Purpose of a Building Society Essay Example

Purpose of a Building Society Essay Example Purpose of a Building Society Essay Purpose of a Building Society Essay Abbey National diversified further into money market and offshore banking by buying Cater Allen Holdings Plc for 195 million. Cater Allens main businesses are in wholesale money markets and offshore banking; other businesses include an onshore retail banking operation and a major execution-only sharedealing operation  Diversification towards the Internet Banking sector  Cahoot, Abbey Nationals separately branded e-bank, went live in June 2000 offering a competitively priced credit card and current account. cahoot has links with a number of non-financial retail and service partners to offer its customers a range of lifestyle products and services. In August 2001 Abbey National acquired Scottish Provident, to give Abbey National a leading position in the UKs individual protection insurance market.  Inscape  Abbey national diversified its activities to Investment Management.Inscape, Abbey Nationals new investment management business, was launched. The service is for the new wealthy a growing market of approximately four million people in the UK who have at least 50,000 to invest. Inscape delivered its services through a new network of advice centres where clients can meet dedicated relationship managers for face-to-face professional advice, seven days a week. This was complemented by a true multi-channel proposition of internet, telephone and postal support. Abbey National from being just a building society which offered savings account and Mortgage had diversified its activities to fields of General insurance and life assurance,offshore banking,Money Markets Commercial banking including asset financing, commercial lending operations, securities financing and risk management and even Car Finance and Leasing.  Abbey Nationals decision to convert to a Plc. is appropriate and timely.After the Big Bang(1983) Abbey National was facing tough competition from banks, centralised lenders and even high street retailers who were offering a range of financial products and services.Conversion to a Plc helped Abbey National to diversify its activities to the above mentioned field rather than being confined to the savings and mortgage Industry. Banks began to compete with building societies for home loans and 1981/82 gained a considerable share of the mortgage market for new homes. But profit-maximising banks would not be able to compete profitably with mutual-help nonprofit-making building societies in providing mortgages.  At that time the Council of the Building Societies Association was made up of Chief Executives of something like 30 building societies, including the ten largest. And in 1983 a working party of the Building Societies Association recommended proposals for changing the role of building societies. They were seeking wide-ranging powers to extend their operations into areas such as banking, insurance and hire-purchase. Implementing many of their proposals would overturn 200 years of tradition.  Where such activities would involve a degree of risk they proposed to operate only through subsidiary companies. Presumably to protect parent societies from having to pay the full debts of their subsidiaries if the subsidiaries became insolvent. The activities of building societies are restricted by legislation. When banks entered the mortgage market, building societies pressed for changes which enabled building societies to compete with banks for services offered so far by banks alone.  Consumers benefited considerably from this. It was building societies which introduced free banking and interest-paying current accounts and forced at least some banks to reduce charges and treat their customers with more consideration. Most building societies now compete to some considerable extent with banks and insurance companies, providing loans and insurance policies. The sale of mortgages in the UK is a à ¯Ã‚ ¿Ã‚ ½500 billion business. Huge. There are tens of thousands of intermediaries and advisers offering thousands of mortgages from hundreds of lenders. New entrants to the market are bringing with them technology and process that have driven down the costs of running a mortgage business and thereby making products more competitive. Lenders making their products available through low-cost distribution channels such as the Internet and telephone are further enhancing this effect. Meanwhile, image conscious lenders are working together to clean up the industry as they try to shed the stigma sometimes attached to operating in their industry. In converting to plc status, a society would become a public limited company (plc), subject to all the regulations imposed by the Companies Acts and, being a deposit-taking institution, it would require a banking licence from the Bank of England. Thus conversion meant converting to a bank.  There are approximately 70 building societies in the UK, with assets of over 185 billion. They employ over 34,000 staff who work across the country in head offices and 2,100 branches, serving more than 15 million savers and over two and a half million borrowers. Building societies currently account for 19% of all outstanding residential mortgages. On the savings side, building societies hold about 18% of all personal deposits.  Top 15 Building societies asset wise  The main legislation governing the sector is the Building Societies Act 1986 (amended in 1997) which requires building societies to have as their main business making residential mortgage loans funded by the savings of members, and describes how they are to be regulated in order to ensure that members money is safe. Each society has a set of rules that governs the relationship between the society and its members. Along with banks, building societies also voluntarily follow the Banking Code, which sets minimum standards of good banking practice and customer service, and the Mortgage Code, which sets good mortgage lending practice. Purpose of a Building Society  Section 5(1) of the 1986 Act provides that a building society may be established under the 1986Act if (and only if)   Its purpose or principal purpose is that of making loans which are secured on residential property and are funded substantially by its members  Residential property is defined as being land at least 40% of which is normally used as, or in connection with, one or more dwellings, or which has been, is being or is to be developed or adapted for such use. The 1997 Act gave building societies the freedom to pursue any activities set out in their memorandum, subject only to compliance with the revised principal purpose introduced by that Act, the lending and funding limits, the restrictions on powers and appropriate prudential requirements, referred to below. In essence, it is the principal purpose, the nature limits and restrictions, together with the fact that most of a building societys customers are its members, which retain a building societys fundamental character, and differentiate it from other financial institutions.  A new building society can be established by ten or more people, and the capital which they have to put into the society is a minimum of à ¯Ã‚ ¿Ã‚ ½1 million (to be held in permanent interest bearing shares (PIBS).So it is relatively easy to start a Building society. The number of Building societies approximately 70 is realistic because they all function purely according to the banking codes set by Banking Code Standards Board and the Mortgage Code set by the Mortgage Code Compliance Board. Building societies whether bigger or smaller are regulated by the Financial Services Authority (FSA), under the Financial Services and Markets Act 2000. The role of the regulator is to ensure societies are run in a safe and prudent manner. All Building societies are required to participate in ombudsmen schemes.