Not such a good idea after all?

With the nationalisation of the Bradford & Bingley, the last of the demutualised building societies has lost its independence.

Some people have been tempted to argue that this proves that converting from a building society to a bank was always a bad idea.

What looked like a good way of expanding business and becoming a modern, thrusting, go-getting organisation for the modern age (in other words, a bank) became something different - a new and exciting way to lose money.

But John Wriglesworth, an analyst of building societies for the investment bank UBS in the 1990s, and later a senior executive at the Bradford & Bingley, sees things differently.

"The reason the demutualised societies have gone has been due to investors having panic attacks," he said. "It has been a self-fulfilling, cataclysmic spiral into the abyss."

Way back when

Just 11 years ago, demutualisation among building societies was all the rage.

The year 1997 marked a sea change for a movement of safe and sound financial organisations, most of which had started up in the 1800s. One after another some of the biggest names jumped ship.

The Abbey National had struck out on its own back in 1989 to become a bank and, overnight, it converted its savers into shareholders. But with the Cheltenham & Gloucester agreeing to sell itself to Lloyds bank in 1995, the dam burst. Within the space of twelve months in 1997, the Alliance & Leicester, Halifax, Northern Rock and the Woolwich, all well known mortgage lenders, decided they wanted to be banks as well.

The Bristol & West jumped directly into bed with the Bank of Ireland that year, and two years later the Birmingham Midshires did the same with the Halifax. By the year 2000 the Bradford & Bingley was the last to join the stock market.

Adrian Coles, of the Building Societies Association (BSA), disapproved of all this at the time, but does not hide his amazement at recent events. "It has been utterly, unbelievably, astonishing," he said. "Seeing the swift disappearance of the former societies in the firestorm, which I don't claim to have predicted, has also been astonishing."

No guarantee

In fact the B&B directors campaigned against converting to be a bank, but were defeated after a saver from Northern Ireland, Stephen Major, succeeded in forcing a vote on the issue among members the year before.

"It's unfortunate but that's the way these things go," he told the BBC regretfully.

"Nine years ago we didn't think about credit crunches or that building societies or banks could go bust.

"There's no guarantee it wouldn't have happened anyway," he added.

According to the BSA, the total value of the payouts in 1997 amounted to £36bn in shares and cash into demutualisation. The B&B members were simply too keen to cash in on the value of their society, and so it went the same way as the other societies.

Share options

So why did all this happen?

Until the mid 1980s building societies dominated the mortgage lending business, more or less as a cartel. That changed with the 1986 building societies act, which also paved the way for demutualisation.

The house price boom of the mid and late 1980s alerted the banks to the rich picking to be had in home loans, as well as selling endowment investment policies, house insurance and, so they thought, estate agency.

They also recognised that the quickest way to get a large slice of this profitable business was to buy up an existing lender. And according to John Wriglesworth, directors of building societies were only too keen to join them. "They used words like 'freedom to compete' and 'access to capital,' but the main reasons were excessive pay, share options and testosterone".

Investment banks from the City and Wall Street did their best to speed up the process, touring the boardrooms of the larger building societies, convincing their directors that now was the time to break the mould and demutualise.

The fact that these investment banks often made large fees as advisers to the eventual flotations or takeovers was not a coincidence.

Funding

For the past decade the banks, building societies and other specialist lenders have all taken part in the biggest house price, and mortgage lending, boom in the UK's history.

One thing that has helped the banks in particular has been their ability to borrow money from other financial institutions, rather than just from savers, to fund their mortgage lending.

Building societies are restricted by law to funding just 50% of their lending this way and the average among societies is much less, at about 30%. It is this borrowing, and the current difficulty in repaying it, that lies at the heart of the problems that have been experienced by the Northern Rock, Halifax and now the B&B.

"With hindsight they raised more money than they would have done had they stayed as building societies and with the credit crunch that now looks like a mistake," said Adrian Coles.

But John Wriglesworth argues that losing their independence because of this was certainly not inevitable for the former mutuals, especially for the Halifax and the Alliance & Leicester. "They had a viable comprehensive strategy - their demise is due to the exceptional circumstances, based on fear breeding fear, not their areas," he said.

"There was no reason for the Northern Rock to go down the sub-prime route, or for the Bradford & Bingley to go down the buy-to-let route."

http://news.bbc.co.uk/

FSA fines GE Money £1.12m

The Financial Services Authority has fined GE Money Home Lending £1.12 million for systems and controls failings that resulted in 684 borrowers suffering financial loss in excess of £2.3m

This is the first time the FSA has fined a mortgage lender in relation to its lending processes.

The FSA says this action sends a clear signal that lenders’ management must treat all their customers fairly and prevent them suffering detriment.

The news follows concerns raised by housing minister Caroline Flint at this week’s Labour conference, on the number of second charge repossessions initiated by GE Money. For the full story see this week’s Money Marketing.

The regulator revealed that the customers affected were those whose mortgage contracts were subject to a retention clause, where a sum of around £3,000 was withheld from the mortgage advance - typically where the borrower was required to carry out specified repairs to the mortgaged property.

The firm’s mortgage terms and conditions provided that these retention monies would be retained for six months and that during this time the borrower would be charged interest on the full mortgage loan including the retention monies. After six months the retention monies and accumulated interest should have been released to the borrower or applied to reduce the outstanding mortgage loan.

The firm’s terms and conditions did not make it clear to all customers that they would be charged interest on the full mortgage loan, including the retention monies, during the six month retention period. The FSA has also revealed that due to inadequate systems and procedures at the firm, retention monies and accumulated interest were not always paid to borrowers or applied to their outstanding mortgage loan after six months and the firm continued to charge some borrowers interest on retention monies beyond the six month retention period.

When a mortgage with an outstanding retention was redeemed, the firm did not always deduct the retention monies and accumulated interest from the outstanding mortgage loan. This resulted in some borrowers overpaying the firm when redeeming their mortgage.

FSA director of enforcement Margaret Cole says: “The firm’s failings were serious because a large number of borrowers, including some with impaired or non-standard credit profiles, were put at risk of financial loss. The firm identified the systems and control failings in 2004, but despite internal recommendations that improvements be made, no corrective action was taken for more than two years.

“I emphasise that we expect high standards by lenders in their administration of their mortgage book.”

As a result, the regulator has ensured that customers who suffered financial loss as a result of the retentions failings were properly compensated.

GE Money says it will commission an external review of the issue and will share the report with the FSA. It says it also has stopped using the retentions mechanism.

Because GE Money agreed to settle an early stage of the proceedings, it had a 30 per cent reduction in the FSA penalty. The FSA says if it were not for this, it would have fined GE Money £1.6m.

In total, including both regulated and non-regulated mortgage contracts, GE Money has paid 5,245 customers redress of £7.04 million in relation to their mortgage retentions.

www.moneymarketing.co.uk

Ex-mutuals fall to the bottom of food chain

The financial jungle is full of endangered species at the moment. But building societies - those perennial dinosaurs of the sector - appear to be in relatively fine fettle.

With families seeking safe havens for their cash, and the global lenders on the retreat, dull and conservative customer-owned lenders have been hoovering up record savings as their commercial cousins stagger under the weight of toxic debts.

Building society bosses must be taking particular satisfaction at the beleaguered state of those ultimate turncoats - the former mutuals.

Abbey National was the first of the building societies to seek a stock market listing in 1989, but the high tide was in 1997, when four societies floated.

For a while the wave of demutualisations proved to be a boon for customers, who enjoyed a cash and shares bonanza of £20bn. Yet many of the former societies have since found themselves in deep water.

The woes of Abbey were an early foretaste, as the firm's overly-ambitious Treasury department racked up huge losses on dodgy loans, forcing it into the arms of Spain's Santander in 2004.

More recently, Alliance & Leicester was snapped up by Santander after being pushed into the mire by the wholesale lending drought. HBOS, the owner of former society Halifax, is being scooped up by Lloyds TSB amid its own funding woes.

Bradford & Bingley is expected to fall into the hands of a rescuer under the worried watch of the Financial Services Authority. And the less said about Northern Rock the better.

Adrian Coles, head of the Building Societies Association, is scathing about the record of members that abandoned their mutual status.

In their eagerness to drive up returns, managements bit off more than they could chew, he claims. 'They took their eyes off the customer focus and began to think money was more important than people.'

Bruno Paulson, UK banks analyst at Sanford Bernstein, is a little less emotive. He argues that firms such as A&L and B&B simply lacked the scale and diversification to withstand a major market maelstrom.

HBOS and Northern Rock expanded their businesses at breakneck speed, leaving them with too little funding from depositors when the wholesale markets dried up.

He said: 'Some of the demutualised lenders had a decent run for a while, but they all ended up coming a cropper. For some the problem was a lack of scale, while others misjudged risk as they chased growth and diversification.'

For investors who held onto their shares after demutualisation, the record has been pretty grim. For example, B&B floated at 248p, but it is now trading at 28¼p. Northern Rock started life on the stock market at 452p, but shareholders are expected to get precious little compensation following its nationalisation.

That said, it is possible to display a little too much schadenfreude at the fate of the ex-mutuals.

www.thisismoney.co.uk

Temenos names Mike Head global partners director

Swiss core banking vendor Temenos has appointed Mike Head to lead the development of its global partners programme.

As global partners director, Head is charged with expanding the programme to include new firms as Temenos looks to increase its geographic reach and capacity and win clients for its T24 and core banking products.

Reporting to COO Mark Cullinane, he will be a member of the management board and based in the company's London office.

Previously Head was programme director for German software giant SAP - building its reseller partner channel in Europe. After leaving SAP he was responsible for the start up of software implementation and development vendor Pecaso.

Andreas Andreades, CEO, Temenos, says that having built up its direct channel, the firm is now looking to expand the partner programme and become the "preferred partner of the world's largest systems integrators".

Temenos already has partnership deals with IBM, HP, Metavante, Oracle, Logica and Interactive Data, among others.

Says Head: "My role will be to bring to the core banking market the practices and the discipline that a partners programme requires for success".

www.finextra.com