PUBLISHED
October 2015
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The History of Building Societies
1775 The first known society was formed - Richard Ketley's, at the Golden Cross Inn,
Birmingham. The earliest societies were 'terminating', and wound up when all their
members had been housed. They were confined to the Midlands and the North of
England. The last terminating society in existence (First Salisbury) was dissolved in March
1980
1812 Test case of Pratt v Hutchinson, involving arrears in payment to the Greenwich
Union. Until this point societies had been operating under the Friendly Societies Act of
1793. The Court ruled in the society's favour - the first formal recognition of building
societies' rights.
1825 The Jubilee of the industry - over 250 societies in existence throughout the
country.
1832 The Great Reform Act, which extended the franchise to owners of property worth
forty shillings a year, resulted in a rapidly increased growth of the industry.
1836 The first legislation dealing specifically with the industry. The Regulation of Benefit
Building Societies Act officially recognised societies for the first time. It came about
partly because the Government wished to encourage building society saving - the
Savings Bank rate of 4.5%, subsidised by the Treasury, having proved embarrassingly
expensive. A barrister was appointed to certify societies' rules and offer advice. Later he
became known as the Chief Registrar of Friendly Societies.
1838 'Model rules' concerning the operation of building societies were compiled by the
Chief Registrar and issued by the Lords of Treasury.
1840s Societies began to accept savings from members who were not necessarily
potential home owners.
1845 James Henry James produced a leaflet that outlined a new idea for 'permanent'
building societies.
1845 The first known permanent society formed - The Metropolitan Equitable.
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1847 Publication of Arthur Scratchley's famous Treatise on Benefit Building Societies
which outlined the permanent principle in greater detail and provided tables for the
calculation of interest and repayments, etc.
1855 The Liverpool and London Building Society Protection Associations were formed,
both to safeguard the industry from increasing legislation designed to extract more tax
revenue from the industry.
1860 Over 750 societies in existence in London and 2,000 in the provinces.
1869 The Building Societies' Gazette established.
1869 The Building Societies Protection Association formed in London by James Higham
to act as the national body for the industry.
1870 The Royal Commission on Friendly Societies included building societies in its
enquiries. Many had retained the features of members balloting for loans, thus
attracting gamblers as well as genuine house-buyers.
1874 The Commission's Report, plus amendments from the Association, resulted in the
Building Societies Act.
1875 The Chief Registrar's Report on Friendly Societies now included a separate annual
section on building societies.
1884 A Building Societies Act dealing with the question of arbitration was passed,
enabling societies to take erring members to court rather than employing arbitrators.
1892 The spectacular collapse of the largest building society in the country - The
Liberator Permanent Benefit - due to the financial activities of its founder.
1894 The Building Societies Act, which closed loopholes in the 1874 Act and guarded
against the recurrence of the Liberator fiasco, as well as legislating against the so-called
'promoter' societies, such as Bowkett, Star-Bowkett, Richmond, Self-Help etc, which
were founded on dubious gambling principles.
1910 1,723 societies in existence with 626,000 members and total assets of over £76m.
1926 The Building Societies Protection Association was renamed The Building Societies
Association, with 310 member-societies.
1936 A split in the industry caused by the 'Code of Ethics' resulted in the Association
being wound up and the formation of a new Building Societies Association, but with a
splinter group called the National Federation of Building Societies.
1937 The famous case of Bradford Third Equitable v Borders which disputed the legality
of collateral security and which claimed societies' responsibility for the condition of
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property to be mortgaged and for builders' description of new houses. The ruling was
in favour of societies.
1939 The Building Societies Act, passed with the co-operation of the Association and
the Government, restricted the mortgage security that building societies could accept.
1940 The Association and the National Federation were re-united.
1951 Ruling by the Association on 7.5% liquidity as a condition of membership.
1960 The Building Societies Act, ensuring liquid funds were both liquid and safe,
increased the power of the Chief Registrar and restricted size of loans, particularly to
corporate bodies.
1962 The Building Societies Act - a consolidation of all previous legislation. This proved
too restrictive in the 1980s.
1975 The industry is officially 200 years old.
1980 The last terminating society in existence (First Salisbury) was dissolved in March
1980.
1986 New Building Societies Act. Gave wider powers to societies in the field of housing
and personal banking services. Established the Building Societies Commission as
societies' regulator.
1989 Abbey National passes a resolution enabling it to convert to plc, and bank, status.
This was an option given under the Building Societies Act 1986. From July 1989 the
Abbey National no longer a building society.
A new central trade body for mortgage lending institutions established in August. The
Council of Mortgage Lenders was promoted by four trade bodies (the Association of
Mortgage Lenders, the Association of British Insurers, The Building Societies Association
and the Finance Houses Association), with the BSA withdrawing from most mortgage
and housing matters.
1991 The Tax-Exempt Special Savings Account (TESSA) was introduced. The number of
repossessions hit 75,500 for the year - the highest ever recorded figure.
1995 Cheltenham & Gloucester Building Society converted to plc, and bank, status and
became part of the Lloyds Bank Group - the first example of a society using the
provisions in the 1986 Act to be taken over by an existing organisation.
1997 In March the Building Societies Act 1997, which made substantive amendments to,
but did not replace, the Building Societies Act 1986, was enacted. The 1997 Act
introduced a more flexible operating regime for societies. It increased the powers of the
Building Societies Commission in line with the new powers granted to societies and
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included a package of measures to increase the accountability of building societies'
boards to their members.
The industry's largest society, Halifax Building Society, converted to plc, and bank,
status, along with four other societies.
1999 Legislation changed to increase the number of members required to propose a
resolution for consideration at an annual general meeting; nominate a candidate for
director; and requisition a special general meeting. The Individual Savings Acccount
(ISA) was introduced, replacing the Tax-Exempt Special Savings Account (TESSA).
2000 Bradford & Bingley Building Society converts to plc status - the last, to date, to
convert.
2001 The Financial Services and Markets Act 2000 - providing for a single legislative
framework for regulation of financial services in the UK - came into force on 1
December 2001. The Financial Services Authority became societies' regulator (replacing
the Building Societies Commission) and substantive amendments were made to the
Building Societies Act 1986.
2004 The Consultation Document prepared by Paul Myners to inform his work on the
corporate governance of mutual life offices was published in July. In December the full
report is published. The general tenor of the Report is supportive of the valuable
role played by financial mutuals.
2005 Britannia Building Society buys the savings and branch business of Bristol & West
plc, the first remutualisation of a converted institution. The Child Trust Fund was
introduced.
2007 -The Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 (the
“Butterfill” Act) received Royal Assent. The main provisions in the Act (all of which
require secondary legislation before they come into force) were to: increase the current
50% non-member funding limit to a maximum of 75%; to alter priorities on dissolution
and winding-up ensuring that ordinary shareholders would rank equally with ordinary
creditors; enable the transfer of a building society, friendly society, industrial and
provident society, mutual insurance company or an equivalent European mutual, to a
subsidiary of another mutual.
2008 The Banking (Special Provisions) Act 2008 received Royal Assent in February – this
was emergency legislation introduced following the collapse of Northern Rock. It
enabled the government to nationalise Northern Rock and to provide temporary
powers to intervene in other banking collapses. The temporary provisions lapsed twelve
months later.
HM Treasury and the Bank of England introduced a package of measures to provide
support for banks (and building societies, although both HM Treasury and the FSA have
indicated that they believe that building societies have been less affected by the credit
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crisis than banks) intended to promote stability and provide protection for savers and
borrowers.
2009 The new Banking Act 2009 makes provision for a Special Resolution Regime for
deposit-takers, under which various tools (“stabilisation options”) will be available –
such as directed transfer to a private sector purchaser, transfer to a bridge bank, and
transfer to temporary public ownership. There is also provision for partial transfers.
Dunfermline Building Society's retail and wholesale deposits, branches, head office and
originated residential mortgages were transferred to Nationwide Building Society. This
followed a sale process conducted by the Bank of England under the Special Resolution
Regime provisions of the Banking Act 2009.
Britannia Building Society merged with the mutual Co-Operative Financial Services – the
first merger between a building society and a mutual bank since such mergers were
made possible under the ‘Butterfill Act’.
The BSA changed its rules to admit other mutually-owned deposit takers into
membership rather than restricting its activities to building societies. This enabled the
BSA to represent a wider range of organisations, and a larger market share, than would
otherwise be the case.
The FSA recognised a new form of tier 1 permanent capital instrument for building
societies – profit-participating deferred shares (PPDS). The West Bromwich building
society has announced that it has issued PPDS in exchange for existing holdings of
subordinated debt, thereby upgrading its capital, and is the first society to take
advantage of this new instrument .
A report by Oxford University, published for the BSA, revealed a strong case for
converting failed banks into mutual organisations. In light of the report, the BSA urged
the Government to consider returning Northern Rock bank to the mutual sector.
2010 In March the Mutuals’ Manifesto was published. This manifesto was the first of its
kind and brought together the views of various trade associations and mutual
organisations. It was a challenge to the UK’s political parties to show how they plan to
support and nurture the mutual sector. The three main political party manifestos
recognised the importance of mutuals, both within financial services and wider public
services. The Labour Party notes the value of building societies and the strength and
diversity that a healthy mutual sector brings to financial services. The Liberal Democrats
assert “mutuals, co-operatives and social enterprises have an important role to play in
the creation of a more balanced and mixed economy. Mutuals give people a proper
stake in the places they work, spreading wealth through society, and bringing innovative
and imaginative business ideas to bear on meeting local needs.” The Conservative Party
sees mutuality as the way forward within public services and pledge to support cooperatives and mutualisation as a way of transferring public assets and revenue streams
to public sector workers; essentially employee-led co-operatives.
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A new specialist sourcebook for building societies was published by the FSA in March,
intended to enhance the supervisory guidance available on societies’ financial and
credit risk management. The BSA have concerns that, overall, the sourcebook may tend
to disadvantage building societies by imposing a tougher and more prescriptive regime
on them than banks or other lenders will be subject to, specifically with mortgage
lending requirements.
In May the Coalition Government pledged in its Coalition Agreement to promote
mutuals. “We want the banking system to serve business, not the other way round. We
will bring forward detailed proposals to foster diversity in financial services, promote
mutuals and create a more competitive banking industry.”
2011 In February Kent Reliance Building Society was restructured by transferring its
business, assets and liabilities to OneSavings Bank plc. JC Flowers, a US private equity
firm, injected £50m into the new bank, which is 59.9% owned by a new mutual called
Kent Reliance Provident Society, which Kent Reliance Building Society's members belong
to. JC Flowers own the rest of the bank.
Reclaim Fund Ltd, a wholly owned subsidiary of The Co-operative Financial Services,
was authorised by the FSA in March. This was an important milestone for the Dormant
Accounts Scheme, whereby money in accounts with no customer activity of 15 years or
more will be made available to charitable causes. Reclaim Fund will receive dormant
account monies from banks and building societies and distribute to the Big Lottery Fund
for onwards distribution. In England, it will be passed to the Big Society Bank, while
different arrangements will apply elsewhere in the UK. There is also an alternative
scheme for institutions with assets below £7 billion. This will enable them to directly
support good causes within their local communities or those that they have an affinity
with, rather than via the Big Society Bank. Most BSA members are eligible for the
alternative scheme, and this is a good fit with their local and regional franchises.
In November Northern Rock was sold to Virgin Money, disappointing those that wanted
it to be remutualised.
2012 In June the Bank of England announced the launch of the Funding for Lending
Scheme which aims to provide funding to boost lending to the real economy.
In July the FSA published The Future of Building Societies, aimed at producing the right
legislative framework to enable building societies to compete fairly, free from
inappropriate burdens and maintain their distinctive approach and lower risk business
model.
New mortgage rules were published by the FSA in October, coming into effect in April
2014.
In December the Financial Services Act was passed. It provides a new regulatory
framework for financial services and gives the Bank of England responsibility for
protecting and enhancing financial stability. The Act, which is to come into force in April
2013, abolishes the Financial Services Authority and creates a new regulatory system of
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the Financial Policy Committee, the Prudential Regulation Authority and the Financial
Conduct Authority.
2013 Help to Buy is a package of measures announced in the March budget. The
measures comprise two elements, Help to Buy: equity loan and Help to Buy: mortgage
guarantee. The Help to Buy: equity loan scheme will provide an equity loan to
borrowers worth up to 20% of the value of a new build home. The loan will be interest
free for the first five years and repayable within 25 years or when the house is sold. The
scheme is intended to run for three years to support up to 74,000 home buyers.The
Help to Buy: mortgage guarantee scheme will provide a £12 bn guarantee of up to
£130 bn loans on residential properties.
On the 1 April the Financial Services Authority was replaced by a new regulatory system
of the Prudential Regulation Authority (part of the Bank of England) and the Financial
Conduct Authority.
In November Nationwide became the first building society to issue new Core Capital
Deferred Shares (CCDS), a mutual-friendly capital instrument .CCDS have been
designed to meet the requirements of the UK and European authorities under the new
Capital Requirements Directive IV capital regime, being perpetual; loss-absorbing and
subordinate, whilst at the same time safeguarding mutual principles through features
such as capped, discretionary return.
2014 In the March 2014 budget the Government announced that the Help to Buy:
equity loan scheme would receive a further £6bn of funding and be extended to March
2020. Around 200,000 people are expected to buy with the equity loan scheme.
In April new mortgage market review rules came into force. Key changes include the
fact that all applicants, bar a few very specific groups, will receive mortgage advice, and
that lenders will have to establish that a borrower can afford a loan at the current
interest rate but also if the rate were to rise.
2015 In June the FCA issued the final rules covering the restrictions on the retail
distribution of regulatory capital instruments. For building societies, this primarily covers
the issuance of Core Capital Deferred Shares (CCDS) to retail investors. We agree with
the FCA that retail capital instruments such as CCDS should only be sold to those
investors who can understand the risk, and as a modest part of a portfolio - the rules
specify a maximum of 10% of net investable assets. CCDS are totally different to a
savings account, and although the return may be higher, this matches the higher level
of risk undertaken.
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In October BSA & Loughborough University's School of Business and Economics launch
first Masters for customer-owned financial firms.
Suggested Further Reading
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The building society movement/E J Cleary
London: Elek Books, 1965
Building societies: their origins and history/Seymour J Price
London: Franey & Co, 1958
The building society story/Herbert Ashworth
London: Franey, 1980 ISBN:0 900382 38 4
The building society industry/Mark Boléat
London: George Allen & Unwin, 1982 ISBN:0 04 332087 2
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