1.2.3 The liberalisation of the financial services
The financial services industry prior to the 1980s was an environment of demarcation. Banks provided cheque accounts, overdrafts and loans. Building societies provided mortgages for home buyers and savings accounts for savers. Insurance firms provided insurance products. Although there were some modest overlaps in product offerings, the pattern prevailed of (informal) demarcation and clarity – in terms of where you went for a particular product.
A further feature was the nature of the relationships between the institutions and the public. These relationships were typically long-term and conflicted with the contemporary pattern where individuals move from one provider to another much more regularly in order to secure the best deal. If you were seeking to obtain a mortgage from a building society prior to the 1980s, the normal expectation was for you to have been a saver with the same building society for a period of time – thus paying at least lip-service to the original mutual concept of building societies. Even when a mortgage was approved, it was possible that you would have to effectively queue up for it rather than have the funds made immediately available to you. All of this is a far cry from the fluidity that now exists in the relationships between providers and product buyers. What changed this financial environment?
The overarching change was the liberalisation of the financial services industry that resulted from the Financial Services Act 1986, the Building Societies Act 1986 and the Banking Act 1987. These pieces of legislation provided greater freedom to banks and building societies to diversify their activities and to seek finance from the wholesale markets to support their lending. Subsequent years saw many of the larger building societies offer cheque accounts to customers, while banks moved more actively into the mortgage, savings account and insurance markets. This move into the insurance business gave rise to the term ‘bancassurance’, summarising the extended operations of these diversifying banks.
The enlarged scope to raise funds provided by wholesale funding meant that mortgage lenders could respond to the growth in mortgage demand that was stimulated by the expansion in home ownership. Additionally, subject to checks on the creditworthiness of customers, mortgages could be provided on demand. The requirement to be a saver with a building society before you could borrow from it quietly disappeared.
At the same time, changes occurred to the pricing of products. Previously, mortgage rates had been tacitly agreed by a cartel of the largest building societies, with the result that there was little to choose between the mortgage lenders in terms of price. The liberalisation of the industry saw the end of the cartel and the emergence of a more competitive market for mortgage offerings, to the benefit of customers. The liberalisation also saw new providers enter the market, with overseas financial firms such as MBNA entering the UK credit card market and supermarkets such as Marks & Spencer, Tesco and Sainsbury’s commencing financial services business in partnerships with banks.
By the 1990s, the preconditions for a boom in financial services – including a boom in the various forms of lending to individuals – had been created. Affluence and the demand for home ownership pushed at an open door of product availability that had been harnessed by the concurrent liberalisation of financial services.
Subsequently, most of the larger building societies converted to banking status – starting with the Abbey National Building Society in 1989, and then in the 1990s Halifax, Northern Rock, the Woolwich, Bradford & Bingley and Alliance & Leicester. Others, including the Leeds Permanent, National & Provincial and Bristol & West, were acquired by these ‘converters’ or other banks, with the result that the size of the building society sector shrank dramatically.
Various reasons were proffered by the converting societies to justify the change in their status – including increasing access to finance, greater recognition in the international environment, greater scope to diversify product offerings and even greater capacity to attract and retain top-calibre staff. The executives of the building societies may also have been influenced by the prospect of the higher remuneration likely to arise through conversion to banking status. Membership approval had to be sought for the changed corporate status – although the offer of ‘free’ shares in the new companies to members (who, after all, owned the building societies) provided an incentive to forgo mutual status.
In tandem with (and subsequent to) these conversions, the financial services industry witnessed a marked consolidation, with the Royal Bank of Scotland taking over NatWest; Lloyds Bank taking over TSB; the Bank of Scotland amalgamating with the Halifax to become HBOS; and the international HSBC bank acquiring Midland Bank.
In the 2000s the Spanish bank Santander became a major player in the UK via the acquisition of Abbey National (in 2004), Alliance & Leicester bank (in 2008) and the deposit-taking part of Bradford & Bingley bank (also in 2008). The consequences of the 2007–08 financial crisis led to the takeover of HBOS by Lloyds TSB to form the Lloyds Banking Group, which as a result, became a colossus in the UK financial services industry.