In an economic climate which is far from being the most favourable, although it has improved, the building societies movement is undergoing fundamental changes which will lead to a steep reduction in the number of societies as well as of the total assets and mortgage assets of the movement. Following the example set by Abbey National, a number of the largest societies are preparing themselves to become PLCs and banks. The original impetus for these changes came from the Building Societies Act of 1986, which made it possible for building societies to change their status and enlarge the scope of their financial services.

Building societies have been serving the British public for over two hundred years. They were founded as mutual societies the aim of which was to raise funds from their members and to lend them the collected funds for the purpose of buying or building a house which was used as a security for the loan. This activity developed into a major financial service offered by other financial institutions as well as by the building societies. By 1995, the amount of the loans secured on dwellings represented over 73 percent of the total national consumer loans. The building societies still have the largest share of this market: in 1995 the amount of building society loans secured on dwellings accounted for 47 percent of the outstanding loans of the personal sector borrowings. This is in spite of a decline in mortgage lending activity due, for the greater part, to the sluggishness of the housing market. Indeed, in 1995, the amount of loans secured on dwellings had declined by 11 percent in relation to the previous year.

As mentioned earlier, loans on dwelling secured by a mortgage thereon are offered by a number of financial institutions. In relation to these, the building societies still have the largest share of the market, on the basis of the gross advances for the year; in 1995 it stood at 59 percent whereas their nearest competitors, the banks, had 37 percent. However, it must be said that the latter increased their share of the market whereas the building societies lost some of theirs. The conversion of Abbey National in 1989 and the various acquisitions of building societies by the banks helped the banking sector to increase its market share. The shares of the other financial institutions, including insurance companies were minimal. Similarly, the public sector can be considered to be out of the competition, in accordance with official policy. In terms of loans outstanding, the situation is the same: the building societies have 57 percent of the market and the banks 36 percent.

As competition increased, the financial institutions, including the building societies, tried to be innovative in their products but basically, in so far as the mortgage business was concerned there was still only two basic methods of repayment. The first was the simple method of repayment which involves repaying part of the principal with the interest and the other was the endowment method. The latter involves taking an endowment insurance which is used at maturity to repay the principal, interests having been paid separately over the years of the loan. However, the endowment method which greatly in demand in the 1980s, saw its popularity decline as uncertainty grew as to the final amount of the policy.

The way the likely mortgagors obtain their loans has not changed over the years: the majority approach the potential mortgagee directly. A small number use the services of a broker and a still smaller number the services of insurance brokers or estate agents. The building societies as the institution which has the largest share of the market has a large distribution network. The large societies are represented in practically every high street in the kingdom. Nevertheless, there has been a decline in the total number of their branches - this is unfortunately part of their recent evolution.

The total number of building societies has been declining for a very long time. Some of them were not meant to be permanent, but were to be wound up when all their members had been housed. In 1990, there were 2,286 societies but by 1994, the number had fallen to 96. The number of branches which stood at over six thousand in 1990 had fallen to 5,566 in 1994. However, the number of shareholders which was of the order of 585,000 in 1900 had risen to over 38 million in 1994. Similarly, the number of borrowers which stood at 1.5 million in 1950 had risen to 7.4 million in 1994. In the process of consolidation by merger which took place over the years, contributed to a considerable increase in their total assets as well as their mortgage assets. The former stood at over £300 billion in 1994 and the latter at £237 billion - a far cry from the £60 million and £46 million which they has in 1990.

The building societies employ a large number of persons both on a full time and part time basis. For the period from 1989 to 1994, their number increased, although there was a fall of the order of 4 percent in that last year. This seems to be contrary to the trends in national employment where during that very same period, full time employment declined.

Like most sectors of the economy, the building societies movement is dominated by a small number of very large and large societies. The ten top societies in the movement accounted for nearly 83 percent of the total assets of the movement and over 86 percent of the mortgage assets. The largest of these societies, Halifax, made larger by its merger with the Leeds, accounted for 32 percent of the total assets and 33 percent of the mortgage assets of the movement. In second place by a long way, is Nationwide with 12 percent and 13 percent respectively. The smallest of the ten top had only 2.2 percent of the total assets of the movement and 2.4 percent of the mortgage assets. This would indicate that the share of the other building societies are also relatively very small.

The trend towards conversion to PLC status has been mentioned and it would seem that 1997 will be a particularly active time for this operation. Four of the largest, including the Halifax are planning to convert and one of the smaller among them is to be bought by a bank. Since these control such large shares of the total assets and of the mortgage assets, their departure from the ranks of the building societies movement is bound to have a very severe impact on its future.

There is a very large body of laws and regulations affecting the building societies and these appear to be in a constant state of revision. During 1995 and 1996, a number of amendments and supplements have been laid before Parliament and some of these have already been implemented. There have been changes in the amount societies could raise from the wholesale sector and they have been given the freedom to make loans unsecured on land to corporate bodies, they also may own an insurance company. One of the new bills before Parliament would in effect allow building societies to carry out any activity which is on their memorandum, provided they adhere to some basic rules regarding loans on residential property.

The same high degree of competition which is forcing change in the movement is causing the societies to spend considerable amounts in advertising. In most of the personal finance magazines, there are a large number of advertisements and it is the same in some segments of the daily press. Some building societies advertise heavily on television. However, at the time of conversion or merger, expenditure on advertising rises considerably. A prudent estimate would put the amount spent on advertising during 1995 at over £12 million for some of the largest societies. The overall bill for that year could have been of more than £75 million.

A comprehensive survey carried out by the National Opinion Poll (NOP) for MAPS was carried out during November 1996. The question asked was which institution would the respondent choose to invest or deposit savings and which one would be used for a mortgage. The range of institutions included banks, insurance companies, specialist lenders and other types of financial institutions. The answer in both cases was unequivocal: the building societies came first and this confirms that the movement is still held in high consideration by the public at large.

To complete the report, future trends are examined and it is obvious that they are as mentioned above: the number of societies as well as that of their branches will decrease on account of continuing consolidation and the conversion of the larger societies. The departure of the largest societies will affect the amount of the mortgage assets of the movement as well as of its total assets. In the medium term, that is for the nest five years to 2001, it is expected that the number of advances would decline slightly every year, but that the gross advances would increase slightly. There is no indication in the economy of incipient increase in the growth rate or in the yearly number of property transactions. It is foreseen that the same low rate of growth will continue and that it will set the trend for the building societies.