The History of Building Societies

1775 The first known society was formed - Richard Ketley's, at the Golden Cross Inn, Birmingham. The earliest societies were 'terminating', and wound up when all their members had been housed. They were confined to the Midlands and the North of England. The last terminating society in existence (First Salisbury) was dissolved in March 1980

1812 Test case of Pratt v Hutchinson, involving arrears in payment to the Greenwich Union. Until this point societies had been operating under the Friendly Societies Act of 1793. The Court ruled in the society's favour - the first formal recognition of building societies' rights.

1825 The Golden Jubilee of the industry - over 250 societies in existence throughout the country.

1832 The Great Reform Act, which extended the franchise to owners of property worth forty shillings a year, resulted in a rapidly increased growth of the industry.

1836 The first legislation dealing specifically with the industry. The Regulation of Benefit Building Societies Act officially recognised societies for the first time. It came about partly because the Government wished to encourage building society saving - the Savings Bank rate of 4.5%, subsidised by the Treasury, having proved embarrassingly expensive. A barrister was appointed to certify societies' rules and offer advice. Later he became known as the Chief Registrar of Friendly Societies.

1838 'Model rules' concerning the operation of building societies were compiled by the Chief Registrar and issued by the Lords of Treasury.

1840s Societies began to accept savings from members who were not necessarily potential home owners.

1845 James Henry James produced a leaflet that outlined a new idea for 'permanent' building societies.

1845 The first known permanent society formed - The Metropolitan Equitable.

1847 Publication of Arthur Scratchley's famous Treatise on Benefit Building Societies which outlined the permanent principle in greater detail and provided tables for the calculation of interest and repayments, etc.

1855 The Liverpool and London Building Society Protection Associations were formed, both to safeguard the industry from increasing legislation designed to extract more tax revenue from the industry.

1860 Over 750 societies in existence in London and 2,000 in the provinces.

1869 The Building Societies' Gazette established.

1869 The Building Societies Protection Association formed in London by James Higham to act as the national body for the industry.

1870 The Royal Commission on Friendly Societies included building societies in its enquiries. Many had retained the features of members balloting for loans, thus attracting gamblers as well as genuine house-buyers.

1874 The Commission's Report, plus amendments from the Association, resulted in the Building Societies Act.

1875 The Chief Registrar's Report on Friendly Societies now included a separate annual section on building societies.

1884 A Building Societies Act dealing with the question of arbitration was passed, enabling societies to take erring members to court rather than employing arbitrators.

1892 The spectacular collapse of the largest building society in the country - The Liberator Permanent Benefit - due to the financial activities of its founder.

1894 The Building Societies Act, which closed loopholes in the 1874 Act and guarded against the recurrence of the Liberator fiasco, as well as legislating against the so-called 'promoter' societies, such as Bowkett, Star-Bowkett, Richmond, Self-Help etc, which were founded on dubious gambling principles.

1910 1,723 societies in existence with 626,000 members and total assets of over £76m.

1936 A split in the industry caused by the 'Code of Ethics' resulted in the National Association of Building Societies being reformed as the Building Societies Association and the establishment of a splinter group called the National Federation of Building Societies, which reunited with the Association in 1940.

1937 The famous case of Bradford Third Equitable v Borders which disputed the legality of collateral security and which claimed societies' responsibility for the condition of property to be mortgaged and for builders' description of new houses. The ruling was in favour of societies.

1939 The Building Societies Act, passed with the co-operation of the Association and the Government, restricted the mortgage security that building societies could accept.

1940 The Association and the National Federation were re-united.

1951 Ruling by the Association on 7.5% liquidity as a condition of membership.

1960 The Building Societies Act, ensuring liquid funds were both liquid and safe, increased the power of the Chief Registrar and restricted size of loans, particularly to corporate bodies.

1962 The Building Societies Act - a consolidation of all previous legislation. This proved too restrictive in the 1980s.

1975 The industry is officially 200 years old.

1980 The last terminating society in existence (First Salisbury) was dissolved in March 1980.

1986 New Building Societies Act. Gave wider powers to societies in the field of housing and personal banking services. Established the Building Societies Commission as societies' regulator.

1989 Abbey National passes a resolution enabling it to convert to plc, and bank, status. This was an option given under the Building Societies Act 1986. From July 1989 the Abbey National no longer a building society.

A new central trade body for mortgage lending institutions established in August. The Council of Mortgage Lenders was promoted by four trade bodies (the Association of Mortgage Lenders, the Association of British Insurers, The Building Societies Association and the Finance Houses Association), with the BSA withdrawing from most mortgage and housing matters.

1991 The Tax-Exempt Special Savings Account (TESSA) was introduced. The number of repossessions hit 75,500 for the year - the highest ever recorded figure.

1995 Cheltenham & Gloucester Building Society converted to plc, and bank, status and became part of the Lloyds Bank Group - the first example of a society using the provisions in the 1986 Act to be taken over by an existing organisation.

1997 In March the Building Societies Act 1997, which made substantive amendments to, but did not replace, the Building Societies Act 1986, was enacted. The 1997 Act introduced a more flexible operating regime for societies. It increased the powers of the Building Societies Commission in line with the new powers granted to societies and included a package of measures to increase the accountability of building societies' boards to their members.

The industry's largest society, Halifax Building Society, converted to plc, and bank, status, along with four other societies.

1999 Legislation changed to increase the number of members required to propose a resolution for consideration at an annual general meeting; nominate a candidate for director; and requisition a special general meeting. The Individual Savings Account (ISA) was introduced, replacing the Tax-Exempt Special Savings Account (TESSA).

2000 Bradford & Bingley Building Society converts to plc status - the last, to date, to convert.

2001 The Financial Services and Markets Act 2000 - providing for a single legislative framework for regulation of financial services in the UK - came into force on 1 December 2001. The Financial Services Authority became societies' regulator (replacing the Building Societies Commission) and substantive amendments were made to the Building Societies Act 1986.

2004 The Consultation Document prepared by Paul Myners to inform his work on the corporate governance of mutual life offices was published in July. In December the full report is published. The general tenor of the Report is supportive of the valuable role played by financial mutuals.

2005 Britannia Building Society buys the savings and branch business of Bristol & West plc, the first remutualisation of a converted institution. The Child Trust Fund was introduced.

2007 -The Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 (the “Butterfill” Act) received Royal Assent. The main provisions in the Act (all of which require secondary legislation before they come into force) were to: increase the current 50% non-member funding limit to a maximum of 75%; to alter priorities on dissolution and winding-up ensuring that ordinary shareholders would rank equally with ordinary creditors; enable the transfer of a building society, friendly society, industrial and provident society, mutual insurance company or an equivalent European mutual, to a subsidiary of another mutual.

2008 The Banking (Special Provisions) Act 2008 received Royal Assent in February – this was emergency legislation introduced following the collapse of Northern Rock. It enabled the government to nationalise Northern Rock and to provide temporary powers to intervene in other banking collapses. The temporary provisions lapsed twelve months later.

HM Treasury and the Bank of England introduced a package of measures to provide support for banks (and building societies, although both HM Treasury and the FSA have indicated that they believe that building societies have been less affected by the credit crisis than banks) intended to promote stability and provide protection for savers and borrowers.

2009 The new Banking Act 2009 makes provision for a Special Resolution Regime for deposit-takers, under which various tools (“stabilisation options”) will be available – such as directed transfer to a private sector purchaser, transfer to a bridge bank, and transfer to temporary public ownership. There is also provision for partial transfers.

Dunfermline Building Society's retail and wholesale deposits, branches, head office and originated residential mortgages were transferred to Nationwide Building Society. This followed a sale process conducted by the Bank of England under the Special Resolution Regime provisions of the Banking Act 2009.

Britannia Building Society merged with the mutual Co-Operative Financial Services – the first merger between a building society and a mutual bank since such mergers were made possible under the ‘Butterfill Act’.

The BSA changed its rules to admit other mutually-owned deposit takers into membership rather than restricting its activities to building societies. This enabled the BSA to represent a wider range of organisations, and a larger market share, than would otherwise be the case.

The FSA recognised a new form of tier 1 permanent capital instrument for building societies – profit-participating deferred shares (PPDS). The West Bromwich building society has announced that it has issued PPDS in exchange for existing holdings of subordinated debt, thereby upgrading its capital, and is the first society to take advantage of this new instrument .

A report by Oxford University, published for the BSA, revealed a strong case for converting failed banks into mutual organisations. In light of the report, the BSA urged the Government to consider returning Northern Rock bank to the mutual sector.

2010 In March the Mutuals' Manifesto was published. This manifesto was the first of its kind and brought together the views of various trade associations and mutual organisations. It was a challenge to the UK’s political parties to show how they plan to support and nurture the mutual sector. The three main political party manifestos recognised the importance of mutuals, both within financial services and wider public services. The Labour Party notes the value of building societies and the strength and diversity that a healthy mutual sector brings to financial services. The Liberal Democrats assert “mutuals, co-operatives and social enterprises have an important role to play in the creation of a more balanced and mixed economy. Mutuals give people a proper stake in the places they work, spreading wealth through society, and bringing innovative and imaginative business ideas to bear on meeting local needs.” The Conservative Party sees mutuality as the way forward within public services and pledge to support co-operatives and mutualisation as a way of transferring public assets and revenue streams to public sector workers; essentially employee-led co-operatives.

A new specialist sourcebook for building societies was published by the FSA in March, intended to enhance the supervisory guidance available on societies’ financial and credit risk management. The BSA have concerns that, overall, the sourcebook may tend to disadvantage building societies by imposing a tougher and more prescriptive regime on them than banks or other lenders will be subject to, specifically with mortgage lending requirements.

In May the Coalition Government pledged in its Coalition Agreement to promote mutuals. “We want the banking system to serve business, not the other way round. We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry.”

2011 In February Kent Reliance Building Society was restructured by transferring its business, assets and liabilities to OneSavings Bank plc. JC Flowers, a US private equity firm, injected £50m into the new bank, which is 59.9% owned by a new mutual called Kent Reliance Provident Society, which Kent Reliance Building Society's members belong to. JC Flowers own the rest of the bank.

Reclaim Fund Ltd, a wholly owned subsidiary of The Co-operative Financial Services, was authorised by the FSA in March. This was an important milestone for the Dormant Accounts Scheme, whereby money in accounts with no customer activity of 15 years or more will be made available to charitable causes. Reclaim Fund will receive dormant account monies from banks and building societies and distribute to the Big Lottery Fund for onwards distribution. In England, it will be passed to the Big Society Bank, while different arrangements will apply elsewhere in the UK. There is also an alternative scheme for institutions with assets below £7 billion. This will enable them to directly support good causes within their local communities or those that they have an affinity with, rather than via the Big Society Bank. Most BSA members are eligible for the alternative scheme, and this is a good fit with their local and regional franchises.

In November Northern Rock was sold to Virgin Money, disappointing those that wanted Northern Rock to be remutualised.

2012 In June the Bank of England announced the launch of the Funding for Lending Scheme which aims to provide funding to boost lending to the real economy.

In July the FSA published The Future of Building Societies, aimed at producing the right legislative framework to enable building societies to compete fairly, free from inappropriate burdens and maintain their distinctive approach and lower risk business model.

New mortgage rules were published by the FSA in October, coming into effect in April 2014.

In December the Financial Services Act was passed. It provides a new regulatory framework for financial services and gives the Bank of England responsibility for protecting and enhancing financial stability. The Act, which is to come into force in April 2013, abolishes the Financial Services Authority and creates a new regulatory system of the Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority.

2013 Help to Buy, a package of measures was announced in the March budget. The measures comprise two elements, Help to Buy: equity loan and Help to Buy: mortgage guarantee. The Help to Buy: equity loan scheme will provide an equity loan to borrowers worth up to 20% of the value of a new build home. The loan will be interest free for the first five years and repayable within 25 years or when the house is sold. The scheme is intended to run for three years to support up to 74,000 home buyers.The Help to Buy: mortgage guarantee scheme will provide a £12 bn guarantee of up to £130 bn loans on residential properties.

On the 1 April the Financial Services Authority was replaced by a new regulatory system of the Prudential Regulation Authority (part of the Bank of England) and the Financial Conduct Authority.

In November Nationwide became the first building society to issue new Core Capital Deferred Shares (CCDS), a mutual-friendly capital instrument .CCDS have been designed to meet the requirements of the UK and European authorities under the new Capital Requirements Directive IV capital regime, being perpetual; loss-absorbing and subordinate, whilst at the same time safeguarding mutual principles through features such as capped, discretionary return.

2014 In the March 2014 budget the Government announced that the Help to Buy: equity loan scheme would receive a further £6bn of funding and be extended to March 2020. Around 200,000 people are expected to buy with the equity loan scheme.

In April new mortgage market review rules came into force. Key changes include the fact that all applicants, bar a few very specific groups, will receive mortgage advice, and that lenders will have to establish that a borrower can afford a loan at the current interest rate but also if the rate were to rise.

2015 The Building Societies Sourcebook was re-issued (unchanged) as a Supervisory Statement - SS 20/15.

In June the FCA issued the final rules covering the restrictions on the retail distribution of regulatory capital instruments. For building societies, this primarily covers the issuance of Core Capital Deferred Shares (CCDS) to retail investors. We agree with the FCA that retail capital instruments such as CCDS should only be sold to those investors who can understand the risk, and as a modest part of a portfolio - the rules specify a maximum of 10% of net investable assets. CCDS are totally different to a savings account, and although the return may be higher, this matches the higher level of risk undertaken.

In October BSA & Loughborough University's School of Business and Economics launch first Masters for customer-owned financial firms.

2016 The Bank of England and Financial Services Act 2016 enabled the absorption of the Prudential & Regulatory Authority (PRA) into the Bank of England. The same act also introduced the new Senior Managers Regime, with its focus on personal accountability, and also explicitly mentioned mutual societies in the enhanced competition objective of the regulators (section 20 of the Act).

A UK referendum was held in June to decide whether the UK should leave or remain in the European Union. Leave won by 51.9% to 48.1%.

2017 January saw the Prudential Regulation Authority's rules about what kind of lending societies could carry out come into effect, loosening previously tight restrictions to allow building societies to widen their product range. The regulator made the changes in its revised supervisory statement SS 20/15, which replaced the Building Society Sourcebook.

In April the Lifetime ISA was launched - a tax-free savings product, available to people aged 18-39, designed for first-time buyers or for saving for retirement. The state pays a 25% bonus, up to £1,000 per year on the maximum annual deposit of £4,000.

A new financial trade association, UK Finance, was formed by the merger of six existing trade bodies, including the British Bankers' Association and the Council of Mortgage Lenders. The members of the BSA decided to keep the BSA separate due to the distinct nature of the building society sector.

2019 The Building Societies Association and Mortgage Finance Gazette (previously called Building Societies' Gazette) both celebrated their 150th anniversaries.

2024 The Building Societies Act 1986 (Amendment Bill ) passed. This new Act of Parliament helps put building societies on a level playing field with their banking competitors, enabling them to support more lending to first-time buyers and homeowners in the future. Under the existing Act, member owned building societies are required to raise at least 50% of their funding from members’ savings deposits. This ‘funding limit’ is an important feature of the building society model, as it preserves their mutual status. However, other types of funding, taken from the financial markets or from the Bank of England, also count toward the funding limit, and constrains building societies from competing more effectively with the UK banks. Amending the current Act enables building societies to have more capacity to lend to UK customers, and to access emergency funding from the Bank of England in a time of financial stress, without it impacting their funding limits.

2025 The building society sector will be celebrating the 250th anniversary of the first known building society.

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Simon Rex

simon.rex@bsa.org.uk

The History of Building Societies

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