Cut-rate Nationwide jeopardises future

The Nationwide Building Society is playing a dangerous game with its savers which could reverberate on its crucial members' vote in the summer on the issue of whether it should convert from a mutual to a bank.

Industry observers say that in the battle for mortgage customers the Nationwide's savers are being unfairly penalised. And many could show their dissatisfaction by backing calls by businessman Andrew Muir, who is leading the challenge against the society's determination to remain mutual.

There is a frenzied battle under way for customers in financial services - sparked by Halifax and Nationwide's high-profile home loan rate cuts last month - and savers are quickly emerging as the losing side.

Nationwide, which has more than 8.5m savers, has cut the rates on its top saving accounts faster then the reduction in the Bank of England's official interest rate.

While the Bank's benchmark rate was cut to 5.75% last month, the building society has reduced the rates on its savings accounts by almost three times that amount in some cases, according to Moneyfacts, which monitors financial products.

Most other high street savings institutions have reduced their rates too, including the Halifax, Abbey National and Cheltenham & Gloucester, part of the Lloyds TSB group. But industry experts believe that attention is starting to focus on Nationwide, which as a building society cannot ask shareholders to share the pain of savers who might otherwise be left stranded as a result of mortgage rate cuts.

Earlier this month Brian Davis, Nationwide's chief executive, fired off a furious letter to his counterpart at the Halifax, James Crosby, accusing its rival of misleading customers over its mortgage rate cuts.

While the battle for mortgage business has been so high profile, less attention has been paid to savings rates. Last year Nationwide lured in a vast number of deposits by offering attractive rates. But a spokeswoman admitted yesterday that it has been quietly lowering its savings rates.

"We were taking a large slice of the savings market and had to balance the books to stem those inflows. We try to remain competitive, though," the spokeswoman said.

Industry observers believe this is this a crucial period for the Nationwide, which faces yet another demutalisation campaign this summer by a group of its 10m members who would receive handsome windfalls if it was forced to convert into a bank.

Its savers outnumber mortgage customers by a ratio of almost eight to one and it is savers the building society needs to keep sweet in the face of rebel members.

The Nationwide insisted yesterday that savers were not being asked to carry the burden of the reduction in home loan rates.

The real impact of the trade-off between savers and borrowers will be reflected later this year when the crucial vote takes place.

As new customers have been asked to sign away their rights to any proceeds of a stock market flotation, industry observers believe the Nationwide may start to distort the rates on some of the products held mainly by the longest-standing customers.