It's a few decades too late to mourn the death of mutuality

Everyone wins in the building society sell-off. No wonder no one is protesting, writes Patrick Hosking

IF YOU had happened to pass any branch of the National & Provincial Building Society 10 days ago, you would have noticed a curious spectacle: long queues of people opening new accounts. Not just the handful who open accounts on any normal business day, but, around the country, tens of thousands eager to obtain an N&P passbook.

The explanation was simple. N&P was talking to Abbey National and other financial institutions about being taken over. A takeover would mean a windfall for N&P members averaging, perhaps, £600 each. Any N&P saver with a qualifying account - however recently opened - would count as a member. This was money for old rope.

The same money-for-nothing mania is infecting all our building societies. At the Cheltenham & Gloucester, Britain's sixth largest building society, the 800,000 members have just voted themselves an average payout of £2,200 by agreeing to be taken over by Lloyds Bank; the wealthiest savers will receive as much as £13,500.

The Halifax, the biggest society, and the Leeds Permanent, the fifth biggest, are planning to merge and then float on the stock market. The 10 million qualifying savers and borrowers stand to receive about £800 worth of shares each. More building societies will follow, either with flotations or by yielding to offers from companies. BAT Industries, Royal Bank of Scotland and TSB all want to buy a building society.

Opportunistic investors, meanwhile, have opened accounts with every building society in the hope of windfall payouts. This is the ultimate one-way bet: potential winnings of £500 or more and you don't lose your original £100 stake. Indeed it even earns interest while you wait.

The casualty of this bonanza is the principle of mutuality - that a building society's customers are its legal owners. Within a few years the unique ownership structure of building societies could be regarded as a quaint hangover from the 19th century. We may mourn the death of a noble ideal but it's hard to summon up many tears for the reality. For the last few decades there has been precious little idealism in the way building societies have treated their members More serious is the disappearance of safe, ultra-cautious, deposit-takers. This could be catastrophic.

Few investors seem likely to complain. The probable payouts from building societies make the National Lottery look like village-hall bingo. Reserves built up over a century or more are being distributed in one fell swoop. In the space of a few months societies have announced plans to hand out about £11bn in cash or free shares to 13 million people. That is equal to a 5p cut in income tax for the whole population.

The move by societies to plc status now looks unstoppable as members realise the immediate gains they can make if their building society changes its status. As one N&P member put it at the society's annual meeting last month: "Everybody has a price, don't they? Mine would be in the region of £500."

The scale of this shift in wealth is on a par with the privatisations of the late 1980s. Yet the phenomenon has attracted a fraction of the scrutiny and debate that accompanied Margaret Thatcher's sale of the family silver. The sheer quantity of gravy on this train seems to have silenced all but the most loyal fans of building societies. And the gravy is not just for the saving and borrowing members but for the lawyers, accountants, merchant bankers and PR consultants advising the societies. The Halifax/Leeds deal alone is expected to cost £100m in fees. Lawyers in particular cannot believe their luck: at £200 an hour the ambiguous thickets of the Building Societies Act are a delight to explore. With the fat years of privatisation behind them, City advisers are relieved to have found a new honey-pot to see them comfortably into the next century.

There are rewards too for the directors and senior managers of the societies that convert: top salaries in banks are roughly double those in building societies. Then there are the share options, which only become possible after a society transforms itself into a quoted company.

Building societies trace their roots back to the Golden Cross Inn in Birmingham, where in 1775 Richard Ketley's building society was founded. Small groups of local people pooled their savings, built themselves homes with the proceeds, and then wound up the society when everyone was housed. It was a brilliant idea. Ordinary people helped each other while cutting out rapacious money-lenders.

The rot began to set in, the purists would have it, with the invention of "permanent" societies in 1845. These did not terminate themselves but constantly recruited new members. Power started to shift from the members to the managers. That power shift was intensified as societies got bigger. Mergers reduced the number of societies from 2,000 in 1900 to 250 by 1980 and only 82 today. Evocatively named societies were subsumed into the financial services giants we know today: farewell the Newton, Haydock & Golborne Permanent Benefit, swallowed by the mighty Halifax; farewell the Leicester Temperance, now part of the Alliance & Leicester; farewell the Clapham Perseverance, absorbed long ago into the Nationwide.

Today it is hard to tell banks and building societies apart. Societies are as focused on the bottom line as any bank and just as obsessed with growth and diversification. They now shamelessly disadvantage their existing customers (their legal owners, don't forget) in the quest for new customers. New borrowers are routinely offered interest rate discounts not available to existing borrowers. Similarly, existing savers are often stranded in obsolete accounts paying uncompetitive rates of interest. About 20 million savers currently have £20bn invested in these second-class accounts. Every year they miss out on £800m of interest because societies do not alert them that they could do better.

Building society directors have forgotten that their duty is to serve their members. The Office of Fair Trading's report last month into the mis-selling of endowment mortgages by building societies reinforced the point. Societies are more interested in commissions from insurance companies than doing the best for their owners. And the societies have become terribly undemocratic. Ordinary members trying to get elected to a building society board face huge obstacles. Even the strongest argument for mutuality doesn't hold much water in practice. In theory, for example, mutuals should be able to exist on narrower margins than banks because they have no dividends to pay. Their savings rates should therefore be higher and their lending rates lower. Yet the Abbey National, the society that converted to bank status five years ago, has shown it can remain competitive on rates while still satisfying its shareholders. Peter Birch, the Abbey's chief executive, says: "Building societies are a very protected species. Plcs have to be more efficient. And we're much more accountable."

The truth is that mutuality had already died in all but name. But there is still one good reason for building societies to survive. This is that they are more tightly controlled than banks. Regulated by the Building Societies Commission, they have to allot the bulk of their lending to mortgages, they are restricted in the extent to which they can "bulk-borrow" in the wholesale money markets, and they are prohibited from many areas of diversification.

Too much freedom tends to be fatal for financial institutions. Give them the opportunity and they will rush sheep-like into, say, lending to bankrupt Latin American regimes, or risking a fortune in the precarious derivatives market. Even with their limited freedoms, building societies have been no exception. Tightly constrained, they have still managed to lose hundreds of millions buying estate agency chains and lending to property developers.

Set free from their constraints, what kind of self-destruction might they wreak? The change is bad news for depositors and taxpayers, who will doubtless have to bail them out. We still need safe, unadventurous deposit- takers. More Bradford & Bingleys, please, and fewer Barings.