House of Commons Treasury Committee

UK Financial Investments Ltd 2012

Oral and written evidence

Wednesday 14 March 2012 Robin Budenberg, Chairman, Keith Morgan, Head of Wholly Owned Investments, and Jim O’Neil, Head of Market Investments, UK Financial Investments Ltd

Ordered by the House of Commons to be printed Wednesday 14 March 2012

HC 1896 Published on Friday 27 April 2012 by authority of the House of Commons London: The Stationery Office Limited £7.00

The Treasury Committee

The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of HM Treasury, HM Revenue and Customs and associated public bodies.

Current membership Mr Andrew Tyrie MP (Conservative, Chichester) (Chairman) Michael Fallon MP (Conservative, Sevenoaks) Mark Garnier MP (Conservative, Wyre Forest) Stewart Hosie MP (Scottish National Party, Dundee East) Andrea Leadsom MP (Conservative, South Northamptonshire) Mr Andy Love MP (Labour, Edmonton) John Mann MP (Labour, Bassetlaw) Rt Hon Pat McFadden MP (Labour, Wolverhampton South West) Mr George Mudie MP (Labour, Leeds East) Jesse Norman MP (Conservative, Hereford and South Herefordshire) Teresa Pearce MP (Labour, Erith and Thamesmead) David Ruffley MP, (Conservative, Bury St Edmunds) John Thurso MP (Liberal Democrat, Caithness, Sutherland, and Easter Ross)

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List of witnesses

Wednesday 14 March 2012 Page

Robin Budenberg, Chairman, Keith Morgan, Head of Wholly Owned Investments, and Jim O’Neil, Head of Market Investments, UK Financial Investments Ltd Ev 1

List of written evidence

1 UK Financial Investments Ltd Ev 18

Treasury Committee: Evidence Ev 1

Oral evidence

Taken before the Treasury Committee on Wednesday 14 March 2012

Members present: Mr Andrew Tyrie (Chair)

Michael Fallon Mr George Mudie Mark Garnier Jesse Norman Andrea Leadsom Teresa Pearce Mr Andy Love Mr David Ruffley Mr Pat McFadden John Thurso John Mann ______

Examination of Witnesses

Witnesses: Robin Budenberg, Chairman, UKFI, Keith Morgan, Head of Wholly Owned Investments, UKFI, and Jim O'Neil, Head of Market Investments, UKFI, gave evidence.

Q1 Chair: Thank you very much for coming this Robin Budenberg: Not at that stage, because it is the afternoon. As you may imagine, one of the important chairman who carries out the review of Stephen issues we want to examine is the remuneration of Hester. senior RBS staff. I would like to begin by asking you when you, UKFI, were first involved in any way in Q5 Chair: Did that meeting take place before or after discussions about Stephen Hester’s bonus. the Prime Minister’s very well-reported intervention Robin Budenberg: First of all, I should say our with his speech on moral capitalism on 19 January? involvement is obviously in our role as a commercial Robin Budenberg: It wasn’t a meeting. We had a investor in RBS, operating on an arm’s length basis. series of telephone discussions in which he was As such, the chairwoman of the remuneration getting our input, and certainly the first of those committee sees us on a fairly regular basis through discussions was well before that, yes. the year but in particular came to see us in, I think, early December, to talk about the way in which they Q6 Chair: What did he say? were going to approach the whole issue of executive Robin Budenberg: We went through the five criteria director remuneration through this year. I would say against which Stephen Hester is assessed, as set out in terms of substance, which I think is probably what in the remuneration report in last year’s RBS annual you are looking at, it was, I would guess, in the third report, and we went through each of those. He asked me for my views on Stephen Hester’s performance in week of January. At that point, again as you would each of those five areas. He then talked a bit about his expect, the chairman of RBS spoke to me about his perspective and, as we went through that conversation, assessment of Stephen Hester’s performance during clearly I got a good sense of where he was beginning the course of 2011. to come out in terms of his views.

Q2 Chair: Why don’t we focus in on these events in Q7 Chair: When did you first discuss this specific set January just so we have a clear chronology of events? of issues with the Government or with anybody who Do you happen to know when the remuneration could represent the Government—that is, either a committee of RBS took the decision? Minister or an official? Robin Budenberg: The final decision, I believe, was Robin Budenberg: We were discussing remuneration taken on or around 26 January, if I remember rightly. generally with the Government through officials throughout the run-up to this process. As you know, Q3 Chair: So we need to look at the third and fourth the Chancellor made it clear to this Committee that he week of January. I hope we are able to move on quite was very interested in the RBS bonus process, so we were discussing those things with officials, so that quickly from this, but let’s just try to clarify this they were kept aware with progress. In terms of the chronology. You first met the chairman of precise output from those discussions with the remuneration to discuss specifically the decisions he chairman of RBS, I would say it was later on that would take on 26 January, in the third week of week, in the week before the 26th. January, you say? Robin Budenberg: The discussions with actually the Q8 Chair: Did you form a view about the advice that chairman of RBS, because Sir Philip Hampton is the you thought, as a shareholder, should go to RBS? person. Robin Budenberg: Yes.

Q4 Chair: Just the chairman? You did not see the Q9 Chair: Did you communicate that view after the chairman of remuneration? meeting that you had with them, a specific view on Ev 2 Treasury Committee: Evidence

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil the advice you felt you should communicate with Q19 Chair: There does seem to be, doesn’t there, a respect to the 26 January decision that was pending? difference between what the Prime Minster said, when Robin Budenberg: Not a specific view, not in terms he said in response to a question he would act to stop of an exact proportion of the bonus that we felt would bonuses over £1 million, and what the Chancellor said be appropriate, but a general range, yes, we did. to you, which was that this was a matter for the RBS board? Q10 Chair: What was that range? Robin Budenberg: I can’t speak for what the Prime Robin Budenberg: I think our view was that broadly Minister said. our sense was that it clearly was not going to be close to 100%, based on what Sir Philip Hampton had told Q20 Chair: Do you think that your stance changed us, but would be more than 50%. That gives you a as a consequence of what the Government said to you, range of, I guess, 50% to 70%. We did not specifically or were you merely able to say that this was say, “This is what we think the range is. We think it confirmation of what you had already more or less will be less than the maximum”. decided among yourselves that you would take to the RBS board as your view? Q11 Chair: This is a per cent of— Robin Budenberg: Again, I think it is important that Robin Budenberg: The way in which the bonus for as a shareholder we do not dictate what the level of last year was established was directly in relation to bonus for Stephen Hester should be. That is absolutely the value of a pot of shares. a matter for the board. Our role is to be consulted in that, and if we think we have fundamental issues with Q12 Chair: This is a question of how much would that, our role is to make that clear to the board. be released? Robin Budenberg: Exactly. Q21 Chair: Did you consult other shareholders? Robin Budenberg: No. Q13 Chair: Roughly, what was the value of the 50% to 70% at that time? Q22 Chair: Do you think, were it to be fully put into Robin Budenberg: The share price went up 10% the public domain—and clearly only some of what during the period of these discussions. you have told us so far was already in the public Chair: I just want to get a rough figure. domain prior to these exchanges—that any of what Robin Budenberg: It was, I guess, between £800,000 you saw or heard at that time could be challenged on and £1 million. the grounds that it was creating shadow direction? Robin Budenberg: I do not believe so. I am very Q14 Chair: When you spoke to the Government, comfortable that the board of RBS, or particularly the what guidance did they give you? remuneration committee of RBS through which this Robin Budenberg: They were very clear that they decision is taken, when it took that decision, was not wanted to make sure that this decision was made in aware—I did pass the Chancellor’s views on to Sir the context of the climate on remuneration, and they Philip Hampton but he did not pass those on to the wanted to make sure that it was substantially lower remuneration committee during the time that the than the figure that was announced for Stephen Hester decision was made. The remuneration committee, last year. which ultimately is the body that makes this decision, was not aware of the Chancellor’s views at that stage. Q15 Chair: When was the figure of less than £1 million first discussed? Q23 Chair: When your view differs, as it may from Robin Budenberg: I think the Chancellor always time to time, from that of the Government on how made it clear that this was a decision for the board of best to protect shareholder value, what are you going RBS. I think he felt in that meeting that it would be to do about it? difficult for him to justify a figure of more than £1 Robin Budenberg: If we think that something is in million. the bank’s commercial best interests, generally our sense is that the Government also wants to do what is Q16 Chair: You had a meeting with him to discuss in the bank’s commercial best interests and, therefore, this? we would seek to persuade them of our point of view. Robin Budenberg: Yes. Q24 Chair: When that fails, where are you going to Q17 Chair: Where he said he found it difficult to come? justify more than a million but it was a matter for Robin Budenberg: Ultimately, our board is there the board? effectively to protect our mandate, which is to act in Robin Budenberg: He focused on the fact that he the commercial best interests of the bank. understood that this was something that the board needed to decide. Q25 Chair: In your discussions with Sir Philip Hampton, did he say that any of the exchanges that Q18 Chair: When did that meeting take place? have been taking place on all this constituted Robin Budenberg: I think it was a week before the something that was forcing RBS to act on non- 26th, I guess. I am afraid I can’t be absolutely sure commercial grounds? about dates, but broadly I am fairly confident with Robin Budenberg: No. He was entirely comfortable that. with the discussion that we had. He was clearly in a Treasury Committee: Evidence Ev 3

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil position where he felt that he knew what, from his the fact that the public now, the taxpayer, is the main point of view, the right outcome was, and none of the shareholder, how confident are you that there is no discussions we had interfered with that in any way. further risk in that business? Has there been any due Chair: Thank you very much for that. diligence into any others areas where there could be substantial risk such as, for example, tax planning, Q26 Teresa Pearce: On 19 December 2011, the EBTs? There is currently a lot of discussion in the Chancellor told the House of Commons that RBS will financial press about the activities that surround make further significant reductions in the investment LIBOR, and RBS has been mentioned. How confident bank, scaling back riskier activities. Whose decision are you there is not another time bomb in there was that? Was that the Chancellor’s or RBS’s board? somewhere? Robin Budenberg: That was the board of RBS. Jim O’Neil: We did spend a lot of time on the Again, the question of the strategy for the investment investment banking business of RBS, and it is a bank is something that we have been discussing with natural question of a Government-owned institution, RBS for well over 15 months now. It is clear from the or an 82% Government-owned institution, having a whole development of capital regulations in position as an investment bank. It was part of RBS’s international banking that the strategy for investment strategy in 2009. The benefit of the investment bank banking has to be adjusted. We had a series of was it generated £10 billion of capital and profit over discussions with the senior management of RBS about the last three years, which has been important in that. They felt that it was appropriate to wait for the rebuilding the capital of RBS. But as Mr Budenberg outcome of the Vickers Commission, because clearly says, the regulatory and market environment has that could have an impact on the balance and structure changed, so they are changing their business models, of investment banking for banks owned by UK as are Credit Suisse, UBS, BNP and some other companies. The announcement was made in the third European investment banks. quarter results of RBS in November, effectively To get to the heart of your question, risk and controls stating very much what the Chancellor stated in the at RBS was one of the things cited in the FSA report House of Commons on 19 December. on RBS, and management, when they took over on their five-year plan, have instituted a plan to improve Q27 Teresa Pearce: Do you think that that should risk and controls as well. We are two and a half, three have been announced officially by the board rather years into that plan and I think we would all note that than the Chancellor? progress has been made, but they are not all the way Robin Budenberg: I think it was announced officially there to where they want to be and so they continue by the board in the third-quarter results in November. to invest in those risk and controls.

Q28 Teresa Pearce: The Government has adopted an Q31 Teresa Pearce: There were risk controls before, increasingly vocal role in terms of RBS’s corporate but the problem was there were risks that they could strategy. Where does that leave UKFI? Does that not control that they did not know were there. Have make you redundant? there been any provisions within the accounts for a Robin Budenberg: No, I don’t think so. I would say possible risk that could crystallise? What level of due this, wouldn’t I?—but I think we play a very diligence has been done? There are the areas that important role in three ways. First of all, I think just exploded, but there could be other little time bombs by definition our mandate is very important because in there. Has everything been looked at now? Is there we have a board that is charged with a formal mandate anywhere that I should be worried about my money? to act in the best interests of the banks that we own Jim O’Neil: We interface as looking after the or we control the shareholdings in. Effectively, that is taxpayers as the shareholders with the board of the one thing that we do. That creates almost a nuclear management. We are not involved in day-to-day deterrent that if the Government feels that it wants operational decisions as part of our job, but we do do to use the shareholdings to invoke a non-commercial business reviews of all businesses, including GBM. outcome then they have to persuade our board of that. We regularly meet with the risk committee chair as I do not think our board would be prepared to do that well as the heads of risk at each of our banks. because that is the one thing that we are there to Inherently, all banks have risk and so I can’t say that protect. banks won’t have areas that will have losses again, but what I would say is for RBS, as with many banks Q29 Teresa Pearce: In the shift of RBS’s corporate after the crisis, there has been a wholesale change in strategy, did you play a part in that? terms of how they do things. They are not just doing Robin Budenberg: Yes. It is always very difficult to it on their own; the regulatory reforms are carrying say, when you have had discussions over a long period them out there as well. of time, who did what. I am absolutely clear that it was the management of RBS, and ultimately the board Q32 Teresa Pearce: Which brings me on to Lloyds of RBS, that made the decisions about that shift in Banking Group: they have announced a loss of £3.5 strategy, but clearly we were involved in those billion, largely because of the mis-selling of payment discussions and had views and continue to have views, protection insurance. Do you expect Lloyds to set because I think this is an evolving issue. aside more money for that? Jim O’Neil: They have instituted their framework for Q30 Teresa Pearce: Given the huge risk to the dealing with the PPI complaints, and that is ongoing economy that came with the near collapse of RBS and now. That is one of the topics that we engage with Ev 4 Treasury Committee: Evidence

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil

Lloyds management on, because that can potentially results, that was largely offset by increases in salary? be additional risk if they had losses in excess of that Would that not be something you would be and they have to make more provisions. I think at this concerned about? stage they stand by the original provisions that they Robin Budenberg: We would if it was the case, but it made, given the responses that they have received to wasn’t the case. There was only a very small date. That is obviously something they monitor very proportion of offset in relation to increases in salary. closely. Q38 Mr Love: You are clear about that? Q33 Teresa Pearce: Final question. The FSA Robin Budenberg: Absolutely clear. mentioned to us that the mis-selling of payment protection insurance produced large profits in an area Q39 Mr Love: Let me go on to payment protection of the business that would not necessarily have insurance. You will be aware and I suspect you had expected that large a profit, and when the board were some discussions with Lloyds TSB about the action looking at that they should have thought, “How is they have taken in relation to bonus incentive this?” and they did not. That really comes down to schemes. There does not appear to be similar action culture. Someone once said, “While the music was happening at RBS. Have you discussed this with them playing, we were all dancing,” and I think people were and what action are they likely to take arising from it? too busy dancing to look at the risks. What power do Robin Budenberg: Yes, we have discussed that. In the you have over the culture of these organisations that Lloyds context, there were two actions that the Lloyds were so important in the downfall? remuneration committee took. The first one was to Jim O’Neil: I think the most important influence is look very hard at the bonuses of all the employees of the management of the boards. The boards of both of Lloyds this year, and those were reduced by 30%. A those banks are entirely different than prior to the significant proportion of that reduction was a crisis and nearly 100% of the senior management reflection of the PPI provision. Then, of course, in team are different than prior to the crisis. The culture relation to senior executives who had left the group, comes from top down. These are immensely large they took the view that they should seek to get some institutions. RBS has 150,000 employees, Lloyds has of their bonuses clawed back, which again came out 100,000, and so disseminating that through an in public. organisation takes time and these banks are in As far as RBS are concerned, there was not the same transition. There has been a large change since that change in senior management over the course of that time. time and, indeed, the PPI issue at RBS was much less significant. It was a very significant amount, please Q34 Mr Love: Can I come back to the issue of don’t get me wrong on that, but it was significantly Stephen Hester’s bonus? It was widely described in lower than at Lloyds. Therefore, the remuneration the media, when it became public, as a fiasco. Do you committee took account of that in relation to coming agree with that summation, and can you reassure this out of the bonuses at RBS as a whole, which again, if Committee that it is not going to happen again? you look across RBS as whole, were reduced by some Robin Budenberg: I think, as I tried to explain earlier, 40% last year. in terms of the process in arriving at that bonus figure, I feel very comfortable that the process was Q40 Mr Love: Let me remind you that the figure for appropriate. Clearly, the outcome was not satisfactory, Lloyds was £3.2 billion and the figure for RBS is just and I think it demonstrates that RBS remains over £1 billion—a very significant sum of money. But vulnerable to issues and timing working against it. I if I can refer you to your own statement, issued on 24 think that is something that the more we can February, regarding discussions with RBS and Lloyds, demonstrate that RBS is on the way back to recovery it said, “The introduction of share-based awards and and on the way back to returning money to the stringent deferral and clawback”—I repeat that word Exchequer, the less that those sorts of instances will clawback—“conditions”. Why are you not insisting arise. with RBS that they claw back? Robin Budenberg: Clawback arises where you can Q35 Mr Love: There was some suggestion in the show that circumstances existed at the time that you media that resignations from the board of RBS were were awarded the bonus that would have made you being threatened. Were you aware of any of that? change your view on the bonus. I think the case at Robin Budenberg: I have only heard what Stephen RBS was that they were aware of the likelihood of the Hester said in public, which is that he considered need to take a provision in relation to PPI and that was resignation but felt that that would be self-indulgent. reflected in the views on the previous year’s bonuses. I think as the chief executive— Q41 Mr Love: In relation to RBS’s long-term Q36 Mr Love: No, I was not thinking about Stephen incentive plan, the part that relates to total shareholder Hester; I was thinking about other members of the return appears to have been reduced from 50% to board. 25%. Is that not rather contradictory to your stated Robin Budenberg: I am not aware of other objective to get maximum return for the shareholders? resignations, no. Why has that happened? Robin Budenberg: I think there has been a significant Q37 Mr Love: Is it acceptable that although the RBS change in institutional investor attitudes to long-term bonus pool was significantly reduced because of the incentives schemes. I think there has been growing Treasury Committee: Evidence Ev 5

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil concern among institutional investors that by focusing Robin Budenberg: We will take it back, and it is people significantly on share price they are something that we have considered. Clearly, where the incentivised to focus on the share price rather than share price is at the moment, we have to have building up the long-term value of the company. The incentives that have a realistic prospect of— RBS remuneration committee has responded to that by introducing a broader set of measures, particularly Q46 Chair: They can be large down the line when including one in relation to risk and one broadly people have got their money back, but in practice covering a set of measures judging how well the pressure has been brought to bear that has resulted in business is performing—for example, in relation to the bonus being waived by the recipient. customers. We have sympathy with the institutional Robin Budenberg: I accept that point. I would just investor attitude to that. We think it is very important say that all the bonuses are paid in shares that have to that institutional investors are comfortable with the be kept for many years and, therefore, the incentive arrangements at RBS and, therefore, we management is extremely motivated. have agreed to those. Q47 Chair: I am suggesting the application of an Q42 Mr Love: My primary interest, indeed this additional condition. Committee’s primary interest, is the taxpayer as Robin Budenberg: Thank you. shareholder. It says on your website that your overarching objective is to manage shareholdings Q48 Andrea Leadsom: Mr O’Neil, how is the pool commercially to create and protect value for the of shares, from which the base case for the bonus is taxpayer as shareholder. Do you think, by calculated, established? downgrading that particular part of the long-term Jim O'Neil: You are referring to Stephen Hester’s bonus plan, you are protecting the value for the bonus? In the case of last year, the shares were put in taxpayer in RBS? a pool. The share price at that time, at the end of Robin Budenberg: I do not think we would support 2010—correct me if I am wrong—was, I think, 42. It that if we did not feel that the other objectives that was much higher than it is today. As Mr Budenberg were introduced would not lead to a long-term was saying, over the course of the year, as that share sustainable benefit for the share price. Certainly, price went down, effectively the pot available for the elements in relation to reduction in risk and elements bonus went down with the share price. in relation to the long-term customer franchise should result in an increase in overall value and, we think, Q49 Andrea Leadsom: What I am asking you is who would be in the best interests of the taxpayers. decides what the pot is to be. If the share price was 42 pence and a certain number of shares were set aside Q43 Mr Love: Let me ask one final question. It again then clearly, had the share price not moved all year relates to the statement about RBS and Lloyds that and had Mr Hester been eligible for 100% of his UKFI put out. You said that you do not intervene in bonus, that would have amounted to—and I am relation to individual remuneration decisions except guessing here—£3 million, let us say. Who decides on directors through having a vote on the directors’ that that is the base case and why? How is that remuneration report at the annual general meeting. Is calculated? that something you have considered in relation to Robin Budenberg: It was based on the basis of RBS? Stephen Hester’s remuneration that was agreed by shareholders when he was recruited to the role, which Robin Budenberg: Excuse me, whether we should be is 200% of salary. The calculation was based on 200% having a direct impact on individuals? of salary and then divided by the number of shares Mr Love: On directors. and that gave a number of shares. I should say that Robin Budenberg: No, we do. As we have discussed, that system has not been retained for this year, partly because of the importance of our vote at the annual because clearly the share price has gone up very general meeting, the boards and remuneration significantly since the beginning of the year and the committees of the banks believe it is important to get remuneration committee and Stephen Hester felt it our views on the remuneration of executive directors would be inappropriate to base his potential bonus on and, therefore, they do involve us in discussions something that has increased by 40%, I think is the around that. We do do that and that is why we figure. specifically excluded that from our input into individual remuneration decisions. Q50 Andrea Leadsom: That is not really answering the question. What I want to know is, why and how Q44 Chair: Do you agree that it would be more was it decided that the bonus for the chief executive acceptable to the public if RBS made future bonus should be 200% of salary? How was that decided? payments to senior staff conditional on the taxpayers Robin Budenberg: That was decided when Stephen having got their money back? Hester was recruited. Robin Budenberg: I can see that it would be something that taxpayers would feel more comfortable Q51 Andrea Leadsom: Yes, I understand when, but about. I think with the— how? Why was that decided to be? What was the peer grouping? What was the measure? Was it McLagan Q45 Chair: Given the experience we have just been data, for example, that I know is an industry standard through in January, isn’t that something to take back? for comparing pay groups and so on? Who decided Ev 6 Treasury Committee: Evidence

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil that in a taxpayer-owned company that had had such that was not bailed out by the taxpayer somewhere. obvious difficulties that 200% of salary is the right So, yes, do continue on that basis. amount? Robin Budenberg: We have a choice. We could either Robin Budenberg: How it was decided was definitely pay the employees of RBS on the basis of something based on an international peer group and a UK peer that we or the board and the remuneration committee group. Who decided fundamentally was, to begin of RBS consider to be competitive, albeit that I think with, the remuneration committee and, ultimately, that across the board at RBS pay is at the low end of the was approved by shareholders. competitive range, or we could do away with any pretence of competitive pay. My own view is that that Q52 Andrea Leadsom: If Mr Hester was to receive would not be in the public interest. We might find one 100% of his bonus entitlement next year, what would or two people who would be prepared to do that, but that currently amount to? What is the basis for next I think across the piece you would find it impossible year’s bonus? to keep and retain and attract the sort of quality of Robin Budenberg: That remains 200% of salary. people that you need to run an incredibly complex, risky and challenging bank. Q53 Andrea Leadsom: So, next year, if his salary is £1 million, his bonus, if he gets it all, is £2 million. Q57 Andrea Leadsom: I completely disagree with How is it decided again that that salary and bonus for you there, and I think there is some proof of the next year is the appropriate level? How do you take a pudding because Stephen Hester forwent his bonus peer group of state-owned, bailed-out banks and and he is still doing the job. As you said, and as he is create a peer group for the bonus of a chief executive? widely reported to have said, he considered resigning Robin Budenberg: I do not think we should take a and realised that he wanted to do the job more than peer group of state-owned, bailed-out banks, partly he wanted to resign over the fact that he did not get because there probably is not one and partly because I his bonus. That completely undermines what you have think it is very important that if we want to encourage just said. outstanding management, as we have at RBS, into I want to take you back to what you said when you RBS, we need to be able to pay them competitively came to the Treasury Select Committee last year. You with the marketplace. said then, and I distinctly recall it—I do not have the quote here—what you really wanted to do was a Q54 Andrea Leadsom: That is what I was really revolution in corporate governance in these banks. hoping you would say, so thank you for saying that. You wanted to get them to take seriously their That brings me on to the point of if we now turn to, responsibilities and so on. It seems to me we have say, Bob Diamond in Barclays, when he was at made absolutely no progress. I wonder if you have at Barcap, I think his last year’s total comp was your fingertips the statistics on how the shareholder something like £20 million. Why do you think he was dividend has been affected since the financial crisis willing to take a significant pay cut to only something versus the employee bonus pool. That would be a very like £6 million, the poor thing, to be chief executive interesting number to see whether there is any relation of the Barclays Group? How on earth would he have whatsoever with the fact that people who have their been attracted to such a drop in pay if, as you say, the own pensions and their own life savings invested in only reason we can get such outstanding candidates in banks and what has happened to their life savings, the a state-owned bank is if we pay them 200% of salary? share price and the dividends, versus the employees It is illogical. I think you will agree it is just illogical. and the directors of the banks who got them into this Robin Budenberg: I do not think it is for me to mess and appear to have taken very little downside comment on Bob Diamond’s pay. whatsoever. How is that in keeping with your goal of improving the corporate governance? Do you have Q55 Andrea Leadsom: Forget Bob Diamond. If the those statistics? point you have just made, which is that to get Robin Budenberg: Well, the bonuses at RBS overall outstanding candidates you have to be paying them went down by 40% last year. Those in the investment sums that are 60, 70—I have not done the maths—80, 90 times what the average income is in this country, bank went down by 60%. at what point is the cut-off for your outstanding candidate? Is it 50 times the average worker’s salary, Q58 Andrea Leadsom: What about the shareholder or is it 1,000 times? Who decides that that is what you dividends and the share price since the financial need to attract that outstanding calibre of candidates? crisis? Robin Budenberg: I understand that it is very Jim O’Neil: There was no shareholder dividend, so it difficult, in the context of a bank that has been bailed is very— out by the taxpayer, to talk about these sorts of Robin Budenberg: The share price went down from— numbers. Jim O'Neil: I think since the taxpayer investment the share price is down approximately 50% in terms of Q56 Andrea Leadsom: Let us just be clear, every losses. bank was bailed out by the taxpayer—every single bank—because all of the central banks provided Q59 Andrea Leadsom: And the dividends were essential liquidity otherwise the banking system down 95%— would have collapsed. There is not a bank on the Jim O’Neil: There are effectively no common planet, barring the few small retail domestic banks, dividends. Treasury Committee: Evidence Ev 7

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil

Q60 Chair: You said a moment ago we could do of a good bank, what are the other assets and what away with any pretence of competitive pay. Are we does one do with those? There are a variety of those pretending now? assets to think about in RBS, but I think in particular Robin Budenberg: If you compare RBS against its it would be the non-core division of the risky assets peer group—and I think the main area to focus on is is about £100 billion, and what does one do with those the investment bank—you can see that they do pay a assets? Presumably, the Government would have to significantly lower level than other banks. What they intervene in some ways to take those assets on the do is that they are very disciplined in making sure that balance sheet. In looking at a proposal like that, one what bonuses they do pay go to the people that really would have to look at the benefits of turning it into make the difference, and I think that is the right and this kind of bank and what are the potential costs to the only strategy for them to follow. the taxpayer and the Exchequer in dealing with the bad assets. But I can’t say that we have been asked to Q61 Chair: Given what you have just said and what look at that specific proposal. you have been saying over the last few minutes, is it really plausible to say this bank is being run on fully Q66 Mr Ruffley: So you have not received anything commercial lines? from Mr Cable’s Department? Robin Budenberg: Inevitably, when you have an 80% Jim O'Neil: No, not that I am aware of anyway, but I Government shareholder, there are stresses and strains don’t think so. in that relationship. As Mr Love said, we came across a situation in relation to Mr Hester’s bonus. Q67 Mr Ruffley: Not that you are aware of. Is it the case that— Q62 Chair: So it is nearly commercial but not fully Jim O'Neil: As I say, because we are in the role commercial? specifically as a shareholder and there is a lot of policy Robin Budenberg: I think if you talked to the board dimensions to that, they may more likely have reached of RBS, they would feel that they can run this bank out to Treasury on that. and they do run this bank on a commercial basis, but there are some areas where clearly and appropriately Q68 Mr Ruffley: Yes, okay. Wouldn’t the hiving off they have to be, and are, more sensitive than other of the investment banking activity within RBS make commercial entities. a Vince Cable-type proposal irrelevant, because isn’t Chair: You missed out on the diplomatic corps. That the strategy in hiving off the investment banking is very good, but I understand why you are saying business to focus on more business and personal what you are saying and I appreciate it. lending? Jim O'Neil: They are reducing the size of the Q63 Mr Ruffley: Mr Budenberg, just one question investment bank, but they will still be in investment on the Stephen Hester bonus saga in January. There banking. They are particularly closing down their cash was a lot of speculation—I think, informed equities business, which they were losing money in speculation—that the board of RBS had threatened to and trying to grow, but their capabilities in fixed resign. Is that true? income, FX and rates would still be there. If that did Robin Budenberg: No, not that I am aware of not fit into whatever the proposal would be to create anyway, I should say. But I would be surprised if I a new bank, one would have to think about how to was not aware of that, because I think that our role is address that as well. I think any time when there are that if the board of RBS thinks it is being asked to various ideas of turning RBS into another entity, one operate in a non-commercial way we should, very needs to think about what one does with all the other clearly, be aware of that, and our board— parts. Some parts might be able to be sold or done something with, but other parts, it is not so clear what Q64 Mr Ruffley: You are saying you were not aware one would do with those. of it? Robin Budenberg: Yes. Q69 Mr Ruffley: Could you indicate to this Committee, because there is quite a lot of public Q65 Mr Ruffley: That is fine. I want to turn to interest in this, which is favourite at the moment in another issue, which is that the Secretary of State for terms of the possible futures for RBS? Business has announced very recently that he sees Jim O'Neil: What is favourite? As the management attractions in breaking up RBS and from it forming a has articulated, the UK core corporate and retail bank new bank specifically dedicated to business lending. is the centre of RBS. They do have a retail bank in Have you done any work on the proposition? the United States. They have a wealth business. They Robin Budenberg: Could I ask Mr O’Neil to answer have an investment-banking business, which they that? have announced a change in strategy to make smaller. Jim O'Neil: I would not say we have done work on The particularly challenging bits when one thinks that specific proposition, but we do work and think about these ideas is what does one do with the non- about all kinds of propositions as relates to RBS as core division, which is £100 billion of assets, which I part of our role. I think at the heart of that question is think, by the way, the market widely agrees that the do you want to turn RBS into some type of good bank management has done a good job of managing those that has some different type of purpose. What does to the best that they can. There is also the Ulster Bank, one do with the other parts of RBS and how does one which it is difficult to think what one would do with achieve that? I think, specifically related to any type that. Ev 8 Treasury Committee: Evidence

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil

Q70 Mr Ruffley: Do you think it is going to be sold Robin Budenberg: The average figure has gone down off in its present form? 30% from last year to this year. Jim O'Neil: What would be sold off in its present Mr Mudie: Which means? form? Robin Budenberg: Around £800,000. Mr Ruffley: Are the shares going to be sold in this Mr Mudie: How many people were involved there, business in its current form? though? Jim O'Neil: Would we be monetising shares in the Robin Budenberg: The same number. business in its current form? I think the management Mr Mudie: 300? has put on a five-year plan that includes those Robin Budenberg: Yes. businesses in the five-year plan. There has been a change in strategy in GBM related to the change in Q74 Mr Mudie: Can you send us the exact figures? market and regulatory circumstances. So I think when We keep getting figures here that magic away the next investors are buying RBS shares today, they are time people come in front of us. buying into that plan. Management obviously reviews Robin Budenberg: Yes. that strategy in its portfolio of businesses and with the board on a regular basis, but that is the assumption, Q75 Mr Mudie: When you described your yes. discussions with the chair of the board and then you mentioned, “They did involve us in discussions on Q71 Mr Ruffley: Pretty much in its current form, remuneration,” it seemed to me a very cosy chat selling the Government stake, the bank in broadly its between two civilised gentlemen who did not want to current configuration? get overexcited about money. Is there an objective Jim O'Neil: Yes. I think the investment bank is clearly stated criterion for earning these large amounts of something that is evolving, but broadly in its current money in RBS or is it subjective; it is vague, so it form. That does not necessarily mean that an investor enables yourself and the chairman to reach agreement who buys those shares might consider that something without much difficulty? might happen after he buys those shares, so the Robin Budenberg: I think there are five very clear management may decide to do something different criteria, which were laid out in the annual report last down the road, but I think that is the assumption. year and against which the chairman assessed Stephen Hester’s performance. There is an element of Q72 Mr Ruffley: My final question, Mr Chairman. qualitative judgment about that, I agree. The Centre for Policy Studies put out last summer a proposal for the Government’s stake to be given as Q76 Mr Mudie: How big is that element? Or put shares to the public. It would be an offering to the another way, how big is the element that can be public. I think you are aware of that piece of work. objectively studied? Could you tell me something about the status of that? Robin Budenberg: Well, of the five, I would say three You have had discussions with the bankers involved, are pretty quantitative and two are fairly qualitative. haven’t you? Jim O'Neil: We discuss a wide range of proposals Q77 Mr Mudie: When this business blew up, the with a wide range of people. We have discussed this press approached RBS and said, “Can you give us our proposal with some of the people who have been criteria? This is public money. The public are outraged thinking about it as well. What I would say is—and I at it. They have a right to know,” and RBS refused. will give you the short answer, because we do have a They do put certain things in their annual accounts lot of thoughts about the proposal—at the core there that seem fairly vague. Can you supply this are a lot of policy decisions of this proposal. It clearly Committee with the stated criteria for the bonuses has some attractions of giving potential value upside last year? to the general public, potentially accelerating the Robin Budenberg: Yes. disposal of the banks. At the heart of it, there are a lot of policy aspects to it that are not the core of our Q78 Mr Mudie: Straightforward. Lovely. That is us maximising value for money in the sense that our job finished on bonuses, you will be delighted to hear. On is to get the most value for money back for the Vickers, which figures in your future strategy and so Exchequer. But we have engaged on it with various on, are you, RBS and the Government all singing off people, as we do with other proposals, and there are the same hymn sheet? Do you all have general pros and cons with that proposal, as there are with agreement on where you are going? others. I am happy to go through that in more detail, Jim O'Neil: I think we all come at it from a different but it is hard to give a short answer or a very long angle. We did interact with Vickers from our value answer. mandate and we spent time with the Commission, obviously with RBS and Lloyds in terms of their Q73 Mr Mudie: Just a couple of questions on thinking about it, and our role there was to make an remuneration. Last year, over 300 people in RBS assessment of the value implications of various earned more than £1 million. Can you give us the proposals. When we did that, we did not know what comparative figure this year? the final proposal was, so that was a very wide range, Robin Budenberg: I think that figure was 300 people but we come at it from strictly a value standpoint. I with an average—that is the average figure. think Government obviously has other issues to Mr Mudie: Yes, sure. balance as well, so I would not say we are Treasury Committee: Evidence Ev 9

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil disconnected, but we all came from a slightly associated with it, but if it did not generate that profit, different angle. where else would RBS have generated that for its capital position? I would not use the characterisation Q79 Mr Mudie: I am not bothered what your starting that they are running down their investment bank. point is; it is your finishing point. We are fairly well They are making it smaller in the context of the into having an agreement. There are details to be changing market environment and the changing clarified when the legislation comes through, but the regulatory environment, Basel and Vickers. The general shape of Vickers in its final report the management has come up with a plan. I think, like the Government has accepted. Has RBS accepted, to your management of other investment banks, they are knowledge? Are they working with you and the going to have to monitor this as time goes on. I think Government in terms of getting ready for Vickers as the short answer to your question is the investment much as you can at this stage in the proceedings? bank will need to be able to earn its cost of capital for Jim O'Neil: I would say they were working directly it to be a profitable contributor to RBS. with the Government. We are involved in that, but I Mr Mudie: So that means no? think RBS is working with particularly— Jim O'Neil: It is not now, but it is not for any of these banks and it is part of their mission to be able Q80 Mr Mudie: No, but you are aware of what they to do that. are doing. Are they, to your knowledge, working on a detailed strategy as much as they can, because the legislation has not been finalised, on Vickers? Q84 John Mann: Can I ask a few very quick factual Jim O'Neil: I do believe so. I do believe that there is questions just for the record? I want to look at still some important areas like primary loss-absorbing Northern Rock. The first is will the advice provided capital and a few other areas, but yes is the short by Deutsche Bank be made publicly available? answer to your question. Keith Morgan: You have probably seen the report that we have written here and what we have included in Q81 Mr Mudie: There is a strong rumour going the report is all the dimensions of the considerations round that, during last year, they paid a number of that we feel were appropriate to drawing the lobbying firms vast amounts to work for them on conclusions and the conclusions were in the report— Vickers. Well, it will be vast to us but nothing to Stephen. Are you aware of RBS hiring lobbying firms Q85 John Mann: All I have asked is will the advice to lobby against the Vickers proposals? provided be made available. Jim O'Neil: The short answer is no. I know RBS does Keith Morgan: We were planning on making this employ a huge range of consultants because it is going advice available, which is contained within the report. through so much. Q86 John Mann: Nothing more than that will be Q82 Mr Mudie: Do you think you can make made available? inquiries and tell this Committee what money was Keith Morgan: Yes. There are numerous other spent in how many companies to lobby over the Vickers proposals? working documents that we received from Deutsche Jim O'Neil: We can ask them about their lobbying Bank, but it extends to hundreds and hundreds of efforts. pages.

Q83 Mr Mudie: That would be very good. Just the Q87 John Mann: My question is, will they be made last thing in terms of where Mr Ruffley was—it is publicly available? clear that the focus of the bank is shifting to Keith Morgan: No. The answer is we were planning mainstream stuff rather than investment and the on making this available. investment arm is being run down. Do you see the public being able to get their money back if the Q88 John Mann: No, it is a factual question. I heard investment arm continues to decline? In all the banks the answer no. I just want to make sure for the record that went through the last crisis, the investment arm that is accurate. How much did the advice from seems to be the one that causes trouble but the one Deutsche Bank cost? that made the profits at that time. I think Diamond is Keith Morgan: £1.84 million. having the same trouble at Barclays. If you run that down it affects your profits, but it also affects your value, doesn’t it? Do you see? If you continue to run Q89 John Mann: Thank you. Did you meet with the this down at RBS, we have any chance of getting our European Commission to discuss the option of money back? delaying the sale of Northern Rock? Jim O'Neil: It is a fair question. Keith Morgan: The European Commission have been Mr Mudie: Thank you. Is that the first one I have closely engaged throughout the process, both before asked? and during the sales process. The answer is yes, sorry, Jim O'Neil: No, sorry, I did not mean to caveat that. just to get to the straight answer. It is a very important It is a question we think about a lot, is what I meant, dimension because the company was in receipt of and it is not an easy question to answer. As I said state aid. Being in receipt of state aid, we have to before, the investment bank has generated £10 billion satisfy the European Commission that the exit from of profit in the last three years, so it has some issues state aid is appropriate. So, yes. Ev 10 Treasury Committee: Evidence

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil

Q90 John Mann: Did you argue with the European where people need to be comfortable with their own Commission that the extension could or should be bids and they need to feel that they are going to get extended—the deadline could or should be extended? the value from the bid that they put forward. Keith Morgan: I would like to give you some background to this point, because I think it is an Q95 John Mann: Did any drop out because of the important point and it is around about the timing of question of the state aid rules and the European the sale. The EC state aid condition is a legally Commission deadline? binding condition between the UK Government and Keith Morgan: No, we did not make that—obviously, the EC. It relates to the state aid grant to Northern in our case, we wanted to keep that confidential, Rock and the legally binding nature of that is because if bidders had known that there was a enshrined in an EU treaty. Of course, there was a lot deadline, then we would have been in a position of attention devoted to the EC during this process. where people may have felt that was a weakness and Before we approached the European Commission to could have held out and pushed us into a situation discuss any extension of a deadline, we would have where there could have been ultimately a forced sale had to have shown that the sale process was not a as you approached the deadline. success. In this case, the sale process that we had run was showing an outcome where the value was in Q96 John Mann: Did any drop out because of the excess of the market multiples at the time and the staging of payments that you were requiring? value was in excess of any other option to return the Keith Morgan: No, not at all. There were a variety of company to the private sector. In that context, HMT proposals that came forward through this process. considered that they would not have been offered or Some of them were for upfront cash; others were for granted an extension by the EC. cash, as in the case of Virgin, with payment in some other forms along the way. Others that we considered Q91 John Mann: You didn’t then press for that. Are during the period included HMT or the Government there any penalty clauses built into the agreement maintaining some ownership of the company. with Virgin? Keith Morgan: Sorry, in what respect? Q97 John Mann: Why did no established building John Mann: Any penalty clauses of any kind for the society make a bid? future? Keith Morgan: Well, I think you would have to ask Keith Morgan: We have upside built into the deal them specifically that question. I can offer a view on with Virgin, by which if Virgin successfully floats or it. sells the business then the taxpayer will receive an additional amount above and beyond the cash that we have received so far. Q98 John Mann: Why did they tell you they did not make a bid? Q92 John Mann: Why did other bidders drop out of Keith Morgan: The view that I have on building the second round of the sale? societies is that there is quite a difficult circumstance Keith Morgan: The backdrop to the sale of Northern at the moment for them to raise capital. We looked Rock is, I think, very interesting, as we have included at this very closely because we were assessing the in our report. opportunities for Northern Rock to be remutualised on a stand-alone basis. The instruments that you would Q93 John Mann: It does not answer that question at need to use to raise capital are currently not very well all. There were only two bids at the end. There had defined. I do not know for sure, but I think they been five, from your document, seriously interested, probably felt it was uncertain to raise the money they so why did the others drop out? needed to make the bid on Northern Rock. Keith Morgan: There are a number of different reasons for it. We were, first of all, very comfortable Q99 John Mann: But you were keen to get a large that we had maintained competitive tension amount of cash immediately, so that is a potential throughout the process, and having five people impediment then to those mutuals? involved at various points in the two rounds was Keith Morgan: We were keen to get the best value for important in doing that. If you went through the the taxpayer. In the case where cash comes reasons why individuals dropped out—and, of course, immediately, that is something that is here and now. this is only as they relay it to us because we only see In the case where it comes later, it could be the outcome of their deliberations, not the detail of compensated. If you were offered a large amount of what they discuss themselves—in some it was because money later, then that might still be of value to the they decided that they could not get the synergies or taxpayer. the benefits of the combination that they suggested with their own company. In others, it was because Q100 John Mann: In any instance with any mutual they felt that there was not the agreement with other was the question of the payment terms or the question parties that would need to participate in the overall of the EU Commission’s position raised as a outcome. significant factor in them not putting in a bid? Keith Morgan: No. Q94 John Mann: Other parties that they had? Keith Morgan: Yes, that is right. It is the general kind Q101 Mark Garnier: Mr Morgan, how many of, I suppose, cut and thrust of an auction process individual mortgages does Northern Rock Asset Treasury Committee: Evidence Ev 11

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil

Management have, both in terms of owner-occupier arrears at this point. In comparison, there was another houses and buy-to-let mortgages? 37,000 people who were subjected to or offered what Keith Morgan: The total number is approximately you call mortgage arrangements. That is where people 400,000 mortgages. are offered an opportunity to change the basis of their mortgage payments, whether it is an extension of the Q102 Mark Garnier: How many of those have been term or whether it is a reduction in the interest the subject of repossession in 2010 and 2011? payments. More people were offered these mortgage Keith Morgan: This year a total of 8,800 arrangements than went into arrears during the period. possessions were— The point I am making is only that repossession is the Mark Garnier: When you say “this year” you very last thing that the companies have to do in the mean— case where people are not able to make the payments Keith Morgan: This last year, yes. on their mortgage. Mark Garnier: From 1 January to now? Keith Morgan: Sorry, for the full year of last year; for Q107 Mark Garnier: In a very interesting example the full calendar year of 2011. By the way, sorry, that of MPs having the experience of real life, I have been is for both Bradford & Bingley and Northern Rock a victim of repossession. My landlord in 2010 was Asset Management, the two mortgage businesses that repossessed and my family was subjected to Northern we have put together. Rock’s activity, which I can tell you was not the sort of way that I would expect my constituents to be Q103 Mark Garnier: And 2010? treated. Do you have children? Keith Morgan: In 2010, it was 10% lower than that, Keith Morgan: Yes, I do. so it would have been— Mark Garnier: So 8,100? Q108 Mark Garnier: Imagine it being 10 December, Keith Morgan: 8,000, yes. happily sitting around a Christmas tree, and the letter comes through from I think it was Wallers are your Q104 Mark Garnier: That is about a quarter of the agents acting on behalf of this, giving you two weeks’ total repossessions. In 2010, there were 36,300; 2011, notice to vacate the house. Being a Member of 36,200. You are doing about a quarter of the Parliament, of course, you are in a stronger position repossessions? where you can just turn round and tell them to get Keith Morgan: I think that is correct, yes. stuffed, but for most people who are out there it is quite a scary thing. This is the company that you are Q105 Mark Garnier: That is an awful lot, isn’t it? running. What are you doing to try to support people Keith Morgan: Yes. First of all, we are in the position who are in this position? The example that I have is where these banks, or these former banks, inherited a it is extraordinarily unpleasant, and you are very difficult position. There are large quantities of responsible for it. the mortgages that are on the books of these banks Keith Morgan: First of all, I am sorry I can’t talk that are in negative equity and the history, the about the details of the personal circumstances legacy— because I am not really party to the individual detail.

Q106 Mark Garnier: Yes, but that does not Q109 Mark Garnier: No, sure, but we all have necessarily mean you should repossess them, does it? examples of this across all our constituencies. Keith Morgan: No, but I would like to give you the Keith Morgan: But I think the point that we do wish full background to what is going on, because I do to ensure is held very close inside our companies is absolutely realise that repossession is a very difficult they do treat customers fairly. That is what we attempt circumstance for the people involved in the houses. I to do. We look very closely at the activities they take. think people should be interested in what steps the We review at the board the activities they take in companies are taking to avoid that, but also what the terms of the treatment of customers, the way in which backdrop is in terms of the situation that they face. they engage with customers, and all steps are taken to The first point is that, unfortunately, there are ensure that they are in line with what we believe to customers in these banks who are at the worst end of be best practice. the spectrum in terms of their ability to afford the payments on their mortgage. That is because the credit Q110 Mark Garnier: Well, I think you do need to criteria of the banks when they were in the private review that, genuinely. sector were at the less reliable end of that spectrum. Keith Morgan: What I do not know are the details of What we have is a situation where the companies are the specific circumstances in which the landlord absolutely focused on dealing with the issues of took— customers. It is probably the single biggest issue they deal with day in, day out. They have probably 1,000 Q111 Mark Garnier: There are one or two other people devoted to this activity. Members of Parliament who I have spoken to. One is If you look and see what has happened over the the Member for Chatham, and she has given me some period—and the information I would point you to is research that they had from Medway District Council, also not just the possessions but the arrears—the which looked at Northern Rock repossessions that are arrears are where people can’t make the payments on at twice the rate of other lenders. I have spoken Wyre their mortgage, and those have come down by 14% Forest District Council this morning; 114 cases this over the year. There are 33,000 people who were in year. They have three or four times as much chance Ev 12 Treasury Committee: Evidence

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil of having a Northern Rock repossession, be it either Keith Morgan: Certainly. We would be very happy to buy-to-let or residential mortgage, than they do of any lay that out for you. other lender. There is quite an aggressive process going on with Northern Rock, and my question is Q116 Chair: Can you just clarify, is 14 days’ notice leading to what are your long-term plans for Northern of an intention to repossess your best practice? Rock Asset Management? Obviously, you have had Keith Morgan: I confess I do not know the particular the transaction with Northern Rock plc, which is best practice days around repossession. great, but of course that does not have with it the loan Chair: I think it is worth your taking a close look at book. You still have the loan book, which I think is this. It does not sound very good. 90% of the loan book that you took on at the time of the nationalisation. What are the plans for Northern Q117 John Mann: Just going back, because you Rock? Are you in the process of aggressively sorting have cited again European state aid rules, when Sir out the bad loan book in order to tidy it up for a sale Nicholas Macpherson came before this Committee he or are you just trying to wind it down as quickly as said, “Of course, there is always scope to try to you possibly can? renegotiate state aid agreements,” so they are not set Keith Morgan: These companies are held as closed in stone. They are negotiable, according to the mortgage books. Once again, under the European Permanent Secretary to the Treasury. I wanted to Commission conditions of state aid, they can’t enter check whether you had made an estimate of the cost into any new economic activity. of extending the deadline in relation to Northern Rock. Q112 Mark Garnier: Sure. They are not extending, Keith Morgan: The issue was explicitly addressed in but that does not stop them winding down. terms of the decision that was taken. We made a Keith Morgan: No, but in fact there is obviously, recommendation to the Chancellor around the sale of therefore, an inevitability to the wind down of these Northern Rock, and within that there was a discussion books because no new mortgages come on board but as to whether there was the potential to investigate people over time repay their mortgages. They may the timing of the deadline on the state aid. As I have move house or they may remortgage with another mentioned earlier, the argument— lender. The simple dynamic of it from our point of John Mann: You costed that? view is when people do repay the principal on their Keith Morgan: Well, I think the view was taken that mortgages that cash comes back into the company. the EC would not have granted the extension, for the The company then needs to pay its running costs, and reasons I laid out, which is they would have to have every pound that is left over is returned to the known that the sale process was not a success. taxpayer. It is a simple rundown process albeit— Q118 John Mann: There is an inconsistency, Mr Q113 Mark Garnier: That is a long-term process? Morgan, because if you have not gone and negotiated Keith Morgan: It is a long-term process but, as we then you do not know the conclusions, and if you do are making clear in our report, that is something that not have costs of what an extension would be, it seems could last between 10 and 15 years. What we have very clear, it being decided without attempting to done is we have created an organisation that can negotiate with the European Commission, that there actually manage and hold these mortgages to their would be no extension. I just wanted to get that natural life and maturity. We are not in the position of confirmed on the record. having to sell these things quickly, which would put Keith Morgan: But I would like to say that in terms the customer relationship potentially under any kind of all of the evaluation of the options with respect to of stress. We are not under any pressure to sell them. the European Commission, we worked very closely We are able to run these down in a very controlled with the Treasury legal adviser’s expert involved in way. the liaison with the European Commission. We had had many contact points with the European Q114 Mark Garnier: Yet there is four times as much Commission. We knew the issues that the European chance of being repossessed by Northern Rock as Commission faced. HMT, which is responsible for this there is of anybody else. relationship, took the view that they did not believe Keith Morgan: But I do think if you look back at that that they would be granted an extension, for the you would find a lot of that is because unfortunately reasons that I have laid out, which was that the case the people who took mortgages from Northern Rock was not compelling, given that we had a sales process were taking mortgages at very high loan to value where the market values were well below the values ratios. As you know, some of these loan-to-value that we had achieved. I think that is consistent with ratios were in excess of 100% and we have just been the statement that the Permanent Secretary said— through a very, very severe financial crisis. there is scope to renegotiate, but one has to choose the ground upon which you look into those issues. Q115 Mark Garnier: I would be very grateful if you Chair: Well, we have had a good canter around that could let this Committee know what measures you are subject. undertaking to ensure that those people who do find themselves in mortgage arrears and in trouble are Q119 Mr McFadden: I would like to take you back being looked after properly and don’t have a repeat of to the area of disposal of the Government’s shares in the experience that certainly I have had and indeed RBS and in Lloyds, and follow on from the questions many other people that I know have had. Mr Ruffley and Mr Mudie were asking you. Do you Treasury Committee: Evidence Ev 13

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil have any view on the timing issue? The taxpayer has Q122 Mr McFadden: You have been very clear now owned these shares for a few years. They want about that. Your mandate is to protect the taxpayer’s to know whether this sale might happen in the order interests in all of this. The taxpayer bought these of a year or two, or might we be talking about a shares at a certain price and you have just outlined decade or more. What is your view on that? several factors that you think have weighed down the Jim O'Neil: I think the core is, when we think about value of the bank—general economic situation, new disposals, value for money for the taxpayer. I guess regulation that you mentioned, and so on. Is it the case there are two dimensions of answering that question. that you would contemplate a sale at less than what There is value and the timing question. I think it is the taxpayer paid for the shares because of those very difficult right now to predict the value evolution factors? of these banks. I do not think we can pretend that Jim O'Neil: I think our key assessment is what is the things have not changed materially since these right value for money for the taxpayer relative to the fundamental value we believe in the bank. The end investments were made. The macro-economic price that you are referring to on which the average conditions are worse, and in low-interest-rate price that the taxpayer paid is obviously a number that environments banks with large liquidity pools like this we all have in our minds, but in that fundamental just earn less. The markets are very difficult; the value assessment that is not part of our value Eurozone is in crisis. The regulatory environment has assessment. The key question is what is the right changed, and while that has been making the banks transaction not only for value for money to initiate the safer, it is additional costs on banks and the legacy disposals, but what is the right transaction to set the issues are still there. Those issues have weighed down platform for the subsequent disposals that we would the value of the banks, and we are always trying to like to undertake. The ultimate judgment of a evaluate potential transactions—what value can be programme will be what the average price is of a received versus fundamental value—but with all those programme, we would like to think, other than any issues out there, it is very difficult for investors specific sale transaction. There is no fundamental generally to make fundamental value decisions on constraint of selling the shares at any price. What I RBS, and for that matter Lloyds as well, but I think would say is that we monitor this all the time. We your question was particularly relevant for RBS. discuss this with Treasury. Ultimately, the decision is In terms of the time scale, to get to specifics, we for the Chancellor in terms of what price is sold. believe that it is very difficult to set out a specific programme of not only how long it might take but Q123 Mr McFadden: I am going to ask you to put when one might initiate it. If the market gets a sense this in more simple terms. I am interpreting your that there is a deadline in order to sell those shares, answer as a yes; UKFI would contemplate the sale of we worry that might create circumstances of the these shares at less than the price the taxpayer paid market would be waiting for that, it would hinder for them because, although that is a factor in your share price development and that in itself would not thinking, it is not the only factor. be value for money for the taxpayer. Sorry, they are Jim O'Neil: It is not the only factor. If there were not specific answers, but we do not think it is helpful appropriate circumstances that we felt would create to give a timeframe. value for money over the entire programme, I think that is how— Q120 Mr McFadden: Do you think the political Robin Budenberg: I think it is very important to interference over the bonuses has helped weigh down emphasise that decisions around disposals are for the the value of the taxpayer’ shares? As one Chancellor. These are not UKFI decisions. UKFI commentator put it, no one wants to buy shares in a provides advice and co-ordinates its views very Government Department. closely with Treasury, but ultimately decisions around Jim O'Neil: I think it is a clear question. We interface disposals are the Chancellor’s decisions. with investors regularly, and investors have, in their dialogue, expressed their concerns about some of Q124 Mr McFadden: I am trying to get an insight these issues that have come up. I think the short into your thinking and your advice on this. Can I now answer is if you look at the share price performance ask you about the means of disposal? Is there a preferred option here? We had a little bit of discussion of RBS during some of these issues as they occurred, about this a while ago. Can you give us some insight you could not detect, necessarily, that they traded into the kinds of options you are considering? Would fundamentally differently versus other banks. you consider a general IPO? Would you consider an However, clearly, if investors felt that these issues institutional sale to another bank? Mr Ruffley asked would continue and this was not being operated in a you about the option that has been put forward by commercial way then, yes, I think it would weigh Policy Exchange and Portman Capital of a distribution heavily on the share price of the bank. of shares without payment to the taxpayers who propped up the bank in the first place. Are there any Q121 Mr McFadden: There is a danger that political others that I have not mentioned that you would interference ends up losing the taxpayer money? consider? Jim O'Neil: If investors feel that the banks are not Jim O'Neil: We look at the ideas in three categories. being run in a commercial way, then that would One is a broad-based distribution, I think, as you reduce their incentive to buy shares but also the price touched on; something that might look at a kind of that they might pay for shares. modern update of some of the privatisations of the Ev 14 Treasury Committee: Evidence

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil past with a large offering to institutions and retail. somebody would want to buy it as a whole, and that Another category might be more institutional private is a different issue altogether. placement faster to the market transactions because Jim O'Neil: In that circumstance, I can see the nature those transactions take quite a bit of time, so there of your question. You are right; I probably should would be another category of more placement-type have added that there is a fourth category of transactions. A third category is more structured transactions, which are strategic, but I did not include transactions in the sense of exchangeables and that just because it feels so unlikely at this stage. derivatives. Mr Thurso asked us last year about the dribble-out trade that the US Government did with Q129 Chair: Are you engaging in a discussion with Citi, and I would put that in that structured the Government about various ways of offloading the transaction. stock? In terms of the distribution, as I said to Mr Ruffley, Jim O’Neil: Yes. there are a lot of policy issues embedded in that and it is very difficult for us to assess that in a framework Q130 Chair: They are coming to you and saying, relative to those other transactions. It is kind of part “Do you have any ideas?” placement because that transaction has at the Jim O'Neil: Well, I would say we just have a very beginning of it a placement to institutions. That is the regular engagement with Treasury officials on all of first step of that transaction, so that would fall into the these topics, but related to disposals, yes. second bucket. On a broad-based distribution where the Treasury does not give proceeds, there is a lot of Q131 Chair: At ministerial level? policy issues at the heart of that, so I am not so sure Jim O'Neil: Yes. We do have dialogue on occasion. that fits into that framework. But those are the Robin Budenberg: I would not say that is a regular categories of how we look at things. dialogue at this point, but it is something where we have had discussions. Q125 Mr McFadden: I will just end with this, which is a question about location. RBS’s headquarters is in Q132 Michael Fallon: Coming back to the location Scotland, always has been. That is partly for historical point, it is still true that Lloyds HBOS has its reasons. It started life as a Scottish bank. It became registered office in Glasgow, is it not? If Scotland bigger. It became a global bank. Would it be a voted for independence in 2014 and you were faced condition of sale that the future headquarters of this with disposing of them in 2016 or 2017, both banks bank needed to be in Scotland or, indeed, the UK? would already be outside the UK. Jim O'Neil: That is a policy question. It is hard for Jim O'Neil: Again, this is something that we have not us to answer, I think. Our prospect and how we look spent time on. If there was a big change then the board at sales is all about value for money so, unless I have will have to decide where they think it is best for the misunderstood your question, it is hard for me to bank to be. I presume that would be a shareholder answer. vote, but I actually do not know that for a fact.

Q126 Mr McFadden: Well, what I am asking is if Q133 Michael Fallon: Let me take you back to your there is a completely open mind on the future sale of earlier point about your measurement of fundamental the taxpayers’ shares in this, is it reasonable to value rather than share price. How do you factor in contemplate a scenario whereby the bank would be the corrosive effect of a bank simply remaining in the sold in such a way that its headquarters left the UK? state sector for a period of more than two, three, four Jim O'Neil: I think it is hard to imagine that, but I do years? not know what to say other than we look at it from a Jim O'Neil: I think it is a difficult fact to quantify. value for money perspective. I do not think we would However, embedded—and you will be familiar with look at relocating the headquarters as part of that this as embedded—when we look at market multiples of other banks, you can try to look at that factor of analysis for value for money. It is just what value for value being eroded over time, but it is very difficult money can we get. to do so. That fundamental value—the exercise that we do is very market-based, and assessing how policy Q127 Mr McFadden: You would not be instilling issues might develop in Government is much more this as a condition of the sale? subjective. Jim O'Neil: This is entirely a policy—the location of a bank is not our— Q134 Michael Fallon: But do you agree there is a Robin Budenberg: It is probably most of all a corrosive effect? commercial issue for the board of the bank to decide Jim O'Neil: Well, as we were discussing before, it is whether there is any basis for changing its a very difficult item to quantify, because as we look headquarters. Certainly, at the moment we are not at some of these issues as they have happened and aware of any— you try to look at the performance relative to others, it is very difficult to quantify. But, yes, if there was a Q128 Mr McFadden: The board may well change sense that any bank was being run in a non- with the new owner or owners. commercial way fundamentally, investors will be less Robin Budenberg: Well, again, that would depend likely to pay value for those shares than one that whether we were talking about an institutional would be run commercially. I think that is a fair placement, or there is, of course, a possibility that assessment. Treasury Committee: Evidence Ev 15

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil

Q135 Michael Fallon: There would be a bias, then, Q140 Michael Fallon: Does the timetable of the towards getting rid of some of it, to releasing a tranche implementation of Vickers also bear down on the quicker rather than later; is that right? decision as to how to proceed with these tranches? Jim O'Neil: I think it depends on whether there is an Jim O'Neil: I would like to think no, but there are assessment that—and this goes back to the questions still some outstanding items on Vickers that if, for that were asked earlier—the banks are being run in a example, investors more broadly had concerns about commercial way or not with Government ownership. the banks, for example on primary loss-absorbing If there is an assessment that the bank is being run in capacity or something like that and investors did not a commercial way, maybe there is not that pressure. want to invest because that was outstanding, there might be some issues like that. But I would like to think that, once it is clear, there would not be Q136 Michael Fallon: When you talk to us about constraints like that. average prices, it sounds as if you are already considering selling these shares in tranches; is that Q141 Chair: right? If the buffer of UKFI did not exist, do you think that the banks would at the moment be Jim O'Neil: There was an implicit observation from being run differently? what I said that just given the size of these stakes, at Robin Budenberg: I have seen no indication from least where the market fundamentals are today, if you either Treasury or Ministers that they would want to look at the trading liquidity of these shares—RBS do things differently, but I think— trades like £45 million a day so to be able to try to sell all of that in a single transaction seems very hard Q142 Chair: I do not mean this pejoratively— to imagine. Robin Budenberg: No, I know what you are going to say. Q137 Michael Fallon: Given that there may be a Chair: But you are for display purposes only, aren’t corrosive effect from keeping either bank within the you? You are there as a demonstration of state sector wouldn’t that point to getting the first independence rather than actually to have to do tranche away as soon as you can? anything? Robin Budenberg: I would almost say quite Robin Budenberg: I think there is an element, as I separately—because as we discussed earlier, I still said earlier, that we do provide, if you like, a nuclear believe that the bank is capable of being run in a deterrent, yes, but I also like to think that in terms of commercial way—you certainly could argue that what we do, in terms of acting in our stewardship role, actually, as Mr O’Neil says, the lack of liquidity at we play a valuable role there that has an impact. I also the moment does cause an issue in terms of sales and, think that other shareholders feel that our role is very therefore, a transaction that creates more liquidity is important. We talk with them and they take, I believe, in itself helpful in terms of facilitating future sales. I great confidence from the role that we play. think there are arguments that you can make around what an initial sale could do in terms of facilitating Q143 Chair: It is back to one of those very well- future sales that has an impact in terms of a value for rehearsed replies. I don’t know that it is well money judgment that, as an accounting officer, myself rehearsed, but it is extremely fluent, if I may say so. and Nick Macpherson could take into account. You can, therefore, confirm to us that you have not had to resist any pressure from Government on any Q138 Michael Fallon: Are there any external issue of significance so far? constraints on you from the Commission, for example, Robin Budenberg: So far, there has been nothing that as there were in the case of Northern Rock? I believe has been imposed on the board of RBS that Jim O'Neil: In terms of disposing of shares? the board of RBS has a fundamental issue with. We have had discussions— Michael Fallon: Yes. Jim O'Neil: There is a variety of EC remedies in the Q144 Chair: If there were, the nuclear option would bank itself, but clearly where we are talking about be to come to us? potentially a strategic sale that would have anti-trust Robin Budenberg: The nuclear option would be for and considerations like that—but not that I can think our board to consider that issue and to stand up and of off the top of my head. be counted, yes. Chair: Okay, that is very clear. Q139 Michael Fallon: Are there any constraints that are likely to arise from the implementation of the Q145 Jesse Norman: I apologise for being slightly Vickers report? late into the session. Mr O’Neil, just a factual Jim O'Neil: Well, the Vickers report will have costs question. When did you leave Bank of America? for the banks, and so in the sense of the discussion we Jim O'Neil: I left in July, August 2010 and joined were just having on value that is a cost. We have to UKFI in October 2010. make an assessment of, do the banks have an Jesse Norman: July, August 2010? opportunity to recover that value loss or is that a Jim O'Neil: Yes. permanent loss of value? I would say the costs of the Vickers report, which obviously have other social Q146 Jesse Norman: When you were at Merrill benefits of doing that, are something that affects the Lynch, were you involved in either the RBS bid for value. ABN or the Lloyds bid for HBOS? Ev 16 Treasury Committee: Evidence

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil

Jim O'Neil: I was on the team at Merrill Lynch that Jim O'Neil: As a commercial shareholder, we engage advised the consortium of RBS, Santander and Fortis, with management on issues but we do not have any or worked with. I am not an M&A adviser; I am a separate legal advice on those issues. financing specialist, and my work was with Fortis. Jesse Norman: You were part of the RBS group Q153 Jesse Norman: You do not think the acquisition team? Chancellor might need separate advice in respect of— Jim O'Neil: Merrill Lynch advised the consortium, Jim O'Neil: That would be up to the Chancellor. and I had a role in financing. We had different roles, Certainly, for us as shareholder, we are not seeking and my role was with Fortis. separate legal advice. Jesse Norman: But you were not part of the Merrill group that advised Lloyds in relation to HBOS? Q154 John Thurso: I apologise for being late. As Jim O'Neil: No. you know, I was chairing another Committee. Mr Budenberg, can I come to you? It is a follow-up on Q147 Jesse Norman: How much was Merrill paid this issue of the relationship between Ministers, in for its advice to that group? particular the Treasury, and UKFI. There have been a Jim O'Neil: I think it is a question for Merrill Lynch. number of suggestions as to the future of the current I actually don’t know. I can’t recall. It was five years RBS group, which I know have already been ago. The financing fees are public, so we could look discussed. To what extent, given that value to the taxpayer in the long term may be more than simply a them up. monetary value ascribed to shares in the market at any Jesse Norman: Oh, they are? Okay. given time—there may be other goods that the nation Jim O'Neil: I think they would be in—for the work I might wish—at what point are you in the discussion did on Fortis with the rights issue, there is a and at what point should Ministers take over from you prospectus with the fees covered in the prospectus. in making those decisions? Robin Budenberg: I think those sorts of decisions and Q148 Jesse Norman: Absolutely. Of course, it might discussions are for Ministers, frankly, from the outset. not be the case that the total fees were disclosed. I do not think that is something that we should be Often, the advisory fees do not get disclosed. driving, pushing or deciding on. Clearly, there may Jim O'Neil: I just cannot recall and, again, I was a well be situations in there where they look to us for financing specialist on that transaction. views on particular value implications, but those are fundamentally policy issues that do not come within Q149 Jesse Norman: Sure. Would you have our mandate. expected them to be north of a couple of hundred million pounds? That was the level at which I think Q155 John Thurso: Just to be clear, the thinking on we had that estimated by the two independent that, which is, say, is happening between BIS and the assessors of RBS. Treasury and others, would not be something you Jim O'Neil: It is five years ago, so I do not actually would be expected to be consulted on if those remember, but I think if you added all of the decisions were being made? transactions done with those clients over a period of Robin Budenberg: That would be up to the people time, not necessarily just that, I am sure it would be a who were considering it. If they felt that there were very big number. useful insights that we could provide, we would, of course, do what we can, but it is definitely something that is driven not by us. Q150 Jesse Norman: Thank you very much. Final question—and I suppose it is to any of you, which is do you think there is a risk to RBS and, therefore, to Q156 John Thurso: One other question, if I may, which is your role in respect of the ICB proposals. the taxpayer—and, if so, how much—from the rapidly Were you acting as advisers to the Treasury in that building civil lawsuits that we are seeing in respect of capacity? RBS? The scale of the cost is £3 billion to £5 billion, Jim O'Neil: As we discussed earlier, our role as it appears at the moment. primarily and our value mandate was to engage with Jim O'Neil: It is very difficult. There are a lot of the ICB and the banks to come up with an assessment contingent liabilities for RBS, not just lawsuits but of value ranges for the implication of proposals. We elsewhere as well, and there is a whole host at the did not have the proposal then, so the range was fairly bank. It is very difficult to assess what the payouts wide, and we provided that both to the ICB and might be, so it is hard. Treasury. I would not characterise us as an adviser to Treasury. Q151 Jesse Norman: It could be huge? Jim O'Neil: Well, if the suit was successful and they Q157 John Thurso: The FT reports that said you lost £5 billion that would be a big hole, but there is no were advising the Treasury are incorrect? way for us to assess whether it gets zero, or whether it Jim O'Neil: We had a dialogue with Treasury and the is a large number. ICB, so I do not know what the word “advisory” means but the ICB, for example— Q152 Jesse Norman: Right, but you are monitoring it; you have legal people keeping an eye on the Q158 John Thurso: I am sure it was not an after- potential scale of the loss? dinner conversation. Treasury Committee: Evidence Ev 17

14 March 2012 Robin Budenberg, Keith Morgan and Jim O'Neil

Jim O'Neil: The ICB, for example, went and met with as people who I think they deemed might have some a wide range of people they felt would be useful in knowledge about banks, but they did that with a wide terms of giving input, and so we did meet with them variety of people. I can’t tell you what context they as part of their work. Then we have definitely had were asking us those questions in. dialogue with Treasury since. Chair: Thank you very much for coming in front of us this afternoon. It has been quite a lively session in Q159 John Thurso: What I am driving at is the key places. I think it has been quite enlightening, and we point: were you interacting with the ICB as the owners are very grateful to you for the work that you are of a large number of shares in two institutions, or were doing. We may feel the need to see you reasonably you interacting with the ICB as the advisers to the often, given the salience of some of the issues with Treasury? which you are having to deal. Thank you very much. Jim O'Neil: Very much the first rather than the latter. Robin Budenberg: We appreciate the support. Thank They did ask us a lot of questions on what we thought you. the implications of various proposals were on banks Ev 18 Treasury Committee: Evidence

Written evidence

Supplementary written evidence submitted by UK Financial Investments (UFKI) UK Financial Investments (UFKI) appeared before the Treasury Select Committee on 14 March 2012 and during that appearance we were asked to provide the Committee with various pieces of additional information and these are set out below. Many of the wider themes we discussed on our approach to managing the Government’s shareholdings and our strategy for disposing of these we will return to in our Annual Report. We will send the Committee copies of our Annual Report which is scheduled for publication in July of this year. We would be delighted to answer any further questions the Committee has in relation to the work of UKFI.

Remuneration for RBS’ FSA Code Staff Mr Mudie referred to information disclosed by RBS on the quantum of remuneration paid to its Code Staff under the Financial Services Authority’s Remuneration Code in 2010 and enquired as to what the 2011 figures were. In RBS’ 2011 Annual Report & Accounts it disclosed that it had a total of 386 members of staff who were classified as Code Staff and that in 2011 they were paid a total of £316.6 million. This information is included on page 295 of RBS’ Annual Report & Accounts which is available here: http://www.investors.rbs.com/download/report/Annual_Report_2011.pdf

Stephen Hester’s Annual Bonus Criteria Stephen Hester’s annual bonus is assessed relative to performance against a number of strategic and business objectives. Included at Annex A is RBS’ published assessment of Stephen Hester’s objectives and his performance against those in 2011. This information is taken from page 282 of RBS’ 2011 Annual Report & Accounts.

RBS’ Use of Lobbyists We have spoken to RBS about their use of lobbying firms and they have stated the following: “Like most large companies, RBS and its subsidiaries employ consultants for communications advice. RBS does not, however, employ any third parties to lobby politicians or government on our behalf. RBS has not conducted any campaigning against regulatory reform and when RBS has had concerns on the proposals, RBS has stated these publicly and on the record.”

UK Asset Resolution We have liaised with UK Asset Resolution (UKAR) in relation to the issue of repossessions and set out below information in relation to that. At the end of 2011 Bradford & Bingley plc (B&B) and Northern Rock (Asset Management) plc (NRAM), the two closed mortgage books which form UKAR had 657,000 mortgage accounts (2010: 726,000). The majority (90%) of these loans continue to perform well, but there are a significant number of customers who are finding it difficult to meet their repayments. UKAR always seeks to support customers experiencing financial difficulty, with dedicated agents who work closely with customers to offer a range of solutions to help them manage their circumstances. UKAR works actively with a range of non-fee charging debt advice agencies including Payplan, the Consumer Credit Counselling Service, Citizens Advice Bureau, the National Debt Line and the Money Advice Service. This independent expert advice can help customers reorganise their finances and ensure, wherever possible, that they can continue as homeowners. Customers are also encouraged to plan ahead to ensure that they can meet their future mortgage commitments. Where potential signs of financial difficulty are noted, customers are proactively contacted by specialist support teams. This approach is welcomed by the vast majority of customers and can help avoid problems before they start. In some circumstances the most appropriate course of action is for customers to sell their homes and UKAR supports this process, where suitable, through assisted voluntary sales. As a consequence of UKAR’s proactive arrears management coupled with the continued benign interest rate environment, at the end of 2011 the absolute arrears levels for both B&B and NRAM were lower than the 2010 year end position. The total number of mortgage cases three or more months in arrears, including those in possession, reduced by 14% year-on-year to 33,216 cases as at 31 December 2011 (2010: 38,515). During 2011 UKAR made 37,000 mortgage arrangements and account modifications (2010: 44,000) to assist customers with their repayments and continue with their existing mortgage. Throughout 2011, an average of 65% of accounts in arrears each month had a payment arrangement in place (2010: 57%). Treasury Committee: Evidence Ev 19

Repossession proceedings for customers in arrears are always a last resort. UKAR continues to deliver a commitment not to issue litigation proceedings for owner-occupied properties during the first three months of arrears. Litigation is then only entered into after all other suitable forbearance options have been considered and exhausted. Where there is no long-term sustainable option that will allow a customer to maintain their mortgage payments, it can regrettably be in the best interest of the customer (and the taxpayer) for the property to be repossessed. The number of properties taken into possession in 2011 was 8,847 (2010: 7,986). When repossessing a property from an owner-occupier, the process adopted within B&B and NRAM fully complies with FSA regulatory guidelines and the Courts’ Pre Action Protocol requirements. This is a distressing time for customers and their families, so UKAR follows best practice industry standards ensuring customers are treated fairly at all times. Where a buy-to-let landlord is in arrears, UKAR endeavours to protect tenants by honouring the terms of all valid Assured Shorthold Tenancy (AST) agreements and instructing a Law of Property Act Receiver (LPA Receiver) to collect rent directly from the tenant, thereby enabling the tenant to stay in the property for the duration of any agreement. At the end of 2011, there were 3,338 UKAR properties in LPA receivership (2010: 4,553). UKAR’s policy is that where it appoints an LPA Receiver and they wish to adopt a sale strategy, they will communicate with the property’s tenant. This will either be to advise the Tenant that upon expiry of the AST (maximum six months) their tenancy will not be renewed or that they will utilise Section 21 of the Housing Act which gives the Tenant a minimum of 60 days’ notice to vacate the property. This overrides any AST the Landlord and Tenant may have committed to. In practice UKAR will normally serve 60 days prior to the expiry of the AST, ie effectively keeping to the tenancy agreement. However, in exceptional circumstances the LPA Receiver is able to use Section 8 of the same Act, which gives the Tenant 14 days to vacate. UKAR continues to try and engage with all customers’ right up to the point of eviction to try and reach an appropriate solution. Dialogue with a borrower does not stop when repossession proceedings are initiated. Ev 20 Treasury Committee: Evidence re on Annex A dership to o (LDR) ROE was 7.7% ternal Limited Office 19585 Stationery The by 20158 Kingdom d 4/2012 nite U the operations and reducing risk.exceeded Key in Group 2011. strategic However,profits plan the and risk deterioration further measures in led set externalmeasures. the in economic An Group 2009 and extra to were financial £1reduction, prioritise all conditions billion liquidity de-risking significantly impacted was and over spent deposit-gathering drivingplan over goals. returns, for 2011 It which in the was affect order investment profitability also to banking necessary accelerate business to the in make achievement the alterations of light to RWAs of the new strategic regulation and market developments. lending to SMEs upprogress 4%, as exceeding did the the Group’s turnaround Merlin of targets. RBS The Insurance; branch facilitating sale its to planned Santander divestment. made good in d rinte P STEPHEN HESTER’S BONUS CRITERIA plan.lending commitments, EU mandateddisposals. with Core Tier 1 ratio at 10.6%. or The ahead liquidity of portfolio Plan. was This heldmeasures includes above and operation target Asset of levels protection Core/Non-CoreScheme at structure, (APS) £155 rebuilding compliance billion, managementrequirements. and other improved external to stakeholders. 108%, withCustomer Core satisfaction loan:deposit and ratio TreatingCustomers ahead Performance Fairly of against (TCF) target agreed measures. while at APS short-term 94%. objectives UK/US funding Leverage was regulators was was satisfactory relatingperformance, cut stable and to succession to at significantly TCF. and £102 16.9x. improved people billion. stakeholders comparedmanagement. Gross in with new particular lending onImprovements the to sustainable in Group business lending employee in increased policies. extraordinary by Goodengagement. circumstances. 22%, progress Talent with to prior and address year. bench risks reviews identified completed by in all businesses and 2011” staff survey results showed a continued upward trend in the vast majority actions of plans categories. agreed. Female executive representation increased to 18%. The Group’s “Your Feedback Business delivery and financialperformance ROE, profitability, costs, core tier 1Risk and Retail control & Funding Commercial’s ROE improved to 11.3%, or 16.6% excluding Ulster Bank. GBM Stakeholder management ratio, funding and risk Funding, profile, leverage ratio, riskPeople management above Relationships median with compared shareholders to and peers, All leaving risk Core reduction overall Positive and ROE feedback control at from measures 10.5%. key were Core shareholders exceeded. cost:income and This ratio regulators. includes was Increased Group 60%, engagement loan:deposit with rati ex Group’s people strategy including Stephen Hester is widely acknowledged internally and externally as having provided strong lea Core objectivesStrategic progress Targets for 2011 Delivery of the five year strategic The Group recovery strategy set out in 2009 has proven its effectiveness and in 2011, most tasks Progress in a 2011 2 April 2012

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