In a co-operative or mutual organisation the customers collectively own the business.
With no outside shareholders clamouring for dividends, all profits are invested back into the business. This helps to ensure competitive rates of interest for savers and borrowers alike.
Because mutuals rely heavily on members for funding they tend to be fully aware of the direct link between savings and loans: the money lent out to one member has been provided by another. This encourages a constraint that seems to have gone missing at some big banks, where speculation in complex financial markets led to the banking crisis.
Run for and by members, mutuals must focus on members' needs. That's why they beat the big high-street banks on all measures of customer satisfaction, scoring 45% higher on value for money and 39% higher on treating customers fairly, according to a report commissioned by the Building Societies Association.
Without pressure to pay dividends to external shareholders, mutuals are unlikely to get involved in the scandalous mis-selling of financial products that saw high-street banks transfer £32bn from ordinary account holders to executives and shareholders in the last five years alone.
If members don't like the way mutuals are run, the democratic structure – one member, one vote – means they can change it! Meanwhile, the UK government has poured vast amounts money into saving big high-street banks and now seems unable or willing to change the way they operate.
Mutuals are well regulated and offer the same guarantee as the high street banks: under the Financial Services Compensation Scheme (FSCS) 100% of the ﬁrst £85,000 of any eligible deposits for individuals (and up to £170,000 to couples with a joint account) is guaranteed.
Mutuals often have a strong regional identity and tend to be closely involved in their local communities. There are many mutuals up and down the country.
A short history
The first known mutual financial organisation was a building society formed in 1775, to help members get housed. It was wound up when the mission was achieved. The first permanent society was formed in 1845.
In 1872, the Co-operative Wholesale Society formed a retail deposit and loan department, which eventually became The Co-operative Bank. Nearly a century later, it joined the committee of London clearing banks and started to issue its own cheques.
In the 1980s, banking laws were changed to allow building societies to offer banking services equivalent to normal banks. Soon after, they came under pressure to demutualise – to turn themselves into companies listed on the stock exchange.
From 1995 to late-1999, eight societies demutualised, taking with them two thirds of building society assets. Not one of the demutualised building societies remains, having all merged with, or been taken over by, other financial services groups.
In 1999, the Co-operative banking group launched Smile, an internet-only service for personal banking, and in October 2008, the group merged with Britannia Building Society.
The credit union movement was influenced by co-operatives in the UK, but were brought here by immigrants who had seen them working well elsewhere. (One of the earliest credit unions was founded in Jamaica.) Legislation covering credit unions first came into effect in 1979.
Credit unions operating in Britain today are extremely varied in size, membership and the range of services they offer. Most mutuals have a strong regional identity and tend to be closely involved in their local communities.
Mutuals have had to compete with shareholder owned banks that have benefited from huge injections of funds from government allowing them to offer aggressive rates of interest. But the movement has grown fast, with membership rising 300 per cent between 2001 and 2010 and savings rising 200% in the same period.
In 2012, new rules came in allowing credit unions to broaden their membership (to include, among others, businesses). The new rules also make it easier for would-be savers to compare interest rates with banks and building societies.
Credit unions have been identified by government and the Bank of England as having a key role to play in creating financial stability.