Building Societies
Research Paper 97/20
10 February 1997
This research paper covers two related issues within the building society sector: plans for legislative reform and the current wave of mergers and conversions. A second version of a draft Building Societies Bill was issued on 18 December 1996 and is due to be introduced when parliamentary time allows. Meanwhile, a Private Member's Bill, the Building Societies (Distributions) Bill [Bill 77 of 1996-97] introduced by Douglas French, seeks to address some of the perceived injustices associated with building society windfall payments.
Christopher Blair Business and Transport Section
House of Commons Library Library Research Papers are compiled for the benefit of Members of Parliament and their personal staff. Authors are available to discuss the contents of these papers with Members and their staff but cannot advise members of the general public. CONTENTS
Page
Summary 5
I Early History 6
II Legislation: Building Societies Act 1986 8
III The Building Society Market 10
IV Revising the 1986 Act 16
A. Review process 16
B. Protecting mutuality 18
C. Rules covering distributions on conversion 19
D. Protecting newly-floated societies from takeover 21
E. Draft Bill 23
V Mergers and Conversions 26
A. Statutory and other constraints 26
B. Building Society Accounts 29
1. Types of account 29
2. Entitlement to a distribution 29
3. Joint accounts 32
4. Entitlement to a distribution from joint accounts 33
5. Second-named holders: women 34
6. Disabled account holders 36
C. Economic implications 39 VI Societies converting to company status 40
A. Abbey National 41
B. Cheltenham & Gloucester 43
C. Halifax and Leeds Permanent 45
D. National & Provincial 47
E. Woolwich 49
F. Alliance & Leicester 51
G. Northern Rock 53
H. Bristol & West 54
Appendix 1. Cheltenham & Gloucester: additional details 55
Appendix 2. Halifax: additional details 57
Bibliography 58 Research Paper 97/20
Summary
This paper describes the historical development of building societies. It focuses on two current issues: plans for legislative reform in the building society sector and the present series of conversions and mergers amongst societies. It outlines the complex rules and practices regarding payments by societies when they convert and discusses some apparent injustices associated with these payments. Reference information is provided about all societies which have completed or proposed mergers and conversions.
The Government has consulted extensively on replacing the prescriptive regulatory regime of the Building Societies Act 1986 with a more permissive regime. A second version of a draft Bill issued in December 1996 is the culmination of a two year review and consultation. The Bill may be introduced this session if parliamentary time allows.
Meanwhile, several of the largest societies are not waiting for reform but are instead pursuing structural changes which will lead to their becoming banks. Since the sector's assets will fall by about 60 per cent as a result, these changes will have a major effect.
Part of this process of conversion involves substantial payments being made to some members and customers. The expectation of windfall distributions has disrupted normal business at many societies as speculators try to make quick gains. The schemes for distribution are governed in part by statute and in part by the discretion of the society. The logic and fairness of these schemes has been called into question.
One current area of controversy is payments to the mentally impaired. A Private Members' Bill, the Building Societies (Distributions) Bill 1996-97 [HC 77] introduced by Douglas French under the Ten Minute Rule, seeks to address an effect of the law which means that mentally impaired society members who for practical reasons are named second on accounts established for their benefit may receive lower than expected distributions. His Bill is down for Second Reading on Friday 14 February 1997.
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I Early History
The origins of building societies go back over two hundred years; the first recorded society is the Ketley Building Society which was set up in 1775 in Birmingham. Most early societies were terminating societies. The members contributed towards the cost of building houses for all the members. When all members had been housed, the society would then be wound up. Although the last terminating society was only dissolved in 1980, by the middle of the nineteenth century an alternative form of society, the permanent building society, was increasingly commonplace. Such societies had the same essential characteristics as today's building societies: interest was paid on deposits with the society, and housing finance was advanced to borrowers with interest being charged on the loan. As the term 'permanent' suggests, such societies did not wind themselves up when their objects had been achieved, but continued to operate on a permanent basis. By 1912 only half of the societies in existence were terminating societies, and the proportion of terminating societies continued to decline rapidly thereafter.
Building societies only began to establish branch networks in the 1930s; by 1940 there were 640 building society branches, and by 1987 6,962. Since 1987, though, branch networks have contracted slightly and in 1995 Building Societies Commission (BSC) figures show the number of branches had fallen to 5,141. The establishment of branches and permanent societies allowed societies to expand into the very large organisations which are now found within the sector. In absolute terms the number of societies has been in long-term decline. In 1900 there were 2,286 societies in existence but only 819 in 1950 and just 237 in 1980. In March 1996 BSC figures record 80 authorised societies. The falls are explained by mergers between societies and the transfer of the engagements of small societies to larger neighbours, as well as the natural dying out of terminating societies. Although likely to remain small in number, in terms of assets societies choosing the option to leave the building society sector by converting to plc status are a significant factor in the recent headcount of societies. Until recently, despite a fall in the number of societies, the value of assets in the sector has continued to grow, exceeding £300 billion in 1995. This level will fall by as much as 60 per cent when those of the larger societies which are seeking corporate status leave the sector. The Building Societies Commission noted in its 1996 Annual Report, that some 70 societies would remain, with assets of £120 billion and 17 million investors.1
Building societies were first recognised in legislation by the Regulation of Benefit Building Societies Act 1836, but the main legislative framework which societies have operated under is the Building Societies Act 1874 which followed a Royal Commission report of 1871.
1 p. 42
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According to one historian of the sector, 'the main feature of the Act was to limit building societies to building and owning land for the purposes of conducting their business'.2 Controls on societies were further strengthened in 1894 after the collapse of the largest society, the Liberator. Second mortgages were forbidden by this Act. Subsequent legislation in 1939 and 1960 controlled the classes of security which societies could accept, limited their ability to lend to corporate bodies, and increased the powers of the then sectoral regulator, the Chief Registrar of Friendly Societies. Despite consolidation in 1962, much of the framework of building society legislation still derived from the 1874 Act until the passing of the Building Societies Act 1986.
HISTORICAL DEVELOPMENT OF BUILDING SOCIETIES ______Number Assets ______
Year Societies Branches(a) Staff Shareholders(b)Borrowers Total Total assets at 000's 000's 1994 prices (c) £m £m ______
1900 2,286 na na 585 na 60 na 1910 1,723 na na 626 na 76 na 1920 1,271 na na 748 na 87 2,000 1930 1,026 na na 1,449 720 371 12,000 1940 952 640 na 2,088 1,503 756 16,000 1950 819 650 na 2,256 1,508 1,256 20,000 1960 726 985 na 3,910 2,349 3,166 36,000 1970 481 2,016 25,166 10,265 3,655 10,819 84,000 1975 382 3,375 34,949 17,916 4,397 24,204 102,000 1980 273 5,684 52,727 30,636 5,383 53,793 116,000 1985 150 6,926 65,691 39,996 6,657 120,763 184,000 1990 101 6,051 76,382 36,948 6,724 216,848 248,000 1994 82 5,566 104,058 38,150 7,370 301,010 301,010 1995 80 5,141 99,135 38,998 7,178 299,920 290,000 ______
(a) Figures for 1940, 1950 and 1960 are estimates based on BSA sources (b) Includes individuals who may be members of more than one building society (c) General Index of Retail Prices and predecessors ______
Sources: HM Treasury Consultation Document, March 1996, Building Societies Commission Annual Report 1995-96 ______
2 The Building Society Industry, Mark Boléat (2nd edition, 1986) p.2
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II Legislation: Building Societies Act 1986
Over time a number of deficiencies in the 1962 Act had been noted, and in 1980 there was an expectation of a new building societies Bill, both to remedy problems which had been identified in the existing legislation and to apply European legislation on credit institutions. In the event the European legislation was implemented by secondary legislation and no Bill was brought forward. The Building Societies Association, the sectoral trade body, therefore set up a working group in June 1981 to consider the fundamental nature of building societies. The working group's report fed into a report from the BSA Council, The Future Constitution and Powers of Building Societies, which was published in January 1983. It recommended the retention of mutual status, the creation of a route to allow conversion to plc status, and significant widening of the powers of societies to offer services additional to savings accounts and mortgages. The report was not received wholly favourably, and a revised report New Legislation for Building Societies was issued in February 1984. Although most of the changes called for by the first report were retained, the second report was better received. One factor was a more general perception that the nature of the financial services sector was changing. In this respect a key element of the report was the call for societies to be allowed to offer unsecured loans (subject to limitations): this would allow societies to offer personal banking services including cheque accounts and credit card facilities. Other important proposals included the ability to offer insurance and to operate in the EC. These facilities have become and will remain central to the product ranges offered by societies and former societies.
The Government responded by issuing a Green Paper Building Societies: A New Framework, on 23 July 1984. This adopted many of the BSA's proposals, and outlined a new structure of assets which societies would be allowed to hold subject to limits for each specific class of asset. After further policy announcements, a Building Societies Bill was published on 6 December 1985. The Building Societies Act 1986 received its Royal Assent on 25 July 1986, and came into force (for the most part) on 1 January 1987. In addition to the Act and its schedules, detailed implementation was effected by statutory instruments and prudential notes issued by the newly-established regulator, the Building Societies Commission.
The new Act:
created a new regulatory body for the building society sector, the Building Societies Commission. The BSC ensures that societies protect the investments of their members and shareholders. It is also charged with promoting the financial stability of the sector as a whole. The Commission monitors each society's compliance with prescribed restrictions on the extent of specific activities ('nature limits'), and has wide powers of intervention.
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set up a deposit protection scheme for investors which would compensate them up to a maximum of £18,000 (90% of the first £20,000 invested) in the event of a society becoming insolvent.
extended the range of activities in which societies could engage, but remained essentially prescriptive. A society could be established under the Act: 'if its purpose or principal purpose is that of raising, primarily by the subscriptions of the members, a stock or fund for making to them advances secured on land for their residential use' (s.5(1)). Other permitted services were listed in the Act (including money transmission services and estate agency services), and although this list could be extended, any new service would have to be related to the traditional focus of societies: financial services and services related to land.
set up a mechanism for societies to convert to plc status, or to merge with existing societies. In each case thresholds for member approval were included, and the Building Societies Commission was charged with approving the transfer or conversion.
created a new three tier asset classification. Societies would be allowed to hold the following types of assets: Class 1 - first mortgages to owner occupiers; Class 2 - other advances secured on land; Class 3 - unsecured lending, investment in land, and investment in subsidiaries. Initially societies were required to have at least 90% of their assets within Class 1, and no more than 5% in Class 3. These limits have subsequently been relaxed and the proportions of assets permitted within Class 3 increased. Class 3 type assets allow societies to offer a wider range of banking services; they have also permitted overseas expansion.
allowed societies to raise a proportion of funds through the wholesale markets; initially 20 per cent of funds could be raised in this way, but the figure has subsequently been increased.
The provisions of the Act have been substantially modified over time, normally relaxing the controls on societies. An important extension, for example, permitted societies to own life assurance companies, and to take up to a 15 per cent stake in a general insurance company. Plans to revise the 1986 Act are discussed in detail later in this Paper after a review of the market in which building societies conduct their business. This provides a context to proposed legislative reforms.
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III The Building Society Market
For most of the twentieth century, building society fortunes have been closely tied to conditions in the housing market, and especially demand for owner-occupied premises. Where demand for such property has been high, and especially where such demand has been fostered by Government initiatives, societies have prospered. However, the position has become more complex in the second half of the century, and especially since the early 1980s. During this period societies progressively took a larger share of the personal savings market, and with deregulation were able to build on this share by offering an increasing range of banking-style services to the personal sector. Deregulation also allowed societies to offer - with mixed success - other services connected to their traditional business which they had not hitherto offered, including insurance and estate agency. Limited expansion into overseas markets has also been permitted. At the same time, though, societies faced increasing competition in their traditional stronghold, the domestic mortgage market.
To take mortgages first. Before 1980 building societies faced little competition in the provision of mortgages; the market was also protected by a voluntary cartel which societies operated, the Recommended Rate System (RRS). The RRS in its latter form had been introduced as a way of stabilising rates and did help to keep mortgage rates low; it applied also to savings rates, and therefore guaranteed acceptable margins to even inefficient societies and rather better returns to the larger, more efficient societies. At the same time, the system prevented competition on price within the market and perpetuated an excess of demand over supply in the mortgage market. Over time the RRS came under increasing pressure from within the society sector and when it crumbled in the mid 1980s it was also attracting legislative interest. One important factor in the decision of some large societies to withdraw from the system was its inability to protect societies from competition outside the cartel or to allow them to respond to such competition.
Such competition originated initially from the banking sector where the abolition of the corset in 1980 and deregulation of capital bases meant banks were able and keen to expand lending. The mortgage sector was an obvious choice, and helped by prevailing economic conditions which made wholesale funding (to which the banks had access) cheaper than the retail funds which building societies relied on, the banks rapidly built up a significant share of the market for new mortgages. In 1975, the building society sector held 74 per cent of the market (net advances for house purchase), and the monetary sector including banks held just 2 per cent. By 1980 the banks had increased their share to 8 per cent, and the societies held 78 per cent.3 By 1982, just two years later, the banks' share had swelled to 36 per cent, and the societies'
3 Most of the balance was advanced by local authorities
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had shrunk to just 58 per cent.4 Although the banking sector's share has declined since then, it still represents a significant portion of the market. The share is likely to be maintained, although the figures will become more complex as societies are absorbed into banks (the Cheltenham & Gloucester within Lloyds; the National & Provincial within Abbey National), and as former societies join the banking sector following conversion to plc status.
The table below shows the latest available data on gross mortgage advances as a guide to the proportion of new business currently taken by building societies.
______MORTGAGE LENDING: GROSS ADVANCES 1991 - 1996 (second quarter) ______
Total of which: Building Banks Other specialist societies lenders ______£m £m % £m % £m %
1991 64,533 41,078 64 17,298 27 5,437 8
1992 53,725 32,858 61 18,008 34 2,083 4
1993 54,075 30,725 57 20,491 39 2,005 4
1994 57,881 34,847 60 20,244 35 2,549 4
1995 57,109 33,714 59 21,236 37 2,010 4
1996 Q1 13,960 8,033 58 5,349 38 582 4
1996 Q2 17,455 10,078 58 6,875 40 506 3 ______
Source: Housing Finance, Table 13 (November 1996) ______
Competition was also provided by the new centralised mortgage lenders who could combine access to the wholesale markets with low overheads to offer competitive rates. According to McKillop and Ferguson by the end of 1986 new advances by centralised lenders accounted for almost 20 per cent of new lending.5 However this share declined rapidly and many of the centralised lenders withdrew from the market. McKillop and Ferguson cite three main factors
4 Source: Financial Statistics, July 1985, table 9.4, cited in The Building Society Industry, Boléat (1986) 5 Building Societies: Structure, Performance and Change (1993)
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for the difficulties experienced by centralised lenders: rising interest rates made retail funding cheaper than wholesale funding; the centralised lenders had attracted more high risk borrowers and had advanced loans which represented a high proportion of each property's value; they were concentrated in the South East which was among the areas worst affected by the collapse in property prices.
Building societies captured 59 per cent of gross mortgage advances in 1995. In gross terms they advanced £33.7 billion, a figure still well below the levels of the late 1980s and early 1990s. That period itself was marked by significant levels of mortgage arrears and repossessions. Although repossessions peaked in 1991, mortgage demand has remained low and the market subdued.6 It is worth remembering that the mortgage figures include remortgages: of gross advances from all sources in 1995, for example, 26 per cent by number and 28 per cent by value represented remortgages rather than new loans.7
______LOANS SECURED ON DWELLINGS - amount outstanding at end of period ______
Total all sources Building societies ______£m £m %
1991 320,482 197,228 61.5
1992 339,218 211,351 62.3
1993 357,409 219,556 61.4
1994 375,751 231,170 61.5
1995 390,356 223,237 57.2 ______
Source: Financial Statistics, Table 3.2C (January 1997) ______
Recent developments in the mortgage market include a questioning of the appropriateness of endowment mortgages, for long the most popular mortgage product. Their value has been questioned before, but criticism is now in the context of the high standards of investor protection promulgated by financial services law. There have also been warnings from
6 See, e.g., Building Societies: A Future or a Past, Touche Ross (1995) 7 Source: Housing Finance, Table 14 (November 1996)
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sectoral regulators about the sustainability of the special offers made to attract new mortgage customers.
In the savings market building societies have developed a major presence despite the initial disadvantages they faced in this sector. Touche Ross notes that societies raised 'their share of short-term liquid assets from 10 per cent in 1950 to 53 per cent in 1980. This was mainly at the expense of the banks.'8 In the last fifteen years, though, they have faced considerable competition within this market, principally from banks and national savings products which also offer low risk vehicles for savings, but also from personal equity plans, TESSAs and privatisation issues which attracted retail investors. The table below shows how variable societies' share of new savings has been in recent years. Legislative changes have, however, reduced their dependence on attracting retail funds in order to have money to advance for mortgage lending. In 1995 societies derived about 20 per cent of their funds from wholesale sources, well within their permitted levels. Nevertheless access to wholesale funds, particularly at lower cost, remains a factor amongst societies opting to convert.
______INCREASE IN LIQUID ASSETS HELD BY PERSONAL SECTOR 1991-95 ______
Total of which: Increase Building Banks National in year societies Savings ______£m £m % £m % £m %
1991 26,034 17,311 66.5 6,277 24.1 2,168 8.3
1992 22,480 10,804 48.1 5,381 23.9 5,019 22.3
1993 15,086 9,595 63.6 1,876 12.4 3,020 20.0
1994 17,507 8,569 48.9 2,939 16.8 4,596 26.3
1995 31,614 14,233 45.0 13,076 41.4 3,273 10.4
1996 Q1 12,548 3,407 27.2 6,939 55.3 2,543 20.3
Q2 8,999 2,039 22.7 4,673 51.9 1,738 19.3
Q3 5,895 1,851 31.4 2,661 45.2 1,394 23.6 ______Source: Financial Statistics Table 10.7B (November 1996) ______
8 Building societies: a future or a past?, Touche Ross, 1995, p. 41
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During the last fifteen years the cost of attracting retail funds has increased. McKillop and Ferguson observe that whereas before 1980 almost 90 per cent of retail deposits in building societies were held in ordinary accounts, by 1989 less than 8 per cent of deposits were held in these accounts. Instead a range of specialist accounts has been created to attract funds within an increasingly competitive marketplace, usually at the cost of higher rates of interest. Although the 1986 Act allowed building societies to offer some banking services, and the ability to offer accounts which combine money transmission and overdraft facilities was an important development, there is still a perception that building societies may be hampered by their prescriptive legislation from competing freely in the personal financial market. The proposed new Bill should allow societies to develop more strategically in this sector since they would be free to undertake any form of business (with a few exceptions) and would no longer need to wait for specific permission. That said, those societies which are converting, clearly do not feel that the expanded powers of the proposed Bill, which have been widely trailed, offer them sufficient scope to operate competitively in the personal financial services market.
The experience of societies in entering new markets and extending their product ranges has not been wholly successful. McKillop and Ferguson noted in 1993 that it was the largest societies who diversified most; smaller and regionally based societies tended to diversify without straying far from their core product range. They noted 'significant' retrenchment from such diversification areas as share dealing, estate agency, and commercial property development. Whilst recording that at that stage diversification seemed to be inversely related to profit performance, they speculated that diversified societies might in the long term be better placed to take advantage of business upturns, and could benefit from the greater balance implied by diversification despite its inherent risks. On the scope for overseas expansion, they felt niche marketing was likely to be the most successful strategy given the diverse nature of European housing markets and the differing composition of each market in terms of lenders, products and local regulations.
In 1994, Mortgage Finance Gazette with city analyst John Wriglesworth conducted a survey amongst societies to find out what direction participants thought the industry was taking.9 A similar survey had been carried out in 1989 so an historical perspective was available. The survey work was carried out before the Cheltenham & Gloucester announced its takeover by Lloyds Bank. Respondents foresaw few acquisitions or joint ventures in estate agency or property development. In the case of insurance, they anticipated some acquisitions of life insurance companies by large societies but expected few new ventures by larger societies in this area since most had already entered this field. On the question of takeovers, the likelihood of foreign companies buying large societies, and of larger societies joining forces with existing companies, was thought to be higher than at the time of the previous survey. Conversion to plc status was not thought likely.
9 Towards 2000: A view from the top (1994)
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Time has disproved their expectations on conversion, with plans now announced by the merged Halifax/Leeds Permanent, the Alliance & Leicester, Northern Rock and the Woolwich. On the other hand, the C & G and National & Provincial have been acquired by existing companies, and the Bristol & West will be acquired by an Irish Bank, the Bank of Ireland. It is currently thought unlikely that there will be many announcements of further conversions to plc status since the process is costly and few of the remaining societies are thought to be large enough to survive as an independent financial services company. Further consolidation by merger or acquisition within the building society sector seems likely, however.
Those societies which have not announced conversion plans have faced administrative challenges connected with public expectations of large distributions. Typically, these societies are besieged by speculators trying to open accounts, usually with the minimum balance required in order to qualify them for a distribution should conversion or takeover occur. At societies which are thought of as potential candidates account opening levels may increase by as much as tenfold. In response many societies have raised the minimum opening balance on their share accounts to discourage speculators. Some societies in this position have also sought to make their commitment to mutuality manifest by introducing schemes to make the value of mutuality more apparent to their members. Such schemes may take the form of loyalty rewards or a commitment to maintain competitive rates. An example is the Nationwide, which announced in 1996 that it would pass on to its customers the continuing benefits of remaining a building society 'by allowing them to enjoy in one form or another the money which would otherwise have to be used to pay dividends to shareholders'.10 Those societies which have the financial strength and managerial efficiency to maintain such policies should be able to compete vigorously with savings and mortgage providers in the banking sector on this basis.
10 Chairman's Statement, 1996 Annual Report
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IV Revising the 1986 Act
A. Review process
Despite regular amendment to the 1986 Act, in 1994 the Government announced a review of its workings. This was initiated by Anthony Nelson on 20 January 1994, with a brief to review the Act, which included examining deregulatory measures which had been proposed by the Deregulation task forces, and exploring:
'the scope for a further liberalisation of building societies' legislation. In considering the issues, we shall pay particular attention to the interests and security of societies' members and investors'.11
The results of the first stage were announced in a written answer on 6 July 1994.12 Some specific measures were announced, including allowing societies:
• to increase the percentage of funds which they are allowed to raise on the wholesale markets from 40 per cent to 50 per cent
• to make loans which are not secured on land to companies through subsidiaries
• to own an insurance company which writes buildings, contents and mortgage protection policies
A second stage review was then announced with the wider aims of investigating how to encourage evolutionary change in the sector; improving the accountability of directors to members; considering whether the current prescriptive style of the legislation could be altered into a permissive regime; and other specific changes. As part of the review a consultation document was issued by the Treasury in September 1994.13
The results of the second stage review were announced in a written answer on 24 February 1995. Among the proposed changes was the abolition of the distinction between investors and depositors.
11 'Economic Secretary announces review of Building Societies Act 1986', HM Treasury press release, 20 January 1994 12 HC Deb. 6 July 1994, cc.213 - 5w 13 Review of the Building Societies Act 1986, HM Treasury, September 1994
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The Government place great importance on the role of building societies as a safe haven for people's savings and the major source of housing finance in the United Kingdom. At the forefront of our minds has been the objective of creating more competition and accountability in the provision of retail financial services. In drawing conclusions from the review, we have sought to:
enable societies to expand the range of services they offer, while retaining their primary focus as providers of housing finance;
improve societies' accountability to their members; and maintain a sound prudential framework.14
Following the review, a draft Building Societies Bill was published with a consultation document on 18 March 1996. The draft Bill signalled a move away from the current prescriptive legislation where a society can only do what the legislation specifically permits, to a permissive regime which allows societies to pursue a much wider range of activities subject to two main constraints: 75 per cent of their loans must be secured on residential property, and at least half of their funds must be raised from their members in the form of shares. Societies will continue to be subject to prudential regulation by the Building Societies Commission.15 The draft Bill also strengthens the rights of society members and increases the accountability of societies to their members.
Formally, the proposed Building Societies Bill will amend the 1986 Act in fundamental respects. In its consultation document, issued with the draft Bill, the Government classified the planned changes under the four headings: Consultation and Powers; Powers of Control of Commission; Accountability to Members and Complaints and Disputes.
The Treasury also sought opinions on several measures which it was considering adding to the draft Bill.
it proposed making available to societies the administration procedure and the company voluntary arrangement. These systems are available to companies under the Insolvency Act 1986, and in the event of financial difficulties could allow a society to be rescued or to secure better terms for businesses which are to be disposed of. The present system allows a society to be wound up, in the worst case, which may not be
14 HC Deb. 24 February 1995, c342w 15 In its report, Financial Services Regulation: The Building Society Sector (HC 26 1994/95), the Treasury and Civil Service Committee recommended that in the long run the regulation of building societies and banks should be carried out by the same body, perhaps by amalgamating the Building Societies Commission with the Bank of England's Supervision Division.
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in the best interests of its investors and creditors. The Government does not, however, intend to allow administrative receivership to apply to societies, and societies will not be permitted to create floating charges.
societies may be allowed more flexibility in the use of names. A system analogous to the business names used by companies (as opposed to a registered company name) may be introduced with corresponding disclosure requirements. Societies may also be permitted to use the names of predecessor societies (which they have taken over or merged with) as a way of retaining the goodwill associated with these names.
the possibility of societies operating as groups is under consideration. This might mean federations or alliances, or it might mean a society becoming a parent of another. Such a group could represent an alternative to conversion or acquisition by a company, and would allow societies to consolidate and attain desired critical masses while remaining within the mutual sector.
The new Building Societies Bill, which was put out for consultation in March 1996, had been expected to appear in Queen's Speech in October 1996. Subsequently the Economic Secretary to the Treasury announced that another revised version would be published 'later this year' and introduced 'when a suitable opportunity arises'.16 The draft Bill itself was published on 18 December 1996. A written answer of 6 November 1996 outlines in detail the content of the proposed Bill. The text of this answer appears below after a discussion of some of the more controversial proposals which are contained in or absent from the Bill. The understanding appears to be that despite the shortage of parliamentary time left in this Parliament, a revised Bill might be introduced and rushed through the House if broad cross-party support exists for the measure.
B. Protecting mutuality
The prospective demutualisation of a substantial proportion of the building society sector, accompanied by large payments to former members, has prompted debate over whether mutuality has still a relevance in the present world and if so how that value can be demonstrated to the members of mutual organisations. The debate is not limited to building societies, since other mutual organisations are also in a state of flux, notably such large mutual insurers as Norwich Union and Scottish Amicable.
16 HC Deb 28 November 1996 c390w
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In the case of building societies, strong arguments for remaining mutual have historically been the societies' slightly more competitive rates, and the public's greater estimation of societies. These perceptions may lose some of their relevance as the true mutuals' share of the mortgage market shrinks, and the share of former mutuals (perhaps not yet perceived as banks) grows. The ability to raise wholesale capital cheaply is potentially valuable to plc lenders, although societies can now borrow more funds of this type than before. The cost of capital otherwise is lower for societies, and this should underpin their competitiveness. However, increased competition in the mortgage market, and the growing expectation of society members that they should enjoy higher returns from membership could reduce this benefit somewhat. An enduring difference between societies and plcs will nevertheless remain. In a society, the interests of the members and customers should be closely aligned, whereas in a plc the shareholders and the customers' interests can diverge. On this point it is interesting to note that at a time when greater awareness of governance issues in the corporate sector is encouraging companies to view the interests of the firm and those of its customers, suppliers and employees as complementary, one of the explicit reasons given by building societies for choosing corporate status is to make a formal separation between ownership and being a customer.
Among the conclusions of the first stage of its review of the 1986 Act, the Government recognised the role played by societies in maintaining a competitive market in the personal financial sector. It believed societies should be encouraged to develop this role, and noted specifically the importance of small societies in their local areas. Yet despite this pledge of support, some societies feel that new legislative plans do not do enough to protect societies either from speculative inflows or from acquisition by other financial institutions including former societies.
C. Rules covering distributions on takeovers
As part of a conversion or takeover members may receive a distribution either of shares or cash. The Act sets down eligibility criteria for such distributions, including what is known as the two year rule. This provision was thought to prevent such distributions from being paid to anyone except savers with a two-year investing record in the society. Recent conversions have tested the Act's provisions in the courts, and have succeeded in widening to some degree the scope for payments to be made.
Of particular controversy is the absence of any specific reform to the nature of financial incentives which can be offered to society members in the event of a merger or conversion. The payments that accompany these events are seen by many as fuelling the present merger and conversion season. Many societies have found their systems overwhelmed by a wave of speculative account opening by people intent on qualifying for such a payment in the event of a change of status. Not only has this rush of new business made it hard for societies to
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conduct their normal operations, some have had to raise the threshold for new accounts and in so doing risk blocking out savers of small means in the process. Part of the problem here is the interpretation of the 1986 Act, given during the Halifax merger with the Leeds, that the normal two year qualifying rule could be circumvented if the distribution was made in shares and structured in such a way as to be more favourable to those with a two year old account than to more recent investors. Because conversions and mergers require high votes in favour from the membership, societies are usually keen to structure distributions so that as many members as possible benefit.
The powers created by the 1986 Act to allow societies to convert were wholly new and have not operated in the manner intended. Legal judgments in the early conversions and takeovers widened the interpretation of the statute allowing changes of status by societies to offer members payouts on a scale and in a manner not envisaged by the legislation. There are arguments for and against the desirability of this situation. In favour, one might claim that the value which is released in these payouts belongs to the membership and has been created by them. When locked up in societies this capital represented an inefficient and unproductive allocation of resources. One could also argue that if societies had been more careful in the past to demonstrate the value of mutuality to their members the pressure on them now to convert would not be so strong. Against, there is the argument that the capital backing of building societies has contributed to their reputation for reliability and security and given them the trusted position they now occupy in the financial sector which derives from their community-based, thrift-oriented origins. There is also the persuasive argument that the legislation is inadequate for distributions on the present scale with the practical result that the money is being paid to some who have little claim on societies' assets whilst provisions designed to prevent speculation actually contribute to the unjust exclusion of longer-term society members on narrowly technical grounds.
The societies had hoped that the new legislation would help put share and cash distributions back on an equal footing, subject to a strict two year rule, and thereby discourage the speculative account opening. Although some societies have acted to limit speculative accounts by raising their thresholds, or accepting deposit accounts only (which have no membership rights), in the longer term in the absence of government action in this area, the societies may try to apply instead a standard probationary period of two years before members can enjoy membership rights (including the right to partake in distributions). This may be difficult if the distinction between share and deposit accounts is abolished as planned. The argument employed by the Government that societies are free to structure distributions so as to exclude speculators perhaps fails to take account of the high voting thresholds which would-be converters must overcome and of the pressures faced by societies because of the widespread expectation of conversion bonuses. The Government has no plans to remodel the two year rule it appears, although the Labour party is calling for the rule to be enforced.17
17 'Woolwich vows to fight Bill', Independent, 19 December 1996
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D. Protecting newly-floated societies from takeover
Another area of controversy is the relative protections for existing societies and newly converted ones. Under the 1986 Act, newly converted societies are protected from takeover for five years; during this period, however, they are free to acquire building societies which enjoy no protection from takeover. The Building Societies Association has campaigned for the unequal takeover protection to be remedied by the new legislation. During the review process it was suggested that societies which announce a merger with another society should be protected from hostile bids during the merger process. This proposal did not attract wholehearted support, especially from the banks who argue that it would prejudice the members of the societies by preventing them from the opportunity of voting on a better bid. In November 1996, though, it became apparent that the Government intend to modify the five year protection from takeover which currently protects building societies which have converted into banks. The protection will not apply if a former society takes over another financial institution, or if the shareholders vote to waive this protection:
The 1986 Act provides that for five years after a society converts to a plc, no one may hold over 15 per cent. of its shares. This may be waived by the Bank of England, in certain circumstances. Some respondents asked us to remove this protection; others to keep it. The draft Bill will provide for the protection to lapse if, during the five years, the converted society takes over another financial institution, or if its shareholders vote to waive it. If enacted, this change would apply to any converted society still within its five year period.18
Those societies which have already announced plans to convert to plc status are not happy about this proposal since it may alter the balance of reasons for converting. Societies face broad choices between continuing to operate as an independent society; merging with another society to form a bigger and stronger society; merging with a bank or other financial services company and ceasing to exist as a building society; or converting to plc status and operating under the banking laws. The attractiveness of these options to an individual society will depend upon the society's aims and future ambitions: the different opportunities permitted under building society legislation and banking legislation is one of the relevant factors. A society which had planned to convert and make acquisitions of financial services companies may have based that decision in part on the fact that as a converted society they would enjoy an initial period of protection from being taken over themselves. Societies which have already announced plans to float - on the basis of the 1986 Act - may want to reconsider their decisions in the light of changes to the building society regime introduced by a new Act. In the case of societies which have already issued their transfer document, their transfer to plc status is to be carried out on the terms set out in that document. Some societies are reportedly concerned that changes to the legislation could require them to re-issue an amended transfer
18 HC Deb 6 November 1996 cc.539-40
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document, or leave them vulnerable to legal action on the grounds that their transfer document is inaccurate or misleading.
The Building Societies Commission has a statutory role in the conversion process and is required to approve the transfer. Its role is quite strictly limited by statute, but it could refuse to confirm the transfer if material information about the transfer had not been made available to members of the society.
The Alliance & Leicester Building Society which has been quoted in the press as opposing the proposed terms of the new building societies legislation has already issued its Transfer Document. It held its Special General Meeting on 10 December 1996 at which its members voted to approve its transfer document. The document sets out the board's reasons for recommending conversion and flotation as the way ahead. Their reasoning refers on several occasions to the greater ability to make acquisitions as a public company. In the Financial Times the society is quoted: 'We would reconsider our plans if the takeover protection is lost.'19 Most commentators seem doubtful that a society would in practice cancel a planned float on these grounds.
The Halifax Building Society, by way of contrast, has decided to opt for a conversion procedure which does not qualify it for takeover protection. Its reasons for doing so have more to do with the current requirement of converting societies (unless they are being acquired by an existing company) to grant a Priority Liquidation Distribution Right (PLDR) to members in the unlikely event of the society being wound up after it has become a company. The PLDR is designed to protect the current balances of members as at the time of the flotation in these circumstances. This obligation can tie up a significant proportion of the capital of a newly-floated former society. The Halifax has therefore decided to be acquired by an 'existing company' (one of its subsidiaries) and avoid the PLDR. By structuring its conversion in this way the Halifax will not enjoy takeover protection. Two points are worth making. The first is that as a very large society and company the Halifax will have some inherent protection against takeover since only another substantial institution would be able to afford to buy it. The second is that the Government's new Bill proposes abolishing the requirement to create a PLDR, on the grounds that the current payouts at the time of conversion effectively capitalise the members' rights. Societies which do not propose to create a PLDR would have to inform their shareholders in the transfer document of the loss of this right.
A compromise on takeover protection has apparently been suggested by the Northern Rock building society, which would not remove takeover protection if a converted society makes an agreed acquisition of a financial institution, but would remove the protection for hostile
19 'Alliance & Leicester confident of backing', Financial Times, 10 December 1996
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bids. This idea appears to have been rejected by the Minister, according to press reports.20 Technically, the concept of a hostile takeover is not recognised in building society law.
E. Draft Bill
The scope of the planned Building Societies Bill was described in a written answer by the Economic Secretary to the Treasury:
Mrs. Angela Knight: Following the publication of the draft Building Societies Bill in March, the Government received responses from societies, from other professionals and from individual customers, all of which helped to highlight the concerns of those involved with societies. I will publish shortly a final version of the Bill, reflecting the outcome of the consultation.
The draft Bill contains three major changes to the existing legislation. It replaces the current prescriptive regime for societies with a modern, permissive framework, which--subject to a few necessary exceptions--allows societies and their members to decide what businesses to engage in. It updates the arrangements for prudential supervision by the Building Societies Commission, and it modernises and enhances societies' accountability to their members. The draft Bill received a general welcome from societies and other respondents.
A number of the comments received were technical, and have helped to produce a better Bill. I am grateful for the work which respondents put into formulating their comments, which demonstrates the value of consulting on draft legislation.
Some attractive ideas have been suggested which will be included in the new Bill. The principal changes are as follows:
Protection against takeover from converted societies
The 1986 Act provides that for five years after a society converts to a plc, no one may hold over 15 per cent. of its shares. This may be waived by the Bank of England, in certain circumstances. Some respondents asked us to remove this protection; others to keep it.
The draft Bill will provide for the protection to lapse if, during the five years, the converted society takes over another financial institution, or if its shareholders vote to waive it. If enacted, this change would apply to any converted society still within its five year period.
Deposit accounts
The draft published in March proposed that every individual who saved with a society should be a member. There would be some exceptions, for example
20 'Minister vows not to back down', Financial Times, 10 December 1996
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current account holders. The previous draft would have required societies to freeze individuals' deposit accounts operating at the time of enactment. Individuals would not have been able to put new money in those accounts. I have decided to change these provisions so that further money can be put in existing deposit accounts, provided the account holder is given the choice of keeping that account or transferring to a share account with comparable terms. All new savings accounts will still have to be membership accounts.
The new draft Bill will also provide that after a society has announced its intention to put a takeover or conversion proposal to its members, it may offer deposit accounts.
Special general meetings
The draft published in March proposed a statutory right for members to requisition a special general meeting. This right has existed in societies' rules for some time. In transposing this into law, the draft would have preserved societies' ability to set thresholds for share holdings, borrowing and length of membership for those who can exercise this right. The new draft Bill retains these provisions, and furthermore will not put a society under a statutory obligation to hold a meeting within the three months before and one month after the annual general meeting. A duly requisitioned SGM would still have to be held at another time. A society could arrange to hold the SGM and AGM on the same day if it wished.
Access to the register of members
The new Bill will restrict the existing statutory right to apply to the Building Societies Commission for access to a society's register. This right will generally be restricted to members of at least two years' standing, and with a share holding balance or mortgage debt, of at least £100. A fee of £25 will be payable to the BSC with each application, and successful applicants will be required to respect the confidentiality of names and addresses taken from the register.
Priority Liquidation Distribution Right
The 1986 Act creates a residual priority liquidation distribution right for former members of a converted society. This comes into play should a converted institution subsequently fail, and relates to share accounts held at the time of the conversion. Each person's entitlement is initially equal to a percentage of his share holding at the time of conversion, but it runs down as withdrawals are made, with no increase from subsequent deposits. Because of this provision, converted societies often have to raise extra capital, and face additional costs and administrative burdens.
As societies proposing a change of status now offer substantial benefits to eligible members on conversion--effectively capitalising the reserves at that time--this additional protection seems unnecessary. And the cost of providing for it disadvantages new shareholders and customers. So the new draft Bill will remove this burden. If enacted, the repeal of this provision would apply to all societies whose business is transferred to a successor company after today's
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date, provided that the members had been warned in the relevant transfer statement of the possible abolition of the right.
Mergers, conversions and takeovers
The new draft Bill will include proposals modifying the procedures for conversion and takeover, while keeping necessary protection for members. It will allow societies to send members a short version of the transfer statement, provided the full version is available to members who request it.
The 1986 Act arrangements for takeovers or mergers are cumbersome for a society in serious difficulty. All mergers and takeovers require a vote of the members of a society being absorbed. Invoking such a procedure during a rescue would be impractical. Although such circumstances may arise only very infrequently, the new draft Bill will give the BSC the power to direct a society in extremis to seek a merger or takeover, and to allow a merger or takeover to proceed by board resolution only, so that an ailing society's business can be taken over by another society or a bank, without the disruption that a full public proposal would cause.
Deposit and Investor Protection
Finally, the draft Bill will contain an enabling power to merge, at a point in the future, the banks' deposit and societies' investor protection schemes. This is solely a contingency provision, should it ever become necessary at some point in the future.21
21 HC Deb 6 November 1996 cc539-41w
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V Mergers and Conversions
A. Statutory and other constraints
The Building Societies Act 1986 contains the rules on societies converting to become public limited companies (transfer to a specially formed company) and on takeovers of societies by existing companies. Changes in status are subject to various safeguards including a vote on the conversion by both investing and borrowing members, and the approval of the Building Societies Commission. As part of a conversion or takeover members may receive a distribution either of shares or cash. The Act sets down eligibility criteria for such distributions, including what is known as the two year rule. This provision was thought to prevent such distributions from being paid to anyone except savers with a two-year investing record in the society, but societies have been able to distribute to a wider class of members and customers thanks to several High Court judgments.
The 1986 Act requires the membership to vote on transfer proposals and sets specific voting thresholds according to whether the transfer of business is to a specially formed successor (conversion) or to an existing company (takeover). Two votes take place in each case. The following thresholds apply:
Transfer to a specially formed successor
- Shareholders special resolution: At least seventy five per cent of investor members qualified to vote and actually voting must vote in favour. In addition, to prevent this ballot being unrepresentative, at least 20 per cent of those shareholders who are entitled to vote must actually have voted.
- Borrowing members resolution: a simple majority of 50 per cent of those voting is sufficient on this poll.
Transfer to an existing company
- Shareholders special resolution: At least seventy five per cent of investor members qualified to vote and actually voting must vote in favour. In addition, either 50 per cent of all shareholders entitled to vote, or shareholders representing 90 per cent by value of the society's shares, must vote in favour.
- Borrowing members resolution: a simple majority of 50 per cent of those voting is sufficient on this poll.
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These polls take place at a Special General Meeting called for the purpose. Members receive a transfer document on which to base their decision. Some of the contents of this document are laid down in statute.
The Act also sets out rules on procedures to be observed at transfers, including to whom distributions can or must be made. In practice, the discretionary powers of the society in this respect are equally important for determining which classes of customer receive substantial distributions. The Building Societies (Joint Account Holders) Act 1995, which originated as a Private Members' Bill introduced by Douglas French, gives societies some additional discretionary powers to make payments to certain groups who would be ineligible under the 1986 Act, but societies have only drawn on these powers to a limited extent.22
Once the members have approved the transfer, it is then subject to confirmation by the Building Societies Commission. Its basis for confirmation is quite circumscribed. The Commission advertises for oral and written submissions by interested parties, and may also seek information from the societies. The Commission must approve the transfer unless one of the grounds for refusing to confirm as set out in the Act applies. The grounds for refusal are:
• information material to the decision of the members was not made available
• the vote is thought to be unrepresentative of those entitled to vote
• a relevant statutory procedure or rule of the society has not been observed (the breach must be thought to be material to the members' decision)
• there is a substantial risk that the society will not obtain the necessary banking authorisation to allow it to operate after the transfer
The Commission is not allowed to rule on the basis of other elements of the transfer. In its 1995-96 Annual Report, the Commission notes:
It is for a society proposing a transfer of business to formulate the particular terms and conditions relating to the proposal and then for the members to vote on the proposals. It is not the Commission's role to consider either the merits of the proposed transfer of business or the fairness of any proposed distribution of shares or cash to members of the society in connection with the proposed transfer, provided this is in conformity with the requirements of the 1986 Act and the rules of the society. These are matters for the members to decide.23
22 See Building Societies (Joint Account Holders) Bill, RP 95/53, 26 April 1995 23 p.13
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The Office of Fair Trading in addition monitors all mergers to assess their competition effects and other relevant public interest considerations. This includes mergers of building societies, whether with another society or with a public company. The Director General may recommend that the Secretary of State refer a merger to the Monopolies and Mergers Commission for a formal investigation, or binding undertakings can be sought as an alternative. Although references are normally made before a merger takes place, they can be made up to four months after the completion of a merger. To come within the scope of the Fair Trading Act 1973 regime, a merger must involve either gross assets of more than £70 million in the company being acquired, or a combined market share of more than 25 per cent in the UK or a substantial part of it. No building society mergers have been referred to the MMC, although there have been calls for them to be. One instance was the merger of the Halifax with the Leeds as part of its conversion process, where some felt a case could have been made on size grounds and public interest concerns, but on 21 December 1994 Michael Heseltine announced in accordance with the advice of the Director General of Fair Trading that the merger would not be referred.24
24 Merger clearance by the Secretary of State for the acquisition of the Bristol & West by the Bank of Ireland Group was announced on 23 December 1996. Previous clearances had been granted for the acquisition of the Cheltenham & Gloucester by Lloyds Bank (23 September 1994) and the acquisition of the National & Provincial by the Abbey National (17 January 1996).
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B. Building Society Accounts
1. Types of account
The type of account held by a building society customer and the class of membership to which they belong to will dictate the benefits that he or she will receive from any distribution, but the distinction between these classes is not widely appreciated. The main division is between savers and borrowers. There are two types of saver: investors and depositors. The distinction is mostly technical: some accounts are designated share or investment accounts; others are deposit accounts. Someone with a share or investment account is an investing member of the society, and owns a share of the society (one share per account). With this membership comes the right to vote on society business, and to take a small part in the way the society is run. Those savers who have a deposit account are not members of the society. They cannot vote on society business, and take no part in its affairs. Theirs is a purely commercial relationship with the society. Although there is very little real difference between an investment account and a deposit account, the fact that investors have rights that depositors do not is an aspect of building society structure which has gained a much higher profile as a result of the present merger and takeover activity.25 Borrowers have a mortgage account. They are borrowing members of the society, but they do not have a share in the society. Because their loans are long term their interest in the future of the society is recognised by a separate ballot for borrowers on a takeover or conversion.
2. Entitlement to a distribution
Members of building societies may have a right to receive distributions when a society is taken over by an existing company (takeover) or when it forms a special public limited company to whom it transfers its assets (conversion). Because building societies have some discretion in framing distributions, payments can sometimes be made to those who do not have a strict right to receive a payment. The value attaching to a right may also vary greatly. Given the different forms of transfer and the different classes of membership, the rules can be quite complex. Some key statutorily-based rights and discretionary considerations are set out here. Note that in order to prevent investors qualifying for a certain bonus, the qualification dates for receiving a distribution apply a cut-off date prior to the public announcement of a transfer.
25 The Government proposes to abolish the distinction between savers and depositors to give all savers membership rights.
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• Those who would otherwise be qualifying members but are not entitled to vote on the transfer are entitled to a statutory cash bonus.26 The main recipients of this bonus, which is related to the value of their interests in the society, are normally members with less than the minimum voting balance (£100) in their accounts, or those who are under 18 and therefore not entitled to vote. This right to a statutory bonus can be cancelled in the case of a transfer to an existing company.27 In recent distributions the value of the bonus has been less than the value of non-statutory distributions, especially for small accounts. This is an unfortunate effect of a provision which was designed to protect the interests of members who cannot influence a society's decision because they are not eligible to vote.
• A two year rule applies to cash distributions under the Act where the transfer is to an existing company (takeovers). Distributions 'shall only be made to those members who held shares in the society throughout the period of two years which expired with the qualifying day'.28 The section cited continues: 'It is unlawful for any distribution to be made in contravention of this subsection.'
• Where the distribution is in the form of shares the two year rule can be avoided. Technically the society is giving a right to subscribe for shares rather than shares themselves. The Act says that if 'rights are to be conferred on members of the society to acquire shares in priority to other subscribers, the right shall be restricted to those of its members who held shares in the society throughout the period of two years which expired with the qualifying day'.29 This appears to create a two year qualifying period but in a case brought in relation to the proposed Halifax distribution, it was held that shares could be given to members without the statutory two year history if members with that two year history were given an additional entitlement.30 This explains the structure of subsequent distributions which have been in the form of share entitlements, with a basic distribution and a variable distribution which only two year investing members (with large account balances) are entitled to: this is their 'priority' distribution.
• Entitlement is based on continuous membership over a specific period. Societies apply this criterion strictly and any change of an account's details, including the order of the names, constitutes a new account which may break the member's required continuity.
26 BSA 1986, s.100(2)(b), s.100(4) 27 BSA 1986, s.100(7) 28 BSA 1986, s.100(9) 29 BSA 1986, s.100(8) 30 Building Societies Commission v Halifax Building Society [1995] 3 All E. R. 193
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Who qualifies for a bonus may depend significantly on the discretionary extension of these basic rules.
• Societies have the option of basing the distribution on the number of accounts held by a member, or on membership alone. The Cheltenham & Gloucester paid a cash bonus to qualifying members for each account they held. Other societies, such as the Woolwich, have limited members to a single distribution however many investment accounts they hold.31
• There is no requirement to make a distribution to borrowing members. The rationale for making such a payment is that borrowers must also vote to approve the transfer resolution, but the Cheltenham & Gloucester for example did not make a payment to borrowers.
• Deposit accounts do not confer membership rights. However, a ruling obtained by the Cheltenham & Gloucester in the High Court found that societies may make payments to non-members if the members approve such payments as part of their vote on the transfer resolution. In that scheme, this included depositors, pensioners and employees of the society.
• The Cheltenham & Gloucester paid cash bonuses to children with qualifying accounts. Under the Act, they were only entitled to the lower statutory cash bonus. Whilst the C & G's decision seems fairer to children, there are problems with issuing shares to children, and with combining the statutory entitlement to a cash bonus with a discretionary payment. This probably explains why subsequent distributions have excluded children from the main distribution.
• Given the complexity of the rules a number of other apparent instances of injustice have been identified in relation to distributions. There seems to be a discretionary scope for societies (if they do so early enough) to frame distributions so as to avoid these injustices although this may cause them significant administrative problems. An example is the disabled and mentally-impaired who are often named second on accounts which are for their benefit. This problem is discussed further below.
31 Woolwich borrowers also receive a distribution, so investors who are also borrowers can receive a distribution on a maximum of one investment account and one mortgage account.
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3. Joint accounts
An account can be opened by more than one person, and all the account holders' names will appear in the passbook and on the society's records. Couples often open accounts jointly; joint accounts may also be opened by groups such as clubs, and to allow accounts to be administered in cases where an individual may have difficulty operating the account on their own, such as for children, the disabled or mentally impaired. The Building Societies Act 1986, in the case of joint accounts, treats the first named holder as the representative joint holder, and all voting rights and distribution entitlements are vested in the representative joint holder. The legislation provides that documents need be served only on the representative joint holder. When it comes to voting at meetings, say on the election of directors, only the representative joint holder may vote. The Act is specific on how this distinction applies to mergers and conversions.
For the purposes of sections 87 and 93 to 102 the shares shall be treated as held by the representative joint holder alone; and accordingly a person who is a member of the society by reason only of being a joint holder of those shares (other than the representative joint holder) shall not be regarded as a member of the society for the purpose of those sections.32
Section 87 deals with winding up a society with the consent of its members; sections 93 to 102 deal with mergers and takeovers. The shares referred to in the Act are building society shares (one share for each share account). During a merger or takeover, certain rights and entitlements are given to members of the society, and sometimes specifically to members with voting rights. Because only the first-named account holder is treated as a member, when a distribution as part of a merger or takeover is made of shares in a public company, those shares are issued in the name of the first name on the account only, so second, or third or fourth named account holders do not directly receive any free shares. It would appear that the Act adopted the approach of only enfranchising the first-named holder for simplicity. Unlike in a company, each account in a building society, of whatever size, entitles the holder to a single vote. By granting that vote to the first named holder, any problem of double voting is avoided. If the distribution is made in cash, it would normally be credited to the jointly-held account so the distribution to joint accounts is less problematic in a cash distribution.
During the time of the Cheltenham & Gloucester takeover, the case of widows and others who were losing their entitlement to a payment because of the death of the first-named account holder was brought to prominence. The cash payments were subject to the statutory two year rule but if accounts had to be changed to reflect the death of the first name, the necessary continuity was broken and with it the entitlement to a payment. A Private Members' Bill in the name of Douglas French MP, The Building Societies (Joint Account Holders) Act 1995, received the Royal Assent on 1 May 1995. This solved some of the greater inequities of the
32 BSA 1986, Sched. 2 para. 7(2)(5)
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treatment of second named holders. The background to Mr French's Act is described in a Library research paper.33
4. Entitlement to distributions from joint accounts
Although the society is legally obliged to issue the shares in the name of the first name on the account, the shares themselves probably belong to all the names on the account. Savers and borrowers in joint accounts are joint tenants: each is fully entitled to all the funds in the account, in the case of savers, and individually liable for the full debt in the case of a mortgage. It would seem to follow that any proceeds from the account, such as a share distribution, also belong to all account holders jointly rather than to the first named holder only. This interpretation may be qualified by individual circumstances relating to the operation of the account and the beneficial ownership of the funds in the account.
This was the view taken by the Equal Opportunities Commission in a January 1995 briefing which considered the question of whether the provisions of the Act with regard to second- named holders discriminate against women since they are often by convention named second on an account:
'The representative holder of a joint account who receives the cash payment arising from the holding of the joint account, probably holds the sum received in trust for all the holders of the account. The second-named holder is likely, therefore, to be a joint beneficial owner of that sum. In other words the second-named account holder may have a claim in the Courts if the money is withheld, against the first-named account holder but not against the Building Society.'34
The formal documents which set out the terms on which the transfer of assets will be conducted draw the attention of first-named account holders to their obligations, although building society members may find the wording of these warnings rather opaque.
On joint accounts, the National & Provincial transfer document states: 'the saving member should have regard to the rights of any joint holders with whom any of the accounts is held.... similar considerations may apply in relation to the Fixed Distribution receivable as a Qualifying Borrower'. It adds: 'The nature of the rights and interests of members will depend on the member's circumstances. Any member who is in doubt as to his own position is advised to seek appropriate professional advice.'35
33 Building Societies (Joint Account Holders) Bill, RP 95/53, 26 April 1995 34 25 January 1995, p.4 35 para 6.3 (M)
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The Alliance & Leicester issued its transfer document in 1996, prior to its Special General Meeting on 10 December 1996. At paragraph 3.3.2 it states:
'In the case of a joint account, only the first-named member can be a Qualifying Member. .... Qualifying Members who do not have the entire beneficial interest in the share account or who are not solely responsible for the repayment of the mortgage debt in respect of which (as the case may be) they receive an allocation of Free Shares may, depending on the circumstances, be obliged to account to the other beneficial owners or borrowers in respect of such Free Shares .'36
Similar wordings are contained in the transfer documents of the Halifax and the Woolwich. First-named account holders with the Woolwich are warned about possible conflicts of interest and told: 'You should note that you may have a duty to account [to other account holders] for any free shares which you receive'.37 The Halifax states: 'The first named joint holder may be bound to account for any free shares he or she receives to the other joint holders of the share account, PIBS, mortgage account or secured personal loan account.'38
5. Second-named holders: women
It has been argued that the treatment of joint account holders when distributions are made discriminates against women. On many joint accounts the order of names is 'Mr and Mrs ....' with the man's name first: this means any distribution will be in the name of the husband. A problem also exists if a couple have separated or divorced. Where the account is still open, the payment will again go to the first name who may in these circumstances be reluctant to account for this payment to his former partner. Furthermore divorced couples may change their accounts on divorce and thereby risk losing the two year continuity which is necessary for the full payouts.
The Sex Discrimination Act 1975 does apply to financial services. Under s.29(2)(c) 'facilities by way of banking or insurance or for grants, loans, credit or finance' are specifically mentioned as areas where it is unlawful for discrimination to be applied. Although it seemed possible that the effect of the Building Societies Act 1986 might be considered as indirect discrimination in the provision of goods, facilities, services and premises, the Equal
36 The paragraphs cited also warn of potential conflicts of interest between the personal right to vote and the rights of other joint holders which the first named account holder should be aware of in casting his or her vote. This appears to apply particularly to first-named holders who also have another account: they are entitled to only one vote on the investors' resolution, and their interests on behalf of one account may conflict with those of another jointly held account. 37 Woolwich Transfer Document, 5.4.8 38 Halifax Transfer Document, 1.4.2; PIBS: Permanent Interest Bearing Shares
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Opportunities Commission was advised that a legal challenge on this basis would not be certain of success. They were told that a society might be able to claim objective justification for its discrimination, since it was obliged to obey the Building Societies Act 1986. Moreover, as a later Act, the Building Societies Act 1986 might be interpreted as having impliedly repealed the Sex Discrimination Act 1975 insofar as was necessary to comply with its own provisions. They also identified some other reservations about the possibility of a successful legal challenge.39
However, the EOC concluded that the second-named holder is likely to have a beneficial interest in any distribution of free shares. How can second-named account holders enforce a beneficial entitlement to free shares? If the representative holder is amenable to observing the beneficial ownership (whatever it may be) of the shares the simplest solution would be for the new shareholder to divide the shares appropriately once they have been issued, using a stock transfer form. This form is available from legal stationers and from stockbrokers, and allows a shareholding to be split and re-registered for nominal or no cost. If the representative holder is reluctant to account for the proceeds to the joint account holders, other options to consider would include taking an action through the County Court. In such circumstances, account holders would be advised to take prior legal advice from a solicitor, law centre or citizens advice bureau on the advisability of such a course of action.
If the joint account was created by a husband and wife, their marital status may be relevant. If there has been a separation or divorce a financial settlement may have been drawn up. In such circumstances, account holders should take legal advice, preferably from their settlement adviser, on the implications of the settlement to a possible beneficial interest in distributions arising from joint accounts.
Under The Building Societies (Joint Account Holders) Act 1995, there is a power available for societies to amend the normal operation of the two year rule where the name on an account has been changed or where a member has been a member in different accounts. A two year history is still required but the normal procedure under which each change of account details would constitute a change of account can be ignored. This power could be used to benefit women who have changed the name order on their accounts to place their names first, or to cover the account history of a divorced or separated woman who has changed accounts to reflect changed status but remained with the same society. Although these powers exist on the statute book, in general they have not been used by societies who have instead limited their recourse to this Act chiefly to allow them to make payments on accounts where the first name has died.
39 EOC press release 'Widows lose cash in building society takeover' and EOC briefing, 25 January 1995
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6. Disabled account holders
Under the Disability Discrimination Act 1995 which came into force on 2 December 1996, it is illegal for a provider of services to discriminate against a disabled person (s.19). The Act specifically applies to financial services. Discrimination is held to occur when a provider of services 'for a reason which relates to the disabled person's disability... treats him less favourably than he treats or would treat others to whom that reason does not or would not apply' and when 'he cannot show that the treatment in question is justified' (s.20(1)).
Disabled and, especially, mentally impaired persons frequently hold building society accounts in joint accounts either because they would have difficulty in administering the account or because they are incapable of doing so. In such cases the name of the disabled person may appear either as the first name on the account or as the second name after a trustee, attorney, curator bonis or receiver. If the disabled person's name appears as the first name on the account and that person is not able to vote because of mental incapacity, the person's entitlement to a distribution is not affected since he or she is still theoretically eligible to vote. It is more common, though, for another person to be named first on such accounts and to act on the disabled person's behalf in running the account. In recent distributions, the underlying criterion of eligibility has been based on the right to vote, and on one distribution only being made to each member in an investing and/ or borrowing capacity. Since the first name on the account is treated as the member, problems can arise where an individual who acts on behalf of a disabled person and is named first on an account is the first name on more than one account. Under the terms of most payouts an individual who is named first is only entitled to one payment however many accounts may be involved although in some cases the aggregate balances of these accounts will be reflected in a variable distribution scheme.
This type of situation is likely to happen, for example, where the director of a residential centre acts on behalf of all the residents, or where a nominee of a charitable organisation fulfils a similar role on a number of accounts. Some building societies, it is thought, required accounts for mentally-impaired people to be operated on a trust basis with the disabled person named second. There has been speculation that the way payments are made to the first named holder may breach the new Disability Discrimination Act 1995 since the effect may be to reduce the amount which disabled persons receive.
A lengthy parliamentary written answer reproduces a letter on this point from the Social Security Minister Alistair Burt to his Labour shadow, Tom Clarke.40 In the letter Mr Burt raises the possibility that a distribution by a building society which is based on making a payment to each member rather than to each account might be in breach of the Disability Discrimination Act 1995 in that a disabled member might not receive a payment in the same
40 HC Deb 12 November 1996 cc.202-4w
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way as other members. The minister seems to suggest that because the choice of payment is open to the society and is non-statutory it does not qualify for the exemption which the Act under s.59 gives to measures which are taken in pursuance of an enactment. He refers to the payment scheme of the Cheltenham & Gloucester when it was taken over by Lloyds Bank which made its payments to each account rather than to each member; such a scheme would entitle all accounts to payments and not limit a first name with multiple accounts to a single payment.
In the Woolwich's Transfer Document it states that it has taken advice on the applicability of the Disability Discrimination Act 1995 and believes that its scheme is not discriminatory, apparently on the basis that it treats all accounts consistently (5.1.5).
The Halifax states:
The Board of the Society has given serious consideration to views which have been expressed on the question of whether the proposed share distribution scheme could be considered to discriminate against persons with a disability. The Board strongly believes that the terms of the share distribution scheme are not discriminatory and that the guiding principle of the close relationship between entitlement to free shares and the right to vote should be maintained. In addition, the Board, having taken legal advice, is satisfied that the terms of the proposed share distribution scheme are not in breach of the provision of the Disability Discrimination Act 1995.41
Douglas French MP was granted leave on Wednesday 22 January 1997 to introduce a Bill, under the Ten Minute Rule, to remedy injustices caused by distributions to disabled people among others.42 The Building Societies (Distributions) Bill's Second Reading is provisionally set for 14 February 1997.43 Mr French described the aims of his Bill in the following terms:
..... my Bill requires building societies to recognise the legitimate entitlement of underlying beneficiaries to receive the same allocation of shares as every other customer, where it can be shown that they would have been the first-named account holder and qualified in their own right, but for the presence of a trustee. The Bill requires converting and merging building societies to establish a reserve or suspense account charged against assets, from which to meet legitimate claims from underlying beneficiaries of trustee accounts.
No onus at all is placed upon the societies to track down those who may be eligible. That would be an impossible task and a daunting prospect, and may well explain why societies have been unwilling to face up to the problem, of which they have been only too well aware.
Instead, the Bill requires societies in the course of normal notification to their members to tell them that claims within the specific definition will be considered, and that claimants should submit details of their circumstances and allow time for the society to satisfy itself that the
41 Transfer Document, p. 32 42 Building Societies (Distribution) Bill; see e.g., 'Societies play Mr Scrooge', Observer, 15 December 1996 43 Bill 77 of 1996-97; It is seventh on the Order Paper.
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criteria have been met. The society can then make a payment of equivalent value out of the fund set aside for the purpose. It will not cost the society anything extra. The society will, after all, only be returning to its mutual members the fruits of mutuality.
The most significant although not the only category of people to benefit from the Bill will be the disabled, the handicapped, the sick, the elderly and those who, through misfortune, are unable to look after themselves. That is why leading charities, such as Mencap, SENSE, and the Royal National Institute for the Blind, are strong supporters of the Bill.44
The Treasury is studying the text of the Bill to consider whether it should receive Government support. The Second Reading is down for 14 February 1997. If the Bill is passed, there is some doubt, acknowledged by Mr French, whether it would apply to any of the current conversions where building societies have already issued their transfer documents.
The procedure outlined in my Bill could have been adopted voluntarily by the Woolwich, the Halifax and the Alliance and Leicester. With the benefit of hindsight, I am sure they would now acknowledge that they underestimated the public's strong belief in fair play. Fortunately, the Alliance and Leicester is showing clear signs of a change of heart, but the Halifax still perceives technical obstacles. Even though those societies have already sent out their conversion documents, I hope that--within the constraints of company law--they will make every effort to find a formula that enables them to follow the requirements of my Bill.
There is an opportunity for a go-ahead society to blaze a trail and set an example of best practice. I hope very much that that will happen. However, once the Bill is passed, societies that convert or merge in future will have no choice: they will have to recognise the rights of underlying beneficiaries, and a massive injustice will have been corrected.45
44 HC Deb 22 January 1997 cc.974 45 HC Deb 22 January 1997 cc.974-5
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C. Economic Implications
The six societies which are making distributions from late 1996 through into 1997, starting with the Abbey National's acquisition of the National & Provincial, are expected to make a total payout of around £18 billion. There has been speculation about the effects of these windfall gains on consumer spending since the value of the total payout greatly exceeds the value of even the largest round of cuts in personal taxation.
Building society payouts are not directly comparable to tax cuts. In strict terms these payouts represent in part a change in the nature of building society capital, which becomes tradable when it is issued in the form of shares, and in part a redistribution of capital since the societies' assets are allocated to individuals on the basis of each society's distribution scheme as part of the payouts. They are not net additions to consumer wealth. The Bank of England's quarterly Inflation Report has been predicting throughout 1996 that the building society payouts will lead to a modest rise in the growth of consumer consumption above its long-run trend rate. Spending on consumer durables is expected to be most affected. Once the assets have been distributed, effects on consumer consumption will depend on whether the former society shares are sold by investors and then whether the proceeds of those sales are actually spent. Consumer surveys of the plans of building society investors have produced some indication of their intentions: a survey for Nikko Europe in late 1995, for example, suggested that approximately one third of windfall recipients planned to spend their gain. Overall, though, the effects of windfall gains are expected to be relatively small and to have little long-term impact. In terms of timing, most of the shares are expected to be distributed in the summer of 1997, although the Alliance & Leicester payments are likely to occur in the second quarter.
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VI Societies converting to company status
There follows a checklist of mergers, conversions and takeovers which have led or will lead to societies operating as plcs under the Banking Act. More detail of two significant legal judgments is given in the appendices. It is not possible to address specific groups affected by the payout structure of each society in comprehensive detail. Although a guide to the basis of entitlements to distributions is given for each society this information is a simplified summary of what can be very complex provisions and should not be relied on to determine individual entitlement. The full basis for individual entitlements is set out in each society's transfer document. In complex cases, advice can be sought from the relevant society or a legal or financial adviser. Some societies have also established information centres to assist their members: details of these are given where known. These information centres will be able to help interpret the transfer documents but their staff will not be able to advise building society members on which way they should vote.
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A. Abbey National
Abbey House, Baker Street, London NW1 6XL (Tel: 0171 612 4000)
Background: On 23 March 1988, the Abbey National Building Society announced plans to convert from a building society into a limited company and float on the stock market. It was the first society to take advantage of the new powers in the 1986 Act. As a plc it would be governed by the banking legislation rather than the building society framework. A distribution of free shares was made to an expected 5.6 million members, and additional capital of £1 billion was raised by allowing members to subscribe for additional shares also. The Building Society Commission was critical of the contents of the Transfer Document although Abbey National rejected these criticisms. In recent years it has made substantial acquisitions including Scottish Mutual (1992) and the National & Provincial Building Society (1996). Building society analysts at UBS continue to assess Abbey National on the same performance criteria as if it had remained a building society. In 1996 UBS ranked it eighth overall, and first by asset size.
Reason for converting: 'Enlargement of the capital base is one of the key strategic reasons for conversion itself. In the longer term, the new capital will mainly be deployed in the business to achieve the Company's long term strategic objective of expansion in the United Kingdom personal financial services market. ...it is likely that some expansion....will be best achieved through acquisitions, although no specific material acquisition is currently planned.'46 The Board assured members that the essential character of the group would not change.
Date of announcement: 23 March 1988.
Schedule of events: Transfer Document issued in March 1989. Special General Meeting in London on 11 April 1989 where the investors and the borrowers resolutions were both passed with majorities of about 90 per cent. Abbey National made its debut on the stock market on the Vesting Day, 12 July 1989. The shares closed at 153p on the first day's trading.
Type of transfer: Transfer of business to a specially formed successor company.
Basis of distribution: One fixed allocation of 100 free shares to qualifying investors, borrowers and employees. Surplus shares not distributed in the free allocation were only available for purchase (at 130p per share) by application to those receiving the free allocation. Three categories of eligibility were established: as a qualifying investor, a qualifying
46 Transfer Document, pp. 18, 19
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borrower, and a qualifying employee. One free allocation and one application to purchase shares were allowed in each of these capacities, so a qualifying borrower who was also a qualifying investor received two free allocations and could have applied twice to purchase shares (a minimum number of shares was guaranteed to applicants).
Entitlements:
Investing members: 100 free shares to savers with a share account on which they were the first named member. An account balance of at least £100 on 31 December 1988, and continuous membership from then until the Vesting Date were also required.
Borrowing members: 100 free shares. To qualify an outstanding mortgage balance of at least £100 was required on both 31 December 1988 and the date of the SGM.
Depositors: Nothing.
Children: Qualifying investors aged under 18 on the date of the SGM received the statutory cash bonus, estimated in the transfer document to be worth 5.8 per cent of balances.
Other beneficiaries: Employees and pensioners of the Abbey National received one free share allocation in addition to any other allocation for which they may have qualified as borrowers or investors.
Further information: Abbey National's Transfer Document (1989) and subsequent Annual Reports. Margaret Reid's Conversion to PLC (1991) is an account of the conversion process.
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B. Cheltenham & Gloucester
Barnett Way, Gloucester GL4 3RL (Tel: 01452 372372)
Background: On 21 April 1994 Lloyds Bank and the Cheltenham & Gloucester Building Society announced a deal whereby, subject to the approval of their respective shareholders, members and borrowers the C & G would be acquired by a subsidiary company of Lloyds Bank, Chambers & Remington, and then become a public limited company. The terms of the C & G's first offer were subject to a High Court challenge by the Building Societies Commission on a number of points, including the device by which the society hoped to circumvent the Act's prohibition on cash payments to members whose accounts had been open for less than two years. The High Court found in the Commission's favour on this point but the C & G produced a revised offer.47 The takeover, valued at £1.8 billion, was completed on 31 July 1995. Although the Building Societies Commission approved the transfer, it criticised the quality of information supplied by the society to its members, whilst acknowledging that any deficiencies were not large enough to have affected the decision of its members to accept the offer. The Building Societies Ombudsman received many complaints about the change of status from aggrieved members and depositors. According to his 1995-96 Report, none of these complaints was resolved in favour of the complainant.
Reason for converting: The C & G wanted to improve the distribution of its products, to increase market share, and to remain competitive in a difficult and changing market. The value to members was also a factor, and in the chosen option (acquisition by a non-society) this took the form of a cash payment for the loss of membership rights paid for by the accompanying release of value. The C & G, however, wanted to retain autonomy within its new setting and to retain control of interest rate policy. It specifically did not want to use plc status to expand into different markets.
Date of announcement: 21 April 1994.
Schedule of events: High Court verdict blocks original payment scheme on 8 June 1994. Outline of revised offer made on 11 August 1994. Special General Meeting 31 March 1995 with a majority vote in favour of 94.9% on the investors resolution and 75% on the borrowers resolution. Takeover completed on 31 July 1995.
Type of transfer: Transfer of business to an existing company.
47 See Appendix One for further details
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Basis of distribution: Cash distribution plus a percentage of the account balance. Each qualifying account (rather than each member) was entitled to a distribution. Borrowers were not included in the offer but other categories who were not statutorily entitled to payment received a distribution.
Entitlements:
Investing members: For each account held investor members received £500 plus about 13 per cent of their account balance. Eligibility was based on the account having been opened before 1 January 1993 in order to satisfy the two year rule and remaining open continuously from then until completion day. A balance of at least £100 on 31 December 1994 was also required.
Borrowing members: Nothing.
Depositors: Depositors received £500 plus a percentage of their account but their accounts needed only to have been opened before 31 March 1994 (and have a balance of at least £100) since payments to them were not required by or covered by the Act.
Children: Children received the same distribution as other qualifying investors.
Other beneficiaries: Pensioners and employees.
Further information: The C & G's Transfer Document and subsequent Annual Reports of Lloyds Bank. See also the Annual Reports of the Building Societies Commission and the Building Societies Ombudsman.
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C. Halifax and Leeds Permanent
Halifax Building Society, Trinity Road, Halifax, W. Yorkshire HX1 2RG (Tel: 01422 333333)
Background: On 25 November 1994 the boards of the Halifax and Leeds Permanent building societies announced proposals to merge the two societies. The Halifax was already the largest society; the Leeds was the fifth largest. The merger was subject to approval by the members, which was given at a Special General Meeting held by each society on 22 May 1995. The societies officially merged on 1 August 1995. The newly merged society was to float on the stock market. It was known when the societies merged that at the time of the flotation a distribution of free shares would be made to borrowers and members. Although only outline details were available of the distribution plans, they were subject to a challenge in the High Court. The judgment went in favour of the society and set a precedent for most subsequent distributions which have used the scope of a two-tiered share distribution to allow shares to be distributed to investors who do not meet the two year qualifying rule.48
The Halifax has chosen to structure its conversion as a transfer to an existing company rather than a transfer to a specially formed successor. This decision, taken for capital structure reasons, means that in the special resolution vote by investing members at least 50 per cent of all those qualified to vote must vote in favour.
Reason for converting: The Halifax identifies the following reasons for converting: it will provide greater flexibility to operate in the personal financial services industry; it will enable it to operate under a 'more appropriate' regulatory regime; it will separate the ownership of the company from customer relationships; and it will provide easier access to capital markets and wholesale funding markets.
Date of announcement: 25 November 1994.
Schedule of events: Special General Meetings of both societies to approve the merger on 22 May 1995. Merger took place on 1 August 1995. Transfer document issued January 1997. Special General Meeting in Sheffield on 24 February 1997. Expected Vesting Day is in June 1997.
Type of transfer: Technically a transfer to an existing company, although that company is a Halifax subsidiary.
48 See Appendix Two for details
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Basis of distribution: The distribution is in the form of a basic distribution which all qualifying borrowers and investors (approximately 8.7 million) receive; there is an additional variable distribution for those investors with more than £1,000 in their accounts at the relevant dates. Members are only entitled to one distribution as investors and one as borrowers.
Entitlements:
Investing members: The basic distribution is 200 free shares (estimated to be worth between £780 and £900). The higher variable distribution consists of one additional free share for each £50 above £1,000 up to a maximum of 1,181 free shares. For the basic distribution accounts must have been open continuously since 25 November 1994 with a balance of at least £100 on that date and on 31 December 1996. Variable distributions are made instead to those with account balances of at least £1,000 on 25 November 1994 and 24 February 1997.
Borrowing members: Basic distribution only of 200 free shares to those with a balance of £100 outstanding on a mortgage or secured personal loan on 25 November 1994, 31 December 1996 and on the day of the SGM.
Depositors: Nothing
Children: Qualifying investors aged under 18 on the date of the SGM receive the statutory cash bonus of 9.4 per cent of their balances only.
Other beneficiaries: Qualifying employees and pensioners.
Further information: Halifax Transfer Document; Halifax Helpline: 0800 527327; Internet site: http://www.halifax.co.uk/Nhalifax.html
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D. National & Provincial
Provincial House, Bradford BD1 1NL (Tel: 01274 733444)
Background: The Society began a strategic review of its options in October 1994 after the appointment of a new chief executive, Alastair Lyons. This review decided that the society should seek a partner, either a merger with another society followed by a float, or by joining forces with another financial services organisation. After discussions with both banks and building societies, on 10 July 1995 N & P announced its decision to recommend an agreed takeover by the Abbey National (a former building society, now a bank). The consideration was to be £1.35 billion. In 1996 UBS ranked N & P fifth in its performance league, and eighth by asset size.
Reason for converting: In order to remain competitive over the longer term, the society wanted to spread its customer base and improve its geographical coverage. By opting for acquisition, value was released much quicker to the members than if it had chosen to convert itself.
Date of announcement: 10 July 1995.
Schedule of events: Special General Meeting 11 April 1996 at which both resolutions were passed by a majority of about 96 per cent. Takeover completed on 5 August 1996.
Type of transfer: Transfer to an existing company (Abbey National plc).
Basis of distribution: The distribution was structured into a two tier payout: a basic fixed distribution of Abbey National shares to borrowers and savers and a higher distribution to two year qualifying savers.
Entitlements:
Investing members: £500 in Abbey National shares to savers with accounts open on 28 April 1995. The variable distribution, open to two year qualifying savers (accounts open since 31 December 1993), was for £750 in either cash or shares, plus 7 per cent of their account balance. Members who are entitled to receive the variable distribution do not receive the fixed distribution.
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Borrowing members: £500 of Abbey National shares to borrowers with a balance outstanding of at least £100 on 28 April 1995, 31 December 1995 and the date of the SGM.
Depositors: Nothing.
Children: Statutory cash bonus of about 9 per cent of account balance.
Other beneficiaries: Qualifying employees and pensioners.
Further information: N&P Transfer Document
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E. Woolwich
Corporate Headquarters, Watling Street, Bexleyheath, Kent DA6 7RR (Tel: 0181 298 5000)
Background: On 11 January 1996 the Woolwich announced plans to convert to plc status and float on the stock market. At the time the society was the third largest in the UK. The Woolwich plans to offer its members free shares, structured in a tiered payout consisting of a fixed and a variable distribution, in line with the precedent established by the Halifax. The sudden departure of the chief executive Peter Robinson shortly after the announcement of conversion caused speculation that the society might be vulnerable to acquisition before it reached that stage. In 1996 UBS ranked the society fourth by asset size and fifteenth in its performance tables. Based on information available on 20 December 1996, the Woolwich was advised that its shares if they had been listed at the time would have been worth between 175p and 200p each.
Reason for converting: Announcing its planned flotation, the then chief executive of the Woolwich wrote that conversion would allow the society to compete better in its existing market, and to expand into foreign and other personal finance markets, without affecting its customer service standards.49
Date of announcement: 11 January 1996.
Schedule of events: Transfer Document January 1997. Special General Meeting in London on 11 February 1997. Expected Vesting Day 7 July 1997.
Type of transfer: Transfer to a specially formed company.
Basis of distribution: A basic and higher variable distribution of free shares linked closely to the entitlement to vote. One distribution per member only in respect of investing and borrowing entitlements irrespective of the number of accounts.
Entitlements:
Investing members: The basic distribution is 450 free shares. Qualifying members need a balance of at least £100 on 31 December 1995 and 31 December 1996 and
49 'Why the Woolwich is going for a quote', Evening Standard, 11 January 1996
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continuous membership as the first or sole name. The additional variable distribution consists of four free shares for each £100 (subject to a maximum of 2,450 shares in total) and is made to qualifying investors with an aggregate of more than £1,000 in their accounts on 31 December 1995 and 11 February 1997.
Borrowing members: Qualifying borrowers receive 450 free shares. Qualification is based on an outstanding balance of at least £100 on a mortgage on 31 December 1995, 31 December 1996 and the day of the SGM.
Depositors: Nothing.
Children: Qualifying investors under 18 on the date of the SGM receive the statutory cash bonus of about 10 per cent of account balance.
Other beneficiaries: Qualifying pensioners and qualifying employees.
Further information: Woolwich Transfer Document; Conversion Information Line: 0345 022033; Internet site: http://www.woolwich.co.uk/woolwich/hotnews/pr060197.htm
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F. Alliance & Leicester
49 Park Lane, London W1Y 4EQ (Tel: 0171 629 6661)
Background: At the time of its conversion announcement the Alliance & Leicester was the fourth largest building society. The society bought the Girobank in 1990 and is unusual amongst societies in already deriving a substantial proportion of its income from banking activities including corporate banking. More than one fifth of its five million customers are not in fact members of the society already. A strategic review started in late 1994 concluded that conversion was the best way forward for the society, although it had conducted exploratory talks with the National & Provincial (later acquired by Abbey National) with a view to merging. The A & L pursued its conversion plans faster than its larger rivals, the Woolwich and the Halifax, both of whom had announced their intention to convert before the A & L. In 1996 UBS ranked the A & L fifth by asset size and eleventh in its performance table.
Reason for converting: The society sees the key advantages of conversion and flotation as being: achieving a separation of owners and customers; allowing members to realise their ownership rights; and placing the society on an equal and hence competitive footing with other companies in the UK financial services market.
Date of announcement: 31 January 1996.
Schedule of events: Special General Meeting in London on 10 December 1996 at which the investors resolution was passed by a 96 per cent majority and the borrowers resolution by a 97 per cent majority. The society plans to float on the stockmarket possibly in April 1997.
Type of transfer: Transfer to a specially formed successor and flotation.
Basis of distribution: The society decided to depart from the recent norm and make a single tiered payment: all qualifying investors and borrowers will receive 250 free shares irrespective of the value of their accounts or the duration of their membership. A valuation carried out for the society as at 30 September 1996 suggested a value range of between £960 and £1,090 for these shares.
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Entitlements:
Investing members: Investing members with a balance of at least £100 on 14 October 1996, who have been the sole or first named member on an account open from 31 December 1995 until the SGM, receive a flat rate distribution of 250 free shares. The account must remain open until the final qualifying date, which will be not more than eight weeks before the Vesting Date.
Borrowing members: Borrowers with an outstanding balance of at least £100 on a mortgage account on which they are the sole or first name on 31 December 1995 and 10 December 1996 qualify for 250 free shares. The account must remain open until the final qualifying date, which will be not more than eight weeks before the Vesting Date.
Depositors: Nothing.
Children: Qualifying investors aged under 18 on the day of the SGM receive the statutory cash bonus, estimated to be about 11 per cent of their account balance.
Other beneficiaries: Qualifying employees and pensioners.
Further information: Alliance & Leicester Transfer Document.
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G. Northern Rock
Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL (Tel: 0191 285 7191)
Background: The society announced plans to convert into a public company on 3 April 1996. The payment to savers and borrowers is likely to be made in the form of shares but details are not yet known. An unusual feature of the float is a commitment to pay 5 per cent of pre- tax profits to a new charitable foundation which will support charities in the North East of England.50 This device may serve to discourage takeovers in the future, although it will also reduce the value of the society in the market. Some analysts feel that with an expected market capitalisation of around £1 billion the Northern Rock is too small to survive as an independent bank; there is also thought to be some danger of a predator trying to acquire the society before it floats. In 1996 UBS ranked the Northern Rock ninth by asset size and second in the performance table.
Reason for converting: The society has striven hard for efficiency in recent years and focused on a relatively narrow range of mortgage and savings products. It seems that on conversion it will pursue similar policies but its detailed reasons for converting will not be known until the Transfer Document is published.
Date of announcement: 3 April 1996.
Schedule of events: The Northern Rock is expected to issue a Transfer Document early in March 1997 with a Special General Meeting happening in April, prior to flotation - all being well - in October 1997.
Type of transfer: Transfer to a specially formed successor.
Basis of distribution: Not known.
Entitlements: Not known.
Further information: Transfer Document due in March 1997.
50 'Northern Rock to create £1 bn bank', Financial Times, 4 April 1996
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H. Bristol & West
PO Box 27, Broad Quay, Bristol, Avon BS99 7AX (Tel: 0117 979 2222)
Background: On 15 April 1996, a deal was announced by the Bank of Ireland to acquire the Bristol & West for £600m. Bristol & West was the ninth largest society at the time. The deal should be finalised in mid 1997. The society had a difficult period in the early 1990s including arrears problems and poorly performing subsidiaries. It has since concentrated more closely on core products. UBS ranked it tenth by asset size in 1996 and twentieth on performance criteria.
Reason for converting: The cited benefits are access to lower-cost wholesale funding and the potential to expand within its chosen market.
Date of announcement: 15 April 1996
Schedule of events: Transfer Document due in March 1997. Special General Meeting 15 April 1997. Takeover is expected to be completed in July or August 1997. Shares and cash distributed within 28 days of completion.
Type of transfer: Transfer to an existing company (Bank of Ireland)
Basis of distribution: Distribution expected to consist of preference shares for borrowers and cash entitlements linked to account balances for two year qualifying investors. Some details being sent to members in February 1997.
Entitlements:
Investing members: Average payment for two year qualifying investor expected to be around £1,000 in cash.
Borrowing members: £250 worth of preference shares.
Further information: Transfer Document in early March 1997; Information office: 0800 886633.
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Appendix 1
Cheltenham & Gloucester: additional details
This appendix describes a court decision obtained in relation to the Cheltenham & Gloucester which tested the applicability of the two year rule when distributions are made in the form of cash.51
Under the terms of C & G's first offer to its members, investing members were to receive £500 in cash and a further ten per cent of their account balances; borrowers and C&G staff and pensioners would receive £500 each, whilst deposit account holders (i.e. savers whose account does not confer society membership) were to receive ten per cent of their account balances. These terms were changed after a High Court challenge which was brought by the Building Societies Commission. The case questioned the legality of the society's interpretation of those sections of the Building Societies Act 1986 which relate to the transfer of building society assets to an existing company (sections 97 to 102).
Part of the protection of societies from takeovers is the requirement that very large proportions of societies' memberships must vote and approve any proposed transfer of business to an existing company. There is a separate section in the Act (s. 100(9)) which limits cash payments, in such a transfer, to members who have held a share in the society for at least two years prior to the qualifying day. Its rationale is to protect the building society sector from destabilising flows of short-term cash moving from society to society in the hope of benefiting from windfall payments. Section 100(9) would have prevented some 27 per cent of shareholders in the C & G from receiving payments, and it was feared that the size of this block was so great that non-payment to them might have threatened a favourable vote for the whole deal.
In order to overcome the hurdle of the voting requirement, and at the same time to avoid the two year qualifying period, the society argued that the two year qualifying period did not apply in its case. The basis for this argument was that the successor company, in the words of the Act, was to be a subsidiary of Lloyds Bank, Chambers and Remington Ltd. The payments, however, were to originate from Lloyds Bank, a third party. Giving judgment on June 8 1994, Sir Donald Nicholls held that the bar on payments in section 100(9) applied just as much to the parent company of a successor company as to the successor company itself. The two year period had to apply to all share accounts. The intention of the Cheltenham & Gloucester to pay a bonus to depositors was also challenged by the Building Societies Commission, but in this instance the High Court found in favour of the society. Sir Donald judged that it would be lawful to make payment to non-members:
51 Cheltenham and Gloucester Building Society v. The Building Societies Commission, Times Law Reports, 10 June 1994
55 Research Paper 97/20
"'They have no votes. They have no say in whether the transfer agreement will be approved. In principle, therefore, if the members are prepared to approve terms whereby part of the cash on offer will be paid to employees and pensioners and depositors, that is a matter for them"."52
As a result of the verdict, the Cheltenham & Gloucester revised its terms. In so doing it moved the date from which share accounts needed to have been continuously open back from 31 December 1993 to 31 December 1992. This meant that many more accounts were disqualified as a result of the two year rule, which served to highlight the problems not only of joint account holders, but also those who had switched between types of account during the period. Borrowers were also removed from the payout: under the new offer they received nothing. Children, however, did newly become eligible for a payment.
52 'C & G takeover in virgin territory', Financial Times, 9 June 1994
56 Research Paper 97/20
Appendix 2
Halifax: additional details
This Appendix describes a court ruling obtained by the Halifax which determined the applicability of the two year rule when a distribution was to be made in the form of shares (strictly speaking, a right to subscribe for shares, since the Act prohibits the distribution of shares).53
In the case of share distributions, the relevant section of the Building Societies Act 1986 is s.100(8):
100 (8) Where, in connection with any transfer, rights are to be conferred on members of the society to acquire shares in priority to other subscribers, the right shall be restricted to those of its members who held shares in the society throughout the period of two years which expired with the qualifying day; and it is unlawful for any right in relation to shares to be conferred in contravention of this subsection.
At issue was the interpretation of 'other subscribers'. The deal was permitted on the grounds that no one who was not a member of the society would be allowed to subscribe. Within this group, all investing members and borrowing members will be eligible for free shares if they had more than £100 in their accounts at midnight on 25 November 1994. This includes those investing members whose accounts have been open for less than two years prior to this qualifying date. The requirement that only two year members should have priority, is satisfied by such members qualifying also for an additional variable distribution based on the value of the funds which they hold with the societies (their 'priority' distribution).
The judgment had widespread implications for future changes of status by societies since it meant that societies could avoid the two year rule and make payments to those with less than a two year investing history so long as the distribution was in the form of shares, and so long as two year members were eligible for an additional priority distribution.
53 Building Societies Commission v Halifax Building Society [1995] 3 All E. R. 193
57 Research Paper 97/20
Bibliography
Building societies: a future or a past?, Touche Ross, 1995
Building Societies Commission Annual Report 1995-96
Building societies research: The major players, Rob Thomas (UBS global research), September 1996
Building Societies: Structure, Performance and Change, Donald McKillop and Charles Ferguson, 1993
Building Societies: The regulatory framework, Building Societies Association, third edition, 1992
Building Societies (Joint Account Holders) Bill, RP 95/53, 26 April 1995
The Building Society Industry, Mark Boleat, second edition, 1986
Building Society Law, Wurtzburg and Mills (15th edition)
Inflation Report, Bank of England, published quarterly
'Mutual benefits: Time to decide', UBS Global Research, 26 January 1996
'Mutuality for the next millennium', HM Treasury release 49/96, 18 March 1996
'Mutuality moves on', HM Treasury release 50/96, 18 March 1996
Proposals for a new Building Societies Bill: A draft Bill published by HM Treasury, March 1996
Proposals for a new Building Societies Bill: A revised draft published by HM Treasury, December 1996
Proposals for a new Building Societies Bill: A consultation document published by HM Treasury, March 1996
Towards 2000: A view from the top, Building Societies Research, Mortgage Finance Gazette and John Wriglesworth, 1994
Transfer document and prospectus, National and Provincial Building Society, 1996
58 Research Paper 97/20
Transfer document and prospectus, Alliance & Leicester Building Society, 1996
Transfer document, Halifax Building Society, 1997
Transfer document, Woolwich Building Society, 1996
Transfer document, Cheltenham & Gloucester Building Society, 1996
Parliamentary references
Speech seeking leave to introduce the Building Societies (Distributions) Bill [Bill 77 of 1996- 97], Douglas French MP, HC Deb 22 January 1997 cc.974-5
Written answer announcing result of first stage of the review of the Building Societies Act 1986, HC Deb 6 July 1994, cc.213 - 5w
Written answer announcing result of second stage of the review of the Building Societies Act 1986, HC Deb 24 February 1995, cc.341-3w
Written answer on scope of proposed Building Societies Bill, HC Deb 6 November 1996 cc.539-41w
Legal cases
Abbey National Building Society v. The Building Societies Commission, Judgment in Building Societies Commission Annual Report 1988-89
Building Societies Commission v. Halifax Building Society [1995] 3 All E. R. 193
Cheltenham and Gloucester Building Society v. The Building Societies Commission, Times Law Reports, 10 June 1994
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