Building societies as an institution began in late-18th century
Birmingham – a town which was undergoing rapid economic and physical expansion driven by a multiplicity of small metalworking firms, whose many highly skilled and prosperous owners readily invested in property. Many of the early building societies were based in
taverns or
coffeehouses, which had become the focus for a network of clubs and societies for co-operation and the exchange of ideas among Birmingham's highly active citizenry as part of the movement known as the
Midlands Enlightenment. The first building society to be established was
Ketley's Building Society, founded by Richard Ketley, the landlord of the
Golden Cross inn, in 1775. Members of Ketley's society paid a monthly subscription to a central pool of funds which was used to finance the building of houses for members, which in turn acted as
collateral to attract further funding to the society, enabling further construction. By 1781 three more societies had been established in Birmingham, with a fourth in the nearby town of
Dudley; and 19 more formed in Birmingham between 1782 and 1795. The first outside the
English Midlands was established in
Leeds in 1785. Most of the original societies were fully
terminating, where they would be dissolved when all members had a house: the last of them,
First Salisbury and District Perfect Thrift Building Society, was wound up in March 1980. In the 1830s and 1840s a new development took place with the
permanent building society, where the society continued on a rolling basis, continually taking in new members as earlier ones completed purchases, such as
Leek Building Society. The main legislative framework for the building society was the
Building Societies Act 1874 (
37 & 38 Vict. c. 42), with subsequent amending legislation in 1894, 1939 (see
Coney Hall), and 1960. In their heyday, there were hundreds of building societies: just about every town in the country had a building society named after that town. Over succeeding decades the number of societies has decreased, as various societies merged to form larger ones, often renaming in the process, and other societies opted for
demutualisation followed by – in the great majority of cases – eventual takeover by a listed bank. Most of the existing larger building societies are the result of the mergers of many smaller societies. All building societies in the UK are members of the
Building Societies Association. At the start of 2008, there were 59 building societies in the UK, with total assets exceeding £360 billion. The number of societies in the UK fell by four during 2008 due to a series of mergers brought about, to a large extent, by the consequences of the
2008 financial crisis. There were three further mergers in each of 2009 and 2010, a demutualisation and a merger in 2011, and four further mergers 2013–2018 which resulted in there being only one building society headquartered respectively in Scotland and Northern Ireland. Since then, the only merger has been in 2023, when the Manchester society merged with the Newcastle society.
Demutualisation was the first society to
demutualise in July 1989. In the 1980s, changes to British banking laws allowed building societies to offer banking services equivalent to normal banks. The management of a number of societies still felt that they were unable to compete with the banks, and a new
Building Societies Act was passed in 1986 in response to their concerns. This permitted societies to '
demutualise'. If more than 75% of members voted in favour, the building society would then become a
limited company like any other. Members' mutual rights were exchanged for shares in this new company. A number of the larger societies made such proposals to their members and all were accepted. Some listed on the
London Stock Exchange, while others were acquired by larger financial groups. The process began with the demutualisation of the Abbey National Building Society in 1989. Then, from 1995 to late 1999, eight societies demutualised accounting for two-thirds of building societies assets as at 1994. Five of these societies became joint stock banks (plc), one merged with another and the other four were taken over by plcs (in two cases after the mutual had previously converted to a plc). As mentions, demutualisation moves succeeded immediately because neither Conservative nor Labour party UK governments created a framework which put obstacles in the way of demutualisation. Political acquiescence in demutualisation was clearest in the case of the position on '
carpetbaggers', that is those who joined societies by lodging minimum amounts of £100 or so in the hope of profiting from a distribution of surplus after demutualisation. The deregulating
Building Societies Act 1986 contained an anti-carpetbagger provision in the form of a two-year rule. This prescribed a qualifying period of two years before savers could participate in a residual claim. But, before the 1989 Abbey National Building Society demutualisation, the courts found against the two-year rule after legal action brought by Abbey National itself to circumvent the intent of the legislators. After this the legislation did prevent a cash distribution to members of less than two years standing, but the same result was obtained by permitting the issue of 'free' shares in the acquiring plc, saleable for cash. The Thatcher Conservative government declined to introduce amending legislation to make good the defect in the 'two-year rule'.
1980s and 1990s Building societies, like mutual life insurers, arose as people clubbed together to address a common need interest; in the case of the building societies, this was housing and members were originally both savers and borrowers. But it very quickly became clear that 'outsider' savers were needed whose motive was profit through interest on deposits. Thus permanent building societies quickly became mortgage banks and in such institutions there always existed a conflict of interest between borrowers and savers. It was the task of the movement to reconcile that conflict of interest so as to enable savers to conclude that their interests and those of borrowers were to some extent complementary rather than conflictive. Conflict of interest between savers and borrowers was never fully reconciled in the building societies but upon deregulation that reconciliation became something of a lost cause. The management of building societies apparently could expend considerable time and resources (which belonged the organisation) planning their effective capture—of as much of the assets as they could. If so, this is arguably insider dealing on a grand scale with the benefit of inside specialist knowledge of the business and resources of the firm not shared with outsiders like politicians and members (and, perhaps, regulators). Once the opportunity to claim was presented by management the savers in particular could be relied upon to seize it. There were sufficient hard-up borrowers to take the inducement offered them by management (in spite of few simple sums sufficing to demonstrate that they were probably going to end up effectively paying back the inducement). Management promoting demutualisation also thereby met managerial objectives because the end of mutuality brought joint stock company (plc) style remuneration committee pay standards and share options. Share options for management of converting societies appear to be a powerful factor in management calculation. refers to this in the following terms: Instead of deploying their margin advantage as a defence of mutuality, around 1980 building societies began setting mortgage rates with reference to market clearing levels. In sum they began behaving more like banks, seeking to maximise profit instead of the advantages of a mutual organisation. Thus, according to the Bank of England's : As also observe: draws a rather more direct and cynical conclusion: Some of these managements ended up in dispute with their own members. Of the first major conversion of the Abbey in 1989, observed: In the end, after a number of large demutualisations, and pressure from carpetbaggers moving from one building society to another to cream off the windfalls, most of the societies whose management wished to keep them mutual modified their rules of membership in the late 1990s. The method usually adopted were membership rules to ensure that anyone newly joining a society would, for the first few years, be unable to get any profit out of a demutualisation. With the chance of a quick profit removed, the wave of demutualisations came to an end in 2000. One academic study found that demutualised societies' pricing behaviour on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates.
2000s and 2010s The
Building Societies (Funding) and Mutual Societies (Transfers) Act 2007, known as the Butterfill Act, was passed in 2007 giving building societies greater powers to merge with other companies. These powers have been used by the
Britannia in 2009 and
Kent Reliance in 2011 leading to their demutualisation. Prior to 31 December 2010, deposits with building societies of up to £50,000 per individual, per institution, were normally protected by the
Financial Services Compensation Scheme (FSCS), but Nationwide and Yorkshire building societies negotiated a temporary change to the terms of the FSCS to protect members of the societies they acquired in late 2008/early 2009. The amended terms allowed former members of multiple societies which merge into one to maintain multiple entitlements to FSCS protection until 30 September 2009 (later extended to 30 December 2010), so (for example) a member with £50,000 in each of Nationwide, Cheshire and Derbyshire at the time of the respective mergers would retain £150,000 of FSCS protection for their funds in the merged Nationwide. On 31 December 2010 the general FSCS limit for retail deposits was increased to £85,000 for banks and building societies and the transitional arrangements in respect of building society mergers came to an end. ==List of building societies==