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Is a building society a better place for your money than a bank?
Yes, says Michelle Slade - Press & PR officer, Moneyfacts Group
When you become a borrower or a saver with a building society, you become a member - which means you get a say in how things are run. Unlike banks, with no shareholders constantly looking for large dividend payments, they do not need to take excessive risks. Building societies are not totally profit driven. As their customers are their owners, the service they receive in branch is second to none, with 52% of customers saying they would recommend their building society compared with 40% of bank customers.
Until recently, no building society had failed - if a society ran into difficulty another would provide assistance. Recent mergers are testament to how quickly a building society will act if another is in trouble in order to protect members. However, when the Dunfermline ran into trouble, no other society was in a position to help.
The options that were open to the Dunfermline were unlikely to be popular with investors, so instead they had no choice but to ask the Treasury for help with the Nationwide picking up the more profitable assets of the society.
Building societies are limited to raising no more than 50% of their funds on the wholesale money markets with, on average, societies only raising around 30% of capital this way. The remaining funding comes via their savings book and, as a result, their members enjoy much more competitive savings rates than those on offer from banks. Currently, 62% of the Moneyfacts savings best buys are provided by building societies. What's more, their deals come with fewer restrictions than those from the banks - for example they don't require you to place additional money in other investment products to secure the top rate. Additionally the best rates carry a healthy shelf life. In a recent Moneyfacts consistency survey, building societies took 79% of the places available, with the Principality being the most consistent provider.
When it comes to mortgages, many smaller societies will only lend in their local area. This means they will know, for example, if the area in which a borrower is buying a property has seen growth and can make individual decisions over how much of the property value to lend, rather than having a one size fits all policy. These extra provisions for risk mean they are seeing less of their residential mortgage debt turning bad.
The Nationwide, Britannia and Yorkshire all regularly feature in the best buys, with the fees charged for arranging mortgages historically much lower than those charged by the banks.
The building societies can't compete on the same scale of the banks in the mortgage market but by doing so they are protecting their savers.
We can be confident that when the boards of each society have met to discuss where to pass on the recent base rate reductions, they have had the best interests of their members at heart.
No, says Kevin Mountford - Head of banking at Moneysupermarket.com
"We have an outstanding record for safety," the Dunfermline told the Guardian in October. "The society is a financially robust, profitable and well-capitalised institution and has absolutely no exposure to subprime lending. Our arrears and provision levels are consistently below the industry averages."
Could any other bank or building society boast such a glowing report? And therein lies the financial industry's major problem - credibility.
Just five months after making that statement, the building society is
being bailed out by the government and part-sold to a rival. So, who can we believe?
After the collapse of Northern Rock, conservative building societies maintained their reputation as the "old reliable" of high street finance, but in the past year it has been these mutuals feeling the merger and takeover heat even more than the banks.
Leading this charge has been the Nationwide, which swallowed the Cheshire and Derbyshire - and has now taken over the best bits of the Dunfermline. Is any part of the UK safe from this Nationwide marauder/white knight? It has been starting to act more like a bank in recent times: its current account savings rates have disappeared, it has been slow to pass on mortgage rate cuts, and it is introducing fees for overseas credit and debit card transactions - albeit at a lower level than most of its rivals.
The question of whether your money is better served in a bank or building society depends on the individual institution. Northern Rock was a bank with a high-risk strategy more akin to playing the blackjack tables in Monte Carlo than traditional banking - and the Dunfermline also fell foul of some poor decisions.
But building societies can no longer claim the moral high ground now that their own problems are becoming commonplace. Their number has dwindled from 55 to 50 in the past year, throwing into question the long-held belief that building societies are more conservatively managed and, as such, will be around forever. With the Dunfermline, the industry took over the positive aspects of a failed operator while the taxpayer is left holding the rubbish.
Sadly the consolidation we are seeing across brands isn't doing much for consumers - as highlighted by the Scarborough's plan to remove its savings range.
Furthermore, building societies have lost their competitive edge over the banks. Three banks, Barclays, NatWest and Alliance & Leicester, were all at the top of our best buy cash Isa tables at the time of writing. The best Isa from a building society - Manchester - has an interest rate 0.86% below the best bank.
The banks fare better for mortgages too with the best rates on a two-year fixed-rate, based on a £100,000 loan, come from HSBC, RBS and Abbey.
So can building societies still attract your savings? Yes, but they now have an even bigger fight on their hands.
• Have you had second thoughts about staying with your building society? Do you think banks could now offer a better deal for your savings and mortgage?
Write to Cash, The Observer, Kings Place, 90 York Way, London N1 9GU, email cash@observer.co.uk or join the debate online at guardian.co.uk/money
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