Building societies started life as friendly societies which are corporate entities designed to provide benefits for their members in sickness and old age. They encouraged small savings for such purposes. Each user of services became a member of the Society and had shares. However, the shares were not transferable and not convertible into cash.
Building societies in the strict sense were mutual societies whose members controlled the societies on the basis of one vote per member. The rules of the Society determined who were the members and what their rights were. The contents of rules was constrained by legislation.
A person could be a member as a depositor or borrower. Each member’s liability was limited to the amount paid on the shares or in arrears on the shares. The shares carried rights to vote, but not rights to realise value. The rights of members were set out in the rules.
Building societies were obliged to keep registers of members generally at their head office. All members were entitled to vote if they held shares of a certain value for a certain period before the annual meeting. Much the same rules as applied in respect of shareholder’s meetings in companies applied to Building Society.
Expanded Powers 1989
The Building Society Act 1989 extended the role of building societies and allowed them to become involved in a broader range of financial services. They were required to retain the basic objective of providing housing loans though this need not be the principal objective.
The building societies had powers to raise funds by the issue of shares and borrowing money and receiving deposits. At least half of these Society’s funds were obliged to be in the form of share.
They obtained power to hold, dispose of and develop residential and commercial properties. The Central Bank had power to grant exemptions from the 50 percent share rule above. Societies where entitled to establish subsidiaries. They were entitled to assume the 1989 act entitlement to provide a range of financial services
Until about 1990, building societies were the predominant providers of home loan credit. Starting in the mid-1980s the European Union-wide policy of a level playing field in financial services caused the roles of building societies to converge with those of banks.
Building societies lost their former characteristics as societies for providing housing loans and became providers of a wide range of financial services products. At the same time the traditional retail banks entered the home loan market so that by the time of financial crisis, the distinction between building societies and the retail side of banks were minimal.
Central Bank Regulation
Formerly building societies were regulated very lightly by the register friendly societies. The Building Societies Act 1989 brought building societies under the control of the Central Bank.
With the 2003/2004 reforms they became fully subject to the same scheme of regulation as retail bank and other financial services providers under the financial regulator and financial services ombudsman jurisdictions. They are now under the jurisdiction of the Central Bank.
The Central Bank must maintain a public file of the Society containing documents and records directed to be kept on the public file. Members of the public are entitled to inspect the public file on giving reasonable notice and to be furnished with copies of the documents on payments of prescribed fees.
Irish Building Societies
The four principal building societies operating in the late 1990s and early 2000s have largely disappeared from the market. First National Building Society used the mechanism for conversion into a PLC and became First Active PLC, [a public company.] As a result its members received a considerable financial windfall. Memberships were converted into shares, marketable shares and members received payments by way of distribution of proceeds of floatation.
Irish Permanent Building Society demutualised and became a public limited companies. It acquired the Trustees Savings Banks and Irish Life Assurance company. On the eve of financial crisis, it formed a single conglomerate financial service provider with two main businesses, Irish Life and Permanent plc.Educational Building Society and Irish Nationwide Building Society remained the two best known building societies.
Irish Nationwide’s lending practises were in some cases, far removed from the role of a conventional Building Society. Its chronic bad loans caused it to be absorbed together with , the nationalised Anglo-Irish bank into the Irish Bank Resolution Corporation. Prior to that its deposits were transferred to Irish Permanent PLC. IBRC was liquidated.
The Educational Building Society was transferred under the Credit Institution Stabilisation Act to Allied Irish Banks plc.On 1 July 2011, EBS Building Society ceased to exist and, after being granted a banking licence, and demutualising, EBS Building Society became EBS Ltd., a subsidiary of AIB.
On 12 September 2016, EBS Limited re-registered as a designated activity company (d.a.c.), as required under the Companies Act 2014. The registered name of the legal entity is now EBS d.a.c.
Some UK Building Society (which have been demutualised) traded in Ireland.
Building Society loans were required to be first legal charges on properties. They were also empowered to provide other types of loans such as, unsecured loans including bridging loan, secured loan and unsecured home improvement loan, loans to cover advance with Central Bank consent.
Prior to the Consumer Credit Act, the Building Society legislation provided specific consumer protection provisions in relation to home loans. These were effectively extended to most lenders / the financial institutions by the Consumer Credit Act and later to the nonbank lenders in 2008.
Certain types of fees and interest were prohibited, redemption fees were prohibited except for fixed rate loans. Varaible interest rate which varied in accordance with the amount outstanding or income of the borrower were restricted and subject to specific disclosure requirement.
There were specific provisions in relation to valuing securities similar to that later replicated in the consumer credit act. A specific duty of care applies in relation to the sale of properties in the course of enforcement.
The Minister may make a scheme with approval of the Minister for Finance to pay subsidies to a Building Society in respect of interest payable to the Society in respect of a housing loan by a member. It may specify classes of persons in respect of which a subsidy may be paid by reference to their financial circumstances, classes of loans or classes of houses securing the loans in respect of which the subsidy may be paid.
Wider Financial Services
Financial services which may be provided include credit, credit by credit card company, giving guarantees, insurance service, trustee and executive service, hire purchase, foreign exchange, travellers check, letters of credits. It was contemplated that building societies would be allowed to provide convincing and auctioneering services. The section was never commenced.
The powers to provide wider financial service must be approved by the members of the Society by special resolution. Central Bank approval wa then required. The Central Bank may impose conditions restrictions on the power and the amount of funds which may be dedicated to the particular service.
Building societies were formed in almost the same way as companies. At least 10 persons must agree the objects and rules and register the same with the Central Bank. The Central Bank must register the rules if it is satisfied that they conform with the relevant legislation and it is satisfied that registration would not be prejudicial to the proper regulation of building societies.
The rules must follow the permitted rules prescribed by legislation. A number of cases showed that the courts were reluctant to interfere with the process of registration of a Building Society given the no and limited discretion for the registrar and laterally the Central Bank in refusing registration.
The Bank has six months in which to consider the application. A refusal may be appealed to the High Courts within six months.
A Building Society may not raise funds without a banking licence/authorisation. It must satisfy the minimum capitalisation requirement applicable to credit institution. Its officers must be fit and proper persons.
Building Society Rules
They must contain provisions regarding the issue of share terms such as when shares may be repaid, duties of boards of directors, appointment, removal or remuneration of directors, appointment of auditors, use of the company seal. Those must also contain provisions regarding the manner in which housing loans are made and redeemed and title deeds are held.
The internal management of the Building Society is largely determined by its rules most of which are prescribed by the Building Society Act. The rules are a contract between the Society and its members.
Member’s right must contain certain minimums including rights to requisitioning meetings, rights to vote at resolutions, right to appoint a proxy, rights to demand a poll, resolution of disputes between members and the Society, cessation of member rights to of members on a winding up.
The memorandum and rules of the Society may be changed by special resolution of the member. The amendment must be approved by the Central Bank.