The Banking Structure in Northern

Written evidence from IBOA The Finance Union to the Affairs Committee

Friday, August 30, 2013

1. Introduction

1.1 IBOA The Finance Union represents over 18,000 employees in the financial sector in the , Northern Ireland and Great Britain – predominantly in banking – of whom approximately 5,000 work in Northern Ireland. Members of the Union work in many areas within the sector, including some managerial grades.

1.2 In Northern Ireland, the Union’s membership is principally located within the four main retail : of Ireland, , First Trust Bank and . Since the banking crisis began, the Union has also secured the right to represent staff in the former Irish Nationwide – which, having merged with to form the Irish Bank Resolution Corporation (now in special liquidation), also operates in Northern Ireland.

1.3 Throughout its history, IBOA has contributed to the development of the sector in both jurisdictions in Ireland. As well as representing employees in their own institutions on industrial relations and professional issues, the Union has also contributed to national discourse on developments affecting the sector.

1.4 As the representative body for a key stake-holder interest in Irish banking, IBOA has a unique perspective based on its work on behalf of bank staff in three jurisdictions. After some general observations on recent developments in Northern Ireland, we propose to focus on four main areas: (a) the structure and governance of banks in Northern Ireland () the possible break-up of RBS/Ulster Bank (c) the position of the staff of the former Irish Bank Resolution Corporation: and (d) to banking in rural communities.

2. General Overview

2.1 The transformation of Northern Ireland’s major retail banks over the last five years has been unprecedented in its speed and depth. In terms of ownership, two banks are, to all intents and purposes, State-owned (although by different States); one bank enjoys minority State support with a significant North American shareholding; while the fourth remains in private ownership with its Danish parent driving the most ambitious changes in its operating model.

2.2 None of the banks, which have experienced major changes in ownership, actively sought them: in each case State intervention was a last resort to prevent a worse outcome. But in all cases key decisions about the ownership or operation of these institutions – which have profound implications for their staff and customers in Northern Ireland – have been taken outside the jurisdiction – in either , Edinburgh, or .

2.3 Northern Ireland may also suffer in terms of the quality of investment in its economic, commercial and social infrastructure. Northern Ireland may not rate highly in either strategic or operational priorities – as Ulster Bank’s customers will readily testify when a temporary IT glitch for RBS and NatWest customers became an IT meltdown for Ulster Bank – lasting weeks.

2.4 The absence of any locally-owned banking institutions may also have a negative impact on the availability of credit within Northern Ireland since it turns on lending policy decisions made elsewhere – by parent boards with no specific concern for the good of Northern Ireland.

2.5 Danske Bank (formerly Northern Bank) is arguably the most financially sound of the major retail banks operating in Northern Ireland – since its more prudent approach to lending meant that it largely avoided the surge in speculative property lending which drove Irish banking to the brink of collapse in 2008-9. Danske Bank has recorded operating profits for a number of years and expects to return to overall profitability by the end of 2013 – even after losses for impairments are included. However, the position of Danske’s Northern Ireland business contrasts with its Republic of Ireland operation (formerly National Irish Bank) – which became heavily involved in property lending before 2008 and suffered accordingly. The complete overhaul of Danske’s Republic of Ireland business – with the virtual elimination of its branch network and its remodelling as a niche business bank – has resulted in the transfer of some call centre traffic and processing work to units in Northern Ireland – enhancing their viability.

2.6 The expansion in this activity has compensated in employment terms for the contraction in Danske’s Branch network in Northern Ireland. Since 2005 the number of offices and sub-offices operated by the Bank has fallen from approximately 130 to fifty-two – with continuing reductions likely in 2014. Unlike other major banks where branch closures may have emerged as desperate cost-cutting measures, Danske/Northern Bank has pursued a deliberate policy – over many years in terms of gestation and implementation – to make greater use of electronic channels to deliver services to customers. While all of the banks in Northern Ireland have begun to promote e-banking for customers to some degree, Danske Bank has gone furthest both in terms of customer adoption of the technology and the reduction in the comparative density of its branch network.

2.7 First Trust Bank is a wholly-owned subsidiary of AIB Group which in turn is 99% owned by the Irish State – as a result of the multi-billion euro public investment made to rescue the Group from the disastrous impact of its impaired loans. As part of the restructuring of the Group’s overseas holdings required by the EU Commission, AIB’s Polish and US interests were sold. AIB also put its UK division – comprising First Trust Bank (FTB) and Allied Irish Bank (GB) – on the market. However, with no significant interest from prospective buyers, the division was withdrawn from sale. Following substantial engagement by Northern Ireland Ministers and Assembly members along with concerted lobbying by members of IBOA, AIB committed to remain in Northern Ireland through FTB.

2.8 AIB Group’s initial decision in 2012 to close over 70 branches was primarily focused on its Republic of Ireland business. Some Northern Ireland locations were earmarked for closure under this programme – bringing to 9 the total of offices and sub-offices which have closed since 2008. However, since FTB continues to operate at a loss, management may seek further branch closures in Northern Ireland – requiring customers to make greater use of electronic banking. As AIB Group attempts to restructure its business to achieve a return to profitability and to exit State ownership, FTB may also come under pressure from its parent to transfer some “back office” support operations to Dublin.

2.9 After Danske Bank, is probably the soundest of the four major retail banks in terms of its balance sheet performance. The Group received €4.7bn in State support. It is forecast to return to profit shortly and is keen to reduce the State’s 15% shareholding by “exiting the bailout” at the earliest opportunity. The Bank’s Northern Ireland operations have been restructured in the last three years from being a semi- autonomous entity to being a fully integrated part of an all-island business. Bank of Ireland also has a significant presence in Britain as the provider of banking services to the Post Office. It also maintains a niche presence in business banking in Britain. However, the viability of this operation may be in question following the EU Commission’s decision that the Bank should sell some parts of this operation.

2.10 As for customer access, Bank of Ireland has committed to close the fewest locations of the four major banking groups. Since the onset of the crisis, it has closed nine offices and sub-offices in Northern Ireland. However, although it may maintain a presence on most of its existing sites, the Bank's “new branch model” is built on customers accessing services through a battery of electronic devices (monitors, ATMs and dedicated phone lines linked to a call centre) rather than by face-to-face interaction with bank workers.

2.11 Of the four major retail banks operating in Northern Ireland, Ulster Bank has probably suffered most from the crisis, relative to its size. While Ulster Bank is a very significant player in Northern Ireland’s banking sector, the majority of its business is located in the Republic of Ireland where it was involved in pre-crash speculative property lending. Indeed Ulster Bank’s former subsidiary, (which has since been merged into the main business) was the first institutional lender in the Republic to offer 100% mortgages.

2.12 To address the consequences of its impaired loan book, Ulster Bank has relied on significant support from its parent, Royal – which has been sustained on “life support” by the State for almost five years. Ulster Bank has also embarked on two major cost-cutting initiatives – each involving 950 job losses achieved through voluntary severance. Although AIB has cut more jobs in absolute terms, Ulster Bank has cut deepest relative to the size of its workforce. Of the 1900 job cuts already implemented or announced for Ulster Bank, Northern Ireland has accounted for around 700.

2.13 Ulster Bank has also engaged in branch closures – primarily as a result of the merger of its First Active mortgage business. Having closed eleven offices and sub-offices in Northern Ireland since 2008, the Bank is reviewing its branch network. However, senior executives recently told Northern Ireland’s outgoing Finance Minister, Sammy Wilson, that the number of branches in Northern Ireland to be closed in 2014 would not exceed nine.

3. The structure and governance of banks in Northern Ireland

3.1 As outlined at 2.2, none of the four major retail banks in Northern Ireland are headquartered in the province. FTB and Bank of Ireland are subsidiaries of Dublin-based banking groups. Danske’s parent is based in Copenhagen, while Ulster Bank’s Dublin Head Office reports to RBS headquarters in Edinburgh. Of Northern Ireland’s second tier of financial institutions, only the Progressive Building Society could be regarded as truly indigenous.

3.2 The distance between the board rooms where key decisions about credit and risk are made and the areas in Northern Ireland affected by them is a further concern – especially as many banks with international interests have retrenched to their home markets since the crisis began. Without the intervention of local public representatives, this trend may have been more pronounced in Northern Ireland. These interventions may have secured additional traction because of the substantial level of State support for these institutions.

3.4 Northern Ireland’s four largest retail banks are supervised to some degree by three different regulatory bodies – none of which is located in Northern Ireland. The recently established Financial Conduct Authority does not have a physical presence on the ground in Northern Ireland – nor did its predecessor, the Financial Services Authority. Quality of oversight is an important issue – in view of the recent history of irresponsible behaviour by the leaderships of key financial institutions in both Ireland and Britain – involving high risk property lending, mis-selling of -based products and interest rate manipulation – facilitated by light touch regulatory regimes in each jurisdiction. In such lax regulatory environments, banking leaders were facilitated in adopting cavalier approaches – partly because they believed, correctly as it turned out, that if they got into major difficulties, the State would assist them.

3.5 Another key factor in the near collapse of banking has been the shift in the sector’s prevailing culture from one focused on customer service to one dictated by sales targets driven by the pursuit of short-term profits. The ongoing controversy around bonuses is one facet of culture. Equally troubling has been the pressure on bank workers to sell financial ‘products’ – rather than to offer dispassionate prudent financial advice to customers. The pressure on staff to meet targets is now based on the ‘stick’ of disciplinary action rather than the ‘carrot’ of performance awards. At the same time, bank workers who speak out – even in the most general terms about the state of the sector – risk disciplinary action for either breaching confidentiality or – with no hint of irony – damaging their employer’s reputation.

3.6 The State’s pivotal role in the financial sector at this time provides an opportunity to embed a new culture – which would promote the traditional values of prudential lending and genuine customer service – with technological advances used to enhance such a development rather than being viewed primarily as a means of cutting costs.

3.7 The composition of the boards of banks have been justifiably criticised as a circle of like-minded individuals (indeed with the same individuals frequently sharing interlocking memberships of a number of boards). Greater diversity of membership is essential for avoiding the high level “group-think” which was apparent before the banking crisis and, also, perhaps, since. The inclusion of employee representatives with those of other stake- holders should be prioritised.

3.8 At the sectoral level, IBOA has advocated a Forum on Banking within Northern Ireland – which could bring together all of the stake-holders in the sector – to discuss its strategic direction so that in future the financial sector becomes a loyal servant of economic and social development rather than its untrustworthy master.

4. The possible break-up of RBS/Ulster Bank

4.1 The possible break-up of RBS is a matter of concern to Ulster Bank’s staff and customers in both Northern Ireland and the Republic in light of the speculation about the future of Ulster Bank. The suggestion that Ulster Bank could be acquired by the Irish State raises many difficulties. Apart from questions about the capacity of the Irish State to take on the liabilities of Ulster Bank, the prospect of the Irish State owning two of the three largest retail banks in the Republic as well as a significant stake in the third – would have serious consequences for competition. In Northern Ireland, the competition issue could become even more significant since the Irish Government would exercise more influence over the economy by virtue of its greater presence in retail banking.

4.2 For customers, this scenario would probably involve an accelerated programme of branch closures as two directly owned State banks operating in parallel might prove unsustainable in the longer term. For staff, substantial job losses might also result.

4.3 Further speculation centres on a merger between Ulster Bank and Permanent TSB, one of the smaller State-owned lenders in the Republic, as a joint venture involving RBS, the Irish State and unknown private interests. While such an alliance may offer some benefits to both institutions, it could also exacerbate the problem of Ulster Bank’s toxic debt, since Permanent TSB also has significant impairment issues.

5. The position of the staff of the former Irish Bank Resolution Corporation

5.1 The “special liquidation” of the Irish Bank Resolution Corporation (IBRC) by the Irish Parliament earlier this year has created considerable difficulty for IBRC’s employees in Northern Ireland and the Republic – not least because the consequences for the IBRC workers were not considered by Parliament. The employees became collateral damage in a legislative initiative designed to facilitate the restructuring of interest payments due on the IBRC’s promissory notes and payable by the Irish Exchequer.

5.2 This legislation may be subject to litigation – not least because, it has been argued, the company was solvent at the time, albeit with the support of the Irish .

5.3 From the workers’ perspective, the liquidation is more akin to a receivership as the company has continued to operate as before in wind-down mode but with an accelerated timescale. IBOA has also raised concerns with the EU as to whether the implementation of the Oireachtas’ decision has frustrated the European directive on the protection of employment during the transfer of undertakings – in the case of IBRC staff transferring to other entities – such as Capita and NAMA. IBRC employees in Northern Ireland are further concerned that the Irish authorities may have breached the terms of the Revised Credit Facility Agreement governing the bilateral loan of £3.25bn provided by the British Government at the end of 2010.

6. Access to banking in rural communities

6.1 The rationalisation of the branch networks of the four major banks in Northern Ireland raises questions about access to banking facilities in rural communities. While Danske Bank has implemented the most dramatic reduction programme, the other banks are to be developing similar strategies involving a concentration of face-to-face banking operations in fewer locations while seeking to increase the use of electronic banking services. Some institutions may be tempted to accelerate the closure of branches to push the adoption of electronic banking by customers rather than allow customers to move at their own pace or even retain the option of face-to-face interaction.

6.2 In some rural areas the e-banking alternative may not be as effective due to major infrastructural problems relating to internet connectivity. So customers in those areas may lose immediate access – both physical and online. Furthermore, our members' direct experience suggests that many customers – especially in the older age groups - would prefer to bank with humans rather than electronic devices.

6.4 The hollowing of the physical banking infrastructure may also have adverse consequences for social welfare recipients in both urban and rural areas who were previously encouraged to open bank accounts to receive State benefits after earlier payment channels were discontinued. Any reduction in face-to-face banking may bear disproportionately on customers on low fixed incomes and unable to afford the electronic alternatives.

6.5 IBOA is concerned that although each banking group is taking decisions incrementally based upon its own specific interests, the cumulative effect may be to leave many rural areas in Northern Ireland with reduced facility. In some parts of Britain, banks have come to an understanding that the last branch of any banking group remaining in an agreed catchment area will not face closure. This “last branch standing” approach should be considered in Northern Ireland to guarantee a minimum threshold of physical as well as online service. With the new facility for easier account switching, such an approach would not necessarily be commercially disadvantageous.

7. Final Thoughts

IBOA thanks the Northern Ireland Affairs Committee for the invitation to make this submission. We would welcome the opportunity to engage with you further. Banking is experiencing an unprecedented transformation – mostly under duress after its catastrophic mismanagement in recent years. In this context, Northern Ireland has particular concerns requiring special attention. We welcome your interest and will endeavour to assist your deliberations.