The proposed demutualisation of Liverpool Victoria is proof the city still needs reform. It demonstrates that not all the right lessons have been learned from the financial crash in 2007/8 and that the Bank of England, the Treasury and our other regulators have left a disturbing weakness in their effort to prevent such a devastating financial crash from ever happening again.
The demutualisation is similar to those that took place before the crash, in that a lack of access to capital is the claimed justification. This time, too, the customer owners of the business are being told little more than the bare minimum about board and management plans for their assets. Similarly, too, it appears some stakeholders will do extremely well out of the deal; it’s difficult for example to see Bain Capital’s purchase of LV as anything other than a no-brainer for them.
One of the major traits the banks and other financial firms that got into trouble in 2007/8 largely shared was that they were all traditional shareholder companies, competing against each other to keep big investment firms who owned them happy, prioritising the next profits announcement, taking ever riskier gambles with products and revelling in high salaries and even bigger bonuses.
By the time of the crash what these big city giants had done was to swallow up other financial services businesses; sometimes a smaller bank, a building society or other financial mutual that had demutualised a few years before. No one really stopped to challenge whether the loss of smaller- and medium-sized firms or the demutualisation of so many building societies was a good thing.
The role that different types of financial services businesses play in keeping markets honest, in protecting customers by ensuring big firms have to compete properly on price and quality as opposed to just using brute market power, have rarely been acknowledged by regulators or ministers.
The inquiry into LV’s future run by the all-party parliamentary group for mutuals discovered, remarkably, that the Competition and Markets Authority and other regulators, notably the Prudential Regulation Authority, had never analysed since the financial crash whether either the demutualisations, similar ownership models and acquisition of smaller banks had helped fuel this extraordinary market dominance of such a small number of big banks – or indeed whether this shrinking of corporate diversity had contributed to the crash.
Like other businesses, mutuals are far from perfect all the time. But good mutual businesses have markedly different cultures. They are usually more long term in their thinking and not focused on short-term profit for shareholder gain. Indeed, there are no shareholders, so the owners are the customers and with the right management the customers long-term needs are paramount.
The law, as it stands, effectively incentivises the demutualisation of mutuals. With skilful presentation, seizing control and ownership of millions if not billions, is a realistic ambition for a determined team. And there’s rarely a strong team or indeed any team opposing demutualisation.
Most demutualisers, as now with Liverpool Victoria, have publicly claimed lack of access to capital. There are issues around access to capital for smaller mutuals (which ministers could easily resolve) but having just sold part of their business for £1bn and successfully raised another £350m from the city, LV’s claims here aren’t convincing.
Every demutualisation of a financial mutual in the last 35 years has been driven by the board and chief executive (not by the owners). They have never ended up poorer. Consumers do lose out, as has been seen in all insurance demutualisations. With new shareholders wanting returns, something must give and eventually it is quality of service and value for money to customers.
There is no evidence that demutualisation strengthens a business. Virtually every other demutualisation of a financial mutual has soon led to it being taken over. Would the scale of the financial crash in Britain have been as bad if Northern Rock and Halifax had stayed as building societies? Would there be more competition in banking and other financial services if there were more building societies, more financial mutuals and slightly smaller big banks? These are questions that should be exercising minds in the Treasury and the Bank of England as the future of Liverpool Victoria lands on their desks. Otherwise what next? With the big banks still dominant any demutualisation of a financial services mutual only makes genuine competition ever more illusory.