Q. Recently a Building Society and a Credit Union (both of which I was a member) changed to a Bank. Statements made by both entities claimed that this would make no difference to  ‘Members’.  How does this affect my Standing? Am I a shareholder, a customer, a creditor? Can these Banks be bought out? How does a “member’ benefit by way of dividend of profit? What protection does my savings have?

A.  Credit Unions and Building Societies are traditionally owned by their customers or members whereas banks are owned by shareholders.  Historically Credit Unions and Building Societies were established to help workers access banking services on a “mutual” or not for profit basis.  As their primary objective was to serve their members, their fees and rates were more competitive than those offered by larger institutions.

Banks broadly fall into two categories; Publicly Listed Banks which exist to generate a profit or return to their shareholders and Mutual Banks whose purpose is to provide lower cost products and services subsidised from profits generated for the benefit of all shareholders.

In recent history, there has been a moving trend for Credit Unions and Building Societies to merge into Mutual banks.  The reasons for this vary but appear to be driven by a necessity to become larger to be able to compete with “for profit” banking institutions driven by a growing demand from members for a broader range of services, the cost of technology changes and the need to meet ongoing regulatory obligations.

All Credit Unions, Mutual Building Societies and Mutual Banks are Authorised Deposit Taking Institutions (ADI’s) and are regulated in the same way as other Australian Banks.  They are regulated by Australian Securities and Investment Commission (ASIC ) under the Corporations Act and by the Australian Prudential Regulation Authority (APRA) under the Banking Act.

Anecdotal evidence suggests that whereas consumers understand the range of products, services and security provided by banks, the same cannot be said for Building Societies and Credit Unions.  The term Bank is a restricted terms under the law.  To use the term bank, an ADI must have $50 million in assets.  Hence we have seen a merger of a number of smaller Building Societies and Credit Unions to meet this capital adequacy hurdle to enable the name change to a bank.

Without being aware of the specifics of the merger and transition to a bank by your Building Society and Credit Union, I cannot be definitive in terms of your specific circumstances and consequences.  However, I would imagine that the members of both the Building Society and the Credit Union would have voted for the merger and the extinguishment of member rights.  Eligible voting members would have swapped their member rights for shareholder rights in accordance with a new constitution for the Mutual Bank. Any prior membership fees would have been refunded to the member’s accounts.  All members would have then become shareholders in the Mutual Bank.

As a shareholder in a Mutual Bank, you have voting rights in terms of governance, structure and the future of the organisation.  You should benefit from lower cost products and services rather than by dividend.  I assume the constitution of the Mutual Bank will outline under what circumstances the Bank could be sold but more likely merged into another institution.

APRA’s rules on safety capital requirements for deposits apply to all Banks, Building Societies and Credit Unions.  In terms of protection for your funds, Deposits in all ADIs of up to $250,000 have been guaranteed by the Commonwealth Government since 1 February 2012.

According to the Customer Owned Banking Association (COBA), there are currently 4.5 million members or shareholders in Mutual Banking and in 2016 the sector managed $92.3 billion.