A building society is a type of financial institution originally established in the United Kingdom whose main activities revolve around accepting deposits from the general public to finance mortgage lending on private housing. This article provides an in-depth exploration of building societies, their history, structure, key events, and contemporary relevance.
Historical Context
Building societies have a rich history dating back to the late 18th century. The first building society, Ketley’s Building Society, was established in Birmingham in 1775. They emerged during a time when access to financing for housing was extremely limited. These societies started as mutual organizations, meaning they were owned and run by their members, who were both depositors and borrowers.
Types and Categories
- Permanent Building Societies: These operate on a permanent basis, providing continuous services to members.
- Terminating Building Societies: Established for a fixed term or until a specific goal was reached, after which they were dissolved.
Key Events
- 1845: The Building Societies Act was enacted to regulate building societies, which helped them grow rapidly.
- 1986: The Building Societies Act allowed building societies to demutualize and become public limited companies (PLCs).
- 1997-2000: Several large building societies demutualized, including Halifax, which became a significant bank.
Functions and Activities
Building societies traditionally offer the following services:
- Mortgage Lending: Providing loans to members to purchase homes.
- Savings Accounts: Offering various savings products to help members save money.
- Current Accounts: Including facilities like cheque books and electronic transfers.
- Commercial Property Lending: Some also finance commercial real estate projects.
Transformation and Demutualization
Demutualization refers to the process by which a building society converts into a public limited company (PLC). This process was catalyzed by legislative changes in the 1980s, allowing societies more freedom and the ability to compete with banks on equal footing.
Demutualization Process
- Proposal: The management proposes the idea to demutualize.
- Voting: Members vote on the proposal.
- Conversion: Upon approval, the society transforms into a PLC, with shares typically distributed to members.
Importance and Applicability
Building societies play a critical role in the housing market by:
- Providing affordable mortgage options.
- Promoting homeownership.
- Offering competitive saving products, fostering financial stability among members.
Examples
- Nationwide Building Society: The largest building society in the world.
- Yorkshire Building Society: Known for innovative financial products and strong customer service.
Considerations
- Member Benefits: Members have voting rights and often receive better interest rates.
- Regulation: Governed by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).
Related Terms
- Mutual Organization: An organization owned by its members.
- Demutualization: Conversion from a mutual organization to a PLC.
- Mortgage: A loan to purchase real estate.
- Savings Account: An account for depositing money that earns interest.
Comparisons
- Building Society vs. Bank: While banks are typically PLCs driven by shareholder profit, building societies are member-owned, prioritizing member benefits over profit.
Interesting Facts
- In 1986, there were over 200 building societies in the UK. Today, there are fewer than 50 due to mergers and demutualizations.
- Building societies often have strong community ties and invest heavily in local projects.
Famous Quotes
- “Building societies have thrived on mutuality – a sense of shared ownership and common purpose.” – Richard Dyson
FAQs
Q: Can anyone become a member of a building society? A: Yes, typically, anyone can become a member by opening a savings account or taking out a mortgage with the society.
Q: Why do some building societies choose to remain mutual? A: Many choose to remain mutual to retain their focus on member benefits and maintain community ties.
References
- Building Societies Association
- Financial Conduct Authority (FCA)
- Prudential Regulation Authority (PRA)
Summary
Building societies are an integral part of the UK’s financial landscape, providing essential services in mortgage lending and savings. Despite significant transformations, including demutualizations, their commitment to member-focused services remains a defining feature.
By understanding building societies’ history, structure, and operations, one can appreciate their unique role in promoting financial stability and homeownership. Whether through traditional savings products or innovative mortgage solutions, building societies continue to play a vital role in the financial well-being of millions.
