BUILDING SOCIETIES. The name "Building Society," once entirely descriptive, has become almost a misnomer as the functions undertaken by these societies have developed and become modified. A few unincorporated societies may still build houses, finance building operations, or acquire property, but the great incorporated societies do not any longer undertake these tasks. The title fails to describe their actual purpose, and the most authoritative textbook describes the building society as "a combination of investors and borrowers operating under a measure of government control to promote the ideals of thrift and home-ownership. The investors—who are either member shareholders or merely depositors—supply the funds from which house-purchase loans are made. The difference between the rate of interest received from the borrower and that paid to the investor represents the margin which enables a society to meet its management expenses—a very modest figure in most cases— as well as to build up and maintain adequate reserves." The society derives its funds from depositors and shareholders. It has financial relations with three classes of people, viz., savers of small weekly and monthly sums, depositors and shareholders with more substantial interest, and its borrowers. To a limited degree it is like a bank, but its lending powers are much more circumscribed. Loans are made for (I) the purchase of existing premises, (2) assistance in having houses built or extended, and (3) paying off existing mortgages.
In the large societies there is a difference of approximately I% between the rate of interest paid and that received, and this forms a sufficient margin for administrative expenses. Develop ment in the movement during the early part of the loth century was so rapid as almost completely to change its character, and this fact has, in many cases, outdistanced the popular concep tion, which still tends to regard the movement in the light of the characteristics it exhibited late in the i9th century. For example, the earliest societies were all terminating societies, con sisting of a limited number of members and ceasing to exist when all had participated according to their agreements. Some of these still exist, but by the building society movement is understood now the permanent societies which are overwhelm ingly important. In these there is no legal limit to the number of shares or to the general expansion. Speaking generally, ter minating societies are of historical interest only.
History of Development.—It was long supposed, and indeed indicated in earlier editions of this Encyclopædia, that 1795 in Birmingham was the starting point, but the researches of Mr. Harold Bellman have revealed the fact that a society was es tablished in Birmingham in 1781 on a large scale.
"Dec. 3, 1781—Proposals for establishing a Society for Building on Lands belonging to William Jennings, Esq., to continue certain streets in the Hamlet of Deritend, called Bradford Street, Alcester Street, Lombard Street, Moseley Street, Birchall Street, and Cheapside ; and open certain new Streets, to be called River Street and Long Bridge Street." (The full conditions are set out by Langford in his Century of Birmingham Life, vol. i. p. 201.) Other authorities have suggested the origin at Kirkcudbright in 1809. The movement originated about the same time as friendly and co-operative societies, and building societies were first certified under the Friendly Societies act of 1834. Their rapid rise led in 1836 to a special act which extended the friendly society regulation to them, binding all members of a society by the rules which were certified by especially appointed officers who gave security. Provision was made for control by a com mittee of management. The society's property was vested in trustees empowered to bring and defend actions and to settle disputes by arbitration. Exemptions were given from stamp duty and usury laws. By 185o over 2,00o societies were registered in the United Kingdom, many of them marked by glaring defects in their financial arrangements.
About 1846 the idea of permanence was first developed in practice, because it was recognized that there were many non borrowing members who were really investors and it was of no significance at what point they began to invest. In 1871 a Royal Commission enquired into and reported on their working, and in 1874 a consequential act was passed that was the founda tion of present practice. Under this act the liability of members was limited to the arrears due from them for the amount owing under mortgage. New societies could no longer be formed un incorporated, and in 1925 only 39 of the unincorporated societies survived, while there were 1,088 incorporated societies.
One effect of incorporation was that members and all who derive title through them were relieved from having to trace that title through the successive trustees of a society. Power to borrow money was also expressly given to the societies by the act, but upon two conditions : that the limitation of liability must be made known to the lender, by being printed on the acknowledgment for the loan, and that the borrowed money must not exceed two-thirds of the amount secured by mortgage from the members, or, in a terminating society, one year's income from subscriptions. Previous to the passing of the act (or rather to the judicial decision in Laing v. Read, which the clause of the Act made statutory) there had been, on the one hand, grave doubts on high legal authority whether a society could borrow money at all ; while, on the other hand, many societies in order to raise funds carried on the business of deposit banks to an extent far exceeding the amounts used by them for their legitimate purpose of investment on mortgage. The act stipulated that if a society borrowed more than the statute authorized, the directors accepting the loan should be personally responsible for the excess.
The Starr-Bowkett societies which at one time were regarded as typical of the movement (over i,000 being established) are no longer considered typical. They existed to provide advances to members, free of interest, and in practice advances were made to borrowers without specified interest. Upon the accumulation of a special sum it was balloted to one of the members, who repaid it by instalments over an agreed period. The successful member often had the right to sell at a profit, but this gave rise to many difficulties and was later modified.
Various undesirable practices, and the failure of the famous "Liberator" in Oct. 1892, led to further legislation which was designed to secure the position of the large majority of societies, that were soundly administered, and to prevent their reputations being tarnished by the few which were less carefully conducted. The act of 1894 required all incorporated societies to make a return on a prescribed form of : (I) Individual mortgages in excess of £5,000.
(2) Properties which had been in the possession of a society for more than 52 months through default on the part of the mortgagors.
(3) Mortgages more than 12 months in arrear.
Since this act public confidence has been steadily restored, dis turbed only by the failure of the Birkbeck Bank in 1911. In the case of the "Liberator" failure in 1892, it ought to be clearly recognized that it had long ceased to perform normal building society functions. In the hands of Jabez Spencer Balfour its funds were applied without scruple to all kinds of speculative enterprises. The frauds excited public indignation and disgust, and the widespread distress was met by a public relief fund to which £ 114,000 was subscribed.
The Birkbeck failure was a clear illustration of the necessity for adhering strictly to the rules of the movement and for non indulgence in banking business. In this case the total mortgaged assets were only three-quarters of a million, whereas the other assets accounted for 11I millions. It was not an incorporated society; it was not worked under the building societies acts, or subject to their regulations. Its difficulties arose not from its building society business, but from its bank business. The official receiver reported that the failure was due to shrinkage of securi ties and lack of banking experience.
The capital of incorporated societies fell from S4 millions in 1887 to 43a millions in 1895. The recovery began in 1898, and since the setback in 1911 there has been a steady forward march to the end of the World War, with a subsequent development of remarkable proportions.
Control and Administration.—The chief registrar of friendly societies prescribes the form of annual accounts for each society from which he compiles his abstract and report for parlia ment. The rules of a society, as approved by him, can be amended only subject to his approval, and he exercises a general supervision to see that the societies are acting within their powers.
A society's annual statement has to show particularly the number of mortgages and the amounts outstanding thereon, classi fied up to £Soo, then £500 to £i,000, from £1,000 to £3,000, and from £3,000 to £s,000. Details have to be given of repayments 12 months in arrear, or property in possession, and mortgages in excess of £s,000. The form of account is by no means ideal, but it is the result of compromise and historical evolution.
Very exacting rules are laid down for the auditors. On the investment side building societies are practically confined to trustee securities.
The ultimate authority of a society rests in its general meeting, which elects directors and auditors, and one of the latter must be a public accountant. It is a common practice for the directors to have an audit of their own.
Arrangements for Investment—It is usually claimed that investment in a well-run society is free from risk of depreciation, with a good yield of interest and easy realization. The securities, apart from gilt-edged securities, are carefully selected in individu ally investigated mortgages. First of all, there is an ad hoc specific valuation, with a definite margin between this and the advance, and then the advance is steadily and rapidly reduced so that, by the monthly or quarterly repayments, the margin of safety on each mortgage is rapidly increased. Moreover, the personal covenant of a borrower of repute stands behind. Deposit or loans to a society are limited to two-thirds of the mortgaged assets and are not based upon securities. Shares are held either as fully paid or partly paid, the latter being specially suitable for small saving by instalments. The rate generally paid in the south of England on share capital is 41 or 5% free of tax, but 4 to 4i% is common in the north.
There are no expenses to the investors for brokerage, com mission, or stamp duty, and fines for non-payments of subscrip tions on partly paid shares are leniently administered. Special arrangements have been entered into with the Inland Revenue department, whereby the society pays income tax direct on a conventional fraction of the share deposit interest, the basis of which is an assumption that half the recipients are exempt and half have incomes liable on the lower ranges of tax. A part of the arrangement generally adopted is that the payer of mortgage interest to the society is not under the ordinary obligation of a borrower to deduct tax from the interest and account for it by direct payment to the Revenue. It will be noted, of course, that investment by way of deposit or share capital is in no way limited to people interested as borrowers. The borrower is usually required to find the minimum amount of of the society's valuation of the property. Short lease property, with its de preciation of value and risk of dilapidation claims, is rarely made the subject of mortgage. A borrower can obtain a higher advance if he deposits further collateral security, concerning which, however, practice and rules are rather complicated. At other times guarantees are given through insurance offices, but this practice is not of rapid growth. The borrower sends his survey fee and a small entrance fee in advance, and then upon final acceptance, on examination of the title, legal fees become payable. Advances are usually repayable by fixed monthly in stalments of principal and interest spread over varying periods, and the borrowing member may choose any term from five to 15 years, or even more, in discharging his liability. This system, which frees the borrower from the trouble of making monthly calculations of the amount due, also permits of a larger proportion being lent than by any other method, as the amount of the advance is being gradually reduced throughout the whole period for which it is granted.
Every encouragement is given to the borrower to pay off sums in addition to his monthly liability. On such extra repayments of principal interest ceases to be charged, and the sums may be employed to reduce either the total of the monthly payment or the term of repayment. Favourable circumstances sometimes enable the mortgagor to repay the whole of the balance, and this is usually permitted, with the provision either that a specified (and usually short) notice is given, or that interest for the same period is paid in lieu of notice (H. Bellman, Building Society Movement, P. 45).
No borrower is actually tied to the mortgaged property during the whole term of repayment, for he can arrange a sale and clear up the outstanding balance. On the other hand, he is under no risk of a mortgage being called in, and there are, therefore, important differences between his position and that of an ordinary mortgagor. In practice great care is taken in the admission of borrowers.
Of late years a special insurance arrangement has been entered into with many societies whereby, for a single premium, the whole of the outstanding balance in the event of the payer's death is remitted, thus avoiding any difficulty to the dependents in keeping up payments. Some 1 so societies have now adopted this scheme.
Economic and Social Position of the Movement.—Since the World War the movement has entered upon an altogether new stage. The special conditions attaching to the building in dustry for several years prior to the war, the abnormal circum stances of the five years' war period, the natural incidence of the increase of population arriving at the adult stage—all corn bined to make a house shortage of extraordinary stringency. Even outside the actual wage-earning classes those who needed houses were great in number and insistent in demand. Those who had professionally supplied them on hire would no longer do so. Each would-be occupier had to supply his own demand and be come also an owner. In the vast majority of cases he was not himself possessed of the necessary circulating capital. The de mands for the available supplies of capital in other directions were enormous. In the absence of the building society move ment it is probable that in response to such pressure a large number of institutions would have sprung up to supply the need. They would have varied enormously in their resources and their regulations, in their probity and their wisdom and foresight. New and hastily improvised structures would have been suddenly sub jected to a vast and rushing flood of insistent requirements. It is fairly clear that out of such a situation must have come many failures, disappointments, and losses. But, as it was, the onrush was actually made upon a system of accredited institutions with traditional practice laid down on sound lines and with all the prestige of solid and steady progress, standing ready for their task. They had won the right to be trusted with this larger task, and they took the whole of the weight of it from the community without abating anything of their practised caution, but rev elling, rather, in the new opportunity of adapting their elastic organization to every reasonable fluctuation of human and com munal need.
See H. Bellman, The Building Society Movement, with an introduc tion by Sir Josiah Stamp (1927) ; The Silent Revolution 0928).
(J. S.)