The mutuals strike back

Building societies that didn't become banks are launching a campaign to win accounts from those who did. Should you switch? Nic Cicutti reports

Should you sell or keep your free Alliance & Leicester, Halifax and Woolwich shares after flotation? And if you decide on the latter, what are the best options to choose from? Although this issue is uppermost in the minds of almost 13 million former and current members of these institutions at present, there is another - potentially more important - question to confront: now that you have the free shares, should you keep your mortgage and savings with the same institution?

Building societies that have decided to stay mutual have been waiting for this moment for almost two years. They have watched as millions of Halifax, Woolwich, Northern Rock and A&L members were locked into their existing accounts for fear of missing out on the pounds 18bn free share bonanza. Now the gloves are off, and many societies are hoping to win a slice of business that was in effect being denied to them.

Among those hoping to win savers is Coventry Building Society, which last week raised the already competitive rates on its First Instant and Postal 50 accounts. For the Postal 50 Account, rates will rise by 0.6 per cent on deposits of pounds 1,000 to 0.25 per cent more on sums from pounds 5,000. Its First Instant account reflects the same trend.

Martin Ritchley, chief executive at Coventry Building Society, says: "We believe that there are many people who have been locked into uncompetitive rates for a long time. They have gained their free shares now and it is clearly time for them to consider switching.

"At the Coventry, we have devised a strategy aimed at persuading a sizeable number of former building society members both that it makes sense to come back to a mutual, ourselves in this case, and the time to make the move is now."

Other societies are also limbering up to win new customers - and to keep the ones they have. Nationwide Building Society, the largest remaining mutual, has launched a telephone-based price challenge, in which callers can find out whether the rates they earn from de-mutualising societies can be bettered. Nationwide claims that in almost all instances it can beat the "floaters" hands down.

Bradford & Bingley, one of the loudest pro-mutual societies, recently launched a pounds 100m annual "loyalty package", aimed at both its own and prospective new members. Among the pledges it is making is that its savings rates will be at least 0.25 per cent higher than those paid by de-mutualising competitors on key accounts.

Bradford & Bingley also expects to maintain the existing 0.25 per cent gap in variable mortgage rates between itself and rivals, while a further 0.2 per cent is being lopped off rates for borrowers of more than two years' standing. The society claims that compared to the de-mutualisers, its "0.25 per cent cheaper" pledge would give savings of pounds 900 over seven years to someone with a typical pounds 50,000 mortgage. The 0.2 per cent cut in the standard variable rate makes home loans even better value.

The mutuals' new-found aggression, which is strongly backed by a revitalised Building Societies Association, their trade body, is bolstered by fresh research from Which? consumer magazine. The latest issue shows how both savers and borrowers who have stayed with de-mutualising societies have lost out where both savings and mortgage rates are concerned. The magazine gives a range of examples. Between April 1996 and March this year, National & Provincial borrowers have paid pounds 247 more on a pounds 60,000 loan than their counterparts with the Nationwide. Bristol & West mortgage borrowers, whose society is being taken over by Bank of Ireland, will receive pounds 250 in free shares when the deal goes through. However, on a same-size mortgage they have paid pounds 222 more than a Nationwide borrower over the same period.

Nor is the argument that competition in the free market and ending the constraints of mutuality will automatically lead to greater competition supported in practice. Cheltenham & Gloucester, which was taken over by Lloyds Bank in 1995, is a case in point. The former building society pledged that its rates would remain 0.25 per cent cheaper than its main competitors, most of them mutuals at the time. Last year, this pledge was abandoned. In fact, says Which?, since April last year C&G's rates have been above those of Nationwide, Bradford & Bingley and Yorkshire in most months.

Further evidence of this disparity comes in a table from MoneyFacts, as shown here. For standard variable-rate interest payments in 1996, the five cheapest institutions are all building societies.

The table shows something else: of the five bottom societies in the list of the 30 biggest lenders, four are also building societies - which shows that even with a mutual you must be prepared to shop carefully.

Still, as the second table from MoneyFacts demonstrates, mutuals will generally offer better deals than their de-mutualising counterparts, though not across the board.

One hopeful sign that the "neo-banks" may have woken up to the threat from their mutual competitors came earlier this month from the Halifax. The society, which will become a listed company within the next few weeks, launched its own massive loyalty package in a bid to prevent post-flotation desertions. Among the deals on offer to those who stick with the Halifax are discounts on personal loans, special rates for existing mortgage customers who move home, up to 15 per cent off the cost of holidays booked through Halifax Holiday Discounts, and a free financial planning service.

Gary Marsh, a spokesman for the Halifax, denies that the loyalty programme has been devised specifically to combat the threat from other mutuals. But he accepts that the better rates on offer from mutuals - and major banks, he argues - are part of the competitive process to which Halifax must respond. "We are keen to show our members that we will continue to offer them a good deal and all-round service and that it is worth them remaining with the Halifax irrespective of where the competition comes from."

If competition should hot up, as many mutuals are hoping, savers and borrowers will benefit from it in the months to come. If not, there is no question that they will be better off looking to a mutual for their needs. Over five years, the difference - which may come to thousands of pounds - is definitely far too large to ignoren