Editing Building society (section)

===1980s and 1990s===
Building societies, like mutual life insurers, arose as people clubbed together to address a common need interest; in the case of the building societies, this was housing and members were originally both savers and borrowers. But it very quickly became clear that 'outsider' savers were needed whose motive was profit through interest on deposits. Thus permanent building societies quickly became mortgage banks and in such institutions there always existed a conflict of interest between borrowers and savers. It was the task of the movement to reconcile that conflict of interest so as to enable savers to conclude that their interests and those of borrowers were to some extent complementary rather than conflictive. Conflict of interest between savers and borrowers was never fully reconciled in the building societies but upon deregulation that reconciliation became something of a lost cause. The management of building societies apparently could expend considerable time and resources (which belonged the organisation) planning their effective capture—of as much of the assets as they could. If so, this is arguably insider dealing on a grand scale with the benefit of inside specialist knowledge of the business and resources of the firm not shared with outsiders like politicians and members (and, perhaps, regulators). Once the opportunity to claim was presented by management the savers in particular could be relied upon to seize it. There were sufficient hard-up borrowers to take the inducement offered them by management (in spite of few simple sums sufficing to demonstrate that they were probably going to end up effectively paying back the inducement). {{harv|Tayler|2003}}

Management promoting demutualisation also thereby met managerial objectives because the end of mutuality brought joint stock company (plc) style remuneration committee pay standards and share options. Share options for management of converting societies appear to be a powerful factor in management calculation. {{harvp|Rasmusen|1988}} refers to this in the following terms:

{{Blockquote|" ... perks do not rise in proportion to [mutual] bank size. If a mutual is large, or is expected to grow if it can raise capital by a conversion, its managers derive more value from a conversion but do not suffer much loss of perks than if the bank were small. Their benefit is in the right to purchase the new stock, which are valuable because the new issues are consistently underpriced [referring to USA mutual bank conversions]. Moreover, by no means are all mutual managers incompetent, and conversions allows the bank to expand more easily and to grant executive stock options that are valuable to skilled managers".}}

Instead of deploying their margin advantage as a defence of mutuality, around 1980 building societies began setting mortgage rates with reference to market clearing levels. In sum they began behaving more like banks, seeking to maximise profit instead of the advantages of a mutual organisation. Thus, according to the Bank of England's {{harvp|Boxall|Gallagher|1997}}:

{{blockquote|"... there was virtually no difference between banks and building society 'listed' interest rates for home finance mortgage lending between 1984 and 1997. This behaviour resulted in a return on assets for building societies which was at least as high as Plc banks and, in the absence of distribution, led to rapid accumulation of reserves".}}

As {{harvp|Boxall|Gallagher|1997}} also observe:

{{blockquote|"... accumulation of reserves in the early-1990s, beyond regulatory and future growth requirements, is difficult to reconcile with conventional theories of mutual behaviour".}}

{{harvp|Llewellyn|1996}} draws a rather more direct and cynical conclusion:

{{blockquote|By adopting a policy of building up reserves by maintaining an excess margin, building societies simultaneously allowed banks to compete and may have undermined the long run viability of mutuality. A more cynical approach is that some societies may have adopted an excess-margin strategy simply to enhance their value for conversion.}}

Some of these managements ended up in dispute with their own members. Of the first major conversion of the Abbey in 1989, {{harvp|Kay|1991}} observed:

{{blockquote|[T]he paradox of the Abbey members who campaigned against flotation [conversion to a shareholder-owned bank] of their building society. They were fighting to preserve a degree of accountability to the membership which the management of the Society patently did not feel. For incumbent management, the contrary views of some of their members were not matters to be weighed in the balance and taken account of in formulation of policy. They were a nuisance to be dealt with by the costly use of public relations advisers and legal processes.}}

In the end, after a number of large demutualisations, and pressure from carpetbaggers moving from one building society to another to cream off the windfalls, most of the societies whose management wished to keep them mutual modified their rules of membership in the late 1990s. The method usually adopted were membership rules to ensure that anyone newly joining a society would, for the first few years, be unable to get any profit out of a demutualisation. With the chance of a quick profit removed, the wave of demutualisations came to an end in 2000.

One academic study {{harv|Heffernan|2003}} found that demutualised societies' pricing behaviour on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates.<ref>{{cite web |title=The Effect of UK Building Society Conversion on Pricing Behaviour |date=March 2003 |first=Shelagh |last=Heffernan |publisher=Faculty of Finance, CASS Business School |location=City of London |url=http://www.cass.city.ac.uk/facfin/papers/WP2003/Mutuals-WP.pdf |access-date=10 October 2007 |url-status=dead |archive-url=https://web.archive.org/web/20071129143345/http://www.cass.city.ac.uk/facfin/papers/WP2003/Mutuals-WP.pdf |archive-date=29 November 2007 |df=dmy }}</ref>