Edward Murray: Welcome everybody and welcome John to your post at the BSA, perhaps you would like to kick us off with your views on the benefits and constraints of mutuality.
John Goodfellow: Yes, thank you very much. I think one of the main benefits of mutuality is quite clearly a pricing benefit. If you do not have to pay shareholders a dividend you have a pricing advantage. And that is why you get building societies at the top of the product tables. I think product is another benefit for the consumer and it is very clear in their eyes that we are focused on the customers who also happen to be members . There is no confusion between customers and shareholders. And if you look at every piece of research it says consumers trust mutuals, more than they trust plc’s.
Paul Howard: Coming from a mutual organisation myself, I would agree with what John said. I also think people like being with building societies. I think particularly for you guys at the sharp end who are selling mortgages, the word building society is a good part of the overall proposition. I am not saying that in itself it will sell the deal, but I think people like the mutual bit and being part of the building society.
Kevin Duffy: I would agree with the sentiment Paul expressed about there being a greater comfort among borrowers when you are talking about a building society rather than when we sit down and talk about General Motors, GMAC or other brands, which do not necessarily indicate that it is a lender of mortgage finance. There is, on occasion, an anxiety among borrowers about where the organisation is based? Why is it getting into this realm of business?
Frank Eve: I think there is another side to this, which is around accountability, efficiencies and innovation. I think they are the three areas that perhaps the plc’s are stronger in because they probably have higher levels of accountability, and therefore efficiencies and innovation drive those organisations and that is where the societies are perhaps weaker.
Edward Murray: One thing I just wanted to touch on was that a lot of building societies have subsidary lenders, which they fully own, but if you take a mortgage out with them you do not get member status. So how does that fit in?
Paul Howard: It works beautifully for the members. We have Sun Bank and the profits that Sun Bank makes all goes into the pot and it helps Portman members have better mortgage rates. The organisation was bought with the members’ money, so it is for the members, and it is another way that we can return more value to the members.
Peter Beaumont: Would you say, taking Sun Bank for example, which is an intermediary operation, that somebody who comes to Sun Bank probably did not choose it but were probably sold its product by the intermediaries in between. I wonder if that is why you can justify saying they are a non-member part of that business, because they did not choose to come to the Portman. They did not walk down the high street or into a Skipton branch and say that is the mortgage I want. They were sold it.
Paul Howard: Yes they would have a specific need, be it buy to let or self-certification mortgages, so yes, I would accept that. But to say overall in terms of the case of the mutuals I think these acquisitions and subsidiary companies all add to the value to the member.
Edward Murray: One of the things that Frank mentioned earlier was the accountability and the efficiency.
John Goodfellow: Yes, I wanted to come back to that point. I think it is interesting that you perceive a difference in accountability, because I do not actually think there is. Which is the more difficult task: a chief executive of a building society or a plc who wants to get a vote through? The building society chief knows all his members have one vote, and in our case we have to communicate with a million people. All the chief executive of a plc has to do is keep the ten biggest shareholders happy.They can wine them and dine them, they can talk to them individually, they can keep them happy. I always think it is incredible that people believe that accountability is stronger in plc world than it is in mutual world. Where are the fat cats, where is the share abuse? They are not in my sector, they are in the plc sector. So if there is this wonderful level of accountability in the plc sector then why does it not work?
Frank Eve: I think also, coming back to my point, it is not that one is better than the other, it is just that there are different dynamics in each. Sometimes if an organisation needs to move quickly because of changing market conditions, then it can be an advantage to have shareholders who understand the dynamics in the market and are prepared to back decisions very quickly. On the other side it can be quite convenient from the point of view of not having to make the decisions if you have got a million share holders to talk to, because if you are unsure then you can delay. But, I do appreciate that there are lots of reasons why mutuals do a very good job for their shareholders and particularly on non-member businesses. But it does come back to the attitude of the executive within the building society in the way that they use the advantages that they have got.
Edward Murray: On regulation and some of the stricter rules that apply to the building societies, does that create problems in terms of the products you can offer or the way you operate?
John Goodfellow: Well at the highest level the definition of a building society is set in a legislation and is defined as having retail savings of more than 50% and 75% of its assets in residential mortgages. Now you can image situations in the market place where those two things would become constraining. it has never been so in the past and I am not saying it is now, but if you drove a market to one extreme or another it would be a constraint. If the Chancellor were to convert the UK mortgage market to long term fixed rates than the 50% retail funding limit would be a constraint, because long term fixed rates could only funded in the City. Retail investors are not going to say: ‘Oh fantastic take my money for twenty five years on a fixed rate,’ and I do not believe mortgage borrowers will go for it either. But you know that is a different argument.
Edward Murray: What about in a shrinking market where building societies are reliant on mortgage business?
Paul Howard: Well we have seen over the years, markets ebb and flow, and there is nothing wrong with that. I think if we stick to our principles of offering good value, I do not really see a threat.
Peter Beaumont: I think it is a question of scale. If you are a small building society then you probably face different and more difficult challenges then medium national or even a large national building society. That could also apply to centralised lenders; it is always a question of scale and growth and being able to diversify and how fast you can do it. I like what Skipton has done. You have taken a venture capital approach to your business strategy and bought in lots of businesses that feed off each other. I think the Newcastle Building Society has done a very similar thing in diversifying its businesses. Markets are changing and we will all face challenges moving forward; we need to evolve and we need to adapt, but actually sticking to businesses that are linked in some way so you can feed off each other is a very clever strategy. But you can do that because of scale.
John Goodfellow: I think on the one hand it is about scale, but on the other it is much easier for us to do it than it is for HBOS to do it. You know it is pretty hard to change the direction of an oil tanker. So you know, big is not beautiful in certain scenarios, small can be very beautiful. If you want to smuggle cigarettes between Gibraltar and North America, you buy a fast motor boat.
Edward Murray: What about from the broking prospective in terms of the products and service offered by mutuals?
Andrew Montlake: I think that in a lot of mutual lenders the service levels are markedly better than a lot of the bigger banks. In terms of innovation there are certain new deals on short lease products and the like which are of great interest.
Kevin Duffy: We have sort of mixed experiences. On the positive side, with the mutuals we deal with, I think the service probably is better than the service we get from the larger plc’s. I think that there is a healthier duty of care in some respects from mutuals although it does not apply to all of them. On the down side, one frustration, and this may only just apply for london brokerages is the speed of decision making for larger loans, where you are going for £1m or £500,000. It is a frustration, but then again that comes back to scale and what is possible. The final point is innovation. I would agree innovation is not the preserve of the big plc’s. I think we are finding more and more of the mutuals leading the way. Who would of thought two years ago that Newcastle Building Society would be the one to give some brokers in London a five-year fix rate of 3.85%? You would have been laughed out the door if you even suggested it. And look at what Yorkshire is doing with the Accord. So I think the mutuals have reacted quite quickly to what may be coming down the track and are well positioned to defend their position. I do not see them being threatened at all.
Peter Beaumont: I agree with you that you have to have scale. I think the small regional building societies have significant challenges facing them, and I think that comes on two counts. One is distribution in a regulated environment where the shape of mortgage distribution will change. Are they in the position to be on the panels they need to be on to get their 50% of the business, roughly speaking that comes from intermediaries? That is going to be a significant challenge to them. The other challenge is competing on price and stopping the high attrition rates that are being seen, as the remortgage market becomes increasingly competitive. So they have to look at other ways of scaling and growing their asset base.
Paul Howard: But that argument about attrition applies to all of us. For the smaller societies, I do think there are challenges. Looking forward I suspect we will see more mergers. But also remember that all of these organisations are not playing in the mainstream. They are servicing niche markets and local areas, and I still think there is going to be a place for those who serves the local needs.
Peter Beaumont: I like the concept of having a small mutual serving the local community, although the reality of that is slightly different. I do not believe customers are loyal. And I fundamentally disagree that borrowers are loyal, I think they chase price and increasingly so. What they want is service and value for money, end of story, and if you do not provide the service and you do not provide value for money, then they are going to go.
Kevin Duffy: Would you say then in terms of scoring the levels of anxiety, if you like, BSA colleagues are anxious at all about what the future of the next five years holds for the building societies, whether they are small or large ones. Or do you think they are fairly confident about their position in the market.
John Goodfellow: All I can tell you is that we had a conference last week and I believe that the feeling at that conference was bubbly. We are confident of our future far more than we were five years ago. We have taken on board the lessons of five years ago, we have addressed how to communicate with our members, how to involve them in what we are doing and we have to focus on the things that are important to the customers and our members.
Paul Howard: I would endorse that and the lessons we have learnt. We are there for the members, we are owned by the members, we exist to bring value to the members.
Kevin Duffy: I think the other thing that is changed over the last ten years is that when the carpet bagging frenzy was at it is greatest, UK plc was going through this whole matter of privatisation. I think your members are cannier now and more discerning. They can say if I am a member of Portman and it demutualises I might get £1,000, but that is underpinning the variable rate I am actually paying which is good value. I am sticking with it, so no thanks I do not need the money. But I think in those days it was a very different attitude.
Peter Beaumont: I think the other thing again, and I know I said it once and I will probably say it more, is the scale. If you are a very small regional society, you cannot demutualise.
Paul Howard: I can see the smaller societies grouping together to do various things or coming under the wing of a larger society, and to get some economies of scale in various areas, whether it is administration, whether it is asset purchase, or distribution.
Edward Murray: Kevin touched on outsourcing. Is it something the smaller players will look at increasingly?
Paul Howard: Possibly, a lot of the ones that I speak to may if it makes economic business sense to do so, just like any organisation would.
Peter Beaumont: Some do when they buy portfolios. Some are outsourcing the administration, some are bringing it in, that is their choice and I think it is a purely business decision and also a control decision as well. They are either happy or they are not happy with their business outsourced.
Edward Murray: What other possible options are available to the smaller societies to help them punch above their weight?
John Goodfellow: As a sector we talk to each other and we share experiences. There is a huge sort of labyrinth of contact that allows small societies to get access to expertise on an informal basis. I think increasingly you will see that become more formalised. Not necessarily more legally formalised, but a more formalised way of coming together to do certain things, because it creates scale.
Edward Murray: Just to touch on what was said earlier about trying to focus locally for building societies, while at the same time trying to be get onto the big distribution channels. How do you create products that are focused locally but they are going to be attractive on nationally?
Frank Eve: I think that that is one of the difficulties, because smaller societies will be unable to get on to the panels of large distributors. I think as regulation changes the intermediary market, an intermediary will have to be directly authorised by the FSA or be an appointed representative of a principal. So there will be large principals who control their appointed representatives and they will dictate the panel, or larger introducers who are directly regulated who also will probably go for the panel concept. Where I think the smaller societies should concentrate therefore is in their locality offering better individual and personalised services and by the acquisition of portfolios which I think we will see start to increase, right across the board.
Paul Howard: I do not think we should assume that small societies want to get on panels, a number of them wouldn’t want to, a number of them would not want, because they do not have that volume appetite.
Edward Murray: Could they cope with the large volume, if they got it?
Paul Howard: Some of the smaller ones would not be able to, it would just be beyond their appetite, they would not want to. So we should not assume that they sitting there wanting to get on it.
Frank Eve: I do not think they want to get on, but they do need the distribution and at the moment they get intermediary distribution from local intermediaries, all I am saying is that that supply might be more difficult for them going forward.
Edward Murray: So generally the outlook for building societies and mutuals, is good?
Frank Eve: I think the concept of mutuality will continue, it is good for customers and it will continue, however it will be an enormous change throughout the industry and the mutuals, like anyone else, will have to adapt to a new environment going forward.
Peter Beaumont: I think yes, as long as they continue to provide excellent value for money and good service and they are able to do that through scale, I still get back to scale.