Every morning at 8.45, Mike Heenan, a trim 58-year-old in a pinstripe suit and sensible spectacles, says goodbye to his wife and sets out on the 15-minute walk to his office in the Market Square of Stafford, a town of 65,000 people in the English potteries.
There’s a decent chance that on his way he will run into one or two of his customers, many of whom he knows by sight, at least. But even if he doesn’t, evidence of his business’s long relationship with its home town is all around in the houses that line the quiet streets – houses often bought with the mortgages that Heenan and his predecessors have been carefully doling out to the people of Stafford (and latterly to those further afield) for 132 years.
When he reaches Market Square, Heenan enters the Stafford Railway Building Society and climbs the stairs to his office on the first floor for a meeting with senior managers. It’s not a grand room – Stafford Railway has only one branch and 17 staff – and it doubles as Heenan’s office at the accountancy firm Dean Statham, where he still has clients.
In an arrangement once typical of Britain’s former roll of 2,000-plus building societies but unique today, Dean Statham continues to provide the building society’s chief executive – or secretary, to give Heenan his more traditional title. It has done so since 1892 when George Dean, auditor of the London and North Western Railway company and founder of Dean Statham, became secretary of Stafford Railway Building Society. His son Walter took over the firm – and the society – in 1912 at the age of 21 and stayed put for the next 60 years, interrupting his work only to fight in the Great War.
Heenan is only the seventh secretary of Stafford Railway, and Walter Dean would not feel out of place if he stepped into his office today. Behind a desk topped with green leather, there is a sturdy safe. Papers on the desk include decisions on mortgage applications and the society’s latest asset position, though computer screens also track currency movements and the like. Framed photographs reveal Heenan’s other long-standing relationship with the people of Stafford – his role as a Conservative borough councillor for the past 33 years. There he is with John Major and other luminaries. A Toby jug commemorates his time as mayor of Stafford. On a filing cabinet sits a letter opener, a gift from Royal Bank of Scotland to mark the opening of its branch in the town. Next to it is a penny, found in the street outside and now encased in glass with a typed note: “This coin is believed to be very rare as it could possibly be the only penny to have slipped through Mike Heenan’s fingers.”
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It is a mark of how far banking in Britain has changed – and how fast – that Heenan, who would once have appeared the quintessential English provincial bank manager, now seems a curious throwback to an age that has not just passed but been wilfully uprooted: consigned readily to history along with the steam trains that inspired the creation of Stafford Railway. Equally, it is only because change has been so rapacious that almost everything about the way the society operates seems odd and old-fashioned, although apt to inspire nostalgia.
Stafford Railway was founded in 1877, 24 years after the Halifax, by local townspeople, guided by civic leaders such as the mayor, the vicar and directors of the London and North Western Railway that had just opened. The aim was to help workers buy houses and develop the land along the new line. The society’s first mortgage built the Mechanics’ Institute, a training centre that later became Stafford College and still stands.
At Stafford Railway, staff answer the phones. Mortgage applications are approved personally by Heenan – who, by industry standards, earns a very modest £139,000 – or his deputy, Susan Whiting. Customers are sized up by experienced negotiators, not shoved through standard credit-scoring procedures. Stafford railway will not lend more than 75 per cent of a property’s value, or above 3.5 times income. The society offers only one residential mortgage product, with interest charged at its standard variable rate (currently 3.49 per cent, and 4.5 per cent for buy-to-let). The lack of choice could easily be put down to an over-cautious conservatism but it is a result of a sober assessment that the society could not offer the same value and customer service if it varied its products. Offering discounted or fixed rates to new borrowers penalises existing ones – and leaves little room for manoeuvre if base rates change fast as they have done recently. To avoid possible conflicts of interest, Stafford does not sell life assurance, travel insurance or repayment vehicles for interest-only mortgages. It has only had to repossess two homes in the past decade.
The squandered legacy
Stafford Railway was one of thousands of building societies founded in the Victorian era that helped finance the urbanisation of Britain. Now there are fewer than 50. The change can be traced back to deregulation of the mortgage market in 1986, as part of efforts to promote home ownership. Until then, mortgages were in effect rationed and the Building Societies Association in London would set and communicate the daily interest rate to lenders.
But beginning with Abbey National, many of the largest building societies converted themselves into banks or were swallowed up by them. Members became shareholders, cashing in their chips – or those of the generations of prudent savers and borrowers before them.
John Kay, the FT columnist, was a director of the Halifax, Britain’s biggest building society, in 1997 when it took the decision to convert itself into a bank. Last year, after the Halifax was rescued from collapse by Lloyds TSB, he unflinchingly examined his role in an episode that he said summed up the financial crisis.
“I once gave away more money than Andrew Carnegie or Bill Gates. I authorised the distribution of almost £20bn to its [Halifax’s] 8 million members on flotation of the business.”
The clash of cultures between the stable, even staid, world of traditional mortgage lending and the risk-taking culture of wholesale banking brought the Halifax down, he wrote.
“Accepting deposits and underwriting and administering mortgages requires that millions of records should be maintained and updated every day with almost no errors. This activity does not require flair or imagination but does require conscientious individuals with integrity and loyalty. The Halifax was a precision machine that made the most of the talents of ordinary people. I came to understand the fundamental incompatibility of the cultures of retail and investment banking and why the marriage of the two so often leads to tears.”
He concluded: “Those conscientious people who process deposits and issue mortgages are still there, though many have had the worst weekend of their lives. The business they do continues to make money. Customers mostly remain loyal. The pursuit of shareholder value damaged both shareholder value and the business. We let them all down.”
To read John Kay’s original column in full, go towww.ft.com/squanderedlegacy
Stafford currently has outstanding mortgage loans worth £130m to 1,750 borrowers and deposits from more than 14,000 savers totalling £160m – so it lends out a bit less than it takes in, an extremely prudent way of doing things. And although it is small, its traditional approach has helped it to win numerous awards including What Mortgage magazine’s Best Overall Lender and Best National Building Society for the past five years. After the FT first reported on Stafford last autumn, others took an interest. The Daily Mirror dubbed it the “safest bank in Britain” while the News of the World and Sunday Express wrote glowingly about its approach to saving and lending.
Of course, the contrast with the rest of Britain’s high street banks (several outposts of which Heenan can see from his office window) is now all too obvious. By the time panicking customers were queuing up outside branches of Northern Rock to withdraw their savings, the former building society had outstanding mortgages and loans worth £100bn and deposits of only £24bn, the gap bridged by short-term borrowing in the wholesale money markets. These, of course, dried up suddenly and totally, forcing the government to come to the Rock’s rescue with £26.9bn of public money.
Or consider the Halifax, which relinquished its mutual status in 1997 (see box), merging four years later with Bank of Scotland to create an even more gigantic institution that was ultimately run by a former retail executive with little experience in banking. It finally had to be rescued via a takeover by Lloyds TSB that left Lloyds all but crippled. This was a world in which staff were handed sales targets that in effect forced them always to say yes – to offer loans and other products to customers who could ill afford them; to regard credit card borrowers who didn’t settle their balances as good customers whose limits would be raised so that the card companies could reap more in arrears and interest charges.
The Stafford seems to attract refugees from exactly this type of bank. Mike Smith, who recently joined the board as a non-executive director, was a local branch manager for a high street bank but became disillusioned and left to become a regional manager for Handelsbanken, the Swedish bank. In his new job, he says, managers have more discretion over lending. Previously, “it was just about pushing products. Bonuses were tied to targets and there was no room for discretion. The rhetoric is all about customer service. That’s fine, but your ability to deliver it and do due diligence is diminished in a chase for growth. A monkey could have taken the lending decisions.”
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Belying his appearance, Mike Heenan has a taste for the spotlight. On stage at the Malcolm Edwards Theatre for the Stafford Railway Building Society’s 131st annual general meeting, Heenan is in his element. Once his deputy has run through the results for the year (a pre-tax profit of £1.05m) there is only one question from the floor. Could the board confirm how much money they had invested with the US fraudster Bernard Madoff and how much with Icelandic banks? “None whatsoever,” comes the reply. A ripple of laughter runs round the room.
Heenan then rises to give his “state of the nation report” and it is immediately clear that this is what the 63 building society members and assorted business contacts have come to hear. His hands thrust in his pockets, the spotlight falls upon him. He begins by recalling last year’s address, when he warned about bankers trading in complicated derivative products that they did not understand. He castigates the greed, the bonus culture and the “too clever by half” financial engineering of many banks. His audience, wearied by months of worry and indignation over the banking collapse, laps it up.
“A simple business model, whereby funds are generally lent on the basis of funds received, where profit is generated to maintain financial stability and not for personal gain, and where you only lend people money that they can afford to repay – not just based on their current circumstances but allowing some margin for the unforeseen – is the model that works,” he intones.
“Many of us of my generation will remember their first bank manager. It was one of those things you always remembered, like your first car and perhaps your first love. But at that time the bank manager was a fearsome character who often seemed intent on stopping you doing what you wanted rather than trying to sell you the latest loan along with every bolt-on product he could find. My first bank manager was A. Nutter” – a pause for laughter – “from the Midland Bank. He told me I couldn’t have the car loan that I wanted; I would have to trim back a bit. It was good advice. Bankers have to learn to say No again.”
He quotes a leader from The Times on the stampede by building societies to shed their mutual status, driven by depositors greedy for windfalls and investment bankers hungry for fees. “Those expressing doubts were ridiculed as steam train enthusiasts, hopeless romantics trying to save a business model that had no place in electrified modern capitalism.”
And there he stands, behind him the logo of Stafford Railway Building Society: a steam train.
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Lately, mutual ownership has regained some of the intellectual currency it lost during the go-go years, when lending was let rip and cheap access to the wholesale money markets made cautious reliance on deposits from savers look like a ruinously uncommercial way to run a bank. Ministers have been heard thinking out loud about the perceived virtues of mutual ownership: conservative financing, a culture of responsibility, good customer service and so on.
Building societies, however, have not dodged every bullet to hit the banking industry. In March, Dunfermline Building Society had to be rescued after it got into trouble. Its demise, say its critics, was down to a badly timed push to ramp up its commercial property lending, using funds from the wholesale money markets that shortly afterwards dried up. Being mutual is no barrier to taking poor business decisions. Nor does it enable one to avoid paying for the mistakes of others – Stafford is not the only small building society to have seen its profits dented by having to pay larger sums into the Financial Services Compensation Scheme, which bails out customers when banks collapse.
Heenan is under no illusion that Stafford Railway provides a blueprint for the banking industry. “We do not deviate from what is prudent. I don’t think we’re a model for every building society. It is perfectly reasonable to want a fixed rate [mortgage], for example. You need some degree of sophistication in the market. We are not terribly good for first-time buyers because we don’t lend more than 75 per cent of the value. But I don’t think our model is bad.” Tellingly, he would not have secured a mortgage from the organisation he now heads when he arrived in Stafford in the 1970s. It would have judged the young accountant too risky a proposition. “I borrowed more than they would have lent me,” cheerfully admits Heenan, who still lives in the home he bought back then with the loan he obtained from a less risk-averse lender.
Some elements of the way Stafford Railway manages its affairs are, however, coming back into fashion, most obviously the greater reliance on deposits by savers to fund banks’ lending, though that of course means they cannot lend as extensively as they did before. The personal touch, too, is on people’s minds. “Everyone is talking about customer service,” says Hugh Fasken, editor of Retail Banker International. “The likes of HSBC and Barclays could not follow Stafford Railway – costs would go through the roof – but branch banking is back. They want a presence on the high street with good staff.”
The question of what it costs to run a bank as Heenan does cuts both ways, however, as we now know. Stafford Railway specialises in what Frank Partnoy, professor of law and finance at the University of San Diego, calls soft information – “knowing the customer, their relationships, the local area. Traders were looking at models not individuals. Perhaps assessing and pricing risk is better done by humans than by markets.” Yes, doing it this way costs more, he acknowledges, but it could still work out less than the trillions so far spent on cleaning up the current crisis.
Nonetheless, Partnoy has reservations. “The question is whether we would pay [the extra costs] without having the damage first,” he says. “I’m sceptical. I think we will always have these cycles of mania.”
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You are unlikely to feel yourself sucked into a cycle of mania at the dinner for members and contacts that follows Stafford Railway’s annual general meeting. Heenan’s PR people always lay on some entertainment for the guests. Last year they hired a magician. The pièce de résistance, though, came at the end of the meal when one guest at each table rose to join the waiters in song, all of them revealing themselves to be professional opera singers.
This time a harpist plays as guests arrive and the post-prandial entertainment comes from the Barbara Walton Singers, who run through a collection of Gilbert and Sullivan-type English standards before their show reaches its climax, in which they perform the blurb from the building society’s website as if it were a psalm. Somewhat surprisingly, it’s a gag that works. Heenan is not the only one beaming.
Last to speak at the dinner, as the clock ticks towards midnight, is John Goodfellow, the then chairman of the Building Societies Association. A diminutive Scot, Goodfellow extols the strength of the mutual model, which, he points out, has withstood numerous recessions. “It is your society and don’t let anybody take it away from you,” he growls at the end to raucous cheers. After he sits down, Heenan flits from table to table, buying drinks, chatting with his members, checking everyone is happy.
Andrew Bounds is the FT’s north of England correspondent
