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Engineering a new model for mutually

Neville Richardson, chief executive of Britiania Building Society, talks about the ground-breaking merger with Co-operative Financial Services that will create a strong mutual force in the market

JM:

Congratulations on your forthcoming merger with Co-operative Financial Services which was made possible by legislation that allows mutual organisations such as building societies to merge with those from other sectors.
So was the merger prompted by the bill or was the catalyst for the legislation the result of pressure from, say, yourself and David Anderson, chief executive of CFS, thinking a merger would be a good idea and then setting about overcoming the legal obstacles?

After all, you and he have some history of working together when he was chief executive of Yorkshire Building Society and the fruit of that was a shared branch network.

NR: I honestly don’t know how the legislation came about. The first I knew of it was that MP Sir John Butterfill was putting the Private Member’s Bill forward and it contained a few things that were particularly relevant to building societies. In fact, the bill seems to have been a long time in gestation because it started off a couple of years ago.

So that’s the background and it was probably some time last summer that David and I, who have known each other for a long time, got together and had a chat. We figured that if anything came out of the legislation that could be of benefit to either organisation we would talk to each other again.

JM: That’s interesting but what sort of vision did you have to want to take that forward?

NR: If you go back to those early conversations we probably started looking at things on a product by product basis, or even considered service sharing. The more we looked at it, the more we realised Britannia has a great name for mortgages, savings and its branch network, and the areas where we would have to invest in the near future would be in functionality, savings, current accounts and the internet.

And if you look at what CFS has to offer, it’s got a strong banking proposition, a strong internet proposition, personal loans and credit cards.

So the more we looked at it the more we realised that if we put this lot together, building on what the two organisations had done separately and bearing in mind what they would be investing in over the next few years while still remaining mutual, we would really have something.

The good thing is that the cultures of the organisations are similar. We think we’re the only two organisations that share profits with customers at the end of each year. Once we put everything to-gether it made sense to create the new organisation.

JM: I know it’s early days and the mer-ger is subject to the approval of your members and the Financial Services Authority but what sort of exposure are you looking at in the mortgage market? Do you have any targets and will Platform have any role to play in the merged business?

NR: I don’t want to seem presumptuous because there will be a members’ vote. The board is strongly recommending it but everything I say is predicated on the merger going ahead.

In terms of the lending market Britannia is much stronger in mortgages than CFS at present and the predominance of the book is in membership lending – traditional building society lending. That will continue.

Then we have Platform. It’s always been our intermediary lender so it’s always been our route to brokers. We’ve never gone through intermediaries to the membership.

JM: Is that because there is a non- conforming element in it?

NR: It had a specialist lending element so Platform has effectively represented intermediary lending of which the majority was specialist. But it wasn’t only a specialist lender. In fact, if you look at what we’ve done with Platform in 2008 and into this year the pendulum has swung far more towards prime lending. So in 2009, for instance, the majority of what Platform will do is prime lending through the intermediary market.

Looking forward, I see Platform as the access point to the intermediary market which accounts for over well over half of the UK market. Whether we choose that to be more specialist or more prime will depend on where the market is at that time.

What we feel is important is that while others were closing their specialist lending arms we have retained the capability, but that doesn’t mean we have to use it heavily at the moment.

There will be a strong specialist market when we come out of this recession.

JM: So the infrastructure will be there to take advantage when that happens?

NR: Exactly.

JM: Most chief executives I talk to have been busy battening down the hatches and striving to run a tight ship until the economic situation improves. On the other hand, you have the stimulation of putting together a new organisation that, members and the FSA willing, will be operational by the summer.

The downside must be that problems in the market have not gone away and you also have to watch your back. How difficult is it to juggle all those factors? NR: With CFS we’ve a really exciting proposition. It’s something different for the future and my questions in the start-up talks were all about customers – what can we do for customers and how can customers get the best deals out of the merger?

At Britannia we’ve always accepted that we must be financially strong but achieve this in a responsible way so in the past 12 months we have reduced the number of roles in our business by 500 – that’s about 10%.

JM: I find the word roles confusing – do you mean jobs?

NR: The reason I say roles is that only a small proportion of the reduction has been by way of redundancy. The rest has been by natural turnover.

We have done redeployments and in-vested in retraining staff. We have achieved higher levels of employee satisfaction and engagement than any other firm we know of in the industry. What I’m saying is that our focus is on being financially strong but in the right way.

So looking forward to the new business we have all the excitement of exploring how we can improve the customer experience but in addition to that we owe it to members to be financially efficient so we’ve said we believe there’s at least £60m of cost savings in play.

JM: Over a three-year period?

NR: That’s right, and these will come out of a mixture of purchasing efficiencies and the way we do things.

JM: Members will be voting on the merger at the end of April and the new business should be up and running by the summer. What kind of market do expect to be facing at that time?

NR: I think it will be a market in which people will distrust shareholder banks – a market where consumers will be looking for something different but there will still be a mortgage market, there will still be a lending market and there will still be a savings market.

I think consumers have changed from the old attitude of megabank versus small bank, with megabank being best. We’re now back to trusted versus not trusted firms, and this is where mutuals will come into their own. Customers are still there and the market is still there, albeit at a reduced level of activity.

In other words, it’s the right time to launch this venture.

JM: You mention megabanks. As chief executive of a building society and until recently deputy chairman of the Building Societies Association, how concerned are you about the development of state-backed mortgage banks and in particular the takeover of HBOS by Lloyds TSB which bypassed competition issues and it seems due diligence too?

NR: I don’t think consumers trust those organisations any more than they did previously, especially in terms of ethical treatment.

JM: Is it a consideration that people feel themselves more secure with those banks?

NR: Well, in the last three months of last year when banking was at a low in terms of consumers’ concerns about security, we were opening accounts faster than we had ever done before. I think consumers have an inherent trust of mutual organisations.

Having said that, we have to have a level playing field and it would be unfair if government-owned banks were to be offering high interest rates and a government security.

And I’m sure that allowing the mergers to go ahead as quickly as it did, the government will keep an eye on the fairness question.

JM: Even though the state might be tempted to use those banks to expand lending back to 2007 levels?

NR: It may be tempted but the indications point towards it wanting to see lending coming through all channels, not just its own.

What’s more, we’ll be in a better position when things start to take off again because we have significant levels of retail savings and don’t have to have wholesale backing to the extent that some banks do. JM: That could pre-empt my next question. At the beginning of the credit crunch I thought the future belonged to building societies with their strong retail funding but they haven’t been able to fill the gap left by off-balance sheet lenders.

I know the FSA is forcing everyone to tighten their lending criteria and hold more liquidity but there’s a view that the building society model doesn’t work that well in a low interest rate environment. I suspect you wouldn’t agree.

NR: No. Our model is sustainable. What has happened is that everybody has be-come more cautious and building societies, despite having significant levels of retail funds and capital compared with shareholder banks, have continued to be cautious and cut back their lending accordingly.

They are constantly looking at how they can be strong organisations for the future. The business model has proved itself at a time when demutualised societies and banks have had to find other routes out of trouble.

The strength of the capital and liquidity holding in societies has kept them in good shape but their inherent caution has also stopped them from going out and trying to fill the gap. Given the prevailing uncertainty, that would not have been the right thing to do.

JM: Yes, but I was thinking about the effect low rates are having on savers. ‘Neither a lender nor a borrower be’ is pretty good counsel but societies are both. And in terms of balancing their interests, aren’t borrowers paying peanuts to the detriment of prudent consumers who may have put money aside for their retirement or a rainy day?

NR: The point you’re raising is fair in that savers are suffering because of the reductions in the base rate the Monetary Policy Committee has sanctioned. My view is that we have yet to see the effect of those reductions coming through.

A lot of savers are on fixed rate products that could still be at 6%. It won’t be until the middle of 2009 that we will see borrowers coming off those higher rates. Provided that all organisations are lowering their rates – and the evidence shows that they are – consumers will look to the organisations they trust, that treat them fairly and that make them feel secure. Again, that’s where societies come into their own.

JM: Finally, no building society has demutualised since Bradford & Bingley went down that road back in December 2000 and the days of the carpetbaggers are well and truly over. True, the number of societies has shrunk but that’s down to consolidation.

But with your upcoming merger, the second largest building society in the country is about to leave the movement, so is this not good news for mutuals generally but bad news for the building society sector, especially if more societies embrace your model?

NR: The legislation and our merger provide an opportunity for the mutual sector to become stronger. The legislation allows different types of mutuals to get together, and that was not possible before.

I agree it’s a long time since the days of the carpetbaggers and that’s a good thing. We’ve seen the rationale that was put forward to demutualise destroyed. It was to give more access to capital but firms did not use this because it was paid to shareholders. It was also to enable them to do inventive things with their balance sheets but that didn’t prove to be such a good idea.

In terms of the business model that societies have and their future, some may end up as different types of mutuals but that will strengthen the sector.

Neville Richardson – personal profile

Position: Chief executive of Britannia Building Society and chief executive designate of Co-operative Financial Services.

Always wanted to be a lender?: No, I wanted to open the batting for England but was never good enough. I worked at PricewaterhouseCoopers before joining Britannia.

Likes: I like tryers – people who achieve their potential so whatever standard they can achieve, they at least aim for it.

Hates: People who lack integrity.

Relaxation: Being with the family, lots of sports, watching Manchester City and running. I also enjoy travel and walking. A couple of years ago my wife and I climbed Mount Kilimanjaro in Tanzania.

Favourite food/restaurant: Any meal with my family or with people whose company I enjoy is a pleasure.

Current bedside book: Recently I’ve read Franz Kafka’s The Trial, Joe Simpson’s Touching the Void and Jim Collins’ Good to Great.

The supermutual – some facts and figures

The merger of Britannia Building Society and Co-operative Financial Services will create a supermutual organisation with some £70bn in assets, nine million customers, more than 12,000 employees, more than 300 branches and 20 corporate banking centres.

Even so, the new organisation will be less than half the size of Nationwide Building Society which, after mopping up the Cheshire and Derbyshire building societies late last year, has assets of more than £200bn and some 600 branches.

The move has been enabled by legislation which for the first time allows mergers between different types of mutuals while maintaining mutual ownership.

A draft statutory instrument under the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 – widely known as the Butterfill Act after its sponsor Sir John Butterfill MP – was laid before both Houses of Parliament on January 19 and is set to become law in March.

The new organisation will initially trade under the Co-operative brands as well as the Smile internet bank and Platform intermediary lender brands, but will move quickly to offering a single product range once the integration of customer systems is complete.

The merged business will be led by Neville Richardson. After supporting the integration process CFS chief executive David Anderson will step down.

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