A new Bill that would enable the merger of different types of mutuals is due to come into force in March, leading the way for further consolidation in the building societies sector.

Co-operative Financial Services and Britannia are the first two mutuals to take advantage of the Butterfill Bill and join forces to create a "super mutual".

This could spark a trend for mergers between building societies, friendly societies and mutual life insurers, which would not have been possible without the Bill.

Although building societies do not use securitisation to raise funds and are less reliant on the wholesale market, they have still been bitten by the economic downturn.

Some are holding back funds which they would normally have used for mortgage lending, and some are opting to strengthen their funding position beyond what is required to provide extra security.

A number of building societies have already been directly affected by the economic downturn, losing money on the Icelandic banks, and the sector is also not immune from the current problem of rising mortgage arrears and repossessions.

As a result many groups are likely to decide that there is safety in numbers and will group together for protection.

Ray Boulger, senior technical manager at John Charcol, said: "It is inevitable that there will be more mergers. In the current environment some societies will be coming under pressure."

In the UK there are 55 building societies, as well as around 33 mutual life insurers and 70 friendly societies, offering a number of possibilities for future mergers.

Co-operative Financial Services chief executive David Anderson said: "I think the new legislation creates an interesting new pathway for mutuals of different kinds to get together. There will be more interest in organisations of different kinds."

A number of smaller building societies are likely to be taken over by their larger rivals as they struggle to survive in the current tough trading conditions.

In December last year Nationwide took over both the Derbyshire and Cheshire Building Societies, while the Catholic merged with the Chelsea, and Yorkshire Building Society took over Barnsley.

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