Press Release

Northern Rock – lessons for mutuality?

18 February 2008

Comment from ACCA Chief Executive – Allen Blewitt

The collapse of Northern Rock into nationalisation yesterday marks the climax of a dramatic u-turn in its fortunes in the two years since a Commons inquiry by the All-Party Parliamentary Group on Building Societies & Financial Mutuals reported on the sector, ACCA (the Association of Chartered Certified Accountants) observes.

ACCA was asked to write the report, entitled “Windfalls or Shortfalls?” for the APPG’s Inquiry, to ensure there was an independent assessment of whether demutualisations had given value for money to consumers who had lost their mutual holdings in return for one-off payments.

The report concluded that while the answer to that question was unclear, the overall performances of financial institutions which had demutalised in the 1980s and 1990s had been worse after their conversions in terms of costs, and non-financial issues such branch closures.

The only exception to this mentioned by the report was Northern Rock, whose response to the Inquiry was a firm espousal of the benefits of demutualising because of the availability of external capital that a plc structure allowed. It drew the MPs’ attention to its impressive success in the decade from 1997-2006, explaining:

“The key to being able to grow quickly after we demutualised was the access we were given to new funding and capital markets. The previous ‘building society’ model depended primarily upon retail deposits to fund mortgage lending. The UK retail deposit market is not able to generate sufficient new funding at an economic rate for our growth in mortgage lending. Since 2000 we have been able to tap into residential mortgage-backed securitisation markets to fund a growing proportion of our lending. These funds have been raised increasingly in Europe, the USA and the Far East.”

The 2006 Inquiry reported that “Northern Rock appears to be the principal success story of the demutualisers” and had almost single-handedly made, if not proved, the benefits of external capital. The Skipton Building Society countered that “there is not a huge need in a well-run mutual to raise capital because it will generate its own capital that it needs to match its business plans.” Two years on, when the downside of Northern Rock’s ventures into the US securitisation markets have become dramatically clear, it seems the latter view was more prescient. 

The Inquiry concluded that while the mutuals had been demonstrably successful, it needed the biggest institution, Nationwide, to continue to prove that the mutual model was sustainable on a larger scale if the perceived attractions of the plc model were not to lead to more conversions. In the US too, the Inquiry found evidence that mutuals had outperformed the demutualisers. Northern Rock’s fate will surely give would-be demutualising financial institutions pause for thought.