Posted to Irish TDS and Senators
25th November, 2004
Dear Deputy,
The Irish Nationwide Building Society
Ireland has only two mutual building societies left – the EBS and the Irish Nationwide – and for at least ten years, Michael Fingleton of the Nationwide has made it clear that he intends that his society should follow the example of the Irish Permanent and the First National and shed its mutual status. The Department of the Environment will be putting a bill before Dail within the next few weeks which, among other things, is intended to allow the INBS to do so. Feasta believes that you should oppose this part of the bill because it is not in your constituents’ interests for the INBS to demutualise. Here’s why.
A mutual building society has no shareholders. This means that it can be run solely in the best interests of those saving with it and borrowing from it. As a result, it should be able to offer much better terms to both borrowers and lenders. This is certainly the case in Britain where the annual reports of banks which were previously building societies show that the extra cost of paying dividends to shareholders raises their running costs by around 35%. As banks make their money from their customers, it is the customers who pay the increased bank charges that result.
As a result, mortgages are generally cheaper from the British mutuals. The 2004 survey of the top 35 mortgage lenders by Moneyfacts magazine compared the total interest paid on a 100,000 standard variable rate mortgage between 1 January 2003 and 31 December 2003. Building societies dominated the top half of the resulting table. They also came out best in a table comparing savings schemes.
The British building societies see themselves as keeping the banks honest by challenging the shareholder-owned institutions on pricing and service. The EBS – which has no intention of demutualising – and the Irish Nationwide need to be kept as they are so that they can play the same role here. A change in the law is needed before the Nationwide can demutualise. According to statements from the Nationwide earlier this year, if the law is changed, it expects to be bought up by a major international bank. The money paid by the bank will be divided up amongst IBNS customers with certain types of savings and mortgage accounts. As each can expect to get at least €5,000, most of them will vote for the sale to go ahead. Yet as Rachel Blackmore, External Affairs Manager at the British Building Society Association says: “Many people who thought about short-term gain when voting for a demutualisation have realised that the long-term cost is high.”
Indeed, selling Nationwide would not only be against its customers’ own long-term interests, but against those of everyone in the country. This is because, by acquiring the same capital structure as all the rest of the country’s financial institutions except the EBS, the bought-out Nationwide would acquire the same higher level of costs too and be unable to compete as effectively as it could do if it stayed as it is. As a result, the price of everyone’s mortgage will tend to go up and savers will get a slightly worse deal.
So why is Michael Fingleton so keen for the IBNS to demutualise? It could be that he hopes to make a substantial personal gain. An academic study of the effects of demutualisation in Britain showed that “The beneficiaries of change included corporate managers whose earnings and status were enhanced following conversion.” Other gains were made by “speculative investors who profited from windfall gains” but these had to be “set against losses to borrowers, in the form of higher costs of loans, and to communities, in the form of reduced diversity of services.” (The study, “Mutuality and Corporate Governance: the Evolution of UL Building Societies following Deregulation” by J. Cook, S. Deakin and A. Hughes was published by the ESRC Centre for Business Research, University of Cambridge, as Working Paper No. 205 in June 2001)
While the Nationwide directors want to acquire the legal right to sell the organisation, what makes them think that its customers have the moral right to vote to do so? In Feasta’s view, the Nationwide’s customers are not its owners. They just happen to be using its services at present. They did not help set it up, or buy shares in it from the successors of those who did. No one owns it. It is the common property of everyone living in Ireland. It’s worth taking a little trouble to prevent its privatisation so that it stays that way.
At present, very few TDs or senators realise that everyone’s interests would be harmed by the Nationwide’s sale, which is why Michael Fingleton is confident that the required legislation will be passed without any problems. Feasta hopes to change that situation which is why we are sending you this letter. We will be in touch with you again when the bill is put before the house.
Yours sincerely,
Richard Douthwaite
Convenor, Feasta Money Group
