still leaves the question of investment for savings.

As interest rates are low and look likely to drop even further, there is a move to stock market investment - unit trusts, Peps and insurance-based schemes.

Building societies are already seeing strong demand for five-year bonds with returns linked to the FT-SE index, with some sort of underlying guarantee. Societies need to be registered under the Financial Services Act, with all the costs of training and compliance that this implies, to be able to sell these investments.

If straight building society savings become unattractive, C&G will not be able to fish in this wider pool.

It has probably gained enormous kudos in its target market of wealthy customers from its move on the mortgage side, but the consequences for savings may prove a real mistake.

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