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PART I
Description and Analysis
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1
An Introduction to Building Societies
A Brief History of the Building Society Industry
Building societies, together with other friendly societies, developed during the second half of the eighteenth century in response to prevailing economic and social trends including growing financial sophistication, the industrial revolution and the increasing attention being focused on self-help. The first known building society was established in Birmingham in 1775 and it is estimated that, by the end of the century, between twenty and fifty had been established, predominantly in the Midlands, Lancashire and Yorkshire. The early societies were true building societies in that they built homes and were mutual. They existed 10 provide each member, and no one else, with a house paid for out of their funds. The members, generally artisans, numbered not more than twenty and paid an agreed sum fortnightly or monthly into the funds of the society. When sufficient money had accumulated, land was bought and building commenced. Lots were drawn to decide the order of allocation of the houses, although sometimes societies auctioned off this priority to the highest bidder. Members continued making regular payments until all the members had been housed and the society then terminated.
In the early nineteenth century societies took their first steps towards becoming savings institutions. To speed up the production of houses, some societies began to pay interest to people who were willing to invest but did not want a house; therefore they had to charge interest to those borrowing.
The first legislation concerned with building societies was the Regulation of Benefit Building Societies Act 1836 which gave societies their official recognition and established a ācertifying barristerā (subsequently the Chief Registrar of Friendly Societies) to register societiesā rules and offer advice.
By the middle of the nineteenth century building societies had become substantially larger and a typical society numbered between 100 and 215 members. The trend 10wards becoming financial institutions continued and many societies changed from the old terminating format to become permanent societies, offering both savings and lending facilities.
In the 1850s and 1860s building societies were in dispute with the government over their exemption from stamp duty and the first steps were taken to provide a unified voice for the industry. In 1869 the Building Societies Gazette was established, facilitating communications within the movement, and in the same year the Building Societies Protection Association, the forerunner of the present Association, was set up.
In 1870 a Royal Commission on friendly societies was established. Building societies were within its terms of reference and came out of the report, which was finalized in 1871, fairly well. The report made certain recommendations, particularly with respect to the role of the Chief Registrar (as the ācertifying barristerā had become) and the powers of societies. The report of the Royal Commission was followed by the first comprehensive Building Societies Act in 1874 and the essence of much of this Act remains in force today. The main feature of the Act was to limit building societies to building and owning land for the purposes of conducting their business. The Royal Commissionās recommendations for strengthening the powers of the Chief Registrar were also implemented.
The last quarter of the nineteenth century was a time of turmoil for financial institutions generally, and building societies were not unaffected. ln 1892 the fairly large Portsea Is1and Building Society collapsed and later that year the industry was rocked by the failure of the Liberator Building Society, by far the largest in the country. An 1894 Act further strengthened the powers of the Chief Registrar and prohibited some of the more questionable practices, including second mortgages and balloting for mortgages.
Comprehensive statistics on building societies became available for the first time in the 1890s. In 1895 it was estimated that there were 3,642 societies in existence, with a total of 631,000 shareholders (that is, investing members) and total assets of about .Ā£45 million.
The industry grew particularly rapidly in the inte-war years, aided by low interest rates in the economy and rent restrictions which served to discourage the building of homes for rent. The number of societies declined sharply from 1,336 at the end of 1918 to 960 at the end of 1939, largely as a result of terminating societies winding up and very small societies transferring their engagements to larger units. The number of shareholders rose from 625,000 at the end of 1918 to over 2 million at the end of 1939 and it is estimated that there were 1 Ā½ million borrowers at the end of 1939, compared with little more than 500,000 at the end of 1918, The total assets of building societies incereased more than tenfold in the inter-war year, form Ā£68 million in 1918 to Ā£773 million in 1939.
However, the 1930s also saw the building society industry face a number of problems. There was fierce competition for mortgages, and an attempt to introduce a code of ethics led to a division within The Building Societies Association and the formation of two separate bodies. The problems within the industry were highlighted in 1938 by the āBorders caseā which brought unfavourable publicity on the movement and led to the 1939 Building Societies Act, the main effect of which was to restrict the mortgage security which building societies could accept. The 1939 Act led to the unification of the two associations in 1940.
The immediate post-war years were relatively quiet for building societies, largely because the Labour government concentrated on building houses for rent. However, in the 1950s the rapid increase in the number of houses built for owner-occupation gave societies a much more important role and they expanded rapidly. The societiesā significant role in the housing market was particularly recognized by the House Purchase and Housing Act 1959 under which the government lent building societies Ā£100 million for on-lending to purchasers of pre-1919 houses.
The prudential supervision of the industry came under scrutiny during the 1950s, partly as a result of the liquidity problems faced by the relatively large Scottish Amicable Building Society and the dubious practices of the State Building Society. In 1959, societies were given trustee status, i. e. they were empowered to accept the investments of trustees without special authorization under the trust deed. This āseal of respectabilityā was something for which societies had long fought. The Chief Registrar was empowered to lay down conditions which a society had to meet in order to obtain trustee status, but in the event these were not onerous.
The Building Societies Act 1960 empowered the Chief Registrar to prescribe the way in which societies should invest their liquid funds and this power was used to ensure that societiesā liquid funds were both relatively liquid and completely safe. The 1960 Act also gave the Chief Registrar considerably greater powers and introduced the special advance limit which has had the effect of limiting societies' ability to lend large amounts or make loans to corporate bodies. The Building Societies Act 1962 consolidated existing legislation and remains the statute under which societies operate.
In the 1960s and 1970s, the number of building societies continued to fall while the assets of the industry and its importance increased considerably. The number of societies fell from 835 at the beginning of 1950 to 726 by the end of 1960. There were 273 societies at the end of 1980 and only 190 at the end of 1984. Meanwhile, the number of borrowers increased from 1Ā½ million in 1951 to nearly 5Ā½ million in 1980, and 6.3 million in 1984.
As building societies became more important, so government took a closer interest in their activities and the mortgage rate became the focus for much political comment. In 1966, the government referred building society interest rates to the Prices and Incomes Board and, following a recommendation of the Board in the following year, the Association established a committee to make recommendations on reserve and liquidity requirements. Those recommendations, the most important feature of which was to introduce a sliding scale for reserves, came into effect in 1968. In the 1970s, the political importance of building societies increased further, largely as a result of changes in the economic climate which led to substantial variations in the general level of interest rates and hence in building society rates. The industry was also blamed by some commentators for the rapid rise in house prices which occurred in the early 1970s. Relations with the government improved noticeably after the Joint Advisory Committee (JAC) was established in 1973.
Table 1.1 Building Societies, General Summary, 1900-84...
