Building Society

Published Apr 6, 2024

Definition of Building Society

A building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially savings and mortgage lending. These societies are similar to banks but differ mainly in their ownership structure; while banks are typically owned by shareholders with the aim of making profits for them, building societies exist solely for the benefit of their members.

Origins and Development

Historically, building societies emerged in the late 18th century in Great Britain. They were initially established to help members save money collectively to buy or build houses, reflecting their name. Over time, their scope expanded, and they began offering a wide range of financial services similar to traditional banks, albeit with a focus on home ownership financing.

How Building Societies Operate

Building societies accept deposits from members, which they then use to provide mortgages to other members wishing to buy a home. The profits generated from the interest on these mortgages are used to pay interest to savers, cover operational costs, and provide services to members. Since they are mutual organizations, any surplus profits are often returned to members in the form of better interest rates or invested back into the society to improve services.

Benefits and Limitations

One of the main benefits of building societies is their focus on member benefits rather than shareholder profits. This can lead to more competitive interest rates, lower fees, and a more personal level of service. However, their size and mutual status can also limit their capacity to raise capital and sometimes limit their competitiveness against larger, shareholder-owned banks.

Regulation and Protection

In the United Kingdom, building societies are regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) to ensure they operate safely and soundly, protecting members’ interests. Similar regulatory bodies oversee building societies in other countries where they operate.

Frequently Asked Questions (FAQ)

Can anyone join a building society?

Typically, yes. Membership to a building society is usually open to any individual who deposits money into a savings account or takes out a mortgage with the society. Membership gives you the right to vote on certain decisions affecting the society.

What happens if a building society fails?

In the unlikely event of a building society facing financial difficulties, protection schemes such as the Financial Services Compensation Scheme (FSCS) in the UK provide a safety net for savers, guaranteeing the return of deposits up to a certain limit.

How does a building society differ from a credit union?

While both are mutual organizations focused on the benefits of their members, building societies are typically larger and offer a broader range of products and services. Credit unions are usually smaller, serve a more limited membership often based on a common bond, and focus more on savings and loan products.

Do building societies only offer services related to housing?

While providing mortgages and promoting home ownership remain core activities, many building societies now offer a wide range of financial services, including savings accounts, insurance, and personal loans, similar to traditional banks.

Can a building society convert to a bank?

Yes, a building society can convert to a bank, subject to fulfilling legal requirements and obtaining member approval. This process is known as demutualization, where the mutual society becomes a company owned by shareholders. However, this shift moves the focus from member benefits to shareholder profits.

In conclusion, building societies play a crucial role in the financial sector by prioritizing member benefits over shareholder profits, especially in the realm of home financing. Their unique structure, history, and service offering distinguish them from other financial institutions and provide valuable alternatives for savers and homebuyers alike.