The decision by Standard Life to press on with demutualisation has prompted the inevitable question – who next? The mutual sector has been through this all before with the demutualisations of the 1990s. All 63 building societies are committed to their mutual status so the question is pretty easy to answer.
Sandy Crombie, the relatively new chief executive of Standard Life, says demutualisation was inevitable given the pressures the group is facing and its need to raise funds. It is the BSA's view that demutualisation is not inevitable and that mutuals play a key role in financial services. Other mutual life companies have said they do not need to raise money from capital markets. In the case of building societies, capital requirement rules introduced by Basle and possible changes as a result of Miles will allow more than adequate access to finance without compromising mutuality.
Diversity is good for consumers. A mutual society is run in the interests of its members – savers and borrowers. The advantage of this over a stock market listed bank is that a mutual does not have to pay dividends to shareholders. The surplus or profit a society makes can be used to benefit members through interest rates which are higher for savers and lower for borrowers, and through better services.
A phrase we often use is 'keeping the banks honest'. By challenging the plcs on pricing and service, societies and mutual life companies provide competitive pressure.
Evidence from the annual reports of banks that were previously building societies shows that the extra cost of paying dividends to shareholders who are not always the bank's customers, raises their running costs by around 35%. As banks make their money from their customers, it is the latter who pay the higher prices that result. Many people who thought of short-term gain when voting for a demutualisation have realised that the long-term cost is high and carpetbagging has ceased to be the sport it once was.
The decision to demutualise has nearly always been taken by the board of an institution and it is no different in the case of Standard Life. The mutual sector has come under increased scrutiny recently, especially in the aftermath of the report by Lord Penrose into Equitable Life's downfall. What Penrose made clear was that the troubles which befell Equitable came about as a result of management decisions, not as a result of the institution's mutual status.
The FSA has made it clear that it makes no distinction between institutions when regulating and has no preferred business models for institutions while MPs have been vocal in their support for mutuals with financial secretary Ruth Kelly saying: “We have taken steps to promote mutuality and encourage mutuals to develop in future. I hope that I can make more progress on the development of the mutual sector in the coming months and years. We are committed to the mutual sector and to proper and realistic financial accounting to ensure that firms recognise the true value of their liabilities and that they treat customers fairly. I hope that I have also shown hon. members that the FSA has no indirect or covert agenda to disadvantage the mutual sector. The government and the FSA value diversity in promoting competition and ensuring that consumer needs are fully met.”
As a result of the Penrose report the government commissioned a review into the corporate governance of mutual life offices which will be led by Paul Myners who will be considering the governance framework for mutual life offices.
The BSA has welcomed the opportunity to participate in this review into the corporate governance of mutual life offices which will also look at the governance of other financial mutuals. We have great confidence in the governance of societies. Members of building societies are able to access information and engage with their societies in many ways. The sector views the Myners review as an opportunity to look at how this can be done effectively and looks forward to playing an active part in discussions with Myners over the coming months.
The mutual sector, far from being endangered, is alive and kicking. By being more accountable to members and offering a demonstrably better product range and service, mutuals will continue to give the banks a run for their money.