You may be old enough to remember the trend for demutualisation some years back, particularly among building societies. This was meant to herald the age of more modern, dynamic financial companies better able to compete with banks and other larger organisations. Members were attracted by the windfall payments that came with demutualisation and new shareholders were attracted by the opportunity for future profits and dividends.
The dream didn’t last long for many members and policyholders. Where are the Bradford & Bingley, Abbey National and Northern Rock now?
Many of the financial mutuals in business today have stood strong, not only against the era of demutualisation, but also against huge world events spanning the last two centuries from the Great Depression through to the 2008 financial crisis. Some of us have been around since the time of the Industrial Revolution when we were established to help those in need at a time of huge societal change.
Acting in an ethical way and putting members and customers first has always been part of the mutual model. This could account for why trust remains high for mutuals: in 2020, 87% of our customers said they thought Wesleyan was a brand they could trust. Compare this to the Edelman survey which found that only 47% of people trust the UK financial services sector as a whole.
This trust is hard earned and won in part because, with no shareholders to consider, mutuals can take long-term, pragmatic decisions that focus on the right outcome for investors and other customers.
So, for example, when investments markets go into turmoil, we can hold strong in the knowledge they’re likely to return stronger and deliver a better outcome for investors over time. If we had shareholders we could be required to take short term, more expedient actions to meet their needs first.
Profit or policyholder – which comes first?
What the trend for demutualisation showed is that customers generally ended up with a worse deal as their interests became secondary to those of shareholders and they lost any control they might have had in the business.
Mutuals, on the other hand, are managed in the interests of their members. It is they who attend the Annual General Meetings (AGM) to ratify the financial performance and ensure future strategy is aligned to member interests. Contrast this with proprietary businesses where it is shareholders who attend to ensure their best interests are the focus of attention.
The more successful mutuals will also ensure members benefit from being part of a successful organisation. With no shareholders expenses to consider, members can receive a share of the profits through various initiatives and may enjoy better annual returns.
Mutuals can also plough profits back into building a stronger, more sustainable business to benefit members for years to come. This is because there are no calls to release excess capital to shareholders. Take Cevian Capital calling on Aviva to return £5bn in excess capital to shareholders earlier this year as an example. At the time, the investor’s request represented a third of the Aviva’s stock market value and came from an organisation that owned only around five per cent of Aviva. Cevian are now calling for more.
At Wesleyan, the majority of our members are investors in our With Profits fund and this gives us additional commitment and focus to ensure the fund delivers a strong performance. We manage the fund so that it is set up to deliver competitive returns over the long-term, using our financial strength to retain a high equity backing.
With Profits products have received some negative press in recent years but not all funds are the same. Look for a well-managed fund, backed by a financially strong provider and check how competitive it is in terms of charges and payouts.
The mutual sector continues to serve millions of UK customers and is a vital and competitive alternative to the bigger, sometimes brasher and often better-known names. As consumers increasingly look to financial service organisations to manage their money more responsibly and play a greater role in the world around them, the mutual model remains as relevant in 2021 as it was in 1841.
This article was also featured on moneymarketing.co.uk