Building Society Overview and Importance

Building a society is a complex process that requires careful planning and execution. It's a vital part of human history, shaping the way we live and interact with each other.

A building society is a type of financial institution that provides loans and mortgages to its members. They are often community-based and offer more personalized services than traditional banks.

These societies are usually owned and controlled by their members, who have a say in how the organization is run. This can lead to more responsive and accountable decision-making.

By providing affordable housing options and financial services, building societies play a crucial role in supporting economic growth and stability.

Building societies have a rich history that spans several centuries. The first building society was established in Birmingham in 1775, with Richard Ketley's being the first of its kind.

By the end of the 18th century, as many as 50 building societies had been established across the U.K. The name "building society" reflects their original purpose: to help members save money collectively to buy or build houses.

In the early 19th century, some societies began to pay interest to people willing to invest, but who did not want a house. This marked a significant shift in their scope and services.

The Regulation of Benefits Building Societies Act 1836 gave building societies official recognition and made provision for the registering of societies' rules. This legislation helped to standardize and regulate the industry.

Here's a brief timeline of the growth of building societies:

The 1874 Building Societies Act provided a comprehensive framework for societies that largely remained in place for over 100 years. This framework helped to establish building societies as a major force in the financial sector.

In New Zealand, building societies are registered with the Registrar of Building Societies under the Building Societies Act 1965, which is a relatively straightforward process with a minimal capital requirement of NZ$200,000.

The registration process is largely a formality, requiring 20 members to issue shares of not less than NZ$1,000 each. Building societies that accept deposits from the public in New Zealand are regulated as "non-bank deposit takers" under the Non-bank Deposit Takers Act 2013, which means they must comply with prudential regulations monitored by the Reserve Bank of New Zealand.

Building societies that operate offshore, even if formally registered in New Zealand, are not subject to the same level of regulation. This includes those that only accept deposits from offshore customers, which are not monitored by the Reserve Bank or the Financial Markets Authority.

Demutualisation is the process of a building society converting to a company owned by shareholders. This shift from a mutual society to a company can be a complex and contentious issue.

Between 1989 and 2000, 10 building societies in the UK demutualised, either becoming banks or being acquired by larger banks. The first society to convert was Abbey National in 1989, which was later acquired by Banco Santander.

The demutualisation process was often driven by the desire for a windfall payment, as people joined societies with the intention of benefiting from any potential sale or acquisition. This can be seen in the example of Abbey National, which was initially demutualised in 1989.

Some building societies, such as the Halifax, converted to a public limited company in 1997, while others, like Cheltenham and Gloucester, were taken over by larger banks. The table below shows the fate of some of the building societies that demutualised between 1989 and 2000:

Northern Rock (Asset Management)1997Nationalised following near bankruptcy in February 2008, due to the financial crisis of 2007–2008. Most of the business bought by Virgin Money UK in January 2012, with remaining riskier mortgage business retained by the government and renamed NRAM plc (now Landmark Mortgages Limited).The WoolwichConverted to plcBarclays1997Now part of Barclays plc. Woolwich brand name now only used for mortgages from Barclays with the Woolwich branch network merging with that of Barclays in 2007.Birmingham MidshiresTaken over byHalifax1999Now owned by Lloyds Banking Group. The brand name is still retained, but running entirely by post and internet.Bradford & BingleyConverted to plc2000Nationalisation with sale of savings book to Abbey (now Santander).

In New Zealand, building societies are registered with the Registrar of Building Societies under the Building Societies Act 1965. The registration process is relatively straightforward and requires a minimum of 20 members to issue shares of not less than NZ$1,000 each, totaling a minimum foundation share capital of NZ$200,000.

Building societies that accept deposits from the public in New Zealand must comply with prudential regulations under the Non-bank Deposit Takers Act 2013. However, the Reserve Bank of New Zealand only monitors compliance with these regulations, not individual building societies for financial soundness.

Most building societies that accept public deposits in New Zealand are supervised by trustees appointed under securities legislation, which have various reporting requirements to the Reserve Bank. These trustees ensure that the building societies comply with the terms of their debt securities.

Building societies that accept deposits only from offshore customers are not regulated under the Non-bank Deposit Takers Act 2013 or New Zealand's financial markets legislation. This means they are not prudentially monitored by the Reserve Bank or the Financial Markets Authority.

The Reserve Bank cautions on its website that it does not monitor transactions undertaken by New Zealand registered building societies operating in overseas markets. Building societies' registration details and filed documents are available in the Register of Building Societies held at the New Zealand Companies Office.

The 1986 Building Societies Act brought about significant changes to the structure and regulation of building societies. One of the key features of this act was the establishment of the Building Societies Commission to oversee the supervision of building societies.

The previous system relied on a single person as the regulator, which was a major change. The act also introduced quantitative limits on the nature of a building society, requiring that 80% of funds be raised from retail sources and 90% of commercial assets be in first mortgage loans to owners of residential property.

This change had a significant impact on the way building societies operated. Societies were given wider powers, including the ability to make unsecured loans to own land, but only up to 5% of commercial assets could be in these new classes of business.

Members of building societies were also given greater powers under the act, including the right to vote on mergers and other significant decisions. This was a major shift in the way building societies were governed.

Here are the key features of the 1986 Act in a nutshell:

Credit unions are a type of financial cooperative where members pool their money to provide financial services to each other. They can range in size from small, volunteer-only operations to entities with thousands of participants.

The structure of credit unions is similar to that of American credit unions, with members owning the cooperative. In the UK, there are 43 building societies and seven credit unions that operate in a similar manner.

Members of credit unions typically purchase shares in the cooperative in exchange for the ability to request loans, open demand deposit accounts, and obtain other financial products and services. Any income generated by credit unions generally goes towards funding projects and services that benefit the community and its members.

Credit unions often offer online banking and auto-bill pay, but may not have as many brick-and-mortar locations as larger banking institutions.

Building societies often have lower overheads compared to banks, which can result in lower mortgage rates and higher interest rates on savings accounts.

Research by Savings Champion in 2020 found that the average interest rate offered by building societies was 1.07%, significantly higher than the 0.84% average offered by banks.

Some big-name high street banks offer low interest rates on their savings products, assuming many people won't bother looking elsewhere.

However, there are exceptions, and some smaller, lesser-known banks do offer market-beating interest rates.

Considering your local building society can be a good idea when looking for the best return on your savings.