Established in 1869 the Dunfermline Building Society was once Scotland's largest building society. It had its own purpose built head office named Caledonia House, which occupied a "commanding position at the south side of Dunfermline on Carnegie Campus" and provided equally commanding views of the Forth Road Bridge, whilst with its thirty-four branches and thirty-seven agencies it claimed to cover the nation from "Kirkwall in the north to Castle Douglas in the south" and "from Paisley in the west to Tranent in the east", and so promoted itself as 'Scotland's Building Society'.

For most of its history, the Dunfermline was a perfectly ordinary and unremarkable building society, albeit one that draped itself in the saltire, but during the early years of the 21st century it, like many similar financial institutions, sought to take advantage of the favourable conditions provided by the Great Brown Boom to expand its business. In 2002 the Society moved into commercial lending, and also began to build up its presence in the social housing market, or lending to housing associations as it was otherwise known. In addition the Society was attracted to the apparently favourable returns being generated by buy-to-let and self-certified business and decided to move into those sectors as well. Although since the Society lacked the ability to generate such business on its own account, it simply brought in loans from the likes of the British subsidiaries of Lehman Brothers and GMAC.

None of which appeared to be any cause for concern at the time, and indeed even when the first ripples of the Global Banking Crisis became evident during the second half of 2007, the Society's management appeared confident in the future. During the spring of 2008 the Dunfermline announced its results for 2007 and noted how the business had succeeded in delivering a 52% increase in pre-tax profits from £7.4 million in 2006 to £11.3 million in 2007. Some of the shine was taken off these results by the one-off £9.5 million write-off of costs involved in a new systems development and integration programme, but nevertheless management seemed to be believe that growth was still the order of the, as they announced the intention of expanding south of the border, and that the Dunfermline would be promoting its "broad range of mortgage products, including loans for professionals and graduates, 100 per cent deals for first-time buyers, buy-to-let loans and equity release products". In the circumstances the Sunday Herald still felt able in August 2008 to describe the Society as "one of the jewels in Scotland's financial services crown".

The first sign that all was not well came in September 2008 when the Society announced a shakeup in its management together with some fifty job losses, coupled with an announcement that it intended to "re-focus" on its "core business of mortgages and savings" and scale back its "activities in other areas, such as insurance and commercial lending". Then in December 2008, in what The Scotsman described as a "surprise development", it was announced that chief executive Graeme Dalziel would be stepping down at the end of the month to be replaced by Jim Willens, a former director of the Nationwide Building Society, who had only recently joined the Dunfermline in a non-executive role. Willens gave some indication that all was not well when he referred to his task as one of leading the society in "unprecedented trading conditions".

Then on the 14th March 2009 the Sunday Herald reported that the Society had "strenuously denied" the rumours "circulating among senior Edinburgh financial insiders" that it was in merger talks with another building society, whilst a few days later on the 19th March the Scotsman broke the news that the Society was about to announce losses of £26 million for 2008 which were said to have been the result of "exposure to bad loans in the commercial property sector and a push into buy-to-let loans".

It seemed that whilst there was no immediate problem with the Society's liquidity, and that the Dunfermline was perfectly capable of swallowing the loss without, Financial Services Authority was concerned about the Society's "future possible severe losses" and had concluded that the potential losses on its commercial loans were so large that there was no possibility whatsoever of the Society being able to maintain its capital base and could no longer continue as an independent concern. Various efforts were made to put together a rescue package for the Dunfermline, which culminated on the 28th March with a meeting convened by John Goodfellow, chairman of the Building Societies Association, to which a number of executives from various leading building societies were invited. Unfortunately none of them were interested, and thus the Government was forced to invoke the provisions of the Banking Act 2009 and take control of the Society.

On the following Monday, 30th March 2009 it was announced that the Nationwide Building Society would now be acquiring the Dunfermline, or at least those parts of it which it thought were worthwhile acquiring; namely its staff and branch network together with its retail deposits totalling £2.35 billion and its mainstream mortgage lending book of some £1.02 billion. The rest of the Society was left in the Government's hands. The Dunfermline's £648 million commercial property loan portfolio, together with another £274 million's worth of buy-to-let and self-certified mortgages were placed in the Building Society Special Administration Process, to be managed by KPMG, the appointed administrators, whilst its remaining £500 million social housing portfolio was placed into a bridge bank, owned by the Bank of England.

There were those that argued that back in the days when the Building Societies Association regulated its members, at least building societies were regulated by people who knew a thing or two about running building societies, whilst the Financial Services Authority (FSC) was staffed by people who did not appreciate the additional level of risk incurred by societies who sought to move into new business areas far removed from the traditional business of providing residential mortgages. In its defence the FSA insisted that it had been "scrutinising the society's commercial property loans since 2005", although naturally this did not necessarily mean that the FSA had actually taken any action as a result. In any event, the FSA's current chairman, Lord Turner was on record as stating that his preferred solution would be to stop building societies from making loans to commercial property developers in the first place.

It has been said that there are a number of other institutions which may have similarly taken on board commercial lending without having any particular appreciation of the risks they were taking on board. And so there may be other building societies who will follow the path laid down by the Dunfermline.

Chronicling the demise of Britain's financial institutions under Gordon Brown.


  • Nick Bevens, DBS bullish as lending soars 50%, 01 March 2004
  • Rosemary Gallagher, Dunfermline heads south as it targets 40% volume growth, The Scotsman, 13 February 2008
  • Ian Forsyth, Dunfermline sees shake-up in its top management, The Press and Journal, 11/09/2008
  • Terry Murden, Dunfermline's chief Dalziel to pass the baton, The Scotsman, 21 December 2008
  • Dunfermline Building Society plays down merger talk, Sunday Herald, 14th March 2009
  • Jane Bradley and Peter MacMahon, Dunfermline Building Society in crisis with £26m loss, 19 March 2009
  • Jeff Prestridge and Andrew Leach, State takes over Dunfermline as rescue bid fails, 29 March 2009
  • Dunfermline boss attacks Treasury, BBC News, 29 March 2009
  • FSA defends Dunfermline oversight, BBC News, 17 April 2009

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