Until the tail-end of the last century, if a borrower wanted a loan to buy a house, the chances are they would have gone into a building society in their local high street. But since the home-loans revolution of the 1980s, they are now as likely to go to a broker, a packager or a bank or even buy over the internet. Furthermore, they probably will not care about the ultimate source of the finance as long as the deal they get is a good one.Up to 1983, there was not much choice for homeloan finance. Mortgage rates and savings interest rates were fixed by a cartel operated under the auspices of the Building Societies Association. The BSA’s Council determined the rate each month, and most societies complied with it. This was seen as beneficial, since one of the effects of the cartel was to keep lending rates in check. Unfortunately, it also had the effect of depressing savings rates, leading to a shortage of funds and the build up of mortgage queues. After the collapse of the cartel in 1983, when Abbey National, the nation’s biggest mortgage lender, and at that time still a building society, pulled out, building societies set their own rates. Following the Building Societies Act of 1986, they also extended their activities into different types of accounts and lending. The mid-1980s saw the arrival of the centralised lenders and, after relaxation of constraints on the banks, they joined the lucrative homeloans market, too. The move heralded a step-change in the fortunes and number of societies. In 1900, there were more than 2,000 societies. By 1970, this number had fallen to 481, and then to just 130 in 1988, when many of the larger societies, such as Abbey National, Halifax, Cheltenham and Gloucester and Bradford & Bingley, began their journey to demutualisation. This was permitted for the first time by the 1986 Building Societies Act. Until this year there had been no society mergers since December 2003. However, there have been four mergers this year alone, leaving just 61 societies. Another household name is set to disappear in the next several months, when Nationwide takes over Portman. So what is the future for the sector? There is no doubt that further consolidation will take place but it is arguable whether this is a good or bad thing, or what the future role of the mutuals will be. Kent Reliance Building Society chief executive Mike Lazenby, is on record as saying that the number of building societies needs to fall to no more than five if they are to compete with banks and offer customers a good deal. The annual review of the sector by accountants KPMG describes a “growing gap” between the successful societies, with strong growth, falling cost ratios and, in some cases, successful diversification, and those that seem to be struggling, with weak growth, poor cost control and limited success in diversification. The author of the report, Simon Walker, says: “With the market set to become more difficult, the gap between societies seems set to grow and pressure on the boards of those weaker performers will rise.” But other commentators on the building society sector are more optimistic. Ray Boulger, senior technical manager at John Charcol, says brokers are bound to recommend mortgages on price, which pits mutual lenders against their banking rivals. But the place where societies score is in niche markets, particularly where they have a clear role, such as the Ecology, or involve themselves with the types of business that the giants such as HBOS will not normally want to touch. “Some of the regional ones are very useful, because they will lend on properties of a certain local type of construction, such as those in East Anglia or the West Country, he says. “They know their market and know the risks. The borrower may pay a little more for the loan than on a mainstream property with another lender, but he won’t pay any more for his unusual property than the standard rate being offered by that local lender.” The Building Societies Association adds: “Being fleet of foot, with small command chains and the ability to make quick decisions means that societies are able to adapt with Darwinian audacity. Consumers are increasingly looking for a wide range of product choice and so niche markets arise. While the bigger lenders will not want to put the time or money into providing anything which is not one size fits all, smaller lenders can build up their business in this area. Products such as Shariah-compliant mortgages, green mortgages and non-conforming mortgages have been developed by the sector over the last few years, and the innovation will go on.” Many mutuals have subsidiaries to enable them to take on extra lending, including non-standard such as self-cert and buy-to-let. In some cases, such as Skipton, the subsidiaries are bigger than the parent mutual. BSA director-general Adrian Coles defends the societies’ role. He emphasises that the reduction in numbers of building societies does not mean a contraction of the societies. “There are still about five times as many societies in the country as retail banks, so the number of institutions in a sector tells us nothing useful,” he says. “Regional building societies have good working relationships with small intermediaries, who know them and like their flexibility and willingness to talk through a case and societies have used the advent of mortgage regulation to reassess their business and the relationship with their intermediaries.” The bottom line is always going to be good value for the borrower. Societies are banding together to share data and back office functions, or outsourcing them to keep costs down and enable them to keep their rates competitive. Barry Meeks, managing director of Mutual One, an organisation founded in 1999 by a consortium of building societies to provide outsourced internal audit for its members, says: “Some societies have outsourced all back-office functions, such as investment and mortgage administration, treasury, finance, compliance, HR and training, as well as systems and audit.” Mutual One now caters for approximately 30 per cent of the building society market and has made its service available to other institutions. It is currently planning to launch a similar organisation to offer compliance services. Skipton building society, the majority shareholder in Mutual One, has another subsidiary – Baseline Capital – to lead the way on Basel II data-sharing, enabling societies to bring down their capital requirement. They can pass on the benefits to members in the form of cheaper mortgages.