Terminating Deposit - Demise

Demise

In Britain terminating deposit schemes were outlawed by statute between 1900 and 1910. The reason appears to have been that they relied heavily on the integrity of the organisers and, if this was not present, they were open to many abuses which left depositors out of pocket or dissatisfied. Similar legislation was passed over the following decades throughout the commonwealth with the last appearing to be in New Zealand in 1980/81. After this date no new schemes could be launched but due to the long life of the product some pre-1980 groups continued to exist to beyond 2000. By this stage the product and its administration was a far cry from the original concept. The factors contributing to this were:

1. the implosion of the building society movement which saw it change through a rapid process of mergers and takeovers from an independent society in most large towns to a few large national societies between 1970 & 1990.
2. the conversion of the biggest of these national societies to banks in the 1980s and 90s
3. strong competition between societies from the 1960s on which saw rival societies make drastic changes to the product to make their version more attractive than their rivals. These innovations included the introductions of guaranteed monthly ballots, balloting at an earlier stage in the life of the group (less than 10 years) and a guaranteed interest-free mortgage for every depositor at maturity of the group, if they had not won one earlier.
4. There is some evidence that these changes in product features undermined the economic model of the product so that groups were no longer financially independent throughout their life cycle as per the original product but instead funds were used from later groups to support the cash flow of earlier groups. This meant that when new groups were prohibited by statute the position became untenable. Administrators began treating the total of terminating deposit money as a whole rather than a series of separate groups so in effect well performing groups cross-subsidised other groups.
5. The size of the loan available via ballot wins became insufficient to buy a house due to inflation of house prices during the 25 year life of the group
6. Freeing up of financial markets and general increases in prosperity had seen mortgages become widely available through banks to anyone who was credit-worthy.
7. After no more groups could be created, knowledge of how they were supposed to work was progressively lost, rule changes during the merger and product changes phases did not keep up with the features of the product so that there arose an increasing grey area where the society rules were no longer clear about how they should be operated.
8. Above all many depositors who had been pressured by door to door salespeople to start subscribing chose not to continue and simply abandoned the money they had saved, which had become a minor sum due to inflation.