November 2015

How can collaboration be successfully developed in the UK Financial Mutual sector?


This abstract is drawn from a new report by Kellogg College, Oxford, sponsored by AFM in association with the Building Societies Association

Retrospectively, the limited success of collaborations across the financial mutual sector in the UK can be made sense of, at least in part, by looking at historical developments. Despite having played in major role historically in enabling ordinary citizen to become homeowners and dominating the mortgage market until the mid-1980s, the UK’s regulatory environment increasingly focused on the individual organisation as an object to be regulated, and preferred Plc ownership while government policy favoured competition policy- and market-based solutions. The challenges borne from this change of policy since the 1986 Big Bang, meant that building societies focused on adapting to the new market pressures. Yet as we suggest, these fundamental shifts in the retail finance marketplace and the accompanied transformation of its constituent players has now slowed down.

At the same time, these long term changes in how financial mutuals operate in the marketplace may well have cultural implications, which in turn may act as barriers to collaboration between financial mutuals. Management and customers of financial mutuals may be keen to preserve operational independence of their mutual. There may also be trust issues between management of different financial mutuals as to their motives for collaboration, for example, free rider problems which would suggest that some organisations would invest more resources than others but benefits are spread evenly.

Discussions with senior management support some of these concerns but have also produced a series of alternative reasons as to why collaboration has not yet become a widespread phenomenon.

  1. The idea of collaboration between financial mutuals have been the subject of research and debate in the past yielding little action;
  2. Where attempts to collaborate were made, they have either failed or not yielded the promised efficiency gains;
  3. There are more general questions as to whether efficiencies can be realised for small scale institutions given the cost of resources spent on collaboration;
  4. Centralisation and sharing of services could align mutuals and drive further consolidation;
  5. Senior executives may find collaboration to be against their interest as it potentially means  giving up, or sharing, some control and/or power;
  6. Regulatory, legislative and competition policy constraints on collaboration;
  7. Limited political appetite to transform the financial mutuals sector in the UK.

Clearly, these barriers to collaboration explain why there have been limited developments in this area. However, interviewees have also suggested that benefits are apparent for a range of functions, including back office services, product development and joint IT platforms. Moreover, there is at least an awareness that collaboration is successfully established in other national contexts, yet in many cases, details of why and how this is the case are limited.

Those interviewees who signalled a general openness to collaboration suggested that the best way forward was through a ‘semi-autonomous’ third party as this would improve coordination and communication between stakeholders and would limit resource commitments from mutuals. Interestingly, there was no real preference as to whether such a third party itself should be a mutual organisation or not, suggesting that mutual values are considered second-order to financial and efficiency benefits. Still, one of the most successful examples of collaboration between financial mutuals in the UK is Mutual Vision which was owned by building societies.

The UK Financial Mutuals sector would not be alone in considering the strategic potential of collaboration. Increasingly, we are living in a ‘shared-power, no-one-wholly-in-charge world’ where multiple actors share responsibility for producing outcomes of benefit to each. For example, public value creation is now dependent upon networked or collaborative governance of multiple agencies including government, public sector organisations, private enterprises, civil society groups and communities. Furthermore, private value creation is inextricably linked to corporate involvement in public value creation, particularly in arenas which are considered to be of public interest, such as the provision of inclusive financial services. This means that competition is not the only impulse driving economic and social relations.

The lessons we can draw from the short review of barriers to collaboration in the UK are:

  • A series of cultural barriers, linked to the loss of control, trust and independence;
  • An adverse institutional setting with limited actual support for mutuals (despite public rhetoric to the contrary) and a competition-led policy focus;
  • A history of challenging changes to market conditions increasing competition from actors within and outside the financial mutual sector.

In light of these concerns and potential barriers, it seems reasonable to conclude that any meaningful development of collaborative practices in the UK’s financial mutual sector would require a long-term horizon and an orchestrator leading change, for example the trade associations. Some of these barriers can be resolved by the financial mutuals themselves; others may require additional support from regulators and government, in particular with respect to regulatory and legislative change needed to accommodate a more coordinated collaborative future for the financial mutual sector.

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