Building societies are high street financial institutions that offer many of the same services as banks.
What are Building Societies?
Building societies operate in the United Kingdom and in the Commonwealth countries of Ireland, Canada, Australia, New Zealand and Jamaica. In many ways they act as high street banks: depending on the society they can offer equivalent services including the provision of bank accounts (both current accounts and savings accounts), overdrafts, credit cards, loans and mortgages. When a borrower or saver approaches a building society it is important to check what they offer, however, as some building societies, especially the smaller ones, do not provide a full range of services (though most act as lenders). That said, most building societies specialise in mortgages, and can often provide competitive interest rate quotes for mortgage loans and associated services.
How do Building Societies Differ from Banks?
The main way building societies differ from banks is in their method of organisation. Rather than being private companies or public Limited Companies owned by shareholders they are mutual organisations owned by their members. Since most customers that have an account with the building society are classed as members (including current account holders, mortgage account holders and credit card holders), this means that most account holders are counted as owners of the building society. Members of building societies are entitled to vote in the society’s Annual General Meeting (AGM) on such matters as the election of directors and on any resolutions are motions that have been put forward; in some cases they may also be entitled to a share of the profits of the society. Since mutual organisations usually do not seek to make high profits, however, preferring to concentrate on stability, payments that may be made in distribution of profits tend to be small: any operating profits made are usually reinvested in the organisation rather than being paid out to members. In general, this has also meant that building societies build up less corporate debt than banks.
Another way building societies differ from banks is in how they deal with accounts. Historically, building society accounts have had roll numbers to identify different accounts, rather than account numbers and sort codes as is the case with bank accounts. The reason for this is that in the past building societies were not part of the UK clearing system, the banks’ system for processing financial transactions. Now, however, the majority of building society accounts have a sort code and account number as well as a building society roll number, which allows payments to be made to other UK bank accounts.
Demutualisation of Building Societies
In recent years, a number of building societies have undergone the process of demutualisation. This means that they have stopped maintaining their status as mutual organisations and have listed themselves on the stock exchange allowing any investor to buy shares in them. As part of this process, society members have received payments of thousands of pounds.
The reason for this change was that, after legislation allowing them to demutualise more easily was passed, many building societies saw the opportunity to turn themselves into banks, which would make it easier for them to expand and focus on increasing profits. While some investors have welcomed this trend, many supporters of the building society model are disappointed as it has led to a large reduction of the number of building societies in the UK: whereas once almost every large town had its own building society, now there are less than fifty in the whole country. This has meant many communities no longer have a lender with special local knowledge, as was once the case in most towns and cities.