Co-operative Financial Services and Britannia Building Society want to merge. Here's how it would affect customers, investors, staff, and the mortgage and savings markets.
Co-operative Financial Services (CFS) and Britannia Building Society plan to merge. First I'll explain a little about the two organisations. Then we'll consider what the merger means for their products, and the savings and mortgage markets. Then I'll consider how it'll affect existing customers, staff and investors, and what say you'll have. Finally I'll talk about its ethical values.
About CFS and Britannia
CFS is a co-operative and Britannia is a building society. Both are types of mutuals. Mutuals are owned by its members and customers, and they are mostly the same, including their missions to put members' interests first.
CFS includes Co-operative Bank, Co-operative Insurance, Co-operative Investments and the online bank Smile. It's part of the Co-operative Group, which also has a large retail presence and is the largest co-operative in the world.
Britannia assimilated Bristol & West in 2005, and is the second-largest building society in the UK after Nationwide.
CFS and Britannia say that between them they have 9 million customers, £70bn in assets, 12,000+ employees and 300+ branches. The group is already promoting itself as `a strong, fair and ethical alternative to banking plcs'.
The two groups will keep their separate licences with the FSA, meaning you'll continue to benefit from £50,000 of protection from each mutual under the Financial Services Compensation Scheme.
It could be that Britannia wants this merger to make it a bit sturdier too, as it only recently started offering prime loans after specialising in sub-prime and buy-to-let. However, both mutuals seem strong enough on the surface, and the huge confidence of the board is very persuasive. I expect Britannia's results in February to be unimpressive, but not frightening.
The effect on competition
The combined mutual should eventually be able to lend more. And the sooner the better!
On the downside, there'll be one less competitor on the market. But it's not a significant reduction in competition.
Mortgage lenders have to make a choice: are they going to offer worse lending rates and better savings rates, or worse savings rates and better mortgage rates? It'll be an easy choice for this mutual. Both tend to offer poor savings rates, but Britannia usually offers good mortgage rates. They'll likely continue to offer cheaper mortgages over higher savings. They can attract savers without paying much interest by being customer friendly and ethical. However, whack up the mortgage rates and people would leave, ethics be damned.
Existing customers
The effect on your products
It'll take a few years to get everything integrated and efficient. Customers won't see a change just yet. However, as soon as it can, the new group will want a single product range.
It expects to be better off by at least £60m a year from three years' time, and it says it wants to share some of that with its members through better interest rates. It also wants to improve customer service, and retain its British-based call centres.
The Standard Variable Rates are close, so consolidation shouldn't be a shock for borrowers in either mutual. Britannia charges 4.99% and CFS 4.74%.
Britannia gained almost _ of a million savers when it paid £150m for Bristol & West. By the end of 2006 it was boasting that it kept its promise that no customers would be worse off as a result, and that some were better off. I hope the same happens following this merger.
Will you get any money?
There won't be a windfall payment, as we've seen when building societies become banks.
Some of the £60m+ savings the mutuals reckon they'll make will go towards larger annual payouts, so you'll continue to share profits. This will be through dividend payments, just as CFS does now. Last July, CFS customers shared a record £6.5m dividend, although this'll likely be a lot smaller for the next few years.
For the moment you'll continue to earn rewards in the same way as you always have. Eventually everyone will join the Co-operative Group's reward scheme, which the group wants to expand to cover more products and to increase the potential points you can earn.
Investors in Britannia
The group will most likely convert Britannia's Permanent Interest Bearing Securities (PIBS) into perpetual subordinated bonds, unless there is new legislation to cover this unusual merger. Hopefully you won't see much difference.
Perpetual subordinated bonds are usually paid immediately after all other debt. You'd be paid every six months still. Like PIBS, they are paid gross, they can be held in ISAs, and the sell price is dependent on the market. They're regrettably just as difficult to sell. Holders will get no voting rights. We're awaiting more details on how PIBS holders would be affected.
What say do you have?
Customers will continue to have a say in running the larger mutual, we're told, and a big say on the future strategy. Both mutuals are proud of the structures they have in place to hear their customers - their owners - and to allow them to decide on the future direction of the organisation.
Britannia customers will get to vote on whether they want a merger.
The effect on staff
No branch staff will be made compulsorily redundant, the mutuals have announced, although some branches, where there are two in a town, may close. Some head office jobs may go.
The effect on ethical policies
The ethical policies of CFS will continue for the enlarged mutual without any watering down. If a business conflicts with its ethical policy, it will turn away request from loans and refuse to invest in it. It has policies on such things as human rights, the arms trade, genetic modification, ecological impact and animal welfare.
Will it happen?
The legislation that allows this merger to happen has just been put forward, and is expected to pass in March. If all goes to plan:
Britannia members should be sent details in March.
Britannia members will vote on 29 April at a general meeting.
The merger will take three years to settle.