John Stewart was the founding secretary of the City of Glasgow Friendly Society. He set the tone, creating an organisation where members had a democratic voice and claims were met promptly.
Under his guidance, it became established as a mutual insurance society with the aim of paying funeral expenses so policyholders avoided a pauper’s grave.
When Fiona McBain arrived in 1998, it had been only four years since this Glasgow society had acquired a small Dumfries insurance outfit to become Scottish Friendly.
By then, it had a single savings product but was ready for dramatic change. While a bronze bust of a bearded John Stewart graces the pleasant open-planned offices in Blythswood Square, Fiona McBain, who became chief executive in 2006, has also made her indelible impression on Scotland’s largest mutual life office.
As mighty financial institutions across Europe have withered in the Great Credit Crunch - and now the Euro Crisis - this modest Glasgow operation has been able to weather the great storm.
“I came from the Prudential in 1998, having been with Scottish Amicable though the de-mutualisation.
It was a massive organisation and my remit was financial reporting, which was just one aspect of the business.
So it was fantastic to join Scottish Friendly, which was a much smaller company with a wider remit.”In 1994, Scottish Friendly became an incorporated society with authority to extend its product range.
It moved into direct marketing and this proved to be a massive boost as a sales force was an increasingly expensive way to win business.
As a result Scottish Friendly was fortunate: it was big enough to have money to invest in new developments, yet small enough to undertake projects more efficiently.
It then closed its sales force and stopped its door-to-door collections, as subsequently did so many of the big name insurance companies.
“I’m very proud of the changes that we’ve driven through here. Sometimes I say to people at Prudential we could have sorted them out as well!” she says with a smile.
“But I do acknowledge that there are different challenges of scale,” she adds. Fiona McBain can stand in the middle of the converted Victorian townhouses that are the Blythswood Square office and cast a weather eye on what everybody is doing.
Even at the height of its recent expansion, when there were three offices, it was still small enough to communicate with the whole staff.
She was brought in by Bob Thomson, the then chief executive, and the actuary, Jim Galbraith, who is the deputy chief executive, because they realised their success was on the back of a single product, the Tax-Exempt Savings Plan.
Fiona was tasked with helping to launch an ISA and the OEIC [Open Ended Investment Company] that underpins that.
Here she recounts a story that would grace the case study section of Harvard Business Review, as she explains there are two strands to the way she runs Scottish Friendly: a constant search for efficiencies and ‘prudential capital management’.
Scottish Friendly had a rather comfortable in-house IT team who were asked by Jim and new girl Fiona to set about launching the new products.
They explained that it was vital to feed off the UK government’s flagship campaign, which was then extolling the benefits of Individual Savings Accounts.
But the IT team shook their heads, and displayed some resistance to what was being suggested.
“We were told it would take them 18 months to build a platform for a new product. Not only would we have missed all the free generic ISA marketing but we would have missed a whole year’s business,” she recalls.
This was simply not good enough. So, much to the chagrin of the in-house IT boffins, the company went externally and bought a software solutions package to get moving. The ISA was launched in good time and caught the tide. But it triggered Fiona’s drive to get IT working for the business.
“From that day, it became a bit of a mission for me. I said that IT had to be an enabler not a business blocker,” she says.
Further savings had to be made to keep the society competitive. In 2002, [the management team] Thomson,Galbraith and McBain made the decision to purchase software package from a little-known New Zealand company, called Tacit, now part of the Australian Bravura Solutions.
Scottish Friendly had five different systems with various manual interventions, each with specialists and a complexity that increased costs. It all needed proper integration and Tacit’s software was a winner.
“It has become something of a cliche that you adapt an off-the-shelf system rather than customise one.
We really lived that and stuck with it.” Tacit’s software was not well-known in the UK, but was cleverly adapted for Scottish Friendly’s Child Trust Fund, gaining quick approval from the Inland Revenue.
This pragmatic approach pushed everything onto a single system: a project delivered on time and on budget.
It meant minimal licensing arrangements and customer’s details and data was accessible in one place.
This was award-winning stuff; there was a return on investment in less than three years; there were immediate cost reductions of over 40%; and a single customer service person within Scottish Friendly could deal with over 15,000 policies, while the resolution of client inquiries improved by 80%.
What Fiona McBain also liked was that the IT department was not determining the timeline for new products to market.
This all made the wider savings and pension industry sit up and take notice of this Glasgow minnow.
“It was about re-engineering how we do things. Scottish Friendly did silo processing with seven different departments, a team looking after new business, another, the administration, another call querying and another claims, etc.” This was crunched into front office and back office.
“Now if you work in our back office you have to be able to do any aspect of a policy life-cycle: from new business all the way through to maturity or death claims.” She says that Scottish Friendly is unique in being able to do this – and it makes the job more varied and interesting for those who relish a wider job remit.
“It’s easy to say we re-engineered and took out 40% of the overhead. In reality, that means an awful lot of change and it means redundancies. It means a lot of pain.
I used to think ‘change management’ was an esoteric thing, it’s not, it is very real, and it affects people’s lives and confidence.” While Fiona McBain is quietly spoken, she concedes that she was perhaps rather arrogant in her part in driving through the changes.
When she approached a staff member who might only ever process one aspect of the job, she tried to reason that they would get more job satisfaction.
Yet some feared that their skills and core expertise were actually being eroded and taken away.
“We had to do a lot of supporting and talking through this.
There were some who preferred to stay with their one area of specialism, and they’ve gone elsewhere, those who have been prepared to undertake a wider role have thrived and felt more empowered.
They are engaged,” she says. On ‘prudential capital management’, there is also a tale to tell. In 2004, Scottish Friendly, as part of its re-engineering, looked again at its investment strategy – or how it was going to grow the customer funds.
Most larger pensions and savings companies have in-house fund management houses which look after the inflow of funds, and often win external mandates.
Scottish Friendly, being significantly smaller, places the bulk of its investments – 80% - in tracker funds, which follow the fortunes of the main indexes.
There is an internal investment committee looking after this and making judgement about the actual allocation of funds into investment classes such as equities, bonds and liquid cash.
The other 20% is used externally and this is the ‘spicy’ money which is actively managed by two of Scotland’s most respected smaller investment houses, Sandy Nairn at Edinburgh Partners, who was formerly the chief investment officer at SWIP, and a founder of the partners in 2003, and Colin Mclean, at SVM, and one of the most thoughtful and successful investment professionals in the UK.
In this post-banking crash environment and with massive uncertainties in Euroland, finding the balance between a safe haven and a decent return on investment is as rare as hen’s teeth.
“Generally, our way of working is seen as lower risk and it is certainly lower cost. Our appetite for risk fits with our customer profile and the types of products we sell to them. But we aim to get the best of both worlds, which is why we have the 20% policy of active funds, so we can get some additional upside.” Fiona McBain learned a great deal from Bob Thomson, who had been with the business for more than 30 years.
She is committed to the principle of mutuality extolled by John Stewart and the six other founders, and is a board director of the Association of Financial Mutuals, the trade body encouraging us all to put more savings away for our futures.
“I really believe passionately in mutuality. The easiest way to characterise it is to say: ‘Why would you have a third party shareholder if you don’t have to?’ Why seek to pay a return to a third party if you don’t need to?” It is a cogent point that has gathered momentum in recent years.
“There are other mutual life offices – none in Scotland except us unfortunately – that show you can be professional and dynamic.” [Scottish Provident, Scottish Life and Bright Grey, employing thousands in Scotland are still mutual, but are part of their parent, Royal London, which is based in London and Wilmslow.] Yet, ten years ago, mutuality was perceived as an old-fashioned and inefficient business model out of kilter with modern capitalism because the policyholder could not generally hold the managers accountable the way that shareholders could.
This has been turned on its head, partly by the banking collapse and the damaging culture of short-term trading in stock market listed firms. Fiona McBain and her AFM colleagues have been fighting back with some brio.
“Customers from a mutual get a better return, which is what you’d expect, if we’re running the business properly. We don’t have to pay shareholder dividends, instead this goes back in the pot for the policyholders,” she says. The pension time-bomb is also is issue.
“You don’t need a degree in economics to know that we all need to make better pension and savings provision for ourselves.
The government need to make it easier for people to do that.” Scottish Friendly has 1.5 million policyholders and it would be difficult for them to express a singular voice, so these interests are represented by the ‘Delegate’ system, which meets twice a year to raise any matter of concern about the operations of the business.
Here 30 delegate representatives are brought on board, given comprehensive information about the company and then encouraged to take an active interest.
“Scottish Friendly is a living example of bringing all the efficiency drives that any shareholder could demand and all those benefits go straight to the customers.” Elsewhere smaller societies have disappeared or been eaten up because they did not have the efficiencies to make money out of small-value policies, particularly as the cost of regulation exploded and marketing to win business was expensive.
Yet Scottish Friendly – selling a ￡300 a year policy - is required to have the same overhead as Prudential, which might be selling ￡100,000 a shot bonds.
“With us, people can save for as little as ￡10 a month. I’m proud of that and that’s what we need to be able to offer to customers. But the UK regulator has to do its bit too to help us make this easier to do.
With our regulatory overheads, it becomes increasingly difficult to provide low-cost products which encourage lower-income people to save.
Yet this is exactly what the country needs.” Once again, Fiona McBain returns to her story on controlling the costs.
“What we have done is drive on with our efficiencies – through the IT programmes I’ve talked about - to remain competitive, so that we can offer small-value products and still make money.” She wants to clear up one point about over-stating the mutuality side.
“A lot of our customers don’t buy into us because we are a mutual, they buy in because of the direct benefit of that, which is to do with service and returns.” This trick has also attracted the attention of major financial plcs in the UK, who have looked on in wonder at how Scottish Friendly had done things that have not been possible in the larger companies.
This has led to Scottish Friendly actually handling business for some UK majors.On the product front, the Junior ISA was launched, and then a range of variations, where different family members can save for the family in different pots, so each auntie and uncle knows their own contribution.
Her colleague, Sales and Marketing Director Neil Lovatt, who arrived shortly after McBain took the helm, has been instrumental in re-shaping many of the products.
Then when Scottish Friendly completed its platform for pulling investments together – its ‘Wrap’ platform – it was then able to offer SIPPS, Self-Investment Pensions Products.
“We concentrate on what we are good at and don’t dive into some big risky venture, but we don’t stand still either.
We are constrained by the tax laws but we are constantly trying to find ways of developing what we do.” Scottish Friendly is preparing to launch a new product with no penalties for customers if it is cashed in early.
While it uses direct sales channels and online e-commerce, it is increasingly involved with partnership distribution, selling the Tax-Exempt Saving Plan to customers of Royal London, Phoenix and the Eui Group, owners of the Admiral brand.
There is another major chapter in Scottish Friendly’s recent story. The IT strategy proved to have an unexpected upside with a golden lining. Scottish Friendly won a contract to administer the wrap business of Nucleus, an Edinburgh group of independent financial advisers. It opened the gates to more outsourcing work.
“We have major UK plcs coming to us now asking us to launch their products for them. We white-label our products and it goes to their customer base. We can launch a product in 12 weeks, when larger organisations often need 12 months.
We can do it quicker and more cost-effectively.” She takes pride in this because six years ago – before she became chief executive - many of the larger players would have said: ‘Scottish who?’ The wrap platform made significant progress, attracting industry admiration and business from the likes of Norwich Union, and it meant expansion for the Glasgow-based organisation with new Glasgow offices.
Alongside, Scottish Friendly was also able to consolidate a number of smaller societies; including its nearby Glasgow rival, Scottish Legal Life, described by Jim Galbraith as a merger of the “Celtic and Rangers of friendly societies.” Overnight, Scottish Friendly grew by a third.
Then, in the summer of 2010, Citi, part of the US giant CitiGroup, made an unsolicited approach to buy the wrap platform and its administration team.
It involved hiving off the St Vincent Street and West George Street staff to a new company, and it was an emotional wrench for McBain, her chairman Michael Walker, the debonair lawyer and former head of leading Scottish firm, Maclay Murray & Spens, who took over in January 2009, and the board.
But the decision was taken and a substantial undisclosed amount was placed into the policyholders’ pot.
“I’m very proud that an organisation of the size and scale of Citi saw real value in what we were doing and paid us a significant premium for that business. Because we’re a mutual everything that we create goes back into the pot. It was quite emotional too when they took down the blinds down with the Scottish Friendly name and replaced them with Citi ones.
On a business level, we could see the value in crystalising that premium now.” In January 2006, Scottish Friendly administered ￡600m in policyholders’ money and, by the end of 2011, it was ￡4bn. In April this year, the mutual announced funds under management of ￡2.2bn, with life and pension sales up 20%.
“I don’t think you can over-estimate the achievement in building that functionality. I’m clear it [the sale] was the right thing to do, but there were a few tearful moments.
We’ve kept close to the business through the transition.” She remains ambitious for the business with a dynamic team in place.
They had certainly done a massive amount to set the Glasgow mutual on its path for the next 150 years.
John Stewart would be proud that his legacy remains in such safe and capable hands.
“In a nutshell, today it is all about giving people maximum access to their savings. We’re still true to the original mission. Why have we succeeded when all the other mutual life offices have failed? It’s because we concentrated on what we are good at – and not go off on some risky venture,” she concluded.